Hr Implications in Private Banks

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Financial Sector Reforms and the Efficiency of Banking in Pakistan

Abdul Qayyum Registrar PIDE Email: abdulqayyum@pide.org.pk

Pakistan Institute of Development Economics (PIDE) Islamabad, Pakistan

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Financial Sector Reforms and the Efficiency of Banking in Pakistan

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INTRODUCTION The banking in Pakistan has been dominated by government owned

institutions. It has accommodated the financial needs of the government, public enterprises and private sectors (Khan, 1995; Khan and Khan, 2007). Public sector dominancy, among others, lead to inefficiency in the banking sector (Haque, 1997). The economic efficiency of the banks remained low that led to low savings and investment in the private sector which resulted in low growth (Khan and Khan, 2007). These problems include concentrated ownership of financial assets, high taxes, narrow range of products and have not diversified into consumer and mortgage financing (Haque, 1997 and Limmi, 2002). A strong regulatory and supervisory system is necessary to cop with the financial crises and promotes the efficient function of financial markets (Caprio and Klingebiel, 1997). Therefore the challenge is to formulate an appropriate regulatory framework that enables the banking system to be more resilient to insolvency. In addition timing, sequencing and speed of restructuring measures are very important for successful restructuring (Khatkhate, 1998 and Alawode and Ikhide, 1997). Moreover, the reforms of the financial system are important to remove market distortions (Eatwell, 1996; Mavrotas and Kelly, 2001; and Khan and Khan, 2007). Financial sector in Pakistan has been under reforms process since early 1990’s. The objectives of these reforms has been removing inefficiencies of financial intermediations and maintaining stability and enhancing growth (Faruqi, 2007). In order to improve the efficiency of financial system the Government of Pakistan initiated macroeconomic and financial sector restructing program. International agencies such as International Monetary Fund (IMF), The World Bank and government of Japan provided technical support as well as banking sector adjustment loan (BSAL) in 1996. The current spell of reforms process has

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started in 1997. The main concern of the reforms agenda has been on the recovery of non-performing loans, retrenchment of surplus staff, closure of over-extended branches, privatization of banks, introduction of international accounting standards, strengthening prudential regulation and establishment of banking courts. During 1998 and 1999, the reform process suffered badly. The Government of Pakistan has decided in 2000 to review the reforms program. Therefore the Government approached the World Bank to get support for revival of the reforms program. As a result the World Bank approved a credit for the Pakistan Banking Sector Restructuring and Privatization Project (PBSRPP). The main focus of PBSRPP has been to improve the efficiency of state owned banks by reducing the cost structure, complete privatization of banks, liberalizing bank branching policy, reduction in taxes, integration of national savings scheme to the financial markets, discontinuance of the mandatory placement of foreign currency deposits by the commercial banks, and strengthening the central bank to play effective role as a regulator of banking sector (Qayyum and Ahmed, 2006). Following the guidelines provided in the agreement with the donors, the Government of Pakistan and State Bank of Pakistan has taken several steps to restructure financial sector. These include privatization of NCBs, corporate governance, capital strengthening, improving asset quality, consumer financing, legal reforms, prudential regulations, E-banking, credit rating, reduction of corporate taxation and human resource development (SBP, 2005). It was expected that these reforms will bring significant economic benefits through a more effective mobilization of domestic savings and efficient...
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