Analysis of Banking Sector in Pakistan

CHAPTER ONE HISTORY OF BANKING

Evolution Of Banking
The Origin of the Word Bank

Still most of the experts, do not agree upon the word Bank i.e. from where and how this word originated. People have different opinions about its origin. Many experts agreed that the word Bank is originated from following two words. Bancus Back Bancus Some authors opine that the word Bank is derived from the Italic word Bancus or Banque which means a bench. The explanation of his origin is attributed to the fact the Italian Jews merchants transacted the business of money exchange on benches in the market place and when the business failed, the Bancus was destroyed by the people. Incidentally, word Bankrupt is said to have been evolved from this practice.
Back

Other authors hold the opinion that the word Bank is derived from the German word Back which means Joint Stock Fund. Later on, when the German occupied on major part of Italy, the word Back was Italianized into Bank.
Definition of Bank

There is no single definition which describes the bank thoroughly and completely. Every expert defines word Bank in his/her own style. Following are important definitions which can help us to understand the word Bank. According to:
Professor Chrowthor

Bank deals with debts of its own and others. Bank borrows money from general public and advances loans to needy people.
Sir Jhon Pajet

Banker is such person or the institution which performs following activities: Opens the accounts Make payments against customers cheques Receives amounts of its customers cheques from other banks
Renolyed

Bank is an institution which deals with money. It borrows from the people who have money in excess and advance loans to the people who want to invest into some business. From above definitions, we can conclude that the bank is entity which deals with money. People deposit their savings into banks which in turn advance it to needy persons for productive works. Generally, banks get money from people on lower interest rate and then advance it on higher interest rate and earn profit. Modern Banking In 1586, the fist bank in the world formed at Italy with the name of Bank of Venus and in 1694, Bank of England was inaugurated in United Kingdom. The Bank of England has got legal right to issue currency in 1758. Following entities play critical role in formation of todays banks. Merchants Money lenders Goldsmith
Merchants

In past, Merchants performed critical role in trading. In fourteenth century, many Lombardy merchants came to England and settled in the parts of city of the London now called Lombard Street. They were so resourceful that event the Kings had to depend on them and loans. They dealt with not only keeping the money in sage custody but also changed money for the travelers or merchants engaged in foreign trade. They issued written permission notice to their agents, friends and relatives, so that the foreign traders got their payments from these people within their own states. These written permission notice are converted into Bank Draft in todays banking system.
Money Lenders

Money lenders are those people who give money to needy persons. In past, these money lenders got money from general public at lower interest rate and advanced other at higher rate which lead toward profitability. Today banking system is progressed form of these traditional money lenders because now banks are performing same activities of these lenders in more sophisticated manners.
Goldsmith

In past, goldsmiths of European countries were financially very strong and were very reliable in society. Common people deposited their precious thing to these goldsmiths for safety purposes. Goldsmiths issued written notices to depositors who are required to see this notice when they want to withdraw their deposited things. Today Cheque relate to that written notice of goldsmith. So, we can conclude that todays banks are formed from these above three concepts. Modern bank is performing all activities of above mentioned people. For example, bank issued draft for further payments as issued by merchants, it advances loans like

money lenders and also accepts deposits like old goldsmith. In 1672 however, English banking faced a great crises when charless II borrowed huge sums of money from the goldsmiths and later refused to pay them back. Therefore a number of goldsmith bankers formed themselves into a corporation in 1695, known as the Bank of England. This bank became a very serious competitors to the comparatively smaller private banks run by the London goldsmiths. The bank of England was the only Joint Stock Company which was given the monopoly of issuing bank Notes, though the original goldsmith and other private bankers were operating very successfully outside London. Development of Modern Banking The effect of this historical development of banking in England has been fairly wide because: Emergence of a small number of large banks with side net-work of branches. Increase in popularity of bank accounts and large seek use of cheques. In 1918 treasury and the Board of Trade setup a committee to consider the matter of further amalgamation and absorption among the banks to restrict the financial monopoly. The committee proposed that the approval must be obtained by the government and then further from the treasury and the Board of Trade both prior to amalgamation. In 1955 the British banks made a departure from traditional banking by undertaking hire-purchase finance for companies buying industrial plants and machinery, and took interest on hire-purchase finance.

CHAPTER TWO BANKING INPAKISTAN

A t the time of independence, the areas which now constitute Pakistan were producing only food grains and agricultural raw material for Indo-Pakistan subcontinent. There were practically no industries, and whatever raw material was produced was being exported from Pakistan. However, commercial banking facilities were provided fairly well here. There were 487 offices of scheduled banks in the territories now constituting Pakistan. Before Nationalization As a new country without resources it was difficult for Pakistan to run its own banking system immediately, so it was decided that the Reserve Bank of India should continue to function in Pakistan until 30th September 1948, and Pakistan would takeover the management of public debt and exchange control from Reserve Bank of India on 1st April, 1948. by 30th June 1948, the number of offices of scheduled banks in Pakistan declined from 487 to only 195, because registered banks transferred from

Pakistani territories to India. At that time there were 19 non Indian (foreign banks) and only 2 Pakistani banks (Habib Bank, Australian Bank). In 1 July 1948, of the total bank deposits of Rs. 1.1081 billion held in Pakistan, as much as 73% was held by foreign banks whose activities were largely confined to foreign trade. In the first eighteen months of the operation of State Bank of Pakistan, 51 new branches were opened in both East and West Pakistan of which: 28 were Pakistani Banks 12 were Indian Banks 4 were Exchange Banks 7 were newly formed NBP of which 6 were in East Pakistan. By December 1949, there were 35 scheduled banks in Pakistan of which: 4 were Pakistani Banks 23 were Indian Banks 8 were Exchange Banks
Development Banks inPakistan

The food shortage compelled the government to embark upon agricultural credit and the agricultural development bank was setup to attend to agricultural finance. All these measures, and the devaluation of Pakistani rupee on 1 August 1955, had a very favorable effect on commodity market and the balance of payments position in 1955-56, Development of agriculture largely depends on agricultural finance, but the scheduled banks were not very willing to undertake this risky venture. Therefore the SBP sponsored to establishment of agriculture development bank to attend exclusively to agricultural finance. More over, the functions of the State Bank were also broadened by facilities for both agriculture and industry. All these measures had positive effects on Pakistans economy during 1956-58. In 1958 government liberalized imports which increase the demand of funds, so in 1959-60 two more Pakistani banks namely Eastern Merchantile Bank limited and the United Bank Limited were established and scheduled and more Pakistani banks continued to be established, which included Commerce Bank Limited and the Standard Bank Limited. By June 1965 the number of scheduled banks stood at 36. In 1964 NBP also came forward and established a peoples credit department to allow credit facilities to small borrowers.
Weaknesses of Banking System

Although there was development in this sector after independence, but there were many weaknesses in this system.

