Beruflich Dokumente
Kultur Dokumente
SUBMITTED BY:
NOOR ILLAHI
Reg. No: 12-M/COM-245
SUPERVISED BY:
Ghufran Majeed Hashmi
Project Report on
ROLE OF PRIVATE BANKS IN PAKISTAN
ECONOMY
SUBMITTED BY
NOOR ILLAHI
Reg. No: 12-M/COM-245
SUPERVISED BY
Ghufran Majeed Hashmi
This Project Report is submitted in partial fulfillment of the requirements for degree of master
of commerce (2 Years) awarded by Hazara University Mansehra
.
Approval Committee
External Examiner
Mr_____________________________________________Signature______________
Supervisor
Sir Ghufran Majeed_____________________________Signature _______________
Head of Department
Mr____________________________________________Signature_______________
DEDICATION
I dedicate my report to my parents. Who prayed for my
success, and to all my loved ones, whom I love from the core
of my hearts.
TABLE OF CONTENTS
CHAPTER 1
INTRODUCTION __________
_______
1.1Introduction
01
______
1.2Definitions of Bank
01
______
01
02
03
1.5
05
07
07
07
07
07
07
07
08
08
08
08
08
09
10
11
13
CHAPTER # 2
RESEARCH METHODOLOGY
15
15
15
16
2.4Research Design
16
2.5Scope of Study
17
CHAPTER # 3
DATA COLLACTION
17
17
17
20
22
22
23
29
31
Chapter # 4
DATA ANALYSIS
33
4.1Capital Risk
33
35
36
38
39
40
41
42
43
5.1 Conclusion
47
5.2 Recommendation
48
REFERENCE
49
ACKNOWLEDGEMENTS
I express my gratitude to Almighty Allah for his unlimited graciousness because Words are
scarce and knowledge is limited to express his majesty. I have the pearls of my eyes to admire
9
the blessings of the compassionate, omnipotent, the Merciful and the beneficent Allah who is the
entire source of knowledge and wisdom. Due to his blessings, I become able to contribute this
comprehensive assignment towards the deep ocean of knowledge already exist. Heart is warm
with love and thoughts have turned to the city of knowledge The Holy Prophet (P.B.U.H) His
saying Learn from to Cradle to Grave inspired the strong desire in me to undertake this course
of valuable studies. I have no words to express my gratitude to my supervisor Sir Ghufran
Majeed Hashmi of The Muslim College of Commerce & Management Sciences
Abbottabad, for his intellectual guidance, constructive suggestions, patience and wise
comments without which it could have been rather difficult for me to complete this thesis. I
sincerely thank and pray for my respected teacher for his encouraging and cooperative behavior
during my studies and project too.
NOOR ILLAHI
CHAPTER # 1
INTRODUCTION
10
1.1 Introduction
There are different opinions that how the word Bank originated. Some of the authors opinion
that this word is derived from the word Baucus or Banque, which means a bench. The
explanation of this origin is attributed to the fact that the Jews in Lombard transacted the
business of money exchange on benches in the market place; and when the business failed, the
people destroyed the bench. Incidentally the word Bankrupts said to have evolved from this
practice.
Some of the authors are of opinion that the word Bank is derived from the German word back,
which means joint stock fund. Later on when the German occupied major part of the Italy the
word Back was italicized into Back.
In fact human left the need of bank when it begins to realize the importance of money as a
medium of exchange. Perhaps it where the Babylonian who developed banking system as early
as 2000 B.C. At that time temples were used as banks because of their prevalent respect. During
the rule of King Hammurabi (1788 1686 BC) the founder of Babylonians Empire, loans were
started being granted for interest. The borrower has to provide guarantee or he had to pledge his
goods or valuables. King Hammurabi drew up a code wherein he laid down standards rules for
procedures for banking operations by temples and great landowners. Also in Greece, the temples
were used as banks, where the people deposited their money and other valuables for safe custody
and security.
1.2
Definitions of Bank
"A financial institution which deals with money and credit is called a Bank. It accepts Deposits
from individuals, firms and companies at a lower rate of Interest and gives at higher rate of
interest to those who need them.
J.W Gilbert in his principles and practice banking defines a banker in these words:
A banker is dealer in capital or more properly, a dealer in money. He is intermediate party
between the borrower and the lender. He borrows of one and lends to another
11
Bank credit to the private sector rose from Rs. 5,789 million to Rs. 9492 million. There was
also a substantial growth in the bank deposits, which increased from Rs. 6883 million June 1965
to Take current accounts,
Issue and pay Cheques and Collect Cheques crossed and uncrossed for his customers The
American defined the term banker in a very broad sense as under:
By banking, we mean the business of dealing in credits and by a Bank we include every
person, firm or company having a place of business where credits are opened by deposits of
collection of money or currency. Subjects to be paid or remitted on Cheques or order, money is
advanced or loaned on stocks, bonds, bullion, bill of exchange, promissory notes are received for
discount or sale.
