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Impact of privatization on the profitability of banks

Introduction

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.
In short the privatization process firstly put into operation by prime minister of Pakistan of
that epoch M. Nawaz Sharif on 22nd of January 1991.the intention behind the policy was to
improve the nationalized industries to take part with the worldwide market. The privatization
process was sustained but not successful as much as it was anticipated because the wealth
of the nation cut down into the few and far between personalities of the nation and wealth
gap greater than before automatically in 1990’s.
In 1999 prime minister of that period Benazir Bhutto was come to a close the program and
make a decision to nationalize the main industries to disturbed the gap of wealth between
rich and poor.
In 2004 another program was launched by Prime Minister Shaukat Aziz. Aziz officiously
and sharply hard up 100% privatization of state-owned originalities while to some extent
schemed to privatize 85% of banking sector. Starting from 2003 until 2007, Aziz fruitfully
privatized 80% of the financial sectors into private-ownership Corporation, while privatizing
the shares of Pakistan International Airlines and other big sectors into the public hands.
According to ADB the privatization process is successful in all aspects of creativeness
enhancement in effectiveness of sectors and economy, capital possession, employment
and utilization of their resources and assets.
Literature review
Shah, A. (2012)[ CITATION Placeholder1 \l 1033 ] studied comparative study of allied bank of
Pakistan and Muslim commercial bank of Pakistan in pre and post privatization era in his
study he declared privatization as a central tool of increasing efficiency of sectors in
Pakistan especially banking system for his comparative study of pre privatization and post
privatization era he selected two major banks of Pakistan Allied bank limited and Muslim
commercial bank and used A new techniques the reliability model he found that both banks
are improved in the deposit and assets as well as shows a progress in the employment rate
while income is unchanged for both the banks after privatization process the study shows a
clear efficient progress of MCB over ABL the reason may be the separate policy of both
banks. While he conceded the privatization process has the Positive impacts on Pakistan’s
banking system.
Shah A, et al. (2012) they studied privatization of banks in Pakistan a case study of allied
Bank they compare the various measures of performance such as (Profitability, Efficiency,
Investment, Employment and Assets) of Allied Bank in pre privatization era and for post
privatization period and suggest policy measures. The study was based on the hypotheses,
profitability of Allied bank has been changed after Privatization, and ABL’s efficiency of
Privatized banks has been changed. The deposits, pre-tax profit and investment of Allied
bank and Muslim Commercial bank changed after privatization. In their study they used the
methodology of comparative analysis and efficiency levels were measured. The results
show that Allied Bank Limited Showed a slow progress as compared to the other Banks
throughout the privatization period. The reasons Explored by them that the transfer of the
bank from before nationalization to the nationalization without taking in account of the
capital dividends on certain vivid policy measures. They suggested in their study that the
clear advisory policy should be framed and privatization policy should be revised and create
a trust among the investors and government.
Faisal, et al. (2015) studied the financial performance of banks in Pakistan a comparative
analysis of private and public banks for their study they compare financial performance
MCB Bank Ltd and National Bank of Pakistan by applying common size analysis and ratio
analysis of financial statement of banks used the data from 2005-2009 and conclude that
both banks are working efficiently but they need improvement in some areas like current
ratios, return on equity and operating profit of both banks they also found that the MCB is
working more efficiently and utilized their assets more effectively as compare to NBP. They
suggest both banks to improve their debt level to enhance their funds and profit level in the
right time in the right way.
Rizwan. M, et al. (2015) studied the impact of privatization on banking sector a case study
of MCB and ABL. They considered the privatization is best tool for the economic
stabilization for their study they select two firstly privatized banks major banks MCB and
ABL for the comparison they used the data range from pre privatization era 1987-91 and for
post privatization phase 2008-2012 and used the ratio analysis method they found a
significance improvement in both banks especially in MCB as compare to ABL. The rate of
equity of both banks increases after privatization with compare to pre privatization era.
Return on earning assets are also quiet high after privatization. Interest margin to total
assets and loans to deposit ratios are also appreciated after privatization. While a constant
growth in earning are noted after privatization. Suggested that the privatized banks should
expend their areas internationally taking advantage from globalization while the state banks
of Pakistan act as a guidance rather than as direct body to the privatized banks.
Khalid. U, et al (2006) studied The Effect of Privatization and Liberalization on Banking
Sector Performance in Pakistan for his methodology he used the CAMEL framework of
financial performance of the respective banks and used the data “between” 1990-2000.
Results obtained show little evidence of improvement in most of the indicators of Financial
health as a result of the privatization and liberalization policy so far for the Pakistan a poor
performance is shows by ABL because the transfer to the employee sector, however entire
observation on the bases of CAMEL shows that the performance of all sector and
undertaken industries shows a satisfactory changes after privatization process.
METHODOLOGY
The aim of study is to know the impact of privatization on the profitability and financial
growth of the banking sector of Pakistan. The study is based on many banks fall in
Pakistan; like MCB and ABL with- their pre privatization (1987-1991) and post privatization
(2008-2012) phases. It is a descriptive research where the researcher is using secondary
data in the form of annual reports for the respective years of study. In this study the
researcher is using five different ratios to calculate and interpret the impact of privatization
on the performance and valuation of Banks. Financial statements are used to take required
data for these ratio analyses.

Data Analysis

In data analysis comprise ratio analysis and graphic analysis of different banks, Graphic
analysis use for prove the objective of research study.

Research design
Our research is based on quantitative data. And the research is descriptive in nature
because so many researcher have done a lot of research on this topic and all the
information available already but some topic are essential to consider study in depth to
overcome and solve the problem of impact on profitability of banking sector. All the data
collect through internet and the relevant websites of banking sector
Sources of data
All the data sources are secondary in nature
 Annual reports of banks
 Official webs of bank
 Newspaper
 Past research papers

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