Project Report on

ROLE OF PRIVATE SECTOR BANKS IN

PAKISTAN ECONOMY

SUBMITTED BY:
NOOR ILLAHI
Reg. No: 12-M/COM-245
SUPERVISED BY:
Ghufran Majeed Hashmi

The Muslim College of Commerce & Management Sciences,

Abbottabad
1

Session: Fall-2013- Fall-2015

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

Department of Management Sciences

2

Hazara University Mansehra

Session: Fall- 2013- Fall-2015

The Muslim College of Commerce & Management Sciences

Abbottabad
Approval Sheet

.
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

1.3 Evolution of Banking in Pakistan

02

1.4 Banking Growth during (1948-1970)

03

1.5

05

Banking Reforms 1972

1.6 Classification of Banks

07

1.6.1 classification on basis of function

07

1.6.1. a) Centeral bank

07

1.6.1. b) Commercial banks

07

1.6.1. c) Exchange banks

07

1.6.1. d) Saving banks

07

1.6.1. e) Agricultural banks

07

1.6.2. Classifacation on the basis of ownership

08

1.6.2. a) Public sector banks

08

1.6.2 b) Private sector banks

08

1.6.2.c) Corporative banks

08

. 1.6.3 Classification on the basis of domicile

08

1.7 Function of banks

09

1.8Anatomy of Banking Sector

10

2.9 Categorical Listing of Operating Banks

11

2.10 Economic history

13

CHAPTER # 2
RESEARCH METHODOLOGY

15

2.1 Research Objectives

15

2.2 Limitation of the Research

15

2.3Benefit of the Report

16

2.4Research Design

16

2.5Scope of Study

17

CHAPTER # 3
DATA COLLACTION

17

3.1 PRIVATE BANKS

17

3.2The role of private banks

17

3.4 Types of loan granted by private banks

20

3.5 Operations of Private Banks

22

3.6 Banking in Pakistan

22

3.7 Role of Private Bank in the Economy

23

3.8 Structure of economy

29

3.9 Profitability and Productivity of Private Banks

31

Chapter # 4
DATA ANALYSIS

33

4.1Capital Risk

33

4.2 Credit Risk

35

4.3 Liquidity Risk

36

4.4 Interest Rate Risk

38

4.5 Cash Ratio

39

4.6 Gross Profit Margin Ratio

40

4.7 Return on Equity

41

4.8 Debt to assets ratio

42

4.9Advances deposit Ratio

43

4.10 SWOT Analysis

Chapter # 5
RECOMMOENATION AND CONCLUSION

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.

1.4 Banking Growth during (1948-1970)

In this tense situation, a committee was immediately setup to formulate a scheme of central
banking legislation for Pakistan. Many specialists were of the opinion that in view of the acute
shortage of trained staff, any idea of establishing a central bank was I impractical and the best
that could be attempted was the setting up of a currency board until such times as sufficient staff
could be organize to operate a central bank.
One of the first tasks of the state bank was to arrange for the replacement of the Reserve bank of
India notes, which had continued to circulate in Pakistan during the transitional period, by
Pakistan currency.
The first Pakistan notes were issued in October 1948 in the denominations of Rs. 5, 10 & 100.An
equally urgent task, which the new central bank had to address itself, was the creation of a
national banking system. To this end, while extending every help and encouragement to Habib
Bank to expand its organization, the state bank recommended the setting up of a new banking
institution to serve both as an agent to the state bank recommended the setting up of a new
banking institution to serve both as an agent of the State bank as well as the spearhead of its
credit policies.
With a view to broadening the institutional framework of the financial system, the state bank also
sponsored the establishment of specialized credit institutions in the field of agriculture and
industry. Banking companies (control) act was passed in December 1948 specifically
empowering the state bank to control the operations of banking companies in Pakistan.