Limited Number of Banks

There was little number of banks. For 10,000 people there was only a single branch. In developed nations this ratio is 4000. Therefore the saving ratio is very less, and same is the case of investment.
Ignorance of Backward Areas

Banks were opening branches only in developed areas, they were ignoring backward areas. People of rural areas were not getting banking facility.

Undeveloped Money Market

The money market was not very much developed, so the banks were not getting sufficient information and therefore they were not advancing enough loans.
Maldistribution of Loans

Banks were issuing loans to manufacturers and businessmen. They were ignoring agriculture, mining, fisheries and transportation.
Access of People toward Loans

Banks were advancing loans only to large manufacturers who were getting 63% of total loans but they were 222 in number. Each was getting more then Rs. 1million.
Default Ratio

Since the loans were given to large manufacturers they were defaulting due to their approaches. These were few of the weaknesses in this sector and the government efforts were not fruitful. So in 1974 banks were nationalized. Nationalization of Banks Nationalization of banks was considered necessary so that the nation as a whole could benefit from the better channeling of resources. So the government of Pakistan decided to nationalize all scheduled banks as well as State Bank of Pakistan through the ordinance of Nationalized 1974. All this was done on Jan 1, 1974. At the time of nationalization there were 30 scheduled banks in the country. 15 were Pakistani while other were foreign banks. Pakistani banks were having 2902 branches. 70 branches were in foreign countries. There was 36 branches of foreign banks in the country. Only the branches of Pakistani banks were nationalized. All the property rights were transferred to the Federal Government. Through a notification all smaller banks were amalgamation with bigger banks and five units were formed. 1.National Bank of Pakistan 2.Habib Bank Limited 3.United Bank Limited 4.Muslim Commercial Banks 5.Allied Bank of Pakistan Limited All this was completed in three phases
Objectives of Nationalization

The banks were nationalized for achieving the following objectives:

Un-equal Distribution of Loans

Since there was unequal distribution of loans 200 families were getting of total advances. To eliminate this unequal distribution banks were nationalized.
Equal Sectoral Importance

Since banks were ignoring agriculture sector, even though the economy is agriculture based and only 10% loans were given to this sector. This was also the reason that our food needs were not fulfilling.
Unlawful use of Loans

The purpose for which loans were given it was not being used for that purpose. On the bases of their approaches people were getting loans and they were using it for hoarding or for other unlawful purposes.
Loan for Productive Purposes

Earlier banks were advancing loan for unproductive purposes. The objective of this step was that loan will be advanced for productive purposes.
Loans for Deserving People

Banks were advancing loans only to industrialist and businessmen. So the deserving people had no approach to this loan. So this step was necessary.

Wastage of National Resources

Banks were opening their branches in such areas where they had already their branches and there was no need of any branch. So in this way they were wasting national resources.
Heavy Expenditure on Promotion

It was necessary that such things must be stopped so that resources may not be wasted on such undue promotion.
Unethical Ways for Deposits

Banks were using unethical ways for attracting independent institutions and agencies for making deposits and they were providing them undue benefits. This generates social evils in the country. So it was the responsibility of government to stop such things.

Heavy Salaries of Employees

Banks officers were getting heavy salaries as compared to their education and experience. It was a burden on the banks, and it was very difficult to bear this burden for the banks.
Recruitment Criteria

Banks recruitment criteria were not very good, people were getting jobs on the basis of their relations and the relatives of officers were being recruited. They had not other wise ability of that job.
Black Money

People were depositing black money in the deposits and wee avoiding income taxes also. It was necessary to stop such practices.

Benefits of Nationalization

Equal Distribution

Advances of banks are being equally distributed among all sectors of economy.
Cheap Facilities

Now banks are providing cheaper facilities to the public because they are not spending much on undue promotion.
Loan for Productive Purposes

Now loans are being used for only productive purposes.

Equal Policy for Loans

All the banks are following same policy for advances loans to small ad large businessmen, manufacturers and farmers.
Reduction in Concentration of Wealth

Now banks are advancing loans for considering collective benefits, so concentration of wealth has

reduced.
Stoppage of Black Money

Now chances of depositing black money in banks have been eliminated. So revenue of government in term of excise duty and income tax has increased.
Confidence of Public

After nationalization confidence of public on this sector has increased. So they are willing to make deposits without any fear.
Unethical Competence

Unethical competence among different banks has stopped, because management is not supporting such competence.
Employees Recruitment Process

The recruitment process is clear now. People are getting employment on merit, because bank service commission has been established for this purpose.
Unlimited Loan

After nationalization people who had approaches earlier are not able to get loan from many banks. So they are not able to create monopoly.
Facility of Agricultural Loan

Now government has the facility to use there banks. Earlier these banks were not advancing loans for agricultural purposes. Now these banks are advancing directed loans for agricultural purposes. The farmers are getting loans on easy conditions.
Banking Facility in Rural Areas

Before nationalization banks were considering only financial benefits for opening new branches so people in the rural areas were not getting banking facility. Now banks are considering the needs of the rural areas also. So many branches of banks had been opened in rural areas.
Disadvantage of Nationalization

Bad Performance of Employees

Now the performance of employees is not good, because they had no interest in the success of the bank. Before nationalization they have un-protected job and were working hard.
Reduction in Deposits

Now the bank staffs dealing are not good with the public as it was before nationalization. So the bank deposits had decreased.

