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History of Banking in Pakistan

This document provides a history of banking in Pakistan and the subcontinent. It discusses: 1) The origins of banking beginning with goldsmiths and moneylenders in ancient times who kept deposits and lent money, forming the basis for modern banks. 2) A brief history of banking in the subcontinent prior to Pakistan's independence, which was dominated by foreign banks like Grindlays and Imperial Bank of India. 3) The establishment of the banking system in Pakistan after independence, including the founding of the State Bank of Pakistan in 1948 and the National Bank of Pakistan in 1950 to stabilize the sector.

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106 views6 pages

History of Banking in Pakistan

This document provides a history of banking in Pakistan and the subcontinent. It discusses: 1) The origins of banking beginning with goldsmiths and moneylenders in ancient times who kept deposits and lent money, forming the basis for modern banks. 2) A brief history of banking in the subcontinent prior to Pakistan's independence, which was dominated by foreign banks like Grindlays and Imperial Bank of India. 3) The establishment of the banking system in Pakistan after independence, including the founding of the State Bank of Pakistan in 1948 and the National Bank of Pakistan in 1950 to stabilize the sector.

Uploaded by

QasimBhatti
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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ASSIGNMENT # 2

ORIGIN OF BANKING IN PAKISTAN & SUB-CONTINENT

SUBMITTED TO : SIR UMAIR MASOOD

SUBMITTED BY : SHAWAIZ SHAUKAT

ROLL NO :08020920-056

SECTION : “B”

DATE : 1 JAN 2011

1
BANK
A bank is a financial intermediary that accepts deposits and channels those deposits
into lending activities, either directly or through capital markets. A bank connects customers
with capital deficits to customers with capital surpluses.

ORIGIN OF BANKING
It is very difficult to trace out the exact origin of banks. it is said that
the evolution of banking business is as old as the concept of money. crowther in his book an
outline of money says that the present day banker has three ancestors merchants, money
lenders and gold smiths. a modern bank is something of these. it is believed that goldsmiths and
grocers of primitive days started keeping deposits of valuables and jewelleries people on the
basis of their sound financial position in the community. they charged a certain amount from the
depositors for the services rendered in keeping and preserving the valuables in safe custody. but
they soon realized that only a small portion of metal and valuable deposited were taken bark by
the people even at the expiry of the stipulated period. they therefore began to make profit by
lending a part of these deposits. in case of lending, it was not always gold or silver, but issued
their receipts which would pass among the people as if they were gold just like cheques in
modern banks. the present day banks are performing the same functions as performed by
the money lenders and goldsmiths of older days. therefore it is believed that goldsmiths and
moneylenders are the ancestors of banks

HISTORY OF BANKING IN SUB-CONTINENT

The banking system is passing through a difficult phase mainly because of excessive political
interference in the working of the nationalised banks by the different governments in the past.
Hence the political interference in nationalised banks did not allow them to carry out their
business purely on merit.It may be recalled that some twenty years back, the banking system was
working on such a solid ground that various developing and under-developed countries used to
take guidelines from Pakistani banks.

A little earlier before the creation of country, the role of Muslims of the areas which were later
included in Pakistan was of no significance due to their restricted participation in the banking
sector. There was only a small bank namely Australasia Bank having a few branches in Lahore
and its suburbs. In 1942, the Australasia bank was housed in a garrage of a trader of Lahore who
used to trade at a small scale with Australia during that period. However the only Bank was run
by the Muslims of the sub-continent was Habib Bank which was established in 1941. At that

2
time Quaid-e-Azam Mohammad Ali Jinnah expressed his desire that another Muslim bank also
be established in Calcutta which came into reality when Adamjee with the assistance of Isphanis
established Muslim Commercial Bank a few months before the creation of Pakistan in Calcutta.
When Pakistan came in to being The Habib Bank shifted its Headquarters from India to Karachi.
A few of Habib Bank's branches were already in operation in Pakistan. The Muslim Commercial
Bank also moved its headquarters from Calcutta to Dhaka and later on to Karachi. At the time of
independence, another small bank namely Bank of Bahawalpur also started business from
Bahawalpur from December 1947.

