Introduction to the financial sector of Pakistan:

Pakistan has been ranked 34 out of 52 countries in the World Economic Forums first
Financial Development Report, which was released in Pakistan through the Competitiveness
Support Fund (CSF) in December, 2008. The report is a comprehensive analysis of financial
systems and capital markets in 52 countries that explores key drivers of financial system
development and economic growth in developing and developed countries and serves as a
tool by which countries can benchmark themselves and establish priorities for financial
system improvement. Pakistans Banking sector turned profitable in 2002. Their profits
continued to rise for the next five years and peaked to Rs 84.1 ($1.1 billion) billion in 2006.
Arthur Bayhan, Chief Executive of the Competitiveness Support, told the media: I am very
happy to see that financial system in Pakistan is well reformed and competitive vis--vis Asia
and Europe. Pakistan is ranked ahead of the Russian Federation (35), Indonesia (38), Turkey
(39), Poland (41), Brazil (40), Philippines (48) and Kazakhstan (45). Under Factors, Policies
and Institutions pillar, Pakistan ranks 49th in institutional environment, 50th in business
environment and 37th in Financial Stability.
In the Financial Intermediation Pillar Pakistan ranks 25th in banks, 42nd in non banks and
17th in Financial Markets. Under Capital Availability and Access, Pakistan ranks 33rd.
Indicators showed that in business environment Pakistan had development advantage in
Cost to Export, ranking 6th, Cost of closing business 5th.
In corporate governance Pakistan ranked at the very top in shareholder rights index, 14th in
strength of investor protection.
In the Non banks pillar, Pakistan ranked 9th in the Real growth of direct insurance
premiums. In equity market movement Pakistan ranked at the top again in equity market
turnover.

Importance of financial sector in an economy:

Banks are often described as a nations economic engine, in part because they provide
financial intermediation functions between savers/investors who are looking for safety and
growth and consumers/businesses who are looking for access to credit and capital.Banks
also play a major role as instruments of the governments monetary policy aimed at
regulating interest rates and money supply in the economy. The current economic crisis in
the United States and Europe, marked by the ongoing weakness of major banks and the
resulting credit and capital crunch, underlines the critical importance of the banking sector
in national and global economies. Recognizing the crucial importance of the financial sector
in global economic recovery, the Obama administration is allocating the bulk of the stimulus
money to restore the health of major U.S. banks.
Financial Sector of Pakistan

Page 1

 Pakistan's economy growth from 1947-2010:

Pakistani economy grew at a fairly impressive rate of 6 percent per year through the first
four decades of the nation's existence. In spite of rapid population growth during this
period, per capita incomes doubled, inflation remained low and poverty declined from 46%
down to 18% by late 1980s, according to eminent Pakistani economist Dr. Ishrat Husain. This
healthy economic performance was maintained through several wars and successive civilian
and military governments in 1950s, 60s, 70s and 80s until the decade of 1990s, now
appropriately remembered as the lost decade.

In the 1990s, economic growth plummeted to between 3% and 4%, poverty rose to 33%,
inflation was in double digits and the foreign debt mounted to nearly the entire GDP of
Pakistan as the governments of Benazir Bhutto (PPP) and Nawaz Sharif (PML) played musical
chairs. Before Sharif was ousted in 1999, the two parties had presided over a decade of
corruption and mismanagement. In 1999 Pakistans total public debt as percentage of GDP
was the highest in South Asia 99.3 percent of its GDP and 629 percent of its revenue
receipts, compared to Sri Lanka (91.1% & 528.3% respectively in 1998) and India (47.2% &
384.9% respectively in 1998). Internal Debt of Pakistan in 1999 was 45.6 per cent of GDP
and 289.1 per cent of its revenue receipts, as compared to Sri Lanka (45.7% & 264.8%
respectively in 1998) and India (44.0% & 358.4% respectively in 1998).

Financial Sector of Pakistan

Page 2

After a relatively peaceful but economically stagnant decade of the 1990s, the year 1999
brought a bloodless coup led by General Pervez Musharraf, ushering in an era of accelerated
economic growth that led to more than doubling of the national GDP, and dramatic
expansion in Pakistan's urban middle class.
Pakistan became one of the four fastest growing economies in the Asian region during 200007 with its growth averaging 7.0 per cent per year for most of this period. As a result of
strong economic growth, Pakistan succeeded in reducing poverty by one-half, creating
almost 13 million jobs, halving the country's debt burden, raising foreign exchange reserves
to a comfortable position and propping the country's exchange rate, restoring investors'
confidence and most importantly, taking Pakistan out of the IMF Program.
The above facts were acknowledged by the current PPP government in a Memorandum of
Economic and Financial Policies (MEFP) for 2008/09-2009/10, while signing agreement with
the IMF on November 20, 2008. The document clearly (but grudgingly) acknowledged that
"Pakistan's economy witnessed a major economic transformation in the last decade. The
country's real GDP increased from $60 billion to $170 billion, with per capita income rising
from under $500 to over $1000 during 2000-07". It further acknowledged that "the volume
of international trade increased from $20 billion to nearly $60 billion. The improved
macroeconomic performance enabled Pakistan to re-enter the international capital markets
in the mid-2000s. Large capital inflows financed the current account deficit and contributed
Financial Sector of Pakistan

