Banking is one of the most sensitive businesses all over the world. Banks play very important role in the economy of a country and Pakistan is no exemption. Banks are custodian to the assets of the general masses. The banking sector plays a significant role in a contemporary world of money and economy. It influences and facilitates many different but integrated economic activities like resources mobilization, poverty elimination, production and distribution of public finance.
Pakistan has a well-developed banking system, which consists of a wide variety of institutions ranging from a central bank to commercial banks and to specialized agencies to cater for special requirements of specific sectors. The country started without any worthwhile banking network in 1947 but witnessed phenomenal growth in the first two decades. By 1970, it had acquired a flourishing banking sector.
SBP acts as a nucleolus in the financial system of the country. To day, a central bank is the central arch of the monetary and fiscal framework in many countries of the world and its activities are essential for the proper functioning of the economy and critical for the fiscal operations of the government and Pakistan’s banking system is no exemption. Will Roger (1992) describe a central bank as one of the great inventions of the 20th century. State Bank of Pakistan was established on the first of July 1948 under the SBP order 1948 as the central bank of the country.
State Bank of Pakistan reins the monetary and credit system in Pakistan. The SBP is performing many useful functions like custodian of cash reserve of commercial banks, custodian of foreign currency reserves, bank of rediscount, central clearance, settlement and transfer, and conducting monetary policy for the stability of the entire banking industry of Pakistan.
There are 17 listed banks in Pakistan 2007. Four banks are still not listed, which are Habib Bank, United Bank, Allied Bank of Pakistan, Dawood Bank. Standard Chartered Bank, Citibank, Deutsche Bank and ABN AMRO Bank are main foreign banks in the country. These four banks continue to enjoy a significant share in the market, both in terms of deposits and advances. All the foreign banks of the country are busy to invest heavily in the field technology and e-commerce in order to overcome branch limitation. All the foreign banks have been busy to introduce new products and idea to grab larger proportion of the local markets. Foreign banks are carrying major proportion of local business in credit cards, consumer finances and housing finance. Many domestic banks have increased their general standards. Ours is the age of plastic money. Internet-based services are constantly increasing the number of ATM machines, either by installing their own machines or making arrangements with other networks. The number of Debit Cards has also been increasing at an unprecedented rate. All the domestic and foreign banks vigorously institutionalized consumer financing in the country and earned handsome profits. The borrowing to private sector has also increased which ultimately boasted the profitability of all the domestic banks of the country. In the last 3 to 4 years many domestic banks have been suffering from surplus liquidity crisis mainly due to low demand for credit and slowdown of manufacturing sector in the country. Almost all the banks are now buy to invest in capital markets to increase their exposure in equities. To stop that risky trend the State Bank of Pakistan issued the instructions to follow the Prudential Regulations in letter and spirit and not invest in the capital markets beyond the limits. The domestic banks’s lending under consumer finance and housing finance have also been growing. The analysis of Annual Reports of banks shows that their income from core banking activities has been growing. The other positive point is that there are growing expectations for increase in interest...