1.3 Evolution of Banking in Pakistan
At the time of Independence, the areas, which are now constitute Pakistan, were producing only
food grains and agricultural raw material for Indo-Pakistan subcontinent. There were practically
no industries, and whatever raw material was produced was being exported from Pakistan.
However, commercial Banking facilities were provided.
The first phase in evolution of banking in Pakistan sees very hard days for the whole banking
sector. Starting virtually from scratch in 1947, the country today possesses a full range of
banking and financial institutions to cope with various needs of the economy.
The area now constituting Pakistan was, relatively speaking, fairly well provided with banking
facilities in undivided India, in March 1947 there were 3496 offices of Indian scheduled banks
out of which as many as 487 were situated in territories now constituting Pakistan.
The Reserve bank of India was the central banking authority in India. At the time of partition it
was decided that in the interest of smooth transition it should continue to function in newly
emerging state of Pakistan, until 30th Sep.1948.
In 1947 due to uncertainty and unsuitability the banking sector suffer heavy losses.
This resulted in a negative effect on baking service in Pakistan. The banks, which had their
registered offices in Pakistan, transferred them to India. In an effort to bring about the collapse of
12
the new state by pushing a deliberate policy of withdrawals the Indian bank offices closed
quickly.
Those banks, which stayed, operated only in name pending the winding up of their business. The
number of scheduled banks thus declined from 487 branches before independence to only 195
branches by 30th June1948.
13
As the Commercial Banking facilities continued to expand, a new Pakistani bank, the National
Commercial Bank was established and registered as a scheduled bank. In the field of industrial
finance a new institution known as the industrial credit and investment cooperation was set up.
The year 1958 marked the completion of the first decade of the working of the State Bank of
Pakistan. When it was established there were only 195 bank offices in existence. At the end of
June 1958 their number had increased to 307, of which Pakistani banks accounted for 232
against 25 in mid 1948. Moreover at the end of June 1958, Pakistani banks held 60% of the total
banks deposits, and were responsible for 65 of total bank credit.
When the Ayub Khan Government took over in 1958, the banking and monetary scene was
significantly affected by developments such as the liberalization of imports, transfer of business
in food grains to the private sector, and the firming up of commodity markets. The demand of
funds picked up and there was a substantial expansion of bank credit to the private sector. The
pace of expansion in the institutional frameworks of the countrys banking system quickened and
a new Pakistani, bank, namely the United Bank Limited was established.
Owning the five years plan 1960-65, the credit structure in Pakistan made rapid progress. The
bank extended its network by opening six new offices located at Chittagong, Peshawar, Quetta,
Khulna, Lyallpur and Rawalpindi. The number of scheduled bank offices rose from 430 at the
end of June 1960 to 1591 in June 1965. Several new banks were added to the list of scheduled
Two principal additions were the commerce bank, and the standard bank. The number of
scheduled banks, which stood at 29 in June 1960 rose to 36 by June 1965.
Under the impact of economic growth and dear scope of private enterprises, bank credit to the
private sector rose from Rs. 1,458 millions to Rs. 5759 million. Thus the total expansion in bank
credit to the private sector during this period amounted to Rs. 4300 million, which gave a annual
expansion of Rs. 860 million compared to the annual average increase of Rs. 144 million over
the preceding five years. Banks deposits increased from Rs. 2,493 million to Rs. 6883 million
during the five years period ended June 1965 compared to Rs. 231 million in the proceeding five
years.
14
Time deposits during this period increased from Rs. 946 million to Rs. 3228 million, where
demand deposits rose from Rs. 1997 million to Rs 3655 million. The increase in time deposits
was particularly rapid. The ratio of time deposits to total deposits in June 1965 stood at 49.6
percentages as against 32.01 percentage five years earlier. Another salient feature of banking
development during this period was that since the rate of increase in bank deposits lagged behind
the rate of expansion in bank credit, the banked has to depend increasingly on central bank
finance. They borrowing from the state bank rose from Rs. 11 million in June 1960 to Rs. 1688
million in June 1965. Owing keen demand for bank credit, banks investments could not increase
as rapidly as their advances. Their investments totaled to Rs. 1,874 million at the end of June
1965 compared to Rs. 1,231 million in June 1960. Investments, which were almost equal to their
advances in June 1960, were only about one third of the advances in June 1965.
The third plane period witnessed a further expansion of banking facilities in the country the total
number of scheduled banked offices increased from 1,591 at the end of June 1965 to 3133 at the
close of June 1970. During the same Rs. 13147 million at the end of June 1970.
