Rana Aqeel, Hassan Mohi-ud-Din, Umer Toor, Waqas Khalique, Sehrish Asghar Group 2: 1974 Nationalization & ...
1st Jan 1974 – Nationalization of Financial Sectors• Bank Nationalization Ordinance enforced in 1974, 1st J...
Events Leading to Nationalization of Banks• Meenai identified following issues in 1960s: – Credit concentrated in bigger...
Events leading to Nationalization (II): A Change in the Air• Recommendations of 1962 Credit Commission...
Exploitation of Industrialists• Owned lot of banks• Most accounts belonged to them• Looted resources• Maintained h...
Objectives of Nationalization of Banks• “Directing banking activity toward national socio- economic development• Achievin...
1972 Reforms: First Love• 1972 Banking Reforms – prelude to Nationalization: – SBP authorized to remove BoDs, directors...
Structural Changes• A concentrated nation-wide banking system similar to 4 banks in UK• Unlike UK, Pakistani banks were: ...
Introduction of Credit CeilingsPutting limits on credit to a sector:A. Purpose: direct credit to agriculture sector – P...
Pakistan Banking Council (PBC)Operation | control | administration | interference Source: Meenai, Money & banking in Paki...
Years of Massive Expansion & Growth (I)• Branches: – 1971: 2,000+ vs. 1978: 7,000+• Employment: A goal: 40% incre...
Years of Massive Expansion & Growth (II): Reasons• Increase in branches: – PBC’s policy: a bank branch for ...
Sector-wise Growth in Advances: Change of Heart Group 2: 1974 Nationalization & ...
Agricultural Financing• Increase in credit given to agricultural units for seeds,tractors, etc.• Increased growth of agric...
Financial Analysis: Profitability Question• ROA: decreasing trend due to well in excess reserve ratio which hampered prof...
Group 2: 1974 Nationalization & Financial Sector An Irony: Savings Boom, Profits Doo...
Impact on Monetary Assets• Increase in monetary assets created inflationary pressures on economy• -10.5% real interest ...
Role of Development Finance Institutions (I): Chaos• DFIs got low cost (below market rate) long-term li...
Role of Development Finance Institutions (II): Chaos Group 2: 1974 Nationalization & ...
Evaluating Nationalization: Brighter Side Group 2: 1974 Nationalization & ...
Evaluating Nationalization (I): Darker Aspects• Destroyed profitable banks (ROA)• Profitability of NCBs reduced due to hig...
Evaluating Nationalization (II): Darker Aspects• “You can bring the rich to the level of poor overnight but it takes a li...
Afterthoughts• You don’t have to kill industrialists for equity• Interlocking of credit & industries natural (with/withou...
References• Books – Govt. of Pakistan, Pakistan Economic Survey, various issues – Khan, S. K. (ed.) 50 Years o...
of 24

Nationalization of financial sector pakistan 1974

An analytical presentation on 1974 nationalization of banks and financial instituitions in Pakistan. Draws on primary sources: government and non-governmental sources, including, old economic surveys, books and research papers on the topic. Information about this topic is scarce and an open field for financial-analytical research.For more explanation of slides, contact at: Done by:Umer Toor, Hassan Mohi-ud-Din, Aqeel Rana, Waqas Khalique, Sehrish Asghar
Published on: Mar 3, 2016
Published in: Business      Economy & Finance      
Source: www.slideshare.net