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

Banking Reforms 1972

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

1.6 CLASSIFICATION OF BANKS

1.6.1 CLASSIFICATION ON BASIS OF FUNCTION
1.6.1. a) CENTERAL BANK
Every civilized country now has its own central bank. The primary function of the central bank is
to regulate the flow of money and credit in order to promote efficiency stability and growth in
the country. In Pakistan State Bank of Pakistan is the countrys central bank.
1.6.1. b) COMMERCIAL BANKS
Commercial bank is those banks which are engaged in performing the routine duties of banking
business. They collect surplus money from the people. They make loans and advances in the
form of overdraft, cash credits, discounting bill of exchange.

Commercial bank also creates

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

1.6.2. CLASSIFACATION ON THE BASIS OF OWNERSHIP

The banks are classified on the basis of ownership into three categories.
1.6.2. a) PUBLIC SECTOR BANKS
They are owned and controlled by the government such as National Banks, Habib Banks etc.
1.6.2. b) PRIVATE SECTOR BANKS
They are owned by corporations such as MCB, ABL, and UBL etc.
1.6.2.c) CORPORATIVE BANKS
Corporative banks are established mainly to provide short and medium term loans for rural
development in general. In Pakistan these banks are set up under the cooperative society Act of
1925 in the country.

1.6.3 CLASSIFICATION ON THE BASIS OF DOMICILE

The banks are divided on the basis of domicile into two categories
1.6.3. a) DOMESTIC BANKS
The domestic banks are those banks which are registered and incorporated within the country.
1.6.3. b) FOREIGN BANKS
Which have their origin and head offices in the foreign country.
18

1.7 FUNCTION OF BANKS

Banks performs variety of functions which discuss under:
1.7.1 BASIC FUNCTION
Basically banks perform two functions.
1.7.1 a) ACCEPTING DEPOSITS
The first important function of a bank is to accept deposits from these who can save but can not
make profitable use of their savings themselves. In order to attract the savings from different
persons and institutions, the bank maintains the following three types of accounts.
a) Current Account
b) Saving Account
c) Fixed Deposits
1.7.1 b) MAKING LOANS
The second major function of a bank is to make loans to businessmen, traders, exporters,
household etc. These loans are made against documents of title to goods, marketable securities,
personal security of borrowers etc of all the functions of a modern bank, advancing or lending is
by far the most important. The advances comprise a very large portion of a banks total assets.
The strength of a bank is primarily judged by the soundness of its advances.
The lending of money may be in any of the following forms.
a) Loans
b) Cash Credit
c) Overdraft
d) Discounting of Bills
19

1.7.2 SECONDARY FUNCTIONS

The secondary functions of a bank are classified as:
1.7.2. a) SPECIAL FINANCIAL SERVICES
The business of today is highly competitive. It is not enough for the banks now to accept
deposits and make loans. Banks are now offering international services such as currency
exchange, issue of letters of credit, bankers acceptances. Most of the banks are also offering
ATMs (Automated Teller Machine) and EFT (Electronic fund Transfer) .
1.7.2. b) AGENCY FUNCTIONS
a) Banks act as agents of their customers in various ways as:
b) Collections of Cheques
c) Collections of Dividends
d) Purchase or Sale of Securities
e) Execution of Standing Instructions
f) Acting as Trustee or Executor

1.8Anatomy of Banking Sector

(Classification of Pakistans banking Sector)
Pakistans banking system can be classified under the following broad categories

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

Nationalized Scheduled Banks

markets. These offer a host of unique policies,

banking training , services and products which
include loan , credit cards ,savings and consumer
banking
Banks engage in channeling funds from depositors

Private Scheduled banks

to lenders against the primary objective of

acquiring profit i.e. Bank spread
These concentrate primarily on International Trade

Foreign Banks

Finance, Innovative Credit Orientation and Plastic

Money
Investment Banks act as underwriter or agents

Development/

Cooperative/ serving as intermediary between an issuer of

Investment Banks

securities and the investing public

These banks are created with specific interest thus

Specialized Banks

specializing and catering to a particular sector

industry

2.9 Categorical Listing of Operating Banks

Central Bank

State Bank of Pakistan

First Woman Bank Ltd

Nationalized Scheduled Banks

National Bank of Pakistan

Zari Taraqiat Bank (ZTBL)