A remarkable change occurred during this period related to the composition of deposits. Time
deposit becomes greater than demand deposits forming about 54 percent age of the total deposits.
As oppose to what happened in the previous period, banks were able to finance a mush higher
level of credit expansion without having to increase their borrowings from the central bank.
1.5
After the assumption of office by a new government in 1971, may 1972 different reforms were
introduced to make the banks more responsive to the requirements of economics growth with
social justice. The reforms aimed at bringing about a more purposeful and equitable distribution
of bank credit, improving the soundness and efficiency of the banks, and securing greater social
accountability of the banking system as a whole.
The role of the banking system had been truly spectacular in mobilizing savings of the
community and meeting the credit needs of the economy. But at the same time, the banks had
generally neglected their role in promoting social justice and had failed to play an effective role
in ensuring a wider and more equitable dispersal of the benefits of economic growth. Moreover,
15
it was laid down that no person could serve as director of a bank for more than six years
continuously. Each bank was required to have a paid up capital of not less than 5 percent age of
its deposits to be progressively build up to 10 percent age over a period of time. The banks were
also required to transfer 10 percentage of their profit their reserves every years after the reserve
became equal to the paid up capital. With a view to diversity the ownership of the banks, the
banks were required to raise new capital from the market. Unsecured loans to directors, their
families or firms and companies, were totally prohibited. The bank reforms also brought about
the establishment of new institutions to achieve new objectives.
A national credit consultative was setup under the supervision of the state bank with
representation from the government and the private sector. It was assigned the task of
determining of economys annual credit needs within the safe limits of monetary and credit
expansion with reference to the annual development plan. Such a credit plan was to cover the
public and private sectors.
Alongside the National credit council and Agricultural Advisory Committee was formed to
allocate agriculture credit for various purposes, to coordinate the operation or the agriculture
credit agencies and to oversee the flow of credit to the designated targets. A standing committee
on exports in general and the new emerging exports in particular, was also established.
With a view to encourage the banks to extend credit to small borrowers, a credit guarantee
scheme was introduced under which the state bank under took to share any bonfire losses
incurred by the commercial banks in case of small loans of advances to agriculture.
At the same time two financing institutions were established. The peoples Finance Corporation
was designed to provide finance to people of small means while the National Development
Finance Corporation was set up of finance public sector owned and managed industries and
enterprises.
16
money.
1.6.1. c) EXCHANGE BANKS
Exchange banks mainly deal with international trade. These banks take the responsibility of
settlement of foreign exchange and arrange the foreign business. In Pakistan all the nationalized
commercial banks have been allowed to do the business of exchange banks.
1.6.1. d) SAVING BANKS
Saving banks are those banks which collect and keep the small saving of public. They are called
thrift promoting institution. The saving banks invest the funds in the safest government
securities. Post offices and saving centers perform the business of saving bank in Pakistan
1.6.1. e) AGRICULTURAL BANKS
Agricultural banks are set up to provide financial assistance to the agriculturists. The agriculture
banks provide short term credit to the farmers for purchase of seed, manure, etc. They also make
medium term advances for buying tractor and introducing modern techniques in farming. In
17
Pakistan, Agriculture Development Bank of Pakistan was set up in 1981 for meeting the financial
requirement of agriculture.
1.6.1. f) INDUSTRIAL BANKS
The industrial banks mainly provide medium and long term credit to the industries. Since
industrial banks have long term deposits, they are in position to permit long term investment in
industries
Category
State Bank of Pakistan
Description
Central Bank and the Autonomous and Governing
Body for all banking operations in the country
These deal primarily industries and capital
20
Foreign Banks
Development/
Investment Banks
Specialized Banks
Specialized Banks
Foreign Banks
Investment Banks
Recent decades
This is a chart of trend of gross domestic product of Pakistan at market prices estimated by the
International Monetary Fund with figures in millions of Pakistani Rupees.
23
Year
US Dollar Exchange
Inflation Index
(2000=100)
1960
20,058
3.37
1965
31,740
3.40
1970
51,355
3.26
1975
131,330
2.36
1978
283,460
21
2.83
1985
569,114
30
2.07
1990
1,029,093
41
1.92
1995
2,268,461
68
2.16
2000
3,826,111
100
1.54
2005
6,581,103
126
1.71
2010
7,567,405
195
1.61
CHAPTER # 2
RESEARCH METHODOLOGY
24
Research is the process of investigating, discovering and revising the human knowledge. It leads
to betterment of human knowledge about different aspect of the world. It could also be explained
as collection of information and data and then studying ,analyzing that data so as to improve the
existing amount of knowledge on that The word research derives from the French recherch,
from recherch, to search closely where chercher means to search ., its literal meaning is to
to investigate thoroughly. Subject, whatever it may be.
2.1.2 To understand the various operations and to equip with practical knowledge of the Private
Bank.
