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On December 19, United Nations General Assembly (UNGA) adopted a resolution to select 4th December as the International Day of Banks to be observed every year in recognition of the crucial role of the banking sector in contributing to the development and improvement of the standard of living and societies.
The main purpose of World Banking Day
Banks play a significant role in the countries’ economy for offering a service for people wishing to save their money. UNGA in its resolution urged the world community to observe the International Day of Banks, in a way consistent with national priorities, in line to highlight the role of banks in contributing to achieving sustainable development.
It recognized that eliminating poverty in all its forms and dimensions, including extreme poverty, is the greatest international challenge and a crucial requirement for sustainable development. The objectives seek to achieve sustainable development in its three dimensions, social, economic and environmental in a balanced and integrated manner.
Importance of the banking sector
The banking sector is considered as the backbone of the economy of any country particularly Pakistan which is an underdeveloped country. Banks play a vital role in the economy and prosperity of the countries.
This sector also plays a significant role in the mobilization of money in the country. The functions of earlier banks were relatively simple however, in the modern age we see that banks are performing several key functions.
They perform not only the depositing money or issuing loans to different customers and businesses, but they are also involved in buying and selling of shares, debentures and different stocks. Banks issue debit and credit cards and offer online banking to its clientele.
The commercial Banks are involved in making earnings. They give loans to deprived and needy customers and people on interest bases and earn profit in the shape of interest.
Generally, the customers of the banks are trade communities. Bank gives the loan to Small Medium Enterprises and agricultural sectors fulfill their requirement at the reasonable interest rate.
The beginning of banking in Pakistan
Pakistan’s experience with financial liberalization in the banking field is immensely inadequate as compared to the developed countries.
A short glance at the history of banking system in Pakistan disclosed that the banking sector has made remarkable achievements however, still has a long way to go.
Beginnings, 1947 to 1970
Pakistan’s financial sector evolved very differently from banks in developed countries. About one year after the partition, Pakistan had no central bank. Although Habib Bank – set up in 1941 – filled this breach primarily, until the SBP was established in 1948 under quasi-government ownership. The role of domestic banks was mostly inadequate at the instance, accounting for only 24 of the total 195 bank branches across the country.
Hence, the State Bank of Pakistan was firstly mandated to expand commercial banking channels in the country, and maintain monetary stability so trade and commerce could thrive in the country.
Consequently, Habib Bank, Allied Bank and National Bank were amongst the first to start operations with strong shore up from the central bank.
The central bank is responsible for making the monetary policy and supervision of all the activities being conducted in Pakistan to stabilize the economic condition. It is also responsible for making the regulation for the banking sector.
1970 – 1980: An inheritance of public control
Until 1974, Commercial banking grew favorably in the country. Under the nationalization policy implemented by the government Zulfikar Ali Bhutto, as many as 13 banks were brought under full government control and consolidated into six nationalized banks.
The Pakistan Banking Council was established to monitor nationalized banks, marginalizing the State Bank of Pakistan’s role as a regulator.
These steps were meant to develop lending to prioritized industries. Though, while directed lending was viewed favorably at the moment, little can be said of the long-term gains that have been achieved.
Bank Nationalisation Act and privatization
By 1991, the Bank Nationalization Act was amended, and 23 banks were set up – of which 10 were nationally licensed. In 1991, Muslim Commercial Bank was privatized and the larger Allied Bank was moved to its administration by 1993.
There were still four major state-owned banks; however, they now faced competition from 22 domestic banks and 26 foreign banks by 1997. More significantly, administered interest rates were streamlined, bank-wise credit ceilings detached and a method of auctioning government securities was established, forcing the state to sponge at market-determined rates.
Banking in Pakistan – the long journey ahead
a great deal still remains to be accomplished in this sector in the country. In the nonappearance of favorable economic growth, banks will remain helpless to business cycle fluctuations.
Recently, non-performing loans augmented harshly in response to the preceding years of easy credit and perilous consumer lending activities.
Furthermore, strong regulation will continue to be needed so as to maintain the delicate balance between industry concentration and competition. Presently, the top five banks account for over 70 percent of the sector, measured in terms of total advances.
Finally, the benefits of financial liberalization must trickle down to the common man. Banks are proactively exploring new trade models to make this happen – such as branchless banking. However, more evolution required to be made before existing deployments for reaching a critical mass of users.
Favorable reforms for customers have helped banks come a long way, even so, unless the central bank remains self-governing, and continues to err on the side of caution, liberalization may rapidly become a bitter pill to gulp down.
The role of Islamic banking in the economic development of Pakistan is commendable. Investment in Islamic banking also promotes employment.
Thus, there is a need for banks to move away from traditional thinking not only for their own benefit but also for the betterment of account holders which is in the best interest of the nation and the economy and also for the sustainable development of the banks themselves.