Specialized Banks

Industrial Development Bank of Pakistan

Punjab Provincial cooperative Bank Ltd
Askri Commercial Bank Ltd
Bank Al-Falah Limited
Bolan Bank Limited
Faysal Bank Limited
Bank Al-Habib Ltd
Metropolitan Bank Ltd
KASB Commercial Bank Ltd
21

Private Scheduled Banks

Prime Commercial Bank Ltd

PICIC Commercial Bank Ltd
Soneri Bank Ltd
Union Bank Ltd
Meezan Bank Ltd
Saudi Pak Commercial Bank Ltd
Crescent Commercial Bank Ltd
Dawood Bank Limited
NDLC-IFIC Bank Limited
Allied Bank Ltd
United Bank Limited
Habib Bank Limited
SME Banks
Albaraka Islamic Bank BSC (EC)
Ammerican Express Bank Limited
ABN Amro Bank N.V
Bank of Tokyo Mitsubishi Limited
Citibank N.A

Foreign Banks

Deutsch Bank A.G

Habib Bank A.G. Zurish
Hongkong & Shanghai Banking Crop Ltd
Oman International Bank S.O.A.G
Rupali Bank Ltd
Standard Charted Bank Limited
Crescent Investment Bank Ltd
First International Investment Bank Ltd

Investment Banks

Atlas Investment Bank Limited

Security Investment Bank Limited
Fidelity Investment Bank Ltd
Prudential Investment Bank Limited
Islamic Investment Bank Limited
22

Asset Investment Bank Limited

Al-Towfeek Investment Bank Ltd
Jahangir Siddiqui Investment Bank Limited
Franklin Investment Bank Ltd
Orix Investment Bank (Pak) Limited

2.10 Economic history

First five decades

Pakistan was a very poor and predominantly agricultural country when it gained independence in
1947. Pakistan's average economic growth rate in the first five decades (1947-1997) has been
higher than the growth rate of the world economy during the same period. Average annual real
GDP growth rates were 6.8% in the 1960s, 4.8% in the 1970s, and 6.5% in the 1980s. Average
annual growth fell to 4.6% in the 1990s with significantly lower growth in the second half of that
decade.
With a GDP growth rate of 6.8% during the 1960s, Pakistan was seen as a model of economic
development around the world, and there was much praise for its economic progress.
Karachi was seen as an economic role model around the world, and there was much praise for
the way its economy was progressing.
Many countries sought to emulate Pakistan's economic planning strategy and one of them copied
the city's second "Five-Year Later, economic mismanagement in general, and fiscally imprudent
economic policies in particular, caused a large increase in the country's public debt and led to
slower growth in the 1970s and 1990s. The economy improved during the 1980s, with a GDP
growth of 6.5%, a policy of economic deregulation, and an increased inflow of
remittances from expatriate workers.

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

Gross Domestic Product

US Dollar Exchange

Inflation Index
(2000=100)

Per Capita Income

(as % of USA)

1960

20,058

4.76 Pakistani Rupees

3.37

1965

31,740

4.76 Pakistani Rupees

3.40

1970

51,355

4.76 Pakistani Rupees

3.26

1975

131,330

9.91 Pakistani Rupees

2.36

1978

283,460

9.97 Pakistani Rupees

21

2.83

1985

569,114

16.28 Pakistani Rupees

30

2.07

1990

1,029,093

21.41 Pakistani Rupees

41

1.92

1995

2,268,461

30.62 Pakistani Rupees

68

2.16

2000

3,826,111

51.64 Pakistani Rupees

100

1.54

2005

6,581,103

59.86 Pakistani Rupees

126

1.71

2010

7,567,405

100.55 Pakistani Rupees

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 Research Objectives

2.1.1

Discuss thorough study of Private Banks.

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.

2.3Benefit of the Report

The study done will benefit the finance students in particular and business administration and
banking students in general because the financial analysis section of this report comprehensively
encompasses all respects of financial analysis.