Government Regulations

Due to government regulations the performance of banks had been affected because there rules are confusing.
Long Duration for Loan

Since the regulations are very confusing so the methods for getting loan are very difficult. People have to go through many stages. So the people have turned to finance companies and they lost their money.
Fraud

After nationalization the fraud rate has been increased because all the burden has to be beared by normal customers.
Competition among Banks

After nationalization competition among banks has been avoided because employees of the banks are public servant and they want only their salaries.
Unequal Distribution of Wealth

It was thought that after nationalization loans would be provided small enterprises and the concentration of wealth would be eliminated. But it could not happen, and the concentration of wealth has increased.
Political Influence

People are getting loans from there banks on political basis. Such people are unaware of the business for which they obtained loans. These loans were also misused, so these people also defaulted and banks had to bear heavy losses. Privatization inPakistan With the passage of time, the government of Pakistan realized that the national economy was dominated by public sector, and production, trade and finance was over-regulated. This resulted not only in chronic budget deficit, leaving not much for physical and social infrastructure but also led to developing such conditions which could not be changed without disinvestment and privatization of the nationalized and public sector. Privatization efforts began in 1988 and between 1988 to 1990, 14 loss making units were divested. Furthermore, shares of profit making manufacturing units were also sold for retiring public debt and reducing debt servicing. The formal process of privatization picked up only after the setting up of the Privatization Commission in 1991. the objectives laid down for the commission included: Improving the level of efficiency, encouraging competition and creating a market based economy. Attracting foreign investment, mobilizing private sector resources for future investments and developing capital markets for mobilization of domestic savings. Reducing the size and scope of the public sector, and minimizing the financial drains of public enterprises on the government. Maximizing receipts from privatization to pay public debt and reduce the fiscal deficit. Units privatized: (1991-2000) During 1991 to 2000, 103 units were privatized and government realized Rs. 60.5 billion or $ 1.7 billion proceeds through this privatization. The detail of number of units and their respective sale proceeds along with sector are shown below in table 2-1. Table 2-1: Sector No. of unit privatized Amount (Rs. Billion) 1.1 6.2 7.8 2 10.6 0.2 0.7 0.1 30.6 0.1 1.1 60.5

Automobiles 7 Banking 4 Cement 11 Chemicals 14 Energy 3 Engineering 7 Ghee 19 Roti plants 15 Telecommunication 1 Textiles 2 Others 20 Total 103 Source:privatization Commission The total sale proceed of Rs. 60.5 billion include share of different sectors i.e. energy, banking & finance, industry, telecommunication and others. Following graph 2-1 show the overview of %age share in sale proceeds of these sectors. Graph 2-1

This total

amount of Rs 60.5 billion of sale proceed is distributed to federal government, for restructuring expenses, retuned is SOEs, for privatization expenses and to other undistributed expenses. This is shown below in Graph 2-2: Graph 2-2 this graph indicate that out of total proceed, 80% was given to federal

government, 9.5% was released to meet restructuring cost, arising mainly from golden handshakes, 5% was given back to companies on whose behalf selling of shares was carried out and 1% is laying with the commission and distributed. The commission itself utilize 4.5% of total proceed to cover its expenses.

Banks pravitized

During 1988 to 2000, 5 banks are privatized by government which are shown in table 2-2. Table 2-2:

Banks

UBL MCB NPB NIT ABL Source:privatization Commission Banks which are expected to be privatized in future are shown in table 2-3. Table 2-3: % of shares offered to Date of bidding Banks private people HBL 51% 1st Oct. 2003 Source:privatization Commission

% of shares offered to private people 51% 16.6% 5.10% 58% 49%

CHAPTER THREE MAJOR PLAYERS

M ajor players of the banking sector are categorized in the following heads: Nationalized Scheduled Banks De-Nationalized Scheduled Banks Specialized Banks Private Scheduled Banks Foreign Banks Investment Banks Nationalized Scheduled Banks Nationalized scheduled banks are those banks which are registered with SBP and are public owned enterprises. The SBP give directions to these banks and they are required to work according to this direction. Furthermore, scheduled banks are permanent members of SBP. The nationalized scheduled banks are shown in table 3-1 below. Table 3-1 Nationalized Scheduled Banks 1.First Women Bank Ltd. 2.National Bank of Pakistan

3.Habib Bank Ltd. 4.United Bank Ltd. Source:SBP & Finance Division De-Nationalized Scheduled Banks Table 3-2 De-Nationalized Scheduled Banks 1.Allied Bank of Pakistan Ltd. 2.Muslim Commercial Bank Ltd. Source:SBP & Finance Division Specialized Banks These institutions are generally government-sponsored corporations, and provide medium and longterm finance to various sectors. Most of these institutions are players in the capital market in Pakistan which are shown by the table 3-3 below. Table 3-3 Specialized Banks 1.Agricultural Development Bank of Pakistan 2.Industrial Development Bank of Pakistan 3.Punjab Provincial Cooperative Bank 4.Federal Bank for Cooperatives Source:SBP & Finance Division Private Scheduled Banks These are such banks which are registered with SBP but are private owned enterprises. These are also required to work according to the policies of SBP. The private banks currently working in Pakistan are shown in table 3-4 below. Table 3-4 Private Scheduled Banks 1.Askari Commercial Bank Ltd. 2.Bank Al-Habib Ltd. 3.Bolan Bank Ltd. 4.Faysal Bank Ltd. 5.Bank Al-Falah Ltd. 6.Metropolitan Bank Ltd. 7.Platinum Commercial Bank Ltd. 8.Prime Commercial Bank Ltd. 9.Prudential Commercial Bank Ltd. 10.PICIC Commercial Bank Ltd. 11.Soneri Bank Ltd. 12.Union Bank Ltd. 13.The Bank of Khyber Source:SBP & Finance Division