Before independence, the financial sector was in the hands of foreign banks some of them were
British by origin. The oldest bank operating from 1883 in this part of the world was the
Chartered Bank while another bank namely the Grindlays Bank which was also working
simultaneously from 1883. In order to expand its business operations, the Grindlays acquired
other small banks and merged them into the business of Grindlays. For example Allied Bank,
National Bank of India etc were merged into Grindlays Bank. Among the contemporaries,
Imperial bank of India was the largest Indian Bank which had started its operations in 1919
which was discharging the role of a commercial banks as well as the Central Bank for India until
an independent Central Bank i.e. Reserve Bank of India was established in 1935. However, since
the Imperial Bank had the largest network of its branches all over India, it continued to play its
role as a subsidiary of the Reserve Bank of India. In the Muslim majority areas which was later
on became the part of Pakistan, small branches of Indian banks were operating and soon after
creation of Pakistan they shifted their branches and headquarters to India. At the time of
independence, two major banks including Punjab National Bank at Lahore and Comila Banking
Corporation were working in the then East Pakistan. This trend was so obvious that the total
number of bank offices between June 30, 1918 and August 14, 1947 were reduced from 631 to
195 only. During the early part of 1949 the number of branches of Imperial Bank of India in
Pakistani areas were more than of Habib Bank. In the early days of Pakistan, the government
worked hard left no stone unturned to establish and strengthen the banking system in Pakistan.
These efforts resulted in the establishment of State Bank of Pakistan which was inaugurated by
Quaid-e-Azam on July 1, 1948. Quaid-e-Azam flewed from Quetta to Karachi specially to grace
the occasion. Originally the State Bank was scheduled to be established in September 1948.
Zahid Hussain, who was the first Governor of the State Bank devoted all his time and energy to
streamline the working of the State Bank. In normal situation, the Central Bank of a country is
only established when the commercial banking start working on sound footings. But the
circumstances forced the government to establish Central Bank and the task of stabilizing the
commercial banking was also assigned to the State Bank, which it really did.

The establishment of the National Bank of Pakistan in 1950 on the pattern of Imperial Bank of
India was yet another milestone in the banking history of Pakistan. In September 1949 the rupee
value was reduced against the Pound sterling which was a major event in the banking circles.
Consequently Indian government devalued its Rupee against Pound Sterlings, however Pakistan

3
decided not to devalue its currency against Pound Sterling which resulted in increase of Pakistani
cotton and jute prices for India which affected our exports to India. Though Pakistan had to
suffer economically due to decline of exports to India, it however gave a sense of economic
independence to Pakistan. Cut in imports from Pakistan proved as a blessing in disguise as
Pakistan had to explore new exports markets for its products. However Indian banks operating in
Pakistan refused to finance Pakistani exports.

BRIEF HISTORY OF BANKING IN PAKISTAN

Banking in Pakistan first formally started in Pakistan during the period of British colonialisation


in theSouth Asia. After independence from British Raj in 1947, and the emergence of Pakistan as
a country in the globe, the scope of banking in Pakistan has been increasing and expanding
continuously. Pakistan's oldest bank is the State Bank of Pakistan, which is also the central bank
of the nation. Before independence on August 14, 1947, the Reserve Bank of India was the
central bank of what is now Pakistan. After independence, Muhammad Ali Jinnah took actions to
establish a central bank in Pakistan which resulted in the new founding of the State bank of
Pakistan, with its headquarters to be based in Karachi.

Prior to partition in 1947, banking in Pakistan was dominatedby branches of British banks.The
State Bank of Pakistan, thecentral bank, was formed after partition in 1948.It assumed the
supervisory and monetary policy powers of the State Bank ofIndia.In the period of 60s to 70s the
emergence of a number ofspecialized development finance institutions (DFIs) such asIndustrial
Development Bank of Pakistan (IDBP) and theAgricultural Development Bank (ADB).These
DFIs were either controlled directly by the state or through the SBP, and were intended to
concentrate on specific priority sector lending.In 1974 all domestic commercial banks were
nationalized bythe Government.

The Pakistan Banking Council was established, which assumed the role of a banking holding
company but with limited supervisory powers.However, PBC was dissolved in 1997, leaving the
SBP as the sole regulatory authority for banks and financial institutions in
Pakistan.Nationalization of the banking sector led to pet projects.The branch network of NCBs
also proliferated in an effort toprovide banking services to all regions/territories of the
country,often with disregard to the viability or feasibility of suchexpansion.
Banking started in Pakistan after the bold and emergent decision of formulation of SBP on July
30, 1948. Thereafter this sector has witnessed enormous growth. In 1974 banks were
nationalized, in the hope that new era of growth could be achieved through it. However the
process is reverse since 1991, up till now MCB, ABL, and UBL have been privatized and HBL is
in the process of its privatization.