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

3.2The role of private banks

27

Private Banks engage in the following activities:

a) Processing of payments by way of telegraphic transfer, EFTPOS, internet banking or other
means.
b) Issuing bank drafts and banks cheques.
c) Accepting money on term deposit.
d) Lending money by overdraft, installment loan, or other means.
e) Providing documentary and standby letter of credit, guarantees, performance bonds, securities
underwriting commitments and other form of off balance sheet exposures.
f) Safekeeping of documents and other items in safe deposit boxes.
g) Sales/ distribution or brokerage, with or without advise, of insurance, unit trust and similar
financial products as a financial super market.
Traditionally , large private banks also underwrite bonds, and make markets in currency , interest
rates, and credit-related securities but today large private sector banks usually have an
investment bank arm that is involved in the mentioned activities.
Banking sector of an economy generally performs three very primary Functions which include
the facilitation of payment system, mobilization of Savings and allocation of funds to
stakeholders like government, investors, Consumers and business community who can utilize
them for the generation of economic activities. By virtue of its pivotal role, the banking sector
can exert its positive influence on various segments of the economy. On the one side, it Allocates
funds for the highest value use while on the flip side, it limits the Magnitude of risks and costs,
thereby creating a level playing field for economic Agents to flourish and generate economic
activities [Jaffe and Livonian (2001); Wachtel (2001)]. This aspect of banking sector gives it a
privilege over other Competing sectors. Since the banking sector plays a vital in an economy, a
relevant question arises about the efficacy of its operational mechanism. More specifically, how
should the banking sector operate: under a state control or a market-based mechanism. Further,
how the transition towards any of the above stated mechanisms should take place? Answering to
28

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.

3.4 Types of loan granted by private banks

3.4.1 Secured loan
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as
collateral for the loan, which then becomes a secured debt owed to the creditor who gives the
loan .The debt is thus secured against the collateral in the event that the borrower defaults, the
creditor takes possession of the assets used as collateral and may sell it to regain some or all of
the amount originally lent to the borrower, for example, foreclosure of a home. From the
creditors perspective this is a category of debt in which a lender has been granted a portion of the
bundle of rights to specified property. If the sale of the collateral does not raise enough money to
pay off the debt, the creditor can often obtain a deficiency judgment against the borrower for the
remaining amount. The opposite of secured debt/loan is unsecured debt, which is not connected

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.

3.4.2 Unsecured Loan

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.;

3.4.2.a) Bank overdrafts

An overdraft occurs when money is withdrawn from a bank account

and the available

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

overdraft , and the amount withdrawn is

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

3.5 Operations of Private Banks:

Private banks are authorized to engage in only the following type of

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.

3.6 Banking in PAKISTAN

Banking in Pakistan first formally started in Pakistan during the period of British
colonialisation in the south Asia .After independence from British Raj in 1947, and the
emergence of Pakistan as a country in the globe , the scope of banking in Pakistan has
been increasing and expanding continuously . Pakistans oldest bank is the state bank of
Pakistan , which is also the central bank of the nation . After independence Muhammad Ali
Jinnah took action to establish a central bank in Pakistan which resulted in the new
founding of state bank of Pakistan , with its head quarters to be based in Karachi . Only 7
% of the population uses the banks, has tremendous potential but this needs to be pushed
a little further.
The banking sectors in Pakistan has been going through a comprehensive but complex
and pain full process of restructuring since 1997. It is aimed at making these institutions
financial sound and forging their links firmly with real sector for promotion of savings
investment and growth. Although a complete turnaround in banking sector performance is
not expected till the completion of reforms , signs of improvement are visible . The
almost simultaneous nature of various factors makes it difficult to disentangle signs of
improvement and deterioration.
32

3.7 Role of Private Bank in the Economy

Banks play an important role in the economic development of a country. It the banking system is
unorganized and inefficient, it creates maladjustments and impediments in the process of
developments. In Pakistan, the banking system is very well organized. The state bank of Pakistan
is established on July 1, 1948 stands at the at the apex and is responsible for the operation of the
banking system in Pakistan..The other banks which form the structure in Pakistan are playing an
active role in the economic development of the country.
The role of the private banks in the growth

and development

of

sound and healthy

economy of the Pakistan is briefly discussed as under:

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 .