Foreign Banks Foreign banks other than Indian banks have been commonly known as Exchange Banks due to the fact that prior to independence foreign banks in the Indo-Pakistan Subcontinent were engaged primarily in finance of foreign trade and exchange business. Though the SBP does not encourage them to open branches in the interior yet they are fully authorized to discharge normal functions, including the acceptance of Pak Rupee and foreign-Currency deposits from the public. Foreign banks, though very selective and expensive, have introduced not only quite few new products and concepts in banking in Pakistan but they have been quite active in the financing of imports, exports, stock exchange securities and installment credit. Foreign Banks which are working in Pakistan are shown by the table 3-5: Table 3-5 Foreign Banks 1.Hong Kong & Shanghai Banking Corp. Ltd. 2.Emirates Bank International Ltd. 3.Albaraka Islamic Bank Ltd. 4.International Finance Investment & Commercial Bank Ltd. 5.American Express Bank Ltd. 6.Bank of Tokyo Mitsubishi Ltd. 7.Credit Agricole Indosuez. 8.Oman International Bank. 9.ANZ Grindlays Bank Ltd. 10.Bank of Ceylon. 11.Citi Bank N.A. 12.Deutsche Bank A.G. 13.Doha Bank. 14.ABN Amro Bank N.V. 15.Habib Bank A.G.Zurich. 16.Mashreq Bank P.S.C. 17.Rupali Bank Ltd. 18.Societe Generale. The French Int. Bank Ltd. 19.Standard Charted Bank. Source: SBP & Finance Division Investment Banks The investment banks assist business houses and the government bodies to raise money through the sale of stocks and bonds for usually long term purposes. These banks perform the usual functions of raising deposits of idle money from the public and finance the business houses and other bodies. The investment banks which are currently working in Pakistan are shown by table 3-6. Table 3-6: Investment Banks 1.Crescent Investment Bank Ltd. 2.First International Investment Bank Ltd.

3.Atlas Investment Bank Ltd. 4.Security Investment Bank Ltd. 5.Fidelity Investment Bank Ltd. 6.Prudential Investment Bank Ltd. 7.Islamic Investment Bank Ltd. 8.Asset Investment Bank Ltd. 9.Al Lowfeek Investment Bank Ltd. 10.Al-Faysal Investment Bank Ltd. 11.Jahangir Investment Bank Ltd. 12.Frankhin Investment Bank Ltd. 13.Orix Investment Bank (Pak) Ltd. 14.Trust Investment Bank Ltd. 15.Escorts Investment Bank Ltd. 16.Al-Meezan Investment Bank Ltd. Source:SBP & Finance Division

CHAPTERFOUR CUSTOMERS OF BANKS

T he opening of an account is the establishment of Banker-Customer relationship. By opening of an account at a bank a person becomes a customers of the bank. Before describing the different types of customers it is necessary to know that what the definition of Banker and Customer is.
Banker

Different Bankers have defined the different definition on Bankers but according to the Sir John Pigat, defined in his book Banking Laws that. Individual who opens an account. Individual who pays the amount of Cheque of their customers. Individual who receives the amount of Cheque of their customers from other banks. According to banking Act ordinance 1962. Banker is that person who gives loan to general public and receives deposits from general public for investment purposes which must be refundable by Cheque, draft and any other way.

Customer

Account holder of customer is that person who has opens an account in bank or the person who has opened a saving or term deposit and current account in the bank.
Types of Customers

Individuals Customers Joint Customers Married Woman Minor or Infant Customer Lunatics or Mental Patient Customers Partnership Firm Joint Stock Company Non-trading Concern Trustees
Individual Customers

Only one person can operate this account or we can say that when a single man or woman having age limit of 18 years, opens an account in his/her name and has a right to operate, it is called Individual account. The person can be a sole proprietor ship A person should not be a drinker, drug user, mentally abnormal and defaulter, because according to law they cannot make the contract.
Features of Individual Customers

There are different features of individuals customers including.

Adult

The person who is native of their country must be adult according to their laws. According to Pakistani law, the person who has age of 18 years is known as adult.
Mentally Abnormal

The customer must be mentally healthy because mental person has no right to make an agreement and cannot be a customer of bank.
Defaulter

The person who is customer of the bank must not be a defaulter.

Deposit Money

A person, who wants to become the customer of the bank, it is necessary for him to deposit the money in bank. Until a person would not deposit the money in bank he cannot become the customer of bank.
Issuance of Cheque

The account holder has a right to issue a Cheque in the name of bank.
Types of Account

Individual customer has option to open saving a/c, term deposit a/c, profit and loss sharing a/c and any other a/c which he wants.
Signature on form

Only one person is allowed to put a signature on a/c opening form.

Signature on card

One person is allowed to put a signature on specimen card.

Facility of loan

Individual a/c holder can take a loan and overdraft from bank.
Death

After the death of individual a/c holder, the deposited amount will be handed over to legal holder of that person.
Stoppage of payment

If individual a/c holder become mad or defaulter than bank has a authority to stop payment in this account.
Joint Customer

When two or more persons neither partners open an account on their name is called Joint Account. When such an account is opened, it is necessary that banker should obtain clear directions as to whether one or more of them shall operate upon the account. However in the absence of such directions the banker should allow the operations under the signature of all the Joint a/c holders.

Features of Joint Account

Signature on Form

For the opening of a Joint account, all the account holders or partners put signature on the account opening form.
Right of Transaction

All the partners can jointly make a transaction with bank or allow one partner to make transaction with the bank. They give this authority to that person in written and send a copy of this to the bank. If the person who has authority to make a transaction with bank become defaulter or mad then automatically this power is finished or eliminated.
Death of Customer or A/C Holder

It is decided that in case of the death of one of the combined customer, how cash will be withdrawn from the bank. If it is not predecided then the remaining customers possess the right to withdraw cash without any condition.
Power and Right of Taking Loan

If joint customers give right to one person for making transaction then they must also disclose whether this person has right to take loan or overdraft from bank or not.
Responsibility of Loan

All the joint partners are liable to pay back the loan. If one customer dies then responsibility for the payment of loan goes on the shoulder of other partners. Bank has no authority or right to take back the loan from the legal holder of the dead partner.
Share as Guarantee

If at the time of taking loan from bank, joint partners present those shares, which are of joint property then at the time of transaction of these shares in the name of bank all the joint customers are required to signature it, who are owner of shares.
Payment of Cheque

If joint partners do not give authority to one partner for making transaction with bank and also not tell that who will make a transaction with bank then in this condition bank does not make payment until

all the partners signature are not on the Cheque.