Transcripts - Nationalization of financial sector pakistan 1974

  • 1. Rana Aqeel, Hassan Mohi-ud-Din, Umer Toor, Waqas Khalique, Sehrish Asghar Group 2: 1974 Nationalization & 1 Financial Sector
  • 2. 1st Jan 1974 – Nationalization of Financial Sectors• Bank Nationalization Ordinance enforced in 1974, 1st Jan: – Exclusive rights of ownership, management & control of all banks to Federal Govt. – Shareholders compensated for their holdings with Federal bonds• Roots of nationalization in 1960s development in banking sector & economySource: Zaidi, S. A., Issues in Pakistan Economy, OUP. 2004, p. 264 Group 2: 1974 Nationalization & 2 Financial Sector
  • 3. Events Leading to Nationalization of Banks• Meenai identified following issues in 1960s: – Credit concentrated in bigger a/c of 22 families – Interlocking of bank ownership & industries: exploitation of deposits – Rural area & small businesses’ disparities – Large margins (Margin = Rate of lending – Rate of borrowing) – Illegal gratification to institutional personnelSource: Meenai, S. A., Money & Banking in Pakistan, OUP. 1984, p. 230 Group 2: 1974 Nationalization & 3 Financial Sector
  • 4. Events leading to Nationalization (II): A Change in the Air• Recommendations of 1962 Credit Commission: – Sustain small & middle-class borrowers – Commercial banks set up small loan dept. – Unorthodox security policy for small owners – Lower margins for small loans• Policies were not implemented in 1960s• To chase industrialists out of planet – Bhutto saw capitalists’ as the source of evil• Political commitment: PPP promised nationalization in its manifestoSource: Zaidi, A. S. Issues in Pakistan Economy, p. 264; Meenai, S. A., Money & Banking in Pakistan, OUP. 1984, p. 231 Group 2: 1974 Nationalization & 4 Financial Sector
  • 5. Exploitation of Industrialists• Owned lot of banks• Most accounts belonged to them• Looted resources• Maintained hegemony: barred access to credit• Defaulters• 6/14 banks bankrupt Group 2: 1974 Nationalization & 5 Financial Sector
  • 6. Objectives of Nationalization of Banks• “Directing banking activity toward national socio- economic development• Achieving more equitable distribution of bank resources• Ensuring complete safety of depositors’ funds• Improving overall efficiency of banking system”• Also, to increase savingsSource: Govt. of Pakistan, Pakistan Economic Survey, 1974-75, p. 179 Group 2: 1974 Nationalization & 6 Financial Sector
  • 7. 1972 Reforms: First Love• 1972 Banking Reforms – prelude to Nationalization: – SBP authorized to remove BoDs, directors – NCCC determined annual needs of economy – Encouraged banks to serve small businesses – Rooted out unethical practices• Agriculture Advisory Committee set upSource: Meenai, S. A., Money & Banking in Pakistan, OUP. 1977, p. 20-21 Group 2: 1974 Nationalization & 7 Financial Sector
  • 8. Structural Changes• A concentrated nation-wide banking system similar to 4 banks in UK• Unlike UK, Pakistani banks were: – State-owned – “End-result of consolidation & restructuring through an administrative process”• 5 Banks emerged after a merger of 14 banks: – Habib Bank, National Bank, United Bank, MCB & Allied Bank – 6/14 banks were bankrupt at that time, incl. UBLSource: Khan, B. “Note on Banking Industry in Pakistan (A): 1948-90.”, p. 5 Group 2: 1974 Nationalization & 8 Financial Sector
  • 9. Introduction of Credit CeilingsPutting limits on credit to a sector:A. Purpose: direct credit to agriculture sector – Problem: Political exploitation of credit serviceSource: Rehman, S-ur., Who Owns Pakistan? p. 19; Interview of a 1970s bankerB. Credit allocated to banks – As per a bank’s past performance in deposit mobilization – Undue advantage to past performance than success in securing new depositsSource: Khan, B. “Note on Banking Industry in Pakistan (A): 1948-90.”, p. 5 Group 2: 1974 Nationalization & 9 Financial Sector
  • 10. Pakistan Banking Council (PBC)Operation | control | administration | interference Source: Meenai, Money & banking in Pakistan, OUP, 1984; Khan, B. A. ‘Note…’, p.6 Group 2: 1974 Nationalization & 10 Financial Sector
  • 11. Years of Massive Expansion & Growth (I)• Branches: – 1971: 2,000+ vs. 1978: 7,000+• Employment: A goal: 40% increase in a year – 1974: 45,165 vs. 1976: 61,865• Assets & Liabilities: 415% increase – 1970: Rs. 3,827.2 m – 1978: Rs. 19,735 m• Loans & advances: – 1972: Rs. 11.2 m – 1978: Rs. 36.6 mSource: Govt. of Pakistan, Pakistan Economic Survey, 1975-76, p. 153 & 156 Group 2: 1974 Nationalization & 11 Financial Sector
  • 12. Years of Massive Expansion & Growth (II): Reasons• Increase in branches: – PBC’s policy: a bank branch for 5000 or more peopleSource: Pakistan Economic Survey, 1975-76, p.183• Loans: – Government securities as collateralSource: ‘Note on Bank Industries,’ p. 6• Deposits – Expansion in banking operations – Inculcation of saving habits Group 2: 1974 Nationalization & 12 Financial Sector