3.7.2Financing Development Project

The banks and other development finance institution like IDBP etc advance short and
medium term loans for financing of the development projects both in the private and
public sectors and thus help in accelerating the rate of economic development in
country.

3.7.3Facilitating Trade Activities

The credit institutions collect savings of the people arid make them available for
facilitating trade activities both inside and outside the country

3.7.4Creating Climate for Capital Formation

The developed banking system is a stimulant to growth and is creating favorable climate
for capital formation in the country.

3.7.5 Helping SBP in achieving Monetary Policies

33

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.

3.7.6Assisting in the Development

The Private Banks are profit seeking enterprises. In order to maximize the profit , they
have the incentive to maximize the loans . An organized banking system keeps a balance
between liquidity and profitability and thus assists in the planned development of the
economy.

3.7.7Provision of Agency Services

The private banks provide agency services to the clients .they receive and pay cheques .
They collect dividend and pay interest and premium on behalf of the client . They keep
their valuables in safe custody. They help in the mobility of capital and thus stimulate
capital in the country.

3.7.8Profit Sharing Scheme

The private banks receive surplus balances of households and business and pay interest
on the deposits of the clients . The banks have now introduced interest free banking in
Pakistan. The depositors instead of having a fixed return on the deposits well share in
profit and loss of the banks. The profit and loss sharing (PLS) arrangement which is an
alternative to interest under an Islamic economic system is now operating in Pakistan.

3.7.9Making Capital Available for Investment

The organized banking system helps in directing physical resources in productive
channels . It also keeps a balance between the availability and requirements of the capital
in the country.

3.7.10Less Reliance on Foreign Capital

34

A planned banking system by launching a vigorous campaign of mobilizing idle savings

in the country can meet the capital developments requirements from within the country.
The country will thus have to rely less on foreign capital for financing the development
projects.

3.7.11 Export Promotion Cell

In order to boost the exports of the country , the bank have established export promotion
cell for the information and guidance of the exporters.

3.7.12 Provision of Qarz-e Hasna

Qarz -e-hasna scheme has been prepared

and launched by Pakistan banking council

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.

3.7.13Attaining Self Sufficiency

A major problem faced by the developing countries is burden

of foreign debts and

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

develop the various economic sectors. It

results in reduction in imports and increase in exports. Accordingly, banks are very important to
achieve the self sufficiency.

3.7.14 Implementation of Modern Technology

Economic development without use of advance and the most up to date technology is
impossible. Almost in all the economic sectors backward techniques of productions are
used due to poverty in third world countries like Pakistan . Private bank provides more
funds to people to make it possible to use the modern techniques of productions . Due to

35

implementation of modern technology , there is increase in productions level , decrease in

cost and save in time .

3.7.15 Development of Industrial Sector

Industrial sector is the back bone of their economies in rich nations . It is still backward in
Pakistan and other poor countries. Private banks provides different types of loans for the
development of industrial sectors. Industrial development leads to agricultural development
and it result an economic development growth rate of industries is 1.7% .

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

economy . Private bank causes

development of industrial

agriculture sector. Accordingly, there is expansion of market

as well as

that results in economic

development .

3.7.17Development of Agriculture Sector

All the regions and all the sectors of the economy are not equally efficient and develop
in an economy. There is big need to develop the backward regions and sectors for the
economic development Private banks is playing an important role in development of rural
areas and agriculture sector. Growth rate of agricultural sector is 1.2%.

3.7.18Essential for Foreign Trade

Foreign trade is one of the most important needs all the countries of the world

today

international trade , without involving banks , is so difficult . International trade is necessary

for the economic development.

Private bank is

through following ways;

a) Provision of credit facilities.
b) Low rate of interest for the exporter.
36

helpful in

increasing international

trade

c) Opening of letter of credit.

d) Arrangement of foreign exchange.
f) Opening of foreign currency accounts.