Page 3

to an increase in gross official reserves to $14.3 billion at end-June 2007. Buoyant output
growth, low inflation, and the government's social policies contributed to a reduction in
poverty and improvement in many social indicators". (see MEFP, November 20, 2008, Para1
The decade also cast a huge shadow of the US "war on terror" on Pakistan, eventually
turning the nation into a frontline state in the increasingly deadly conflict that shows no
signs of abating. Along with the blood and gore and chaos on the streets, there are hopeful
signs that rule of law and accountability is beginning to prevail in the country with the
restoration of representative democracy and independent judiciary, largely in response to
an increasingly assertive urban middle class, vibrant mass media and growing civil society.
The Zardari-Gilani government inherited a relatively sound economy on March 31, 2008. It
inherited foreign exchange reserves of $13.3 billion, exchange rate at Rs62.76 per US dollar,
the KSE index at 15,125 with market capitalization at $74 billion, inflation at 20.6 per cent
and the country's debt burden on a declining path. The government itself acknowledged in
the same document that "the macroeconomic situation deteriorated significantly in
2007/08 and the first four months of 2008/09 owing to adverse security developments,
large exogenous price shocks (oil and food), global financial turmoil, and policy inaction
during the political transition to the new government". (Para 3 of the MEFP, November 20,
2008.
Why is it that Pakistani economy has done well under military governments and performed
poorly when led by politicians? To put it all in perspective, let's recall how late Dr. Mahbub
ul-Haq, the renowned Pakistani economist who is credited with the idea of UNDP's human
development index (HDI), explained the corrosive impact of political patronage on economic
policy in Pakistan. In a 10/12/1988 interview with Professor Anatol Lieven of King's College
and quoted in a recent book "Pakistan-A Hard Country", here is what Dr. Haq said:
"..Every time a new political government comes in they have to distribute huge amounts of
state money and jobs as rewards to politicians who have supported them, and short term
populist measures to try to convince the people that their election promises meant
something, which leaves nothing for long-term development. As far as development is
concerned, our system has all the worst features of oligarchy and democracy put together.
That is why only technocratic, non-political governments in Pakistan have ever been able to
increase revenues. But they can not stay in power for long because they have no political
support...For the same reason we have not been able to deregulate the economy as much
as I wanted, despite seven years of trying, because the politicians and officials both like the
system Bhutto (Late Prime Minister Zulfikar Ali Bhutto) put in place. It suits them both very
well, because it gave them lots of lucrative state-sponsored jobs in industry and banking to
take for themselves or distribute to their relatives and supporters."

Financial Sector of Pakistan

Page 4

 Role and Responsibilities of State Bank of Pakistan

The scope of the Banks operations was considerably widened in the State Bank of Pakistan
Act 1956, which required the Bank to "regulate the monetary and credit system of Pakistan
and to foster its growth in the best national interest with a view to securing monetary
stability and fuller utilization of the countrys productive resources". Under financial sector
reforms, the State Bank of Pakistan was granted autonomy in February 1994.On 21st
January, 1997.
Like a Central Bank in any developing country, State Bank of Pakistan performs both the
traditional and developmental functions/role to achieve macro-economic goals. The
traditional functions, which are generally performed by central banks almost all over the
world, may be classified into two groups:
a) Primary Functions.
b) Secondary Functions.

Primary functions including:

Issue of notes.
Regulation and supervision of the financial system.
Bankers bank.
Lender of the last resort.
Banker to Government.
Conduct of monetary policy.

Secondary functions including:

The agency functions like management of public debt,

management of foreign exchange, etc.

Main Responsibilities
Regulation of liquidity:
Being the Central Bank of the country, State Bank of Pakistan has been entrusted with the
responsibility to formulate and conduct monetary and credit policy in a manner consistent
with the Governments targets for growth and inflation and the recommendations of the
Monetary and Fiscal Policies Co-ordination Board with respect to macro-economic policy
objectives.
Financial Sector of Pakistan

Page 5

To regulate the volume and the direction of flow of credit to different uses and sectors, the
Bank makes use of both direct and indirect instruments of monetary management. Until
recently, the monetary and credit scenario was characterized by acute segmentation of
credit markets with all the attendant distortions. Pakistan embarked upon a program of
financial sector reforms in the late 1980s.

Regulation & Supervision:

One of the fundamental responsibilities of the State Bank is regulation and supervision of
the financial system to ensure its soundness and stability as well as to protect the interests
of depositors. The rapid advancement in information technology, together with growing
complexities of modern banking operations, has made the supervisory role more difficult
and challenging. The institutional complexity is increasing, technical sophistication is
improving and technical base of banking activities is expanding. All this requires the State
Bank for endeavoring hard to keep pace with the fast-changing financial landscape of the
country. Accordingly, the out dated inspection techniques have been replaced with the new
ones to have better inspection and supervision of the financial institutions. The banking
activities are now being monitored through a system of off-site surveillance and on-site
inspection and supervision. Off-site surveillance is conducted by the State Bank through
regular checking of various returns regularly received from the different banks. On other
hand, on-site inspection is undertaken by the State Bank in the premises of the concerned
banks when required.
To deepen and broaden financial markets as also to diversify the sources of credit, a number
of non-bank financial institutions (NBFIs) were allowed to increase substantially. The State
Bank has also been charged with the responsibilities of regulating and supervising of such
institutions. To regulate and supervise the activities of these institutions, a new Department
namely, NBFIs Regulation and Supervision Department was set up. Moreover, in order to
safeguard the interest of ultimate users of the financial services, and to ensure the viability
of institutions providing these services, the State Bank has issued a comprehensive set of
Prudential Regulations (for commercial banks) and Rules of Business (for NBFIs).
The "Prudential Regulations" for banks, besides providing for credit and risk exposure limits,
prescribe guide lines relating to classification of short-term and long-term loan facilities, set
criteria for management, prohibit criminal use of banking channels for the purpose of
money laundering and other unlawful activities, lay down rules for the payment of
dividends, direct banks to refrain from window dressing and prohibit them to extend fresh
laon to defaulters of old loans. The existing format of balance sheet and profit-and-loss
account has been changed to conform to international standards, ensuring adequate
transparency of operations. Revised capital requirements, envisaging minimum paid up
capital of Rs.500 million have been enforced. Effective December,1997, every bank was
Financial Sector of Pakistan

