Impact of global financial crisis on "National bank of Pakistan" Nasir Zaman MSBA 1st Abstract.

The global financial crunch, food crisis and oil crisis has once again highlighted the fragility of capitalism, as the fallout from the credit crunch and the wider financial crisis continues, demands for alternatives are certain to grow. This paper focuses on financial crisis in the global conventional financial market and points out the various factors that have contributed to the crisis and their effects on National bank of Pakistan. The Financial crisis due to such factors is presented and shows how National Bank of Pakistan is affected due to financial crisis. This paper examines the performance of National Bank of Pakistan during the recent global crisis by looking at the impact of the crisis on profitability, credit and asset growth, and external ratings in Pakistan. My analysis suggests that National Bank of Pakistan has not been affected by recent global financial crisis. Factors related NBP business model helped limit the adverse impact on profitability in 2008, while weaknesses in risk management practices in NBP led to a larger decline in profitability in 2009 as compared to 2010. NBP credit and asset growth performed better in 2008-09, contributing to financial and economic stability. External rating agencies-assessment of NBP risk was generally more favorable.

Introduction
There are many studies for the "impacts of global financial crisis on banking sector of Pakistan." But none of these studies has briefly specified its impacts on National bank of Pakistan, as it is public sector bank of Pakistan, which plays a vital role in the economy of Pakistan. The main part of this study was to test the hypothesis that global financial crisis has decreased the profitability and efficiency of National Bank of Pakistan. The purpose of this study was to analyze the impact of global financial crisis on National Bank of Pakistan only
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during 2008-12. The sample consists of five regional branches and head office of National Bank of Pakistan. National Bank of Pakistan is one of the largest commercial Bank operating in Pakistan. This is not a self-created statement instead of it delivers highest Volume of Trust to its customers. National Bank of Pakistan was converted from a Public sector organization into a modern commercial Bank but the perception of Customer as well as demands of Customers always becomes a first preference for Bank. This Bank is much caring about its customers and they wanted to get more and more demands. There is some selected segment of customers who is getting benefit from this National Bank of Pakistan along with more services. NBP maintains its Position as Pakistans Premier Bank with a network of Over 1200 branches locally as well as 18 overseas branches with subsidiary.

Importance of Topic
During the last decades, the financial systems have played a definite role in the development of the world economic growth. Banking system is the essential factor of this economic development. According to Chapra (2011), the recent financial crisis is not first of its kind. According to some estimates, there were around 100 crises. Those crises affected both all geographical areas as well as all countries (Chapra 2011). Recent financial crisis on banking system is however described as the worst financial crisis ever witnessed by the financial sectors. While financial crisis that started from US and spread to the rest of the world is still present, recent turmoil in supreme ruler debt (government debts) markets in Europe has shown increased weakness of the banks in some Euro area. According to IMF, spreads on royals perceived to face greater fiscal and growth challenges rose rapidly in the wake of Greeces funding difficulties (www.IMF.org 2012).

Objective of study
The objective of the study was to analyze what were the impacts of the global financial crisis on National Bank of Pakistan. To understand the issue I have
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explored some imperative questions such as what were the causes of global financial crisis, what were its impacts on financial institutions, how banking sector was affected due to recent crisis, what were its impacts on banking sector in Pakistan, how stock exchange contributed to it, how National Bank of Pakistan was affected by financial crisis and how National Bank of Pakistan spared from current global financial crisis.