3.7.19 Remove Budget Deficits

The private bank is very helpful for the government .Now a day , the government has to face
the budget deficits because of increased expenditures and falling revenues .In this situation
, government has to depend upon deficit financing to meet the budget deficit .To cover the
gap between the expenditure and revenues ,government borrows from the banks .As a result
the development process can be started through borrowed money from banks.

3.7.20 Optimum Utilization of Resources

Private bank helps in the just and optimum allocation of resources .Some mega projects
cannot be started due to the lack of capital .Muslim commercial bank provides loans and
removes the problem of deficiency of capital. Due to use of resources in an economy
there is increase in productions, income and employment etc. Increase in these things leads
to economic development.

3.7.21 Creators and Distributors of Money

Creation of money and distribution of money are the two main objectives of

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..

3.7.22 Provision of Valuable Services

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

3.7.22 Modern Facilities

Now Private Banks is providing various modern facilities like;
ATM & Online facilities & Balance ready cash etc.Mobile Banking and call centers, Smart card
and Debit card.DD issuance, Statement inquiry and credit cards.

3.7.23 Availability of Funds

An additional point of role of banks is more availability of funds . Poor population has
poor resources for the economic development in poor countries like Pakistan. The activities
like inventions and innovations, research and development and initiatives (Effectiveness in
responding to challenges) are impossible due to insufficiency n of funds in these countries.
Banks remove the deficiency of capital by providing different types of funds that leads
to economic development .

3.7.24Capital Accumulation or Formation:

Capital

formation refers to the increase in the existing stock of capital goods in an

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.

3.8 Structure of economy

The economy of the Islamic Republic of Pakistan is suffering with high inflation rates well above
26%. Over 1,081 patent applications were filed by non-resident Pakistanis in 2004 revealing a
new-found confidence. Agriculture accounted for about 53% of GDP in 1947. While per-capital
agricultural output has grown since then, it has been outpaced by the growth of the nonagricultural sectors, and the share of agriculture has dropped to roughly one-fifth of Pakistan's
economy. In recent years, the country has seen rapid growth in industries (such as apparel,
textiles, and cement) and services (such as telecommunications, transportation, advertising, and
finance).

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)

GDP per Capita

Income

$450

$925

$1085

$1250

$1513

Revenue collection

Rs. 305
billion

Rs. 708 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

KHI stock exchange

(100-Index)

$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

External Debt &

Liabilities

$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. 520 billion

Rs. 549.7
billion

Rs. 621 billion

Rs758 billion

3.9 Profitability and Productivity of Private Banks

The profit earned by the commercial banks is the difference between the deposit rate and the
lending rate, called the spread. In nominal terms, the spread has risen steadily from 5 per cent in
1986-87 to 6.2 per cent in 1992-93, but then fell to 2.8 per cent in 1997 and increased to 3.3 per
cent in 2000. In real terms, the weighted average yield on deposits fell from 3.9 per cent in 198687 to 4.6 per cent in 1990-91, and 1.1 per cent in 1992-93.The weighted average yield on
loans also declined; after declining from 8.9 per cent in 1986-87 to 1.1 per cent in 199091.Thereafter, it climbed rapidly to 5.14 per cent by 1992-93.1
Foreign banks seem to be the main beneficiaries of the relatively large spreads, especially as the
Private Banks s have to deal with problems of large overheads, increasing inefficiencies and
nonperforming loans.
1
40

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

4.2 Credit Risk

Asset quality determines the robustness of financial institutions against loss of value in the
assets. The deteriorating value of assets, being the prime source of banking problems, directly
pour into other areas, as losses are eventually written off against capital, which ultimately
jeopardizes the earning capacity of the institution. With this backdrop, the asset quality is gauged
44

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.

Table 2: Asset Quality of Private Banks in Pakistan Credit Risk (%)

1.
2.
3.