Page 6

required to maintain capital and unencumbered general reserves equivalent to 8 per cent of
its risk weighted assets.
The "Rules of Business" for NBFIs became effective since the day NBFIs came under State
Banks jurisdiction. As from January, 1997, modarbas and leasing companies, which are also
specialized types of NBFIs, are being regulated/ supervised by the Securities and Exchange
Commission (SECP), rather than the State Bank of Pakistan.

Exchange rate management & Balance of payments:

One of the major responsibilities of the State Bank is the maintenance of external value of
the currency. In this regard, the Bank is required, among other measures taken by it, to
regulate foreign exchange reserves of the country in line with the stipulations of the Foreign
Exchange Act 1947. As an agent to the Government, the Bank has been authorized to
purchase and sale gold, silver or approved foreign exchange and transactions of Special
Drawing Rights with the International Monetary Fund under sub-sections 13(a) and 13(f) of
Section 17 of the State Bank of Pakistan Act, 1956. The Bank is responsible to keep the
exchange rate of the rupee at an appropriate level and prevent it from wide fluctuations in
order to maintain competitiveness of our exports and maintain stability in the foreign
exchange market. To achieve the objective, various exchange policies have been adopted
from time to time keeping in view the prevailing circumstances. Pak-rupee remained linked
to Pound Sterling till September, 1971 and subsequently to U.S. Dollar. However, it was
decided to adopt the managed floating exchange rate system w.e.f. January 8, 1982 under
which the value of the rupee was determined on daily basis, with reference to a basket of
currencies of Pakistans major trading partners and competitors. Adjustments were made in
its value as and when the circumstances so warranted. During the course of time, an
important development took place when Pakistan accepted obligations of Article-VIII,
Section 2, 3 and 4 of the IMF Articles of Agreement, thereby making the Pak-rupee
convertible for current international transactions with effect from July 1, 1994.
After nuclear detonation by Pakistan in 1998, a two-tier exchange rate system was
introduced w.e.f. 22nd July 1998, with a view to reduce the pressure on official reserves and
prevent the economy to some extent from adverse implications of sanctions imposed on
Pakistan. However, effective 19th May 1999, the exchange rate has been unified, with the
introduction of market-based floating exchange rate system, under which the exchange rate
is determined by the demand and supply positions in the foreign exchange market. The
surrender requirement of foreign exchange receipts on account of exports and services,
previously required to be made to State Bank through authorized dealers, has now been
done away with and the commercial banks and other authorized dealers have been made
free to hold and undertake transaction in foreign currencies.

Financial Sector of Pakistan

Page 7

As the custodian of countrys external reserves, the State Bank is also responsible for the
management of the foreign exchange reserves. The task is being performed by an
Investment Committee which, after taking into consideration the overall level of reserves,
maturities and payment obligations, takes decision to make investment of surplus funds in
such a manner that ensures liquidity of funds as well as maximises the earnings. These
reserves are also being used for intervention in the foreign exchange market. For this
purpose, a Foreign Exchange Dealing Room has been set up at the Central Directorate of
State Bank of Pakistan and services of a Forex Expert have been acquired.

Developmental role of state bank:

The responsibility of a Central Bank in a developing country goes well beyond the regulatory
duties of managing the monetary policy in order to achieve the macro-economic goals. This
role covers not only the development of important components of monetary and capital
markets but also to assist the process of economic growth and promote the fuller utilisation
of a countrys resources.
Ever since its establishment, the State Bank of Pakistan, besides discharging its traditional
functions of regulating money and credit, has played an active developmental role to
promote the realisation of macro-economic goals. The explicit recognition of the
promotional role of the Central Bank evidently stems from a desire to re-orientate all
policies towards the goal of rapid economic growth. Accordingly, the orthodox central
banking functions have been combined by the State Bank with a well-recognised
developmental role.
The scope of Banks operations has been widened considerably by including the economic
growth objective in its statute under the State Bank of Pakistan Act 1956. The Banks
participation in the development process has been in the form of rehabilitation of banking
system in Pakistan, development of new financial institutions and debt instruments in order
to promote financial intermediation, establishment of Development Financial Institutions
(DFIs), directing the use of credit according to selected development priorities, providing
subsidised credit, and development of the capital market.

Financial Sector of Pakistan

Page 8

 Functions & Roles

Primary Functions:
Issue of Notes:

SBP is the sole authority to issue currency notes in the country. SBP has issued 10,
20, 50, 100, 500, 1000, 5000 denomination rupees note.
10, 20, 50 and 100 rupee are issued by the SBP in July 1976. 500 rupee note was
issued in April 1986. 1000 rupee note in July 1987 and 5000 rupee note in 2005.
SBP has 3 offices of note issue situated at Karachi, Lahore and Peshawar.

Banker to the Government:

Following are some of the primary functions of SBP.

