Professional Documents
Culture Documents
Ashfaq Ahmad
Corresponding Author: Assistant Professor, Department of Business Administration
University of Sargodha, Sargodha, Pakistan
E-mail: ashfaquos@gmail.com
Abstract
This study reflects a historical background of Pakistani banking sector since its
independence on August 14, 1947 from British rule. It indicates the journey of Pakistani
banking sector from the establishment of SBP on July 1, 1948 as central bank. During
1950s and 1960s banking sector got expansion due to development projects. In 1974, banks
operating in Pakistan got nationalized and came under the direct control of the Govt. of
Pakistan. The Govt. of Pakistan is required to eliminate interest based transactions from the
country according to its constitutions (i.e.1956, 1962 and 1973). In 1992, Govt. started
privatization process of the financial sector especially banking sector. However, the
inception of 21st century came with Islamic banking practices across the globe to facilitate
the different segments of the economy. Islamic banking practices in Pakistan proved a
successful experience due to growth and expansion of the banking sector. This study
reflects a picture of Pakistani banking sector since its creation. It enables the readers,
academician and bankers to have a look about banking developments in Pakistan.
1. Introduction
Every country of the world has its recognition due to its specific religious attachment, socio-cultural
features or economic attributes. Economic prosperity and sound economy is the symbol of success in
these days. Similarly, economic soundness is the only outcome of positive interaction of
macroeconomic variables to attain specific objectives by beautiful blending of resources i.e. physical
resources, human resources, financial resources and informational resources. Banking sector is an
important component of financial sector for proper management of financial resources across the
globe.
This study presents a glossary of historical developments in banking sector of Pakistan to a
very sophisticated banking system of recent age. Initially, Pakistan was unable to control its financial
system due to absence of sound banking system and eventually it became the most attractive banking
industry of the globe. It is reported that banking and financial services are the integral part of services
industry and its contribution is increasing with the passage of time (Mishkin, 2001). However,
expansion of global and integrated banking sector has to face many challenges of legislation,
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technological and structural changes (Angur et al. 1999). Some of the countries including Pakistan
appeared on the map of the world as an ideological state. Pakistan came into existence as the first
Islamic republic created in the name of Islam on August 14, 1947. The government of Pakistan is
bound to follow the instructions of Allah Almighty according to Objective Resolution, passed in 1949.
Islam was declared as official religion of Pakistan according to the first constitution of Pakistan in
1956 and all rules/ regulations should be in consistent to the instructions of the Holy Quran and
Sunnah.
The Constitution of 1956 requires an immediate elimination of riba based transactions
according to Article 28. Similarly, the Council of Islamic Ideology was established under the
Constitution of 1962, to eliminate the interest from the economy especially from banking sector.
Interestingly the Constitution of Pakistan (1973) also requires a prompt elimination of interest (riba)
from the economy as shown by the article 2A, 31, 37, 38 (F) and 227 of the said constitution. The
council consulted a large number of bankers and economists to recommend some alternatives to
replace interest-based financial structure in the economy during 1980s. In 1991, Full Bench of
Supreme Court of Pakistan ordered the elimination of riba from the economy until June 30, 1992.
Finally, Islamic banking activities were initiated in December 2002 due to untiring efforts of State
Bank of Pakistan (SBP, 2002).
The Govt. of Pakistan has taken a number of initiatives during 1979-1992 to introduce interest
free products in the market especially in the banking sector. In 1979, National Investment Trust (NIT),
Investment Corporation of Pakistan (ICP) and House Building Finance Corporation (HBFC) started
interest free transactions. Similarly, during 1980 a number of actions were taken as Mudarbaha
companies were established, Participatory Term Certificates (PTC) was launched and Zakat ordinance
was announced. In addition, nationalized banks were required to open interest-free counters for their
customers in 1981. However, Usher ordinance came into force in 1983 throughout the Pakistan. In the
same year, financial services ordinance was amended to introduce non-interest system. SBP was
assigned the duty for transition of interest based financial institutions into interest-free financial
institution till 1985 (Zaidi, 1987; Hussain, 2006; Hassan, 2007).
During the decade of 1990s, Islamic banking practices were initiated all over the world
especially in the Muslim dominated parts of the globe. SBP issued detailed criteria in December 2001
for the establishment of full-fledged Islamic bank in the private sector. Al Meezan Investment Bank
received the license from SBP in January 2002 and started its operations with the name of Meezan
Islamic bank as the first Islamic bank from March 20, 2002 (SBP, 2002). The Islamization efforts were
unable to achieve its objective due to a number of reasons: firstly the transitional process was
revolutionary instead of evolutionary; second there was lack of flexibility due to rigid system, thirdly
there is lack of appropriate Shariah compliance mechanism and finally there is lack of interest from the
stakeholders (SBP, 2007).
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SBP has undertaken a number of initiatives to ensure stability, transparency and flexible
legislation. The regulatory framework encourages “financial sector growth, diversification and
innovation; healthy competition and risk taking to ensure a sustainable and aggressive income stream;
opportunities for enhancing the franchise value of banks; prudent behavior and effective risk
management and loan provisioning requirement are stringent enough to discourage infection of the
loan portfolio; safeguarding social obligations and consumer interests” (Economic Survey of Pakistan,
2007-08).
CY: Calendar Year; PSCBs: Public Sector Commercial Banks; LPBs: Local Private Banks;
FBs: Foreign Banks; CBs: Commercial Banks; SBs: Specialized Banks
Source: SBP, 2007
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The existence of two bank streams i.e. conventional banks and Islamic banks poses some
questions about service quality and customers' satisfaction in Pakistan. Islamic banks have opened new
avenues for acceptance of deposits on interest free-basis and extend credit facilities excluding interest
e.g. Qarz-e-Hasana etc. (Najajmabadi, 1991). It was found that relationships with bank personnel are
important criteria for selection of bank (Abratt & Russell, 1999). Similarly, it is documented that
Islamic banks have shown an excellent performance and they should diversify their products/services
to meet customers’ expectations (Ebrahim & Joo, 2001). However, there is a significant relationship
between service quality and financial performance (Duncan and Elliot, 2002). So it is concluded that
superior delivery of services results into superior profitability (Kotler, 2003). Pakistani banking sector
witnessed a major change due to key role of private sector having about 80% of banking assets
(Economic Survey of Pakistan, 2007-08). Finally, bankers should concentrate on service quality to
have satisfied customers as it is evident that service quality has greater and strong positive impact on
customer satisfaction in case of Islamic banks as compared to conventional banks in Pakistan (Ahmad,
Rehman & Saif, 2010).
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