Type of Account

Joint account holders can open Saving Account, Term Deposit, Profit and Loss Sharing Account and Current Account in the bank and they are not restricted to open the account.
Joint Account of Wife and Husband

If Pakistan the example of Joint account is the joint account of wife and husband. It is decided at the time of opening the account that if the joint account was opened with the intention of making a provision to the wife in case of husbands untimely death the widow receives the money and vice versa. If it is not decided at the time of opening this account then legal holders has right to withdraw money from bank.
Married Woman

Marriage does not disqualify a woman from becoming a customer of a bank because a married woman is capable of holding and disposing any property and also capable of rendering herself liable in respect of any contract. She can open and operate a bank account with cash or Cheque like any other account holder. In case of married woman requests for a loan, adequate securities belonging to her should be taken into consideration separate from her husband property. Bank when open the account of married woman asks the name of her husband and her occupation. According to French law, no woman can open the bank account without the will of her husband.
Features of Married Woman

Signature on Form

There must be signature of married woman on account opening form. There is no signature of her husband on form but name of her husband and occupation is mentioned there.
Signature on Card

Married woman must signature on specimen signature card.

Type of Account

Married woman can open any type of account in the bank like Current, Fixed Deposit, Saving and PLS Account.
Issuance of Cheque

Married woman has right to withdraw money from her account and issue a Cheque on the name of bank. She must do a signature on Cheque like she has done in the specimen signature card.
Facility of Loan

Married woman can take a loan or overdraft from bank. Bank must be careful while granting the loan to married woman because if she is unable to pay back loan then no legal step can be taken against that lady and no one can caught her and cant be put in prison, so thats why bank should grant to the loan to married woman at that time when she has a sufficient property in her own name so that bank can recover their money.
Responsibility of Loan

If married woman has taken loan in the shape of overdraft then her husband will not be responsible. If married woman has taken overdraft from bank for house necessities, in this case husband can be responsible for repayment of loan. But if her husband proves that he is providing enough money to his wife for house necessities or he had forbidden his wife to take overdraft from the bank then he can not be responsible for the repayment of overdraft.
Death of Married Woman

If married woman died, then her husband will have a right to receive the deposited money or her legal holders will receive that money.
Minor or Infant Customer

According to Pakistani law, a person is regarded as minor until he has attained the age of 18 years. In Greek Britain the age limit is 21 years. Banker in Pakistan has allowed the opening of minors a/c only with the idea of inculcating in them the habits of saving. These a/c are opened in the name of minor on the request of his guardian who signs the a/c opening form himself and gives his own specimen signature for the operation of the a/c. so minor can make a transaction with bank and can issue a Cheque in the name of bank.
Features of Minor or Infant Customer

Signature on form

Minor customer will sign on a/c opening form by himself.

Type of A/C

Minor can open any type of a/c and no restriction on him.

Issuance of Cheque

Minor can withdraw money in his a/c at any time and issue a Cheque in the name of bank.
Overdraft facility

Bank doesnt provide the overdraft facility to minor because there is no legal facility is available for the repayment of money.
Guardian Responsibility

If bank has opened a a/c in the name of minor guardian and that person takes overdraft from bank than guardian will responsible for repayment and bank has legal right to take the money from guardian.
Minor as a Agent

If infant or minor works as a agent of adult person than he has facility to take overdraft from bank and responsibility of overdraft goes to that person, who has appointed him agent.
Fraud

If minor makes fraud with bank and get money by showing that I am adult than in this case bank has no authority to take back loan amount and interest amount payment also.
Lunatics or Mental Patient Customers

Section 11 of the contract Act 1872, has debarred all persons of unsound mind from contracting. Therefore, a banker should not open an account in the name of person who is known to be a man of unsound mind. As soon as the banker comes to know of the lunacy of his customers, he should atop all debit operations on the account after confirming the information. The entire credit balance of the customer a/c should be placed at the disposal of the Manager in Lunacy appointed by a competent court of law under the lunacy act 1912, who in the behalf of his owner makes a transaction with the bank. When the customer regains his soundness of mind and is discharged from lunatic asylum the bank should allow him to operate the a/c after he produces a certificate of sanity from a court of law. Bank stops the payment of those Cheques which has issued before the lunacy. If the bank has made the payment of Cheque before the lunacy of his customer than in this case bank will not be responsible.
Partnership Firm

Section 4 of Partnership Act, 1932, Partnership is the relationship b/w the persons who have agreed to share the profit of the business carried on by all or any of them acting for all. Any partnership firm can open the a/c in bank. Therefore, a banker should always open a firms

account in the firms name not the partners name and get the a/c opening form signed by all the partner who must also state the nature of the firms business, the name and addresses of all the partners and name of those who are authorized to operate on the a/c in the name of firm.
Features of Partnership Firm

Signature on form

There must be signature of all the partners on a/c opening form.

Partnership contract

For the opening of partnership a/c firm should provide the copy of partnership contract to bank.
Right for transaction

All the partners can jointly make the dealing with the bank but normally they make a representative among them for making transaction with bank. This authority is written in nature and also copy of this is provided to bank. The authority should include powers to draw, indorse and accept bills and mortgage and sell property belonging to the firm.
Responsibility of Loan

If firm takes a loan from bank than responsibility of repayment is on all the partners.
Refusal of Payment

If bank receives the information from one or more than one partners that the person who has authority to make transaction with bank is cancelled than after this information bank refuses to pay the amount of Cheque issued by that person.
Personal Transaction

The person who has authority to make transaction with the bank, if he has also his personal a/c in same branch where there is firm a/c than must be careful in dealing if that person deposits firm Cheque in his personal a/c than bank should tell the other partners otherwise bank will be responsible for losses,
Retirement of Partner

If one or more than one partner of partnership firm is retired than they are not responsible for such transaction which has been made after their retirement. If the banker doesnt receive the notice of retirement than these partners will be responsible for those transaction which has been made after their retirement. So it is necessary that when partners are going to be retired notice should be given to bank.
Death of Partner

The death of partner dissolves the firm. If the a/c has a credit balance the operation on the a/c should not be stopped by the mutual understanding of all the partners.
Joint Stock Company

Joint Stock Company performs its all monetary transaction through banks. Company can open the current a/c in the bank and few persons are selected for the running of this a/c. they have right to make the transaction with the bank.
Features of Joint Stock Company

Resolution

Company provides the copy of resolution of directors to bank in which few persons are authorized to operate upon a a/c and also their specified authority. In this resolution they also mentioned the name of bank in which they will open their a/c.