SBP floats new loans on the behalf of federal and provincial governments.
The bank also accepts the govt. cheques and drafts and also collects such cheques
and drafts which are drawn on other banks.
It is responsible for transferring government funds across the country.
Manages the public debts of the federal & provincial governments.
It also checks and maintains the foreign exchange remittance.
It is authorized to sell govt. treasury bills and prize bonds.
It is responsible for the payment of salaries and pensions, to govt. employees.
It also advances short term loans to the govt. by discounting its treasury bills.
It also advances loans to the govt. These advances are made without demanding
any collateral or securities.

Bankers Bank:
SBP is the bank of all commercial banks working in Pakistan. Commercial banks are entitled
to take loans from State Bank of Pakistan.

All the Scheduled banks are required to maintain at least 5% of the total demand and
time liabilities with the SBP.
Foreign banks working in Pakistan are required to maintain 7% cash reserves for
their demand and time liabilities.

Financial Sector of Pakistan

Page 9

SBP makes advances and loans to such institutions and banks which are working for the
advancement of agriculture and industrial sectors.
It also lends against those securities which have been specified in SBP Act. Also the SBP can
sell, purchase, hold debentures of any banking company or of any financing corporation
which has been set up for the improvement of any sector of the economy.

Lender of Last Resort:

SBP acts as the lender of the last resort for the commercial banks. When commercial banks
are in difficulty and are short of cash, then SBP comes to their help. If at any time of
commercial banks have large debit balances in the interbank clearing, then SBP provide cash
by rediscounting their bills of exchange and by advancing loans against securities. By
performing the lander of Last Resort function, the SBP helps commercial banks in
maintaining their solvency and liquidity.
Conduct of Monetary Policy:
SBP determine the size and rate of growth of the money supply, which in turn affects
interest rates. Monetary policy is maintained through actions such as increasing the interest
rate, or changing the amount of money banks need to keep in the vault (bank reserves).

Secondary
Agent to the Government:
SBP also functions as the agent to the government. It
represents government on various economic issues and monetary matters. It also enjoys the
responsibility of making all sorts of making adjustments regarding conversion or redemption
of government loans. The underwriting of the securities of govt. is also one of the essential
responsibilities of State Bank of Pakistan.

Management of foreign Exchange:

State Bank of Pakistan has the responsibility to take care of
foreign exchange reserves of the country. It ensures that adequate foreign exchange
reserves are maintained. SBP also constantly observes the level of foreign investment in
domestic assets. It is also responsible for the determination of exchange rates.

Financial Sector of Pakistan

Page 10

WHAT IS A BANK? DISCUSS THE ROLE OF COMMERCIAL BANKS IN ECONOMIC

DEVELOPMENT OF PAKISTAN?

Introduction:
Various economists have different views about the role of commercial banks in
economic development. Schumpeter says, It is the banking system which serves as a
key agent along with the entrepreneur in the process of economic development.
According to Prof. Cameron in his Banking and Economic Development, a banking
system may make a positive contribution to economic growth and development.

What is a commercial bank?

A commercial bank is something with which every one of us is well known.
However different bankers and economists have defined it in a different way:
According to Banking Companies Ordinance 1962
Banking means the accepting for the purpose of lending or investing of deposits of
money from the public repayable in demand or otherwise and withdraw-able by cheque,
draft order or otherwise.
From above definitions, we conclude that bank is an institute, which is established for
the depositing, withdrawing and borrowing money.

What is economic development?

Definition:
It refers to the process whereby the total supply of goods and services of the society
increases leading towards improved living standards.
The following is the list of notable banks in Pakistan. State Bank of Pakistan is the central
bank of Pakistan.

Contents:

Nationalized scheduled banks

Specialized banks
Card issuers
Commercial banks
Development finance institutions
Foreign banks
Islamic banks
Microfinance banks

Financial Sector of Pakistan

Page 11

 Nationalized Scheduled Banks:

National Bank of Pakistan

Bank of Khyber
Bank of Punjab
First Women Bank
Sindh Bank

Specialized Banks:

Industrial Development Bank

Zarai Taraqiati Bank Limited

Card Issuers:

Allied Bank Limited

Askari Bank
Bank AL Habib
Bank Alfalah Limited
Burj Bank (Formerly Dawood Islamic Bank)
Citibank Pakistan
Dubai Islamic Bank
Faysal Bank (Formerly Royal Bank of Scotland Pakistan)

Habib Bank Limited

JS Bank
Khushhali Bank of Pakistan
MCB Bank Limited
Meezan Bank Limited
NIB Bank (formerly known as PICIC Commercial Bank)
Soneri Bank
Standard Chartered Bank Pakistan
Summit Bank (formerly known as Arif Habib Bank)
Tameer MicroFinance Bank Limited

United Bank Limited

Financial Sector of Pakistan

Page 12

 Commercial Banks

Allied Bank Limited

Bank AL Habib
Bank Alfalah
Askari Bank
Barclays Bank Pakistan
First Women Bank
Faysal Bank
Habib Bank Limited
Habib Metropolitan Bank

Habib Bank AG Zurich

JS Bank
KASB Bank Ltd
MCB Bank Limited
NIB Bank (formerly known as PICIC Commercial Bank)
Soneri Bank
Summit Bank
United Bank Limited
Samba Bank Limited
Standard Chartered Pakistan

Development Finance Institutions

Asian Housing Finance Limited

Foreign Banks

Barclays Bank PLC

Deutsche Bank AG
HSBC Bank Middle East Limited
Industrial and Commercial Bank of China Limited

The Bank of Tokyo-Mitsubishi UFJ Limited

Financial Sector of Pakistan

Page 13

 Islamic Banks

Al Baraka Bank

Bank Islami Pakistan Limited

Burj Bank
Dubai Islamic Bank Pakistan Limited
Meezan Bank Limited

Microfinance Bank

Khushhali Bank Limited

NRSP Microfinance Bank

Tameer Microfinance Bank Limited

U Microfinance Bank Limited

Role or importance of economic development in pakistan:

Commercial banks play an important role in the process of economic development,
which is clear from the following points:
1)

Capital Accumulation or Formation

Capital formation refers to the increase in the existing stock of capital goods in an
economy. Commercial banks remove the capital deficiency by encouraging saving and
investment. The commercial banks can promote capital formation in the country by
moving the resources to the productive uses. Rate of capital formation is 5 % in Pakistan.