  • 13. Sector-wise Growth in Advances: Change of Heart Group 2: 1974 Nationalization & 13 Financial Sector
  • 14. Agricultural Financing• Increase in credit given to agricultural units for seeds,tractors, etc.• Increased growth of agricultural outputSource: Zaidi, A.S. Issues in Pakistan Economy, p. 106 Group 2: 1974 Nationalization & 14 Financial Sector
  • 15. Financial Analysis: Profitability Question• ROA: decreasing trend due to well in excess reserve ratio which hampered profitability• NPLs; defaults also decreased profitability• However, volume of deposits increased from Rs. 30,000 m to Rs. 80,000 m from 1974 to 1979 Source: Govt. of Pakistan, Pakistan Economic Survey, 1975-76. Group 2: 1974 Nationalization & 15 Financial Sector
  • 16. Group 2: 1974 Nationalization & Financial Sector An Irony: Savings Boom, Profits Doom?• Phenomenal growth in savings• Excess capital reserve ratio (CRR) adverse effect on profitability: – Reduce yield – Put pressure on alternative assets to generate profits (like, govt. securities)• Positive: safety of deposits (capital adequacy)Source: Khan, B. “Note on Banking Industry in Pakistan (A): 1948-90.”, p. 6 16
  • 17. Impact on Monetary Assets• Increase in monetary assets created inflationary pressures on economy• -10.5% real interest rate hampered resource mobilization (deposits) Source: Khan, B. “Financial Markets of Pakistan,” p. 222, in 50 Years of Pakistan Economy, edited by S. K. Khan Group 2: 1974 Nationalization & 17 Financial Sector
  • 18. Role of Development Finance Institutions (I): Chaos• DFIs got low cost (below market rate) long-term liabilities from World Bank & ADB• Supposed to lend it long-term projects: to IDBP (Industrial Development Bank), PICIC, ADB, etc.• In practice: people borrowed for working capital at low cost• Flattened yield curveSource: Interview with Finance Professor Dr Bashir A Khan, F. C. College Group 2: 1974 Nationalization & 18 Financial Sector
  • 19. Role of Development Finance Institutions (II): Chaos Group 2: 1974 Nationalization & 19 Financial Sector
  • 20. Evaluating Nationalization: Brighter Side Group 2: 1974 Nationalization & 20 Financial Sector
  • 21. Evaluating Nationalization (I): Darker Aspects• Destroyed profitable banks (ROA)• Profitability of NCBs reduced due to high reserve ratio & lack of professionalism• Banks = employment exchanges• More people (over)employed on political basis• Excessive branches, infeasible• Non-performing loans (NPLs)• Bureaucratic managementAll of this led to de-nationalizationSource: Amir Hussain Shar, et. al., “Performance Evaluation of Pre-post Nationalization of Banking Sector in Pakistan: An Application of CLSA-Stress Test,” International Journal of Business and Management Vol. 5, No. 11; November Group 2: 1974 Nationalization & 21 Financial Sector
  • 22. Evaluating Nationalization (II): Darker Aspects• “You can bring the rich to the level of poor overnight but it takes a lifetime to lift the poor to the level of the rich”• “If the rich are getting richer, this does not necessarily mean that the poor are getting poorer.” – Two Irish proverbs in a BBC programme on Feb. 17, 1995 :• Middle class businesses not transformed into bigger, competitive units; destroyed big tycoons• Private bank owners took their capital out of economy and established businesses abroad• Failure of DFIs Group 2: 1974 Nationalization & 22 Financial Sector
  • 23. Afterthoughts• You don’t have to kill industrialists for equity• Interlocking of credit & industries natural (with/without nationalization); Japan: Main Lending Banks• Nationalize, theoretically: – bankrupt banks with seismic risk factor – run by technocrats• Alternate ways to end injustices in system• Clash of Agendas: inherent problem Group 2: 1974 Nationalization & 23 Financial Sector
  • 24. References• Books – Govt. of Pakistan, Pakistan Economic Survey, various issues – Khan, S. K. (ed.) 50 Years of Pakistan Economy – Meenai, S. A., Money & banking in Pakistan, OUP, 1984 & 1977 edition – Qureshi, ML, Planning & Development in Pakistan, Vanguard Books, Lahore – Rehman, Shahid-ur, Who Owns Pakistan? Online edition – State Bank of Pakistan, Banking Statistics, various issues – Zaidi, A. S. Issues in Pakistan Economy, 2004. OUP• Journals/Notes – Amir Hussain Shar, et. al., “Performance Evaluation of Pre-post Nationalization of Banking Sector in Pakistan: An Application of CLSA-Stress Test,” International Journal of Business and Management Vol. 5, No. 11; November – Khan, Bashir A., “Note on Banking Industry in Pakistan (A): 1947-1990,” F. C. College, University. Lahore Group 2: 1974 Nationalization & 24 Financial Sector

Related Documents