Financial Liberalization Affect and Banking Sectors

Deregulation in Pakistan.
Abstract:
In this study is has been observed that what are the factors which is
leading to the non performance of the commercial banks in Pakistan
on the basis of the financial liberalization and how the State Bank of
Pakistans measurement resulted in the deregulation of the
commercial banks over the period.
There are the analyses made on the basis of a survey taken on the
basis of 15 commercial banks which were chosen to obtain the final
results to check the captioned subjects flaw.
There are some methods which were obtained to have a reformism in
the Banking sector of Pakistan, which was based on some points like
good credit decision making (which leads to the credit assessment of
the clients), banks being privatized, Adequate banking environment,
reduction in transaction cost etc also helps in minimizing the
deregulation in the Banking Sector of Pakistan.
Furthermore, this study also shows that before the banks privatization,
there was high transaction cost included as the ownership of these
banks were held with the State Bank of Pakistan for a sufficient period
of time.

Introduction:
The Pakistani Banking Sector has a vital impact on the economy of the
country as it has the main role of receiving deposits and advances
loans which are given with the betterment of economic growth in a
society. The main function of the bank is to receive deposit with the
highest security and to mitigate the risk while lending money for the
economic growth of the country.
The history of the banks in Pakistan is more of a controversial nature
as in the early 1970s but before that it was playing an efficient role in
the economic development of the country, but there was a drastic

change in the financial structure during the middle of 1970s when the
commercial banks got nationalized and even if the case was made for
the betterment of the economic growth but then also Government
took some negative steps in order to damage the growth activities of
the country.
As in the past after the nationalization of the commercial banks it was
observed that the Government was intervening in a way that the
financial requirements of the Govt should be kept in the first place
regardless of everything as they were considered as the primary
borrowers for the fulfillment of their personal needs. All the funds
which were collected through deposits were given to Govt if they
request on the basis of some margin, but due to this the borrowings
which should be made to the Commercial banks by the Central banks
was totally ignored because the Govt was actively involved in
receiving the funds. That was not enough, because the Commercial
banks were totally involved in the establishment of the economic
growth of the country but as there were no funds available to them,
no activities were taken place as a result there was deregulation in the
banking sector.
As a result of this deregulation there was a financial disruption in the
economy as there were no borrowings to the commercial banks, and
the efficiency of the nationalized banks were also been taken into
question. Due to this event there was inadequate performance of the
banks resulting in non collection of the funds, the financial
liberalization was increased rapidly, there was a decline in the
performance of the banks due to this.
As there was a financial depression in the economy, the Central bank
of Pakistan took a step to have a reform in the Banking sector and to
have funds available to the commercial banks which was parted in two
steps, the first step of the reforms has been already made and the
second step for the reforms is still in progress which will be completed
in near future.
The study of financial liberalization and the de regulation of the bank
is not been studied with great efforts in Pakistan for most of the time,
unlike countries like Africa, South America etc. The captioned study
will be interesting to study as there many varieties of banks available
in Pakistan, as they consist of foreign banks, local banks, industrial

banks, agriculture banks etc. The following review will be given under
the literature review.

Literature Review:
The below literature review has been extracted from the various
studies which are based on the financial liberalization and banking
sectors de regulation. It has been discussed in detail below:
The Importance of Banks In an Economy:
The banks have a very effective role in the economic development of
the country as its main function is to receive deposits and advances
loans for the better economic growth. Furthermore, bank is one of the
important organ of the state which lets it to breath in a positive way,
but in an economy there are some queries which needed to be asked
that in what circumstances the banks grow better for the economic
growth of the country.
The query which arises in a mind of a researcher that whether the
growth of the banking sector is better in a govt intervention or if it is
staying in the market?
The first approach shows by the study of some researchers and on the
basis of some empirical results it has showed that government owned
banks have played a positive roles as depicted from the studies of the
researchers and also the govt involvement with the banks have
indicated that positive growth in the bank is also resulted.
But from the market modern approach it has been observed that the
involvement of the govt has negative impact on the growth of the
banks which includes the statutory requirements with some of the
rules and procedures with the govt, also the govt will first use the
banks for their financial requirements which will also mark the
inadequate growth of economic activities. As there will be the
regulation of interest rate on the discretion of the govt on the basis of
which the banks could receive low returns on the loans which they
grant to the govt. For that purpose and to satisfy both the questions,
reforms should be made by the central bank in order to satisfy the
requirements of both i.e. the government and the commercial banks.
The Factors Describing the Poor Performance:

There are many factors which lead to the financial disruption in an

economy as depicted by this literature, that the banks which are
under the govt interference or govt owned mostly are at a higher risk
of default as there are many drawbacks in the system which is govt
owned.
Factors like complexed statutory requirement, high transaction cost
because of low return on the finance, centered to credit financing to
the public sectors only, intention to default as the govt has the
intention to have funds for their own sake and due to this the chances
of corruption occurs. Another issue which arises is the ignorance for
the private sector as they don't have funds which are given to the
government organizations for their own work. There is shortage of
liquidity for the private sectors to invest in economic activities.
There are some other factors which includes the financial depression
in the economy is the law and order situations, high taxes which are
levied due to which the business activities have been shrink.
Financial Liberalization:
The main highlights which are discussed in this study is that how to
take measures to minimize the de regulization and the financial
liberalization in the banking sector in order to have economic
development in the country. As there can be many reforms which
includes the adequate supply of money, proper banking environment
to have a healthy relationship with the clients, the credit policy should
be market oriented and financing should be given on the basis of
credit assessment. The condition of collateral should be involved in
the loan giving process so that in case of any default the amount
should be marginally recovered from the collateral.
The non performing loans should be dealt adequately and to inquire
that what are the reasons due to which they are not returned, for that
a credit committee should be formed. The commercial banks should
be privatized and not in the direction of the govt so that they should
not use the bank for their personal sake and as a result the economic
activities should not be disturbed. The return on the loans should be
sufficient enough so that banks should also earn some profit and
progress towards betterment. The advancement in the technology
should also be upgraded so that no system breakdown or any kind of
hindrance should occur. There should be proper check and balance on

the loans which are granted to the business entities so that they are
utilized in the better economic activities.

Conclusion:
After having the full study review it has been observed that the
following points should be taken into account in order to have good
banking performance and some measures in the financial
liberalization:
1) The banks should have their own discretion while giving credits
financing to any business entity.
2) The role or intervention of govt should be avoided as it will lead to
the poor banking performance as a result low economic growth.
3) The commercial banks should be privatized so that it should have
better performance with adequate financial support.
4) The NPLs should be looked into very thoroughly as they are one of
the most important factor to damage the economic activities of the
country.
5) The quality of banking services should increase in order to have a
good banking environment within the economy.