Literature Review
Many researchers had worked and arr still working on finding impact of global financial crisis on banking industry in Pakistan. As mentioned earlier the banking sector is the most valuable positive feature for economic development of any country. Main purpose of the study is to prove which factors affect the financial institutions and what are their impacts on the economy of the country. According to Zineldin (2010), the purpose of the financial intermediaries is to act as middlemen between investors and depositors. Banks collect savings from scattered individual depositors and businesses that make more than they spend and lend the proceeds to individuals, governments agencies and entrepreneurs that spend more than they make. There are at least five theories that describe why banks exist. These theories are delegated monitoring; information production; liquidity transformation; consumption smoothing; and the role of the banks as a commitment mechanism. To understand what the impacts of financial crisis are, it is necessary to understand the role of the National banks of Pakistan in Pakistan economy. Banks perform two roles. These are (a) size and (b) maturity transformation. First, size transformation refers to the willingness of the depositors or savers to lend. According to this job, savers are willing to lend small money than the amount borrowers would borrow from the bank. In this role, banks collect money from many small size savers and repackage them into large size loans. In this, banks perform size transformation function by exploiting economies of scale. The second role is maturity transformation In this role; banks transform funds lent in short term bases to medium and long-term loans. Banks liabilities such
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as funds collected from the depositors are usually repayable on demand. On the other side banks assets such as funds lent to borrowers are repayable in the medium or long-term. Here it is clear that banks are borrowing on a short term and lending on a long term. In this process banks face what is called mismatch meaning that banks mismatch their assets and liabilities and this process results in liquidity risk for the banks. As already mentioned that many researchers researched about some of the most important triggers of the global financial crises. These causes are Excessive and imprudent lending by banks over a long period, Housing bubble, Global financial Imbalances, Securitization problems, Lack of transparency and Rating Agencies. Subprime mortgage problem was the first trigger of the global financial crisis. Subprime credit refers to extension of credit facilities to borrowers who have deficient credit. The interest rate applicable in the subprime market credit is higher because of the higher risk involved in lending to people who do not show adequate creditworthiness. According to Saraogi (2010), US governments lending standards were relaxed in 2000 to the point that many people were able to buy houses they could not afford. As a result when prices began to fall and loans started going bad, there was a severe shock to the financial system. In the pre-crisis, the interest rates were very low and house price was rising. The rationale behind taking an excessive mortgage was with home prices in secular uptrend. Borrowers were hoping that in a few years the market value of the mortgaged house would become greater than both principal and interest payment liabilities attached to it. Borrowers were hoping that they would sell their houses in the open market and excess of the market value of the mortgaged house over the liability towards the mortgage would be potential capital gain to borrowers. However, when the housing market started showing signs of weakness, no longer could borrowers think of selling their houses and paying off their mortgage liabilities as the price of their houses started to fall below the mortgage liability attached to it. Because huge lending occurred during this period of time, when borrowers defaulted, there were huge losses. According to Ravi (2009), more than $30

billion investments were shut down because of the losses on account of investing in mortgage related securities. Housing bubble was also one of the triggers of the recent financial crisis. Investopedia defines housing bubble as a run-up in housing prices fueled by demand, speculation and the belief that recent history is an infallible forecast of the future. Housing bubbles usually start with an increase in demand (a shift to the right in the demand curve), in the face of limited supply, which takes a relatively long period of time to replenish (fill up) and increase. Speculators enter the market, believing that profits can be made through short-term buying and selling. This further drives demand. At some point, demand decreases (a shift to the left in the demand curve), or stagnates at the same time supply increases, resulting in a sharp drop in prices - and the bubble bursts According to Jickling (2009), With its easy money policies, the Federal Reserve allowed housing prices to rise to unsustainable levels and this crisis was triggered by the bubble bursting as it was bound to it.

The 2008-2012 Financial Crisis Causes and Effects

The housing market declined
The housing slump set off a chain reaction in our economy. Individuals and investors could no longer flip their homes for a quick profit, adjustable rates mortgages adjusted skyward and mortgages no longer became affordable for many homeowners, and thousands of mortgages defaulted, leaving investors and financial institutions holding the bag. This caused massive losses in mortgage backed securities and many banks and investment firms began bleeding money. This also caused a glut of homes on the market which depressed housing prices and slowed the growth of new home building, putting thousands of home builders and laborers out of business. Depressed housing prices caused further complications as it made many homes worth much less than the mortgage value and some owners chose to simply walk away instead of pay their mortgage.