2.2 Limitation of the Research
Something is better than nothing. No matter how efficiently a study is conducted, it cannot be
perfect in all respects. This study was conducted in accordance with the objectives of the study.
Firstly study may not include broad explanations of facts and figures due to the nature of the
study. Secondly, the limitation, which affects the study, is the restriction on mentioning every fact
of the bank due to the problem of secrecy of the bank.
In addition, the availability of required data was a problem as all the documents and files are
kept strictly under lock and key due to their strictly confidential nature. Thirdly, the problem of
short time period also makes the analysis restricted as one cannot properly understand and thus
analyze all the operations of a bank just a very short time of eight weeks.
2.4Research Design
The report is based on Private Bank of Pakistan. The methodology reported for collection of data is
primary as well as secondary data. The biggest source of information is my personal observation while
25
working with staff and having discussion with them. Formally arranged interviews and discussions also
helped me in this regards.
In order to write my report I needed data about the Private Bank of Pakistan and also about the I
needed two types of data. These are:
2.4.1Primary data:
For primary data collection, I have used interview and observation method. I have interviewed
different persons in the branch, which include the branch Operation and foreign exchange in
charge also other staff members and also the customers of the branch. In short I can say that,
Primary data includes Personal observation and of the staff members.
2.4.2Secondary data:
For secondary data collection, I have consulted different published material. I studied different
circulars of Private Bank.
Simply Secondary data consist of Manuals, Journals, magazines, Annual Reports, Internet and
Branch financial statements.
2.5Scope of Study
In the report main focus of my stud was on private banking procedures in Pakistan. These
operations include remittances, deposits, advances and foreign exchange
26
CHAPTER # 3
DATA COLLACTION
3.1 PRIVATE BANKS
Private Banks are those banks which are owned by corporation such as:
a) Muslim Commercial Bank (MCB)
b) Allied Bank Limited (ABL)
c) United Bank Limited (UBL)
d) Meezan Bank Limited
such questions invited researcher to explore various aspects of optimal functioning of banks,
operating either under state control or market -based system. Despite the significance of banking
sector, the existing literature remains, to some extent, inconclusive about the most preferable
mechanism of banking Operations. In fact, we find strong arguments both in favour as well as
against operational mechanisms of banks. According to the proponents of state controlled
mechanism of firms operations, the enterprises need monopoly in markets mainly to achieve
social objectives such as creation of employment opportunities. Particularly, the economies of
scale strongly justify governmental monopoly in the supply of public services. Governments
participation in the financial markets and state owned structure of banks is also supported by
commanding height approach advocated by Lewis (1950) and Gerschenkron (1962). In
particular, the development theories emphasise that government ownership of banks can help
channelise savings for long-term projects of strategic interests. Similarly, the developmental
theorist also support the involvement of state in banking affairs, either through direct control of
ownership or imposition of operational restrictions, mainly to achieve efficiency. Further, the
government involvement is supposed to ensure a better economic outcome by channeling funds
to those development projects which cannot get financing under normal credit criteria or by
creating a branch network.
29
to any specific piece of property and instead the creditor may only satisfy the debts against the
borrower rather than the borrowers collateral and the borrower.
3.4.2Mortgage Loan
A mortgage loan is a very common type of debt instrument, used to purchase real estate .under
this arrangement, the money is used to purchase property .private banks, however, are given
security a lien on the title to the house until the mortgage is paid off in full .if the borrower
defaults on the loan, the bank would have the legal right to repossess the house and sell it, to
recover sums owing to it. In the past , private banks have not been greatly interested in real estate
loans and have placed only a relatively small percentage of assets in mortgages .As their name
implies, such financial institutions secured their earning primarily from commercial and
consumer loans and left the major task of home financing to others .however ,due to changes in
banking laws and policies ,private banks are increasingly active in home financing .
Changes in banking laws now allow private banks to make home mortgage loans on a more
liberal basis than ever before. In acquiring mortgage on real estate, these institutions follow two
main practices. First , some of the banks maintain active and well organized departments whose
primary function is to compete actively for real estate loans .In areas lacking specialized real
estate financial institutions, these banks become the source for residential and farm mortgage
loans . Second, the banks acquire mortgages by simply purchasing them from mortgage bankers
or dealers.
In addition , dealer service companies , which were originally used to obtain car loans for
permanent lenders such as private banks .wanted to broaden their activity beyond their local
area .In recent years , however , such companies have concentrated on acquiring mobile home
loans in volume for both privates banks and saving and loan associations. Services companies
obtain these loans from retail dealers, usually on a non recourse basis. Almost all banks / service
company agreements contains a credit insurance policy that protects the lenders if the consumer
defaults.