2)

Mobilization of Savings
There operates vicious circle of poverty in developing countries like Pakistan. So,
savings remain at the lowest level. Savings of people are very low due to international
demonstration effect in Pakistan. Banks are playing important role in the mobilization of
saving by introducing a variety of saving schemes. Banks induce the people to earn
interest through saving and it provides various facilities in a country to create a will and
power to save. Domestic savings are 9.5 % of GDP.

Financial Sector of Pakistan

Page 14

3)

Availability of Funds
An additional point of role of banks is more availability of funds. Poor population has
poor resources for the economic development in poor countries like Pakistan. the
activities like inventions and innovations, research and development and initiatives
(effectiveness in responding to challenges) are impossible due to insufficiency of funds
in these countries. Banks remove the deficiency of capital by providing different types of
funds that leads to economic development.

4)

Attaining Self Sufficiency

A major problem faced by the developing countries is burden of foreign debts and
dependence on other countries. Commercial banks provide incentive for the
entrepreneurs to take risks and to use idle resources for more and better production. So,
banks are helpful in attaining self-sufficiency. Banks provide loan to develop the various
economic sectors. It results in reduction in imports and increase in exports. Accordingly,
banks are very important to achieve the self-sufficiency.

5)

Implementation of Modern Technology

Economic development without use of advanced and the most up-to-date technology
is impossible. Almost in all the economic sectors backward techniques of productions
are used due to poverty in third world countries like Pakistan. Commercial banks provide
more funds to people to make it possible to use the modern techniques of production.
Due to implementation of modern technology, there is increase in production level,
decrease in cost and save in time.

6)

Development of Agriculture Sector

All the regions and all the sectors of the economy are not equally efficient and
developed in an economy. There is big need to develop the backward regions and
sectors for the economic development. Rural areas and agricultural sector is still
backward In Pakistan. Banks are playing an important role in the development of rural
and agriculture sector. A special bank ZTBL has a major role in development of rural and
agriculture sector. Growth rate of agricultural sector is 1.2 %.

7)

Development of Industrial Sector

Industrial sector is the backbone of their economies in rich nations. It is still
backward in Pakistan. Commercial banks provide different types of loans for the
development of industrial sector. Some special industrial development commer cial
Financial Sector of Pakistan

Page 15

banks i.e., PICIC, IDBP etc. are provided their remarkable services for the development
of industrial sector. Industrial development leads to agricultural development and it
results in economic development. Growth rate of industries is 1.7%.
8)

Expansion of Market
Commercial banks help in the expansion of market. They help in the formation of
sound economic infrastructure in order to raise living standards and to expand trade and
commerce of an economy. Commercial banks cause development of industrial as well as
agriculture sector. Accordingly, there is expansion of market that results in economic
development.

9)

Research and Development

Commercial banks, sometimes, provide finances for research and development,
which leads to inventions and innovations. Various institutes in Pakistan are operating
by the loan provided by the banks. Modern techniques are established and these are
applied to economy in research institutes. Due to use of modern techniques of
production, better quality and more quantity is produced which leads to improve the
living standard of population.

10) Essential for Foreign Trade

Foreign trade is one of the most important needs of all the countries of the world.
Today international trade, without involving banks, is so difficult. International trade is
necessary for the economic development. Commercials banks are helpful in increasing
international trade through following ways:

Provision of credit facilities

Low rate of interest for the exporters

Opening of letter of credit (L/C)

Arrangement of foreign exchange

Opening of foreign currency accounts

Commercial banks have $ 2.2571 billion of foreign exchange reserves

11) Remove Budget Deficits

The commercial banks are very helpful for the government. Now a day, the
government has to face the budget deficits because of increased expenditures and
falling revenues. In this situation, government has to depend upon deficit financing to
Financial Sector of Pakistan

Page 16

meet the budget deficits. To cover the gap between the expenditures and revenues,
government borrows from the banks. As a result, the development process can be
started through borrowed money from banks. Budget deficit is 5.3 % of GDP.
12) Optimum Utilization of Resources
Commercial banks help in the just and optimum allocation of resources. Some mega
projects cannot be started due to the lack of capital. Commercial banks provide loans
and remove the problem of deficiency of capital. Due to use of resources in an econo my,
there is increase in production, income and employment etc. Increase in these things
leads to economic development. Natural resources contribute to GDP just less than 1 %.
13) Surplus in Balance of Payment
Developing countries are facing the problem of deficit in their balance of payment.
Commercial banks are helpful to overcome this problem. Due to commercial banks, a
country can improve its economy and can attain the self-sufficiency all this causes in
favourable balance of trade. So, banks are helpful for the surplus in balance of payment.
14) Creators and Distributors of Money
Creation of money and distribution of money are the two main objectives of
commercial bank. Commercial banks move the finances toward productive uses. There
are a lot of problems in the way of economic development like inflation, deflation, low
investment and saving etc. All these problems are possible to remove through creation
and distribution of money by commercial banks. So, fluctuation in the supply of money
can attain the economic development.
15) Provision of Valuable Services
The commercial banks are providing a lot of valuable services for the economic
development. Some of the most important services provided by commercial banks are as
under:

Banks serve as business and commercial agents of their customers.