Habib Bank Limited

United Bank Limited
Muslim commercial Bank Ltd.
45

2013
53.19
39.95
42.5

2014
50.10
47.10
52.73

4. Askari Commercial Bank Ltd.

5. Bank Al-Falah Ltd.
6. Bolan Bank Ltd.
7. Faysal Bank Ltd.
8. Platinum Commercial Bank Ltd.
9. Prime Commercial Bank Ltd.
10. Soneri Bank Ltd.
11. The Bank of Punjab
12. Union Bank Ltd.
13. ABN AMRO Bank NV
14. City Bank NA
15. Emirates Bank International Ltd.
16. Standard Chartered Grindlays Bank Ltd.
Source: Calculated from financial statements as on 31.12.2014

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

4.3 Liquidity Risk

An adequate liquidity position refers to a situation where the institution can obtain sufficient funds,
either by increasing liabilities or by converting its assets quickly at a reasonable cost. It is, therefore,
generally assessed in terms of overall assets and liability management, as mismatching of maturities
of assets and liabilities gives rise to liquidity risk. Efficient fund management refers to a situation
where a spread between rate sensitive assets (RSA) and rate sensitive liabilities (RSL) is maintained.
The most commonly used tool to evaluate interest rate exposure is the gap between RSA and RSL,
while liquidity is gauged by liquid assets to total asset ratio. We have used investment in short-term
securities to deposits as a measure of liquidity risk. A higher ratio shows that the bank has liquid
assets available to meet deposit withdrawals. However, there is a tradeoff between liquidity and
profitability. A bank that maintains higher liquidity is not investing its funds in long-term and risky
projects. This is shown in Table 4. Foreign Banks have the lowest liquidity risk. For Standard
Chartered, the liquidity ratio increased from 41.4 to 50.95, for Citibank, it increased from 12.9 to
19.75, for ABN AMRO, it increased from 15 to 25. The ratio decreased for private commercial banks
showing increased liquidity risk. For Bank Alfalah the ratio fell from 32 to 28.6. For Bolan Bank the
ratio fell from 48 to 32. For Prime Commercial Bank the ratio also fell from 34 to 26.5. However it
increased for Bank of Punjab from 19 to 33. For the banking sector as a whole, the ratio is quite low
due to the after effects of freezing of Foreign Currency Accounts as the banks had less resources to
46

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.

Table 3: Liquidity of Private Banks in Pakistan Liquidity Risk ( %)

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.

Habib Bank Limited

United Bank Limited
Muslim commercial Bank Ltd.
Askari Commercial Bank Ltd.
Bank Al-Falah Ltd.
Bolan Bank Ltd.
Faysal Bank Ltd.
Platinum Commercial Bank Ltd.
Prime Commercial Bank Ltd.
Soneri Bank Ltd.
The Bank of Punjab
Union Bank Ltd.
ABN AMRO Bank NV
47

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

4.4 Interest Rate Risk

The diversified nature of bank operations makes them vulnerable to various kinds of financial risks.
Sensitivity analysis reflects the institutions exposure to interest rate risk, foreign exchange volatility
and equity price risk. Risk sensitivity is mostly evaluated in terms of the managements ability to
monitor and control market risk. For interest risk we have used a ratio of interest sensitive assets to
interest sensitive liabilities. This is shown in Table 5. RSAs have diverged from RSLs, in absolute
terms. Higher interest rate sensitivity of spread is reflected in less than 100 value of ratio between
RSA and RSL. For most of the banks, this ratio declined between 2013 and 2014 indicating a rise in
interest rate sensitivity. The highest is 588 per cent for Askari Commercial Bank during 2014. Faysal
Bank had 200 per cent during 2013, the Bank of Punjab had 100 per cent during 2014 and Soneri
Bank had 111 per cent during 2013.

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.

Habib Bank Limited

United Bank Limited
Muslim commercial Bank Ltd.
Askari Commercial Bank Ltd.
Bank Al-Falah Ltd.
Bolan Bank Ltd.
Faysal Bank Ltd.
Platinum Commercial Bank Ltd.
Prime Commercial Bank Ltd.
Soneri Bank Ltd.
The Bank of Punjab
Union Bank Ltd.
ABN AMRO Bank NV
City Bank NA
Emirates Bank International Ltd.
48

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

4.5 Cash Ratio

Cash Ratio = Cash/current liabilities

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.

