Introduction to Banking

Nationalization of banks

Privatization of banks

By: Ashra Rehmat Rafia Khan Sandrana

Nationalization of Bank

Nationalization means transfer

of any property or institution from

the private to the ownership of state.

It is defined as:

“Nationalization is the process of bringing the assets of a company into the ownership of the state”

Nationalization of banks in Pakistan

• In the early years of Pakistan, the banks were going well and they played an important role in the economic development of country.

• But afterwards it was felt that banks did not provide funds towards the most needy sectors of economy.

• Keeping in view this situation the banking business was nationalized on 1st January 1947, under Bank Nationalization Act, 1974.

Categories

• On 31st December 1973 there were 13 Pakistani scheduled banks in Pakistan with 2906 branches in all over the country.

• Govt. of Pakistan took control of all 13 commercial banks and state bank of Pakistan under Bank Nationalization Act, 1974. Govt. merged the weaker banks with the banks which had strong financial position to make 5 nationalized banks in all.

Categories

These banks are:

I. National Bank of Pakistan (NBP)

II. Habib Bank Limited (HBL)

III. Muslim Commercial Bank (MCB)

IV. United Bank Limited (UBL)

V. Allied Bank Ltd. (ABL)

Objectives

Objectives of nationalization of banks were as follows:

I. Credit for agriculture sector.

II. Controlling unproductive expenditure

III. Ending control

IV. Professional management

V. Credit for small entrepreneurs

Advantages of nationalization of banks

• Fair distribution of credit• Financing agriculture sector• Banking facilities for underdeveloped

areas• Control over non-development expenditure• Security of deposits• Development of banks• Service motive• Price stability• Mobilization of resources• Use of profit

Disadvantages of nationalization of banks

• Low efficiency of bank employees• Poor service standard• Political interference• Favoritism• Rise in price• Unbalanced distribution of credit• Increase in expenses• Poor recovery of loan• Decrease in profit• Low competition

Privatization of Banks

Privatization of Banks

Privatization is the process of involving private sector in the ownership state owned enterprises.

It is defined as:

“Privatization is the denationalization of an industry, transferring from public to private ownership”

Privatization of Banks in Pakistan

• The objectives which were expected by government have not been achieved.

• Government of Pakistan decided to privatize the bank sector.

• A privatization Commission was set up on 22 January 1994. The commission has transferred MCB, ABL, UBL, HBL but NBP was not privatized. It’s Shares have been sold to general public Through LSE.

Rules for establishing a new bank in private sector

• Public limited sector• Must be listed on SE of country• 20% shares must be offered to general public• Minimum capital of two billion• Directors of bank will not be allowed to

sanction loans for themselves• Bank will concentrate their branch network in

urban areas• Bank will provide quick & efficient services to

customers

• Bank will play an effective role in mobilization of savings.

• Bank will provide services for rural areas according to new concessions and incentives.

• Bank will have to abide by the instructions of SBP.

Objectives

• Better standard of service• Improvement in performance• Promote healthy competition• Quick decisions• Development of capital market• Increase in deposits• Security of loan

Advantages of privatization of banks

• Improvement in performance• Better standard of living• Decrease in expenses • Increase in deposits• Secured loans• Decrease in default loans• Productive loans• Quick decisions• Economic development• Reasonable profit

Disadvantages of privatization of banks

• Misuse of loans• Unhealthy competition• Neglecting small industries• Neglecting agriculture sector• Lack of co-operation• Concentration of wealth in few hands• Protection of black money• Advances to relatives and employees• Favoritism• Profit mitive

Thank You!