30
Unsecured Loans are monetary loans that are not secured against the borrowers assets (i.e., no
collateral is involved). These may be available from financial institutions under many
different guises or marketing packages.;
balances goes below zero .In this situation the account is said to be overdrawn. If there is
a prior agreement with the account provider for an
within the authorized overdraft limit, then interest is normally charged at the agreed rate .
If the POSITIVE balance exceed the agreed terms, then additional fees may be charged
and higher interest rates may apply on ;
a) Corporate bonds
b) Credit cards debt
c) Credit facilities or lines of credit
d) Personal loans
activities;
a) Receiving interest - bearing and interest free deposits ( time , demand and other) and
other returnable means of payment.
b) Extending consumer loans mortgage loans other credits both secured and unsecured
credits and engaging in factoring operations with and without the right of recourse ,
trade finance including the granting of guaranties, letters of credit, accepting finance,
and forfeiting.
c) Buying , selling , paying and receiving monetary instruments , such as notes, drafts and
cheques, certificates of deposit, as well as securities, futures, options and swaps on debt
31
instruments, and interest rates, currencies , foreign exchange , precious metals and
precious stones.
d) Cash and non cash settlement operations and the provision of collection services.
e) Issuing money orders and managing money circulation (including tax cards, cheques and
bills of exchange)
f) Securities brokerage services.
g) Trust operations on behalf of clients and funds management.
h) Safekeeping and registration of valuable including securities.
j) Credit- information services.
and development
of
3.7.1Saving Mobilization
The
private banks namely Allied bank , United bank and Muslim commercial bank has
opened up branches in urban and rural areas to mobilize savings of the people .
The private banks under the supervision and guidance of the state bank of Pakistan help
in implementing and achieving the objectives of the monetary policy which
vary from
time to time.
34
through nationalize commercial banks under the qarz-e-Hasna scheme financial assistance
is provided to the students of in sufficient means and of outstanding caliber who are
unable to pursue their studies due to financial difficulties . Loans are provided for pursuing
studies both within and outside Pakistan.
dependence on others countries. Private bank provides incentive for entrepreneurs to take
risks and to use idle resources for more and better production. So, banks are helpful in
attaining self- sufficiency. Banks provide loan to
results in reduction in imports and increase in exports. Accordingly, banks are very important to
achieve the self sufficiency.
35
3.7.16Expansion of Market
Private Banks help in the expansion of the market. They help in the formation of sound
economic infrastructure in order to raise the living standard and to expand trade and
commerce of
and
development of industrial
as well as
development .
today
Private bank is
helpful in
increasing international
trade
private
bank. Private bank move the finances towards productive uses .There are a lot of problems
in the way of economic development like inflation, deflation, low investment and saving
etc .All these problems are possible to remove through creation and distribution of money.
By bank. So, fluctuation in supply of money can attain the economic development..
37
The Muslim commercial bank is providing a lot of valuable services for the economic
development. Some of the most important services provided by Private Banks are as under;
Due to use of credit instrument like cheques, drafts and bills of exchange, banks have
reduced the use of currency at the cheapest costs and fastest manner.
a) Bank serves as business and commercial agents of their customers.
b) Banker provide locker facilities
c) Banks accept the various utility bills
d) Banks advance loan for education in foreign countries
economy. Muslim commercial banks Remove the capital deficiency by encouraging saving
and investment . The Muslim commercial bank is promoting capital formation in the
38
country by moving the resource to the productive uses . Rate of capital formation is 5% in
Pakistan.
Indicator
2006
2008
2010
2012
2014
GDP
$75 billion
$160 billion
$170 billion
$185 billion
$272.136 billion
purchasing Power
Parity (PPP)
$270 billion
$475.5 billion
$504 billion
$545.6 billion
$928.43 billion
(PPP,2015)
$450
$925
$1085
$1250
$1513
Revenue collection
Rs. 305
billion
Rs. 990
billion
Rs. 1.05
trillion
Rs 2.65 trillion
Foreign reserves
$1.96 billion
$16.4 billion
$8.89 billion
$17.21 billion
$17.7 billion
Exports
$8.5 billion
$18.5 billion
$19.22 billion
$18.45 billion
$30.414 billion
(2013-14 est.)
39
Textile Exports
$5.5 billion
$11.2 billion
$5 billion at
700 points
$75 billion at
14,000 points
$46 billion at
9,300 points
$26.5 billion
at 9,000 points
Foreign Direct
Investment
$1 billion
$8.4 billion
$5.19 billion
$4.6 billion
$0.709 billion
$39 billion
$40.17 billion
$45.9 billion
$50.1 billion
$56 billion
Poverty level
60%
43%
37%
29%
17%
Literacy rate
45%
53%
59%
61%
58%
Development
programs
Rs. 80
billion
Rs. 549.7
billion
Rs758 billion
The three-year (1998-2001) averages of the profitability indicators for Private commercial banks
and commercial banks are illuminating. In the case commercial banks, total administrative costs
were 2 per cent of total assets compared with 0.85 per cent in the case of foreign banks, 0.6 per
cent in the case of private banks. Pre-tax profits as a percentage of deposits are 0.6 per cent for
private commercial banks, 5 per cent for foreign and 2.5 per cent for new private banks.