Banks provide locker facility.

Banks accept the various utility bills.

They guide the investors while making investment decisions.

Banks advance loans for education in foreign countries.

Financial Sector of Pakistan

Page 17

16) Modern Facilities

Now commercial banks are providing various modern facilities like:

PC & Internet banking since 2003, PC banking available to all HBL

customers in 14 cities.

ATM & Online facilities & Balance ready cash etc.

Mobile Banking and Call Centres, Smart Card and Debit Card.

DD issuance, Statement inquiry and credit cards.

Insurance Sector
Insurance Sector has registered a very slow growth in the history of Pakistan. Based on our
research, the following conclusions emerge:
1. Listed insurance sector on Karachi Stock Exchange in terms of companies is only
4.4%.
2. Share of listed insurance sector on total listed companies on Karachi Stock Exchange
is only 1.41%.
3. Out of 637 listed companies, only 29 relate to insurance sector.
4. From the birth of Pakistan till now we have added only 29 listed companies- giving us
a ratio of less than 0.5 per company per year.
5. Turnover for 10 months (January October 2007) on the Karachi Stock market was
only 1.55% of the total turnover.
6. Share of insurance sector on listed companies on Karachi Stock Exchange is only
3.83% in respect of Market Capitalization.
7. Share of insurance in GDP of Pakistan is only 1.80%. Ten percentage companies
shares are listed below par. Therefore, these are sick. They need revival.
8. In the case of life insurance there is a vast scope. State Life Insurance Corporation of
Pakistan should be immediately privatized. Their Mission Statement should be
reviewed and revisited and on war-footing Insurance Policy of a vibrant nature
should be developed so that Insurance Sector starts serving the economy of the
country. As of today, excluding Group Insurance, there are hardly 2.5 million people
in a total population on 166 million who enjoy the life insurance cover. This
percentage requires to be given a quantum jump so that its expansion is seen for the
Financial Sector of Pakistan

Page 18

benefit of the community. In this respect, we plan to develop a draft Insurance Policy
for submission to the democratic Government of Pakistan so that they give a serious
attention to this critical area and also develop insurance

(Conventional)

and

Takaful (Islamic Insurance)

Insurance in Pakistan is regulated under the Insurance Ordinance, 2000. In the past few
years, it has transformed into a developing and fastly growing market that is generally
divided into three components: life insurance, general insurance and health insurance.
The Government of Pakistan established the Department of Insurance in April 1948 as a
department of the Ministry of Commerce; the aim of this department is to take care of
affairs related to the insurance industry. Out of the 54% that Pakistan's service sector
contributes to the national GDP, insurance, along with transport, storage, communications
and finance occupy 24% of the sector.

Insurance Industry Scenario In Pakistan:

The insurance industry in Pakistan, which should be described as a business rather than
anindustry has shown some rapid progress in recent years. When Pakistan was established
in1947, there were 77 insurance companies in all. Today there are 52. In 1947, 70 of those
77companies were foreign companies and/or their branches. Today there are 10. The seven
localcompanies have 47 years later become 42, and might have been more had 32 of them
not beennationalised on March 18, 1972, when their life insurance business was brought
into the publicsector, and consolidated under the aegis of the State Life
Insurance Corporation of Pakistan.
Today, Pakistan has 52 companies conducting general
business. They
offer primarily
Fire,Marine, Motor and Accident cover. The composition of general insurance business is
Understandable, considering the lack of sophistication of our domestic environment. In
1993,Fire (including-Profits) accounted for 32.2 per cent of the Gross Direct Premiums,
Motor
for 33.1 per cent, Marine (including Hull) Premiums for
23 per cent
and Accident (includingEngineering) for 11.7 per cent.
The concentration of business amongst the insurers themselves presents a curiously
disjointed picture. The 10 foreign companies have only a 10.5 per cent share of the Gross
Direct Premiums,and of the 41 Pakistani companies operating in the market, 35 of them
share 18 per cent of the business, while only 6 companies command and control 71.5 per
cent of the general business.