The credit well dried up

These massive losses caused many banks to tighten their lending requirements, but it was already too late for many of them the damage had already been done. Several banks and
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financial institutions merged with other institutions or were simply bought out. Others were lucky enough to receive a government bailout and are still functioning. The worst of the lot or the unlucky ones crashed.

The Economic Bailout is designed to increase the flow of credit

Many financial institutions that are saddled with risky mortgage backed securities can no longer afford to extend new credit. Unfortunately, making loans is how banks stay in business. If their current loans are not bringing in a positive cash flow and they cannot loan new money to individuals and businesses, that financial institution is not long for this world as we have recently seen with the fall of Washington Mutual and other financial institutions. The idea behind the economic bailout is to buy these risky mortgage backed securities from financial institutions, giving these banks the opportunity to lend more money to individuals and businesses, hopefully spurring on the economy.

Money Creation
The most powerful destabilizing factor of all in modern markets is the activity of money creation by the conventional banking system. By creating money out of nothing and putting it into circulation, central banks and commercial banks have together caused a succession of speculative bubbles that can be traced back more than 300 years in the Western world. When newly created money is spent on assets such as property and shares, their prices naturally tend to rise. Conversely, when banks reduce the rate of money creation, buyers disappear from markets and prices begin to fall. The ability to create money is therefore a hugely powerful political and economic tool, and one that is almost always abused in due course. There are two Islamic regulations in particular that work to prevent money creation by the banking system. These are the law of trust and the prohibition of interest (riba). By issuing promises to repay that are in excess of their cash reserves, and by lending these promises at interest, modern banks have contravened both of these regulations in order to earn profit.

Demand for Alternatives

The current crisis shares many similarities with previous crises that have occurred since the Great Depression of the 193 0s. There exists a whole host of specific factors inherent within capitalism that have caused the current credit crunch and food and oil crisis. Such factors continue to plague Western economies and all those that have imitated them. Furthermore,
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this credit crunch has also highlighted the fragility of capitalism and the free-market economy. As the fallout from the credit crunch and the wider economic crisis continues, demands for alternatives are certain to grow. In the midst of such an unprecedented crisis, Islamic banking and finance is witnessing phenomenal growth, with the global value of Islamic finance approaching $1 trillion. According to an estimate by the Asian Development Bank, the average annual growth of the Islamic banking and financial sector is more than 15 percent. Islamic banking and finance is now among the fastest-growing financial segments in the international financial system. This has lead to much research and interest. A few commentators have already predicted that the Islamic banking and finance industry may have a remedy and this fast-growing industry can come forward to solve the credit crisis. While the relatively small size of the Islamic finance industry may make this unrealistic at the moment, there exists an unprecedented opportunity to present the details of the Islamic economic system as well as the solutions Islam has for some of the current problems.

Significant Challenges
The global financial crisis is hitting the developing countries too. Although Muslim world are not the center of the crisis, the Middle Eastern region is, unfortunately, being severely affected by it. They are first victims, due to their political de-stability. Their economies are victimized when exports declined and uncalled for demand from industrialized and emerging economies contracts. The governments of the developing countries will face significant challenges managing the short-run difficulties of the financial crisis while also maintaining conditions for long-term growth. With regards to monetary policy, the challenge will be when and how much to ease. Exchange rate flexibility coupled with deeper local currency debt markets open, at first, space for a counter-cyclical monetary policy. In practice, the room for maneuvering will not only