Over the years, the capital base of private banks has been severely affected by the poor quality of
bank loans made on political and uneconomic grounds. As a result, the single most formidable
problem facing the banks is the heavy burden of nonperforming loans. Pakistan introduced
Prudential Regulations in 1993 to ensure that credit is not misused and the infected portfolio was
minimum. However, the infected portfolio has increased to significant proportions. On June 30,
2001, the Non-Performing Loans (NPLs) amounted to Rs. 279 billion, i.e., 8.2 per cent of GDP,
18.6 per cent of domestic assets, and 32.5 per cent of total credit made available to the private
sector and public enterprises. Non-Performing Loans of the Commercial Banking sector were Rs.
221 billion, i.e, 6.5 per cent of GDP and 22.1 per cent of total deposits. Out of NPLs, the
defaulted loans of the financial institutions and the commercial banking sector were Rs. 172
billion and Rs. 141 billion respectively. Because of such a large infected portfolio, the spread
between lending and deposit rate has remained high. Though rescheduling of loans is common,
the total advances of nationalized commercial banks categorized as bad and doubtful debts are
Rs. 56 billion of which Rs.46 billion are classified as advances related to the private sector. Just
less than 23 per cent of the private sectors classified debt pertains to advances under mandatory
targets and concessional credit schemes. In 1998, the State Bank of Pakistan estimated that
around 14.2 per cent of the loan portfolio of nationalized commercial banks was made up of
nonperforming loans
41
42
Chapter # 4
DATA ANALYSIS
.A total of 16 private banks were selected for the study. The standard tests used to measure the
performance of private banks are applied. These are:
4.1Capital Risk
Capital base of financial institutions facilitates depositors in forming their risk perception about
the institution. Also, it is the key parameter for financial managers to maintain adequate levels of
capitalization. Besides absorbing unanticipated shocks, it signals that the institution will continue
to honor its obligations. In order to protect the interest of depositors and shareholders of
commercial banks, the State Bank of Pakistan introduced the risk-based system for capital
adequacy in November 1998 and asked banks to maintain 8 percent Capital to Risk Weighted
Assets (CRWA) ratio. This is the benchmark set by the BASLE (Bank Supervision Regulation
Committee) of Bank for International Settlements. Additionally, banks are required to achieve a
minimum paid-up capital of Rs. 1 billion vide BSD circular No. 31 dated December 6,
2000.Capital Risk is measured by the ratio of Equity Capital to Total Assets. This ratio for our
sample of 16 banks is shown in Table 2. A higher percentage means that the bank is safer because
it can withstand a sharper decline in the value of its assets. The table shows that this ratio has
improved for most banks over the year 2013 to 2014. However, it is below the target of 8 per
cent for all except Faysal bank, Prime Commercial bank, and Emirates Bank. The ratio has been
low for private commercial banks and foreign banks. This suggests a high degree of capital risk
or inadequate capitalization for the existing level of lending. Only four banks, Faysal Bank,
Prime Commercial bank, the Bank of Punjab, and Emirates Bank had this ratio greater than 8 per
cent. This lower ratio can be attributed to a fall in yield of government securities, and hence fall
in returns on banks investment. Being zero-risk weighted disinvestment of government
securities inevitably led to a slight fall in the capital adequacy ratio. In addition, higher
provisioning against Non-Performing Loans (NPL), which affects the capital base through
profit/loss accounts, has further contributed to the decline of this ratio. This had three
implications. First, lending rates probably did not adequately reflect the prevailing risk premiums
in the market and affected the spreads between lending and borrowing rates. Second, loan
43
recovery was poor and the rate of default high with a corresponding write-off of losses and lower
earnings.
Table1:
Capital
Adequacy
of
Private
Banks
in
Pakistan
Capital Risk ( %)
2013
1.
Habib Bank Limited
3.81
2.
United Bank Limited
3.79
3.
Muslim commercial Bank Ltd.
3.20
4.
Askari Commercial Bank Ltd.
5.06
5.
Bank Al-Falah Ltd.
4.0
6.
Bolan Bank Ltd.
1.5
7.
Faysal Bank Ltd.
9.64
8.
Platinum Commercial Bank Ltd.
5.65
9.
Prime Commercial Bank Ltd.
9
10.
Soneri Bank Ltd.
6.21
11.
The Bank of Punjab
10
12.