Copy of Certificates of company

Before an a/c of public limited company is opened, the banker must ask the person to do so to submit the certificate copies of the following documents. Resolution of Board of Directors Memorandum and Articles of Association Certificate of Incorporation Certificate of Commencement of Business Balance Sheet Bank keeps these things in their record, if bank has doubt about the correctness of documents; they send their representative in the office of registrar of companies and make confirmation.
Signature on form

For the opening of an a/c signatures of authorized persons must be there who has authority to making transaction with bank.

Annual Report

It is the statement of the financial affairs of the company and the banker can draw his own conclusion about the company from the study of the latest balance sheet compared with previous ones.
Authorization of Transaction

Company provides the specimen signatures of those people who are authorized to make transaction with bank. These signature of approved by Managing Director of company.
Payment

Bank only makes a payment of those Cheques on which the signatures of authorized persons are there.
Repayment Responsibility of loan

The authorized persons receives the loans/overdraft from bank, responsibility of repay goes to company.
Non-Trading Concerns

Non-trading organization includes the clubs, societies and associations. These are formed for the promotion of culture, science, education, recreational activities and charitable purposes etc. some of these institutions are registered under the societys registration Act, 1866, and are issued a certificate of registration. The affairs of these institutions are administrated by a body known as governing body or Managing Executive Committee. If these institution are not according to law than they have no legal position. So banker must be careful while making the overdraft payments because the members of these institutions have no responsibility.
Features of Non-Trading Concern

Copy of Resolution

The resolutions of governing body/managing committee authorizing the opening of the account with the bank. The resolution should name the person authorized to operate upon the account clearly specifying the powers of authorized person. The resolution is signed by chairman of Committee and counter signed by the secretary of governing body.
Bye- Laws

Certificate copy of bye- laws or rules and regulation is provided to bank.

Signature on Form

The account opening form duly signed by the authorized person(s) who would operate on the account.
Personal Account

An undertaking signed by all the authorized persons on behalf of the institution expressly mentioning that as and when any change, take place in the persons authorized to operate on the a/c, the balance will be informed immediately.
Death

If the person died who is authori9zed to make transaction with the bank than bank stops the payment from club a/c until it never receives the resolution of managing committee in which new person is appointed for making the transaction with bank.
Trustee account

Is the person who accepts the confidence of other person and take care of property of other person. Bank should be reluctant to open the a/c of such person. If he opens the a/c by his private identification than bank should not put objection on that, but if he opens the a/c as a trustee than bank should require the trust deed from that person, in which he is appointed as trustee.
Features of Trustee Account

Trust Deed

Bank does not open the a/c of any trustee until it does not receive the attested copy of Trust Deed.
Signature

Trustee signs in the a/c opening form and specimen signature card lonely.
Authorization of Transaction

If there are more than one trustee for looks after of property than it is better to mention the bank that which will make the transaction with bank.
Death of Trustee

If there is more than one trustee and one of them dies, than bank should not suppose that other trustee

have right to make transaction with bank.

Utilization of fund

No trustee is allowed to transfer the trust fund in his personal a/c.

Payment

If there are more than one trustee and these all are a/c holders than bill will not pay until the Cheque is not undertaking signed by all trustees.

CHAPTER FIVE MAJOR PRODUCTS/SCHEMES

T he peoples who opens the a/c in the bank they have their different needs and requirements of a/c according to their income. So one account is not best for all the peoples. Thats why banking institutions provides the different sort of a/c and schemes according to the people needs.
General products of Banks

Profit and Loss Sharing A/C Profit or loss sharing Saving A/C Profit or loss sharing term deposit A/C Rozana Munafa Business A/C Current A/C Foreign Currency Deposit Rupee Travelers Cheque Credit Card Profit & Loss Sharing Account The different revolutionary steps which has been taken by government for the running of economic system of country on the basis of islamization, the introduction of profit and loss sharing a/c is one of them.

This system was introduced in 1 January 1981. people deposited the huge amount of money in bank in profit and loss sharing a/c because this system was best according their desires and Islamic point of view. We can judge the popularity of this scheme in this manner that without the surety of success ness of this system and payment of interest, people deposited Rs.3 billion in profit and loss sharing a/c. Commercial Banks invested this money in the rice export corporation, cotton export corporation, House building Finance Corporation and in those industries where there are no or few chances of losses. Banks paid the profit of Rs. 13 crore of the total amounts of Rs.3 billion in first six months. The success of this system is evidence of this thing that people of Pakistan is ready for every kind of scarification. The commercial banks are providing the two types of a/c facility in profit and loss sharing a/c. Profit and loss sharing saving a/c Profit or loss sharing term deposit a/c Profit and loss sharing saving a/c PLS saving a/c can be open by the amount of Rs.1000 in any commercial bank of Pakistan. No person is allowed to open more than one a/c with the same name. Bank has authority to utilize these deposits in any kind of business, customer has no authority to interfere or investigate.
Features

Minimum opening amount

This account can be open in any commercial bank by the amount of Rs.1000.
Maximum amount of withdrawal

In this account Rs.15000 can be withdrawal during a week. If party wants to withdraw more than this amount than they have to given the 7 days prior notice. But now different commercial banks have no restriction of notice.
Use of Cheque

Cheque is used for the withdrawal of money from bank.