Depend on inflation but also on how much stress the domestic currencies and financial systems are facing. On the other hand, in case of fiscal policy, the challenge will be to manage the inevitable fall in tax collection (which is related with the economic downturn and the fall in commodity prices), and to protect key expenditures education, security and infrastructure. These can prevent an unwanted rise in poverty levels and hinder future growth. So what should prudent governments do under these unique circumstances? Firstly, the developing countries needs to temporarily increase well targeted support to the poor. Once households are pushed below the poverty line or pushed further into poverty, their chances of escape are dramatically reduced. Secondly, the developing countries need to prepare for the turnaround. Countries that are better able to manage the dangers posed by the crisis, while seizing its opportunities, will be better positioned to resume rapid growth and gain a larger presence in world markets. This means, for example, continued Islamic investments in trade facilitation and logistics, as well as, the investment climate for business, including for Small and Medium Enterprises (SMEs). Thirdly, and for those countries that have the fiscal space, temporary responsible increases in expenditures, including infrastructure, can boost domestic demand particularly through public private partnerships. These increases, however, must be consistent with sound macro management to avoid inflationary pressures. Finally, the effectiveness of governments and Islamic financial institutions will play a crucial role in weathering the storm. Governments can redouble efforts to remove obstacles to growth and create a better business environment by increasing transparency, respecting and strengthening property rights, putting in place a well-functioning judiciary, and reducing crime and violence. This is crucial as the private sector is the engine of innovation and productivity and best placed to create jobs.

Hypothesis
The main purpose of this study is to test the following Hypotheses: 1. H: Global financial crisis has decreased the profitability and efficiency of National Bank of Pakistan. H1: Global financial crisis has not decreased the profitability and efficiency of National Bank of Pakistan.

Research Design and Methodology

The current study consists of two parts: theoretical part of the study and the empirical part. In theoretical part, I have analyzed and presented current literature and research findings dealing with the concept of the global financial crisis on National bank of Pakistan. In the theoretical part of the study, books, academic papers were the main sources. Press releases and organizations home page sources were also part of the theoretical study to gain support for the main arguments. The empirical part of the study is qualitative and descriptive in nature and is investigated how things are rather than suggesting how things should be. Data for approaching the research problem is collected using open-ended questions complemented with semi-structured interviews with managers of these Branches of National bank of Pakistan.

Data Collection
The initial step in research design is data collection. I have collected data through surveys and questionnaires. I designed9 questionnaire and distribute

among the managers of selected branches of National bank of Pakistan. The empirical research was conducted at selected branches of National bank of Pakistan. The research was conducted between December 15, 2012 and January 10, 2013 in Multan, Lahore, Islamabad, Faisalabad, Bahawalpur and Karachi (Head office). The sampling technique which I used was convenient, because data was easily available. The empirical data for the study is consisted on open-ended questions complemented with semi-structured interviews. In addition, banks financial statements will be used as sources. This means that first, research questionnaire forms was sent to managers for filling and after they have filled the questionnaires, another round of semi-structured interviews was conducted to have more comprehensive knowledge from the interviewees.

Results
To complete the survey 20 samples, respondents selected regional branches and head office. Total questionnaire were distributed 30 and finally I receive 27 so my respondent rate is 90%. The questionnaires are filled by every responsible person of National bank of Pakistan. After the data collection in form of questionnaire, I entered data In SPSS 16. I used the Chi-Square for test the hypothesis. Result is following.. Hypothesis
Table .Hypothesis Hypothesis Chi- Square H:global financial crisis has decreased the profitability and efficiency of 5.82
National Bank of Pakistan.

Sig. Value

Result

.317

Rejected

H1: global financial crisis has decreased the profitability and efficiency of
National Bank of Pakistan

The analysis shows that the global financial crisis has increased the profitability of National Bank of Pakistan. Such as in table the table the p-value is .317 so H is accepted.

Conclusion
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The financial crisis has proven very clearly that the apparent strength of modern financial markets was illusionary. The happy-go-lucky mood evaporated instantly, with the write down of losses accompanied by the sackings of executives and followed by more stringent lending for the real victims of the credit crunch. Furthermore, financial crisis was accompanied by rising inflation as demand for oil and food pushed prices up globally. This crisis has stunned both the left and the right of the political spectrum and the different economic schools of thought. Many economists and policy makers have suggested more regulation and transparency, with only a few highlighting the role greed and speculation played.

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