Union Bank Ltd.
3.65
13.
ABN AMRO Bank NV
2.14
14.
City Bank NA
1.37
15.
Emirates Bank International Ltd.
9.6
16.
Standard Chartered Grindlays Bank Ltd.
2
Source: Calculated from financial statements as on 31.12.2014.
2014
3.84
4.33
3.68
5.05
3.27
1.6
9.38
1.14
10.3
7.57
11
3.78
1.4
0.24
10.2
1
in relation to the level and severity of non-performing assets, adequacy of provisions for bad
loans, recoveries of loans, distribution of assets, etc. Although the banking system is infected
with a large volume of Non-Performing Loans (NPLs), the severity of this problem has stabilized
to some extent. This is not to say that the problem of NPLs has taken a secondary position.
Unfortunately, it still remains the most dominant factor affecting the earning capacity of banks.
Popular indicators include non-performing loans to advances, loan default to total advances, and
recoveries to loan default ratios. We have used total loans to assets ratio to judge credit risk. It
shows what percentages of assets are more risky because loans are the most risky assets on
which default occurs. For a less risky bank, this ratio should be low and must decline overtime.
The results for the years 2000 and 2001 are given in Table 3.The table shows that all the banks
had above average credit risk, ranging from 30 to 60 per cent. Technically, a high credit risk
should be associated with higher returns.
In the case of Private commercial banks, this ratio has declined for Habib Bank. It fell from
53.19 in 2000 to 50.10 in 2001. This shows that fresh loans are being extended much more
prudently than was the case earlier. In other words, the percentage of loans out of total assets
given to clients has fallen. In the case of private and privatized banks, this ratio has increased.
The ratio for UBL increased from 39.95 to 47.77. For MCB, it increased from 42.5 to 52.73. For
Bank Al-Falah, it increased from 49.13 to 55.27. Similarly, for Prime Commercial Bank, this
ratio increased from 47.07 to 57.35. The same is the situation for Emirates Bank and Standard
Chartered Bank. This ratio was very high for Platinum Bank, ABN-Amro, and City bank,
although it has declined over the year 2013 to 2014.This improvement is much more pronounced
given their share in total NPLs. It shows a marked improvement in recovery efforts by the private
banks.
1.
2.
3.
2013
53.19
39.95
42.5
2014
50.10
47.10
52.73
46.53
49.13
33.91
52.10
65.35
47.07
54.34
33.77
49.27
61
49.56
48.60
49.04
45.69
55.27
35.55
56.75
39.71
57.35
49.65
30.43
46.03
57.37
44.04
52.13
53.14
invest in liquid funds. An alternative explanation is decreasing yields on short-term securities which
render investment in such securities unattractive. Generally, declining ratio would imply that a
smaller percentage of deposits are invested in liquid assets, thus raising the liquidity risk.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
2013
16
9.47
12
18.6
32
48
13.66
11
34
49.27
19
12.6
15
2014
16
8.54
14
21.1
28.6
32
13.45
27
26.5
50.05
33
18.39
28
14.
Citibank NA
12.9
15.
Emirates Bank International Ltd.
38.9
16.
Standard Chartered Grindlays Bank Ltd.
41.4
Source: Calculated from financial statements as on 31.12.2014
19.75
32.5
50.95
Table 4: Market Risk of Private Banks in Pakistan Interest Rate Risk (%)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
2013
93
94.7
95
534.6
87.98
83
200
81
82.9
111
95
34.49
81
82.21
68
2014
89
85.4
85
588
89.37
71
114
72
89
107
100
28.49
86
88
67
16.
Standard Chartered Grindlays Bank Ltd. 63
Source: Calculated from financial statements as on 31.12.2001
80
Table 5
Year
2008
2009
2010
2011
2012
2013
2014
Cash Ratio
0.118
0.169
0.19
0.21
0.22
0.15
0.134
Graph 1
Cash Ratio
ratio
0.25
0.2
0.15
0.1
0.05
0
Cash Ratio
2008 2010 2012 2014
years
It means that how much cash is available for payment its current liabilities. This ratio of Private
bank shows a downward trend. Because of high advances cash is less to cover its current
liabilities.
Table 6
Year
2008
2009
2010
2011
2012
2013
2014
29.59
39.67
46.6
51.9
56.2
60.4
63.5
Graph 2
2012
Gross profit
margin%
2010
2008
0
40
50
64
ratio
G. Profit margin relates profit of the organization to its sales (interest earned in case of Bank).
From calculation it is very much clear that the gross profit margin ration have upward trend
which shows that how much they using their deposits to earn interest. This shows the profit of
the firm relative to its revenue.
It is a measure of the efficiency of the firms operations too. As it is clear that the ratio gong high
this is the indication of good performance.