Quantity of Cheque

In this a/c, only 2 Cheque can be issued within a week, but stipulation is that the total amount of these Cheques must not be exceeding Rs.15000.
Interest payment

On this account, instead of interest person receives the profit after the 6 months. Profit and loss sharing term deposit a/c The deposits that can be withdrawn after a specified period of time are referred to as fixed or term deposits. The period for which these deposits are kept by the bank ordinarily varies from three months to five years in accordance with the agreement made between the customers and banker. Interest is paid to depositors on all fixed or term deposits and rate of interest varies with the duration for which the amount is kept with the banker. The depositors are issued a receipt usually an instrument marked not negotiable. If after the specified period, customer does not withdraw his money from bank. Bank does not pay the profit on that amount after time. The minimum time period for deposit in this account is 6 months. Rozana Munafa Business Account Rozana Munafa business a/c is profit and loss sharing a/c for sole proprietor ship and Joint Stock Company.
Features

Facility of money withdrawal

This account is like a current account in which there is no limit of deposit and withdrawal of money.
Calculation of profit

The profit of this account is calculated by the remaining balance of account on daily basis.
Minimum percentage of balance

Bank has already decided the monthly minimum percentage of balance for calculation of profit.
Extra charges

Bank does not charge extra charges for rendering the services in this account. Current Account The amount are payable to the customers whenever they are demanded. These deposits are treated as current liability by the banks. Bankers in Pakistan do not allow any profit on these deposits and customers are required to maintain the minimum balance.
Features

Minimum balance limit

There is a minimum balance required for the opening of this account. In Pakistan this limit differs from bank to bank.
Payment of interest

The amount of current account can not be invested by the bank and the bank can not give this amount as a loan and no interest payment is made for customers.
Need for guarantee

For the opening of current account there is requirement of guarantee of that person who has already bank account in that particular branch in which person is going for opening an account.
Usage of Cheque

Cheque book is issued to the customers because in current account there is no limit of withdrawal of Cheque.
Use of pass book

In current account customers make the transaction with bank often, so bank issue a pass book to customers. Its filled by the banker because it is the copy of general ledger of bank. Foreign Currency A/C Foreign currency a/c can be opened in any commercial or listed bank in Pakistan. Government of Pakistan has introduced many important reforms in foreign exchange control in country in February 1990, in which one of them reforms relates to foreign currency a/c which can be opened in US Dollar, Pound Sterling, Deutsche Marks and Japanese Yens in any of the authorized branches of commercial banks throughout the country. An individual firm and company whether Pakistani or Foreigner and whether resident or non-resident in Pakistan can open the current, saving bank, special notice and term deposits a/c in any of the above mentioned foreign currencies. This a/c can be opened and maintained singly or in the joint name and Rupee loan facility is available against the balance held in such a/c. Government of Pakistan has exempted this foreign currency a/c from payment of taxes and deduction of zakat on the deposits and return occurred on them. The foreign currency a/c can be opened for 7 days to 3 years in shape of term deposits. If foreign currency a/c is in the shape of saving a/c than interest rate is calculated in minimum balances each month and whichs payment is made after six months in same currency in which a/c is opened. If foreign currency a/c is in shape of term deposit than interest rate is calculated by the instructions given by the State Bank of Pakistan, while opening the a/c and interest rate remains same through out period.

Rupee Travelers Cheque For the first time it is introduced in 1993, as a safe way to pay for high valued purchases. The product has become extremely popular and is used by consumers in all walks of life. Banks enjoyed a largest target market share. It has different advantages like Safest way to carry cash. Can be used safely and conveniently to make all kinds of payments. Promptly and easily encashed at any designated branches of banks. It is preferred over cash for business and other transaction and is readily accepted wherever exchanged. This travelers Cheque has no expiry date. If RTCS are theft or stolen or lost, than there is surety of refund of money. These RTC are available in denominations like Rs.1000, Rs.5000, Rs.10000, Rs.50000 and Rs.100000. Credit Card Credit card issuing is an important activity that the most successful and modern banks are doing and generating profit from it. These cards have two categories Gold card Silver card
Features

The banks have introduced the enhanced features of photograph on the card limiting fraud in case of card loss. These cards welcomed over 3000 outlets in Pakistan and two million- service establishments around the world like hotels, resorts, airlines, travel agencies, pumps, departmental stores and restaurants etc. These cards have cash advance facility is available in Pakistan and world wide. Credit card is allowed to withdraw cash from any of the authorized branches of their respective banks. The expiry card would be renewed it the account holder wants and deducts certain specific charges as renewal fees. If the card is lost or misplaced, the card having same validity as the lost card would be sent to the individual concerned as soon as written intimation is received from him.

CHAPTER SIX INDUSTRY ANALYSIS

Without analysis, nobody can determine whether the respective industry is going on right track or moving toward wrong direction. So, analysis of various factors is very important, if anybody want to the performance of any industry. This chapter of our report evaluates some critical factors in banking industry and helps reader to identify the various trends in banking. In order to analyze the banking industry of Pakistan, we have evaluated trends of following important factors which includes: National Saving Trends Deposit Trends Weighted Average Rate of Return on Deposits Trends GDP Analysis and Trends Trends of Advances of all Banks Currency Circulation Trends National Saving Trend Generally people save money when they have extra money after satisfying their basic needs. In order to identify the national saving trends, we have selected data for 10 years starting from 1991 to 2000 which is shown in table 6-1. Table 6-1: NATIONAL SAVINGS Cumulativ AMOUNT e YEAR % change (Rs. million) (% change) 1991 162572 --1992 168681 4% 4% 1993 178933.7 6% 10% 1994 215969.7 17% 27% 1995 255513.6 15% 42% 1996 303893.5 16% 50% 1997 372330 18% 76% 1998 458946.5 19% 95% 1999 623584 26% 121% 2000 714749.9 13% 134%

2001 751204.9 5% 139% Source:SBP (Statistic Department) In this table total amount of national saving comes from three major saving heads i.e. Accounts(national saving centers, post offices, saving accounts, khas deposits accounts, mahana Amdani accounts, special saving accounts etc.), certificates(National Saving centers, post offices, banks, defense saving certificates, national deposit certificates, khas deposit certificates, premium saving certificates, special saving certificates, regular income certificates etc) and prize bondsvalued from Rs. 5 to Rs. 40000. Table shows that saving is continuously increasing from year to year. Graph 6-1 show critical trend analysis of national saving in Pakistan. Graph 6-1:

This graph indicate that national saving is continuously increasing from year by year i.e. from year 1991 to year 1992 there is 4% increase in saving level and from 1992 to year 1993, 6% increase in saving and son on. As graph show that there is continuous increase from year 1991 to 1998 but from year 1998 to year 2000, saving rate is not increasing with the same proportion as last years. That means the saving trend in people is decreasing in these respective years (1998=2000). So, we can say, if this trend continue then saving of people may decrease in future. Deposits Trends In general, people deposits their money into banks for safety purposes and want to earn some profit on this deposited money. Deposits of banks indicate their performance level or reputation. That means, if bank has more deposits then it can further invest this money and earn profit. Table 6-2 shows the total deposits for 10 years. Total amount of deposits consist on schedule banks demand deposits, schedule banks time deposits, resident foreign currency deposits and other deposits with SBP. Table 6-2: Deposits (Rs. Million) Year Sche Sche Resid Oth T % Cu dule dule ent er ot ch mu d d Forei Dep al a lati Ban Ban gn osits D n ve k k Curre Wit ep ge (% Dem Tim ncy h os cha

and Dep osits 1993 1565 09 1685 54 2025 05 2071 08 1922 75 2009 97 3491 15 3753 97

e Dep osits 2062 94 2524 97 2965 21 3447 13 3868 01 4474 32 5165 86 5491 24

Depos its 61274

SBP * 4449

its 42 85 26 51 86 91 60 91 54 70 45 70 80 90 93 93 33 97 99 28 30 10 44 95 5 10 50 57 1

nge ) -17 % 15 % 14 % 13 % 13 % 6 % 5 % -17 % 32 % 46 % 59 % 72 % 78 % 83 %

1994

92134 10507 3 14595 8 22288 2 27855 6 12091 7 11247 5

5506

1995

5055

1996

6791

1997

7135

1998

6412

1999

6212

2000

7959

2001

3749 87

6101 38

15415 4

1129 2

9 %

92 %

Source:SBP (Statistic Department) This table indicate that amount of total deposits is increasing from year to year. In order to evaluate deposits trends, please see graph 6-2 given below. Graph 6-2:

This graph show that deposits rate is increasing from year to year. For example, there is 17% increase in deposits from 1993 to 1994 and so on. So we can say if this trend continues then the banks may get more deposits in future. weighted average ror on Deposits-all scheduled banks Table 6-3 show average rate of return on deposits of all scheduled banks. These rate of return are only for specific deposits which include Demand deposits, saving deposits and time deposits. Further more, ROR for time deposits is only for accounts having maturity period 5 years or more.

Table 6-3:(% per Annum)

Years Demand Deposits Saving Deposits Time Depositsa 1996 7.00 7.43 14.96 1997 6.02 7.32 14.80 1998 6.29 7.36 13.8 1999 5.47 6.25 11.21 2000 4.92 5.56 10.03 Source:SBP (Statistic Department) This table indicates that ROR on all three kinds of deposits is decreasing. Following graphs indicate trend of ROR in more comprehensive manners for all three type of deposits. As indicated by graph 6-3, the ROR on demand deposits is decreasing. If this trend continue then banks will pay minimum ROR to customers in future. Graph 6-3: Graph 6-4 also indicate decreasing trend and if same trend continue the banks will pay limited rate of return on saving deposits to customers. Graph 6-4:

There is also decreasing trend of ROR on time deposits. That means bank continuously decreasing ROR on time/fixed deposits. Graph 6-5:

GDP analysis & trends GDP of the country is continuously increasing over the years. Table 6-4 shows the three basic heads of GDP, which are agriculture, industry,and services. Banking and insurance is part of service sector. Table 6-4: Total Share of Total Share of Contribution of Total Share of Total GDP Agriculture in Industrial sector Banking & service sector Year (FC) (Rs. GDP (Rs. in GDP (Rs. Insurance in in GDP (Rs. Million) Million) Million) Service Sector Million) (Rs. Million) 1997-98 2480884 677531 590504 1212849 77297 1998-99 2735943 739569 649475 1346899 88230 1999-00 2951680 776219 672207 1503254 98532 2000-01 3191813 797455 735494 1658864 107519 Source:SBP (Statistic Department) Graph 6-6 shows the share of banking and insurance which is very limited in the overall GDP. And we can also see from the graph the banking and insurance share is continuously increasing. Graph 6-6: Table 6-5 shows the %age share of

agriculture, industry and service sector in GDP. As we see the contribution of service sector in GDP is more than the other two sectors which is shown in graph 6-7 below as well.

Table 6-5: % Share of % Share of Agriculture Industrial Sector Sector in GDP in GDP 1997-98 27.3% 23.8% 1998-99 27.0% 23.7% 1999-00 26.3% 22.8% 2000-01 24.9% 23.0% Source:SBP (Statistic Department) Graph 6-7: Years % Share of Service Sector In GDP 48.9% 49.2% 50.93% 51.97%

as earlier

described, banking and insurance is a part of service sector and it is very necessary to identify its contribution in GDP in service sector. Table 6-6 show total contribution of service sector in overall GDP along with contribution of banking and insurance. Table 6-6: % share of Service Contribution of Banking and Years Sector in GDP Insurance in Service sector 1997-98 48.9% 6.4% 1998-99 49.2% 6.6% 1999-00 50.93% 6.6% 2000-01 51.97% 6.5%

The above graphs indicate the percentage share of banking and insurance in the service sector. Which is continuously little bit increasing form year to year. ADVANCES OF ALL BANKS Table 6-7 show advances of all scheduled banks for five years which is increasing year to year. Furthermore the graph 6-8 shows the trend over five years. Table 6-7: ADVANCES OF ALL BANKSb YEAR 1996 1997 1998 1999 2000 Source:SBP (Statistic Department) Graph 6-8: AMOUNT (Million Rs.) 548257.7 622607.1 680234.5 720924.4 862557.5

CURRENCY IN CIRCULATION Table 6-8 shows the currency circulation in the country which is found by subtracting currency held by SBP and currency held by the scheduled banks from currency issued for each year. Table 6-8: (Rs. Million) Currency held by SBP 1993 178933 768 1994 199070 624 1995 232589 647 1996 253908 470 1997 262589 627 1998 293263 1572 1999 308542 1955 2000 376997 1851 2001 396548 1905 Source:SBP (Statistic Department) Graph 6-9: Years Currency Issued Currency held by Scheduled Banks 11301 13738 16363 19328 17821 18769 18870 19468 19198 Currency in Circulation 166864 184708 215579 234110 244141 272922 287716 355677 375445

Currency circulation is continuously increasing; it means that the inflation is increasing in the country, because the SBP is issuing more currency every year.