Financial Sector of Pakistan

Page 19

What these companies share in common, though, is an obligation (an onerous one
according tosome) to reinsure a mandatory 20 per cant (it used to be 30%) of their
insurance business withPakistan Insurance Corporation (PIC), which was established in 1952
to provide reinsurancefacilities within Pakistan and overseas, and to develop the insurance
by offering technical andexpert advice. PIC has grown substantially since 1953, with its
Gross Premium Income in thelast five years being above the 1 billion mark. Its overall
profitability has wavered, falling froman all time high of Rs. 119 million in 1991 to below Rs.
50 million in 1991.
Apart from this obligation to reinsure with PIC, the general insurance companies are left
largelyto themselves and expected to be self-regulatory. Their Fire, Motor, Workmen's
Compensationand Marine classes of business are governed by a Tariff which is determined
by themselvesthrough their Insurance Association. Their maximum statutorily approved
agency commissionrates of 15 per cent for Marine business and 20 per cent for Non-Marine
business have become more gentlemanly statements of intent than rigorously enforced
standards.
In their business, insurance companies are monitored by the Controller of Insurance, anad
ministrative arm not of the Ministry of Industries but of the Ministry of Commerce. They
areregulated by Insurance Rules of 1958, approved in the same year as the distant Martial
Law coupof Ayub Khan. And they are governed by a law - the Insurance Act of 1938,
promulgated a year before the outbreak of the Second World War. To fatalism and
pragmatism, one should perhapstherefore add the world Archaism, for no sector of
Pakistan's financial services market stands sodeeply mired in its past, nor has as much need
for deregulation and modernisation, if it is to prepare itself for the future. than the
insurance business sector in Pakistan.
There is no equivalent to the Companies Ordinance 1984 in the insurance sector. There is
noappropriate counterpart to the Corporate Law Authority, to give an impetus to its
development or to safeguard the interest of the public. The recent spectacular growth in the
financial servicessector, in my opinion, was no accident. It was the direct fertile result of an
environment madereceptive by regulated incentives and governmental initiative.
Can the insurance business of Pakistan achieve the same sort of success? I cannot see
why not.What than should be the direction of the insurance sector? What should be its
role? An attemptwas made seven years ago to answer these questions when, in 1987, a
Government Commissionwas constituted to diagnose the malaise in the insurance sector.
The report, submitted to theGovernment three years later, identified some of its more
reprehensible
practices
for
example,the methods used by insurance companies to obtain business particularly through
banks,irregularities in settlement of claims, the indisciplined and unethical practices of
insurance surveyors, methods of rebating, commissions to agents, and discounts.
Financial Sector of Pakistan

Page 20

Whatever good that three volume report contained was interred with its bones; the evils it
hopedto exercise continued to live long after it. More recently, last year in August 1993,
another reviewtook place when, in an Overview of the Insurance Industry by one of the
leading brokeragehouses, Khadim Ali Shah Bukhari Limited, the major problems were
identified as:

Excessive Government controls

Compulsory reinsurance with PIC
High capital gains tax on investment gains
Higher rate of tax on dividend income than 10%
Inaccessibility to public sector business, which is the domain of the National
Insurance Corporation
Poor quality of manpower and limited training facilities

It would be hard to question the justification for these complaints. It would be even harder
to justify why the insurance companies have done so little to assuage them. If the future
of business sector is to grow and match the expanding requirements of Pakistan'seconomy,
there are key areas in which the insurance companies must themselves take theinitiative.
The first must be education. No one should be allowed to forget that insurance being
acustomer service oriented business, its success depends heavily on the quality and calibre
of its personnel. In the United Kingdom, it was once considered enough for a new entrant
into the business to have five GCEO levels and then spend his life within the same
organisation learningthe job on the job. Today, anyone wanting to make a career in
Insurance should expect to beready to tackle very focused courses, like those conducted by
the College of Insurance in London.
Insurance may have been a business by men; it is rapidly becoming one managed by
women. Aninteresting aftermath of the second income phenomenon has been that in the
United Kingdom,out of a total employment in the insurance business of almost 400,000
employed, 49.3 per centhave been women. Another significant feature has been that 8 per
cent are the total strength is self-employed.
This emphasis on education, though needs to go beyond the potential or existing employees
ininsurance companies. Another audience whose knowledge of the insurance business
should never be presumed but whose ignorance can have damaging consequences is that
of the law makers themselves. It took Great Britain over a century to recognise the
significance of this advantage.Only as recently as 1991 was an All Party Parliamentary Group
on Insurance and FinancialServices formed to act as a bridge between the lawmaking MPs
and a law-abiding industry.
Without a better understanding of the business of insurance, should one honestly expectlegi
slators to be able or equipped to promulgate sound and appropriate laws? And what about
Financial Sector of Pakistan

Page 21

thelaws themselves? Can there be legislation of any adequacy without an accepted

definition of such simple but crucial words in a policy as 'theft', or 'flood', 'accidental bodily
injury' or 'reasonable steps to safeguard any property insured? Are we ourselves clear on
what we allunderstand by Warranties, Responsibilities for Disclosure, Misrepresentations,
and the Broker'sresponsibilities to his or her clients?
Such legislative clarity is difficult to achieve but necessary to attain, for without such a
suitable legal framework, and a regulatory environment which is both sensitive to and
responsive to changes, the future growth of the insurance business in Pakistan will continue
as before - a blind perpetuation of arcane laws and the mindless repetition of previous
practices. Can Pakistan afford such an addition to history? Can our insurance Industry avoid
the responsibility for developing new products more attuned to the specific needs of our
economy?
The future of the insurance sector must connect with the permanent features of our
economy. If we are still fundamentally an agrarian society, we have to expand crop,
livestock and other such agrarian insurance schemes. The 1988 National Commission on
Agriculture, incidentally, makes no mention of insurance anywhere in its 644 page report. If
we are gradually expanding into an urban economy, we have to consider widening schemes
which provide household and personal effects insurance.
If we want to build our own motor cars to speed on our own multi-lane highways, we have
to fashion policies which provide cover not simply for the vehicles, its passengers, third
party liability, but also anticipate the responsibilities incumbent on highway authorities
regarding the condition of the roads. If we want to maximise the safer and more efficient
use of our railway system, we must encourage the Pakistan Railways to obtain cover for
risks which are germane to their operations. Similarly, insurance cover of transport by road
should not be left to the good will of the transporters, many of whom regard self-insurance,
like rash driving, as the best form of protection.
If we are veering towards industrialisation, products coverage should have to go beyond
fire insurance of the factory and stocks Loss of profits insurance, safety standards, more
open disclosure of actual replacement values, a fairer participation of the premium/risk are
some of the more brittle realities businessmen will have to learn to accommodate. Health
insurance will become more than simply reimbursing medical bills. It could and must in time
cover risks in obstetrics and gynaecology, health care management, managing financial risks
like contract clauses and indemnities, drugs cases and claims associated with environmental
hazards.
And if we are a nation that attaches a value to the life and well-being of our citizens, a
nation which advocates the work ethic, and a nation which encourages life insurance as a
means of channelling savings into productive investment, the future role of the insurance