4.6 Gross Profit Margin Ratio

This ratio shows the profit margin in sales/ revenue. This is calculated as.
Gross profit/ interest earned
49

Table 6
Year

2008

2009

2010

2011

2012

2013

2014

Gross profit margin%

29.59

39.67

46.6

51.9

56.2

60.4

63.5

Graph 2

Gross profit margin%

2014
Year

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.

4.7 Return on Equity

ROE compares net profit after taxes to the Shareholders Equity.
This ratio is calculated as:
ROE=Profit after taxes/Share holders Equity

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.

4.8 Debt to assets ratio

This ratio shows that to which extent the organization assets are financed by debit. It is
calculated as.
Total debt/total asset
Table 8
Year

2008

2009

2010

51

2011

2012

2013

2014

Debt to asset ratio

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

4.9Advances deposit Ratio

This ratio show that how much efficiently the bank advances the deposits of their customer to
borrower. It is calculated as.
Advances deposit ratio = Advances/ deposit
Table 9

52

Year

2008

2009

2010

2011

2012

2013

2014

Adv. deposits ratio

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.

4.10 SWOT Analysis

The acronym SWOT stand for a firm is internal Strength and Weaknesses and its external
Opportunities and Threats. The purpose of such analysis is to build on companys strength in
order to exploit opportunities and counter threats and to correct companys weaknesses.
SWOT analysis is based on the assumption that if managers carefully review such strength,
weaknesses, opportunities and threats, a useful strategy for ensuring organizational success will
53

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

at an advantage in comparison to its competitors. Private Bank

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

largest bank over all banks. It has

the largest branch network among private bank of Pakistan.

b) It is the
network

market leader in introduction of E- banking and it has the largest ATM

in the country.

c) It has the ability to bring innovative

electronic funds

products and services like personalized service,

transfer , sophisticated

financial products such as electronic banking ,

auto-teller machines and evening banking.

d) Excellent branches appearance gives an edge to over other banks. The branches are well
furnished even in less developed areas where other banks branches give a poor view.

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

a thing which an organization lacks thus

organization at disadvantage in comparison to its competitors. Based on the

above definition , Private Bank has the following weaknesses;

a) Though it is largest bank in Pakistan ,yet the fact remains that it is not market leader
as NBP.
b) The overseas branch network of Private Bank is limited. Similarly NBP has
overseas branches , one subsidiary and four representative office .
54

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

senior staff can not apply the modern

and innovative techniques of management and decision making .

4.10.3 Opportunities
An opportunity can be defined as a change in
exploited with the organizational strengths

external environment

which if properly

will result enhanced sales market

share

or income .
Using its strengths Private Bank can avail the following opportunities...
a) It can introduce debit

card

system or may

convert

complete debit card. New products like personal loans

each

management which

products are

currently

diversify

credit

risk

existing

mortgage and auto leasing and

and add

provided in big cities

ATM cards into a

to

revenue

generating

like Lahore , Islamabad . Karachi

Rawalpindi , these product may be tested for success in other areas like Peshawar ,
Quetta and Sargodha.
b) Developing

network for electronic transaction require huge investment which cannot

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

and customers of other banks.

c) As all around the world remittances of money are strictly monitored so as the
money

remitted

may

not fall in

conventional money laundering

hands

of so

through hundies have

called
been

terrorists

for that all

stopped

there is an

opportunity for it extend its branch network to various countries emphasizing mainly
on introducing electronic

fund transfer facilities.

55

4.10.4 Threats
Threats can define as a change in external environment which if not
strategies

met with proper

will result in loss of revenues market share or income.

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

bills discount rates by

SBP may create pressure on banks profitability.

d) The low discount rates are also negatively
may affect

the bank profits from the other side .

56

influencing the advances rates which

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

can give best suggestion.

f) Open more branches to create employment opportunities in the country .To decrease the
stagflation.

58

REFERENCE

Project report Role of Private Bank in Pakistan Economy

www.slideshare.com

http://www. google.com.pk

http://en.wikipeda.org/wiki/_Pakistan

http://www.scribd.com.pk

59