4
ORIGIN OF ISLAMIC BANKING IN PAKISTAN

The process of islamization the financial system of Pakistan is coincided with the globally
resurgence of Islamic banking in the late seventies. Pakistan was among the three countries in the
world that has been trying to implement Islamic banking at national level. This process started
with presidential order to the local Council of Islamic Ideology (CII) on September 29, 1977.
The council was asked to prepare the blueprint of interest free economic system. The council
included panelists of bankers and economists who submitted their report in February 1980,
highlighting various ways and sufficient details for eliminating the interest from the financial
system of Pakistan. This report was a landmark in the efforts for Islamizing the banking system
in Pakistan.

5
REFERENCES

 http://www.pakistaneconomist.com/database2/pakbanks.asp
 http://bizcovering.com/business/banking-history-and-banking-in-pakistan/
 http://bizcovering.com/business/banking-history-and-banking-in-pakistan/#ixzz1AWfC5Kyl
  http://www.friendsmania.net/forum/banking/25625.htm#ixzz1AWYZyP2T

Common questions

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Political interference severely impaired the functioning of nationalized banks in Pakistan following independence. This interference prevented banks from operating purely on merit, affecting their operational efficiency and financial soundness. Before the creation of Pakistan, Muslim participation in banking was minimal due to restricted access, creating challenges as the new nation sought to establish its banking system independent of foreign influence .

The establishment of the National Bank of Pakistan in 1950 was a strategic move designed to mirror the Imperial Bank of India's functions, both as a commercial bank and a quasi-central bank, until the State Bank of Pakistan could fully settle. It facilitated greater governmental control over financial matters and encouraged the development of banking infrastructure necessary for national growth, bolstering the newly independent country's economic framework .

Goldsmiths and moneylenders played crucial roles as predecessors of modern banking. Initially, goldsmiths kept deposits of valuables and jewelry for their clients, charging for their safe custody. However, they realized they could profit by lending part of these deposits, as only a small portion was ever withdrawn. This practice evolved into the issuance of receipts that functioned similarly to modern cheques. Moneylenders also contributed by providing capital, hence both evolved into the banking systems we recognize today .

The 1974 nationalization of banks in Pakistan led to extensive expansion of the branch network, aiming to provide banking services across all regions, although often without considering the feasibility of such expansions. This move sought to use banking as a strategic tool for national development but faced challenges due to inefficiencies and mismanagement intrinsic to public ownership, affecting growth expectations .

The Islamic banking initiative in Pakistan, initiated in the late 1970s, marked a significant shift towards interest-free banking in alignment with Islamic financial principles. A presidential order in 1977 tasked the Council of Islamic Ideology with drafting a blueprint for an interest-free economic system. By the early 1980s, detailed reports outlined methodologies for eliminating interest from financial transactions, pioneering a move towards consolidating Islamic banking practices nationally, reflecting a broader global resurgence in Islamic finance .

Following the partition, the relocations of Habib Bank and Muslim Commercial Bank were significant as they solidified Pakistan's nascent banking sector. Habib Bank shifted from India to Karachi, providing seasoned banking services and infrastructure. Muslim Commercial Bank's move from Calcutta to Dhaka and then Karachi was crucial in serving the Muslim-majority population, fostering local banking talent, and consolidating Pakistan's economic foundation .

The establishment of the State Bank of Pakistan shortly after independence was pivotal in stabilizing the nascent nation's financial sector. Despite the typical sequence where a central bank is created after commercial banks have sound operations, Pakistan prioritized it due to the pressing need for a monetary authority to regulate and stabilize the banking system. The State Bank assumed leadership in administering monetary policy and overseeing commercial banks, crucially underpinning Pakistan's economic framework .

Pakistan opted not to devalue its currency against the British Pound shortly after independence to assert economic independence, even though it economically suffered due to decreased exports to India. This decision boosted domestic confidence in Pakistan's economic sovereignty but required Pakistan to seek new markets for its products, indirectly leading to more diversified trade relationships .

The Pakistan Banking Council (PBC), established in 1974, aimed to act as a holding company with limited supervisory authority over nationalized banks. Its role was to streamline and potentially enhance the efficiency of nationalized banks. However, due to its limited effectiveness and the shift towards privatization for greater efficiency, the PBC was dissolved in 1997, leaving the State Bank of Pakistan as the principal regulatory authority .

Following independence in 1947, Pakistan's banking sector confronted challenges such as the dominance of foreign banks, with most major Indian banks relocating their headquarters back to India, creating a vacuum. Additionally, there were only a handful of banks operated by Muslims, necessitating urgent structural development to serve the country’s economic needs and gain autonomy from foreign banking influences .

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