Financial Sector of Pakistan

Page 22

sector - both of Life and General - will be a translation of these responsibilities and
opportunities into productive action.
The largest mobiliser of funds in the insurance market has been unquestionably the State
Life Insurance Corporation of Pakistan. Since 1972, following the traumatic nationalisation
of life business, SLIC has grown tremendously. Its premium income has increased from Rs.
316 million in 1973 - the first year of its consolidation to Rs. 5 billion in 1994, equalling the
total Gross Direct Premium of all the 52 companies in the general sector.
SLIC's investment portfolio grew from Rs. 1.4 billion to Rs. 21 billion, and not surprisingly
SLIC's investment income has now become almost one-third of its total income. Its yield on
Life Funds is about 14.4 per cent which may explain why the new companies which have
been granted permission to do life business are displaying an understandable hesitancy.
Nothing is secret in the public sector, and certainly the use of SLIC's funds over the years to
finance Government has been no secret. SLIC's portfolio consists primarily of Government
securities. That in itself is not a problem. What one needs to identify is the impact on the
Government's reliance upon SLIC as a resource, should SLIC be privatised to the point where
its policies could be brought more in line with market imperatives and competitive
investment options.
It is already more than eight years since the Insurance Reforms Commission was
established. During this period, because of Deregulation and Privatisation, the whole
financial services market has undergone an irreversible change. Further privatisation will
bring about additional responsibilities, which means more costs, as insurance of commercial
risks becomes no longer a matter of choice but an inescapable requirement. Businessmen of
tomorrow will have to accept that insurance policies are not a chance talisman against
calamities. Used prudently, they can be are silient and reliable safety net, providing them
and the economy with a level of confidence to take risks which are quantifiable and
knowingly and prudently underwritten.
In another six years Pakistan will be in the 21st century. No one would expect that all of the
aspects of the insurance business whether legislative, regulatory or commercial - will be in
place by then. A reasonable expectation would be that significant steps would be taken to
move in those directions.
Talleyrand once said that war is much too serious a business to be left to military men.
Similarly, perhaps, the future role of Insurance in Pakistan is too serious to be left only to
insurancemen.Its future lies in the hands of better informed legislators, more responsible in
surance professionals, and perhaps most importantly of all, more discerning and demanding
customersthemselves. Collectively they can, and I am sure, will fashion the future role of the
insurancesector in Pakistan.

Financial Sector of Pakistan

Page 23

List of major insurance companies in Pakistan:

1. ACE Insurance Ltd.
2. Adamjee Insurance Co. Ltd.
3. Agro Gen. Ins. Co. Ltd.
4. Alfalah Insurance Company Ltd.
5. Alpha Insurance Co. Ltd.
6 American Life Insurance Co.(Pak.) Ltd.
7. Asia Insurance Co. Ltd.
8. Askari Gen. Ins. Co. Ltd.
9. Atlas Insurance Limited
10. Capital Insurance Co. Ltd.
11. Central Insurance Co. Ltd.
12. Century Insurance Co. Ltd.
13. Cooperative Ins. Society of Pak. Ltd.
14. Crescent Star Ins. Co. Ltd.
15. East West Insurance Co. Ltd.
16. East West Life Assurance Company Ltd.
17. EFU General Ins. Ltd.
18. EFU Life Assurance Limited
19. Excel Insurance Co. Ltd.
20. Habib Insurance. Co. Ltd.
21. IGI Insurance Limited
22. New Hampshire Ins. Co.
23. New Jubilee Ins. Co. Ltd.
24. New Jubilee Life Insurance Company Ltd.
25. Pakistan Gen. Ins. Co. Ltd.
Financial Sector of Pakistan

Page 24

26. PICIC Insurance Limited

27. Premier Insurance Limited
28. Reliance Insurance Co. Ltd.
29. Saudi Pak Insurance Company Ltd
30. Security Gen. Insc. Co. Ltd.
31. Shaheen Ins. Co. Ltd.
32. Silver Star Ins. Co. Ltd.
33. Trakker Direct Insurance Limited
34. UBL Insurers Limited
35. United Ins. Co. of Pak. Ltd.
36. Universal Ins. Co. Ltd.

Constraints and their solutions faced by the economy:

Major Problems:

Political instability.
Underdeveloped capital market.
Govt & public debts.
Shortcomings in foreign exchange.
Foreign Loans

Solutions:
Strengthen Investment Banking.
Promotion of banking at the grassroots level.
Strong coordination between monetary and fiscal authorities.

Financial Sector of Pakistan

Page 25

References
www.sbp.org.pk
www.secp.govt.pk
www.finance.govt.pk/survey
www.scribd.com
www.nation.com.pk/business
www.wikipedia.com
www.ehsankhaneco.blogspot.com
www.googlescholers.com
Articles by Khawaja Amjad Seed
Money Banking and Finance by Riaz Ahmed Mian

Financial Sector of Pakistan

Page 26