50
Table 7
Year
2008
2009
2010
2011
2012
2013
2014
Return on Equity
0.67
5.3
0.2
2.7
6.55
9.4
23.1
Graph 3
Explanation: from the calculation it is clear that the ROE Ratio have an upward trend of Private
bank. It is because of high net profit they have earned. It tells us the earning power on the
shareholders investments. It is because of high investments by Private bank and effective
expense management.
2008
2009
2010
51
2011
2012
2013
2014
0.94
0.944
0.957
0.954
0.92
0.954
0.961
Graph 4
This ration is directly related to risk high ratio means high risk and low ratio means low risk.
From calculation it is clear that the ratio is decreasing which show low risk. This ratio serves the
similar purpose to the debt to equity ratio. This ratio is high because of more deposits in the
bank, and deposits are the liability of customer on bank
52
Year
2008
2009
2010
2011
2012
2013
2014
0.414
0.399
0.416
0.443
0.487
0.387
0.406
Graph 5
From above table and graph it is clear that the ratio is going high. Which means the efficiency on
Private bank is good and they use their deposits efficiently in advancing to borrowers. Here high
ratio is required. The next side of the picture is that the people will think that is risky to deposit
the money in the bank.
become evident. In the following section both internal and external analysis of Private Bank
are outlined.
4.10.1Strength
Strength can be defined as an area where company is best at doing something or feature
that puts the company
enjoy the following strengths; It is a well established bank enjoying log history of over
55 years of experience and profitable operation .
a) It is the largest private bank in Pakistan and third
in the country.
transfer , sophisticated
4.10.2 Weaknesses
A Weaknesses is defined as an area in an organization where the organization is not as
good at doing something as it competitors or
putting the
fifteen
c) Employees at branch level are not properly motivated to work by heart. They take the all
routine activities as a boring job.
d) Most of the employees lack managerial training as they are not properly educated. Due to
seniority , they have moved up on the hierarchy line to Grade-I ,II or III position
having hardly bachelor degrees . This type of
4.10.3 Opportunities
An opportunity can be defined as a change in
exploited with the organizational strengths
external environment
which if properly
share
or income .
Using its strengths Private Bank can avail the following opportunities...
a) It can introduce debit
card
system or may
convert
management which
products are
currently
diversify
credit
risk
existing
and add
to
revenue
generating
Rawalpindi , these product may be tested for success in other areas like Peshawar ,
Quetta and Sargodha.
b) Developing
be made all at once , three exists an opportunity for it enter into agreement with other
banks to use each others ATMs which will result in a increased convenience to it
customers
c) As all around the world remittances of money are strictly monitored so as the
money
remitted
may
not fall in
hands
of so
called
been
terrorists
stopped
there is an
opportunity for it extend its branch network to various countries emphasizing mainly
on introducing electronic
55
4.10.4 Threats
Threats can define as a change in external environment which if not
strategies
In the context of Private Banks external environment the following potential threats exist;
a) Change in interest rate from SBP.
b) The frequent reduction on 6 - months in 12 months treasury
56
Chapter # 5
RECOMMOENATION AND CONCLUSION
5.1 Conclusion
I have concluded that.
A bank is a financial institution and a financial intermediary that accepts deposits and channels
those deposits into lending activities, either directly or through capital markets The word bank
was borrowed in middle English from middle French banque, from old Italian banca, from old
high German banc, bank bench, counter
A private bank (or business bank) is a type of financial institution and intermediary. It is a bank
that provides transactional saving, and money market accounts and that accepts time deposits.
Private bank is a back bone for any country. They play important role in the development of that
country. Private bank perform a lot of function and provide many services for their customers.
Private bank is playing an important role in the developing economy of Pakistan. But there still
some weaknesses in its system that can be taking some strong steps.
5.2 Recommendation
First of all, the management needs to overlook the major problems that the organization is
currently facing and then develop strategies to solve them.
Some of the suggestions that I would like to at the end are:
a) Private Bank does not offer any chances of social gathering for staff .There should be some
informal meeting arrangements to restore the atmosphere of mutual trust and confidence and to
give them respect.
57
b) Private Bank has not built any connection with its customers. For knowing their suggestions
about you services. There should be a proper channel for them.
c) Private Bank is not currently giving ownership to employees. It should give certain percentage
of shares to employees to develop a feeling of belonging in them.
d) When employees own they know. Their own strengths and weaknesses also. So they readily
start working for its progress.
e) In Private Bank, there is no culture of encouraging new ideas. Employees should not be
considering on Robots. They have brain of their own. They should be thought to use the brain
on well on hand. Because they won the night people who are as possible for
operations and
58
REFERENCE
www.slideshare.com
http://www. google.com.pk
http://en.wikipeda.org/wiki/_Pakistan
http://www.scribd.com.pk
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