Effects Of Privatisation & Liberalization On Banking Sector Performance In Pakistan

A well functioning financial system is necessary for enhancing the efficiency of intermediation, which is achieved by mobilizing domestic savings, channeling them into productive investment by identifying and funding good business opportunities, reducing information, transaction, and monitoring costs and facilitating the diversification of risk. This results in efficient allocation of financial resources. In the financial system banks and non banking financial institutions play vital role. The issue to be considered is whether the financial institution should be owned by the government or by the private sector.
To achieve higher growth, policy makers in many developing countries saw public ownership of banks and other financial institutions as necessary in order to direct credit towards priority sectors. Government of Pakistan nationalized the financial sector in Pakistan in the early 1970s under the framework of the Banks Nationalization Act 1974. The nationalized domestic banks were consolidated into 6 major national commercial banks, and several specialized credit institutions were established.
The objective of the nationalization was to direct bank credit towards specific developing sectors and to provide a source of funding to the government. However, by the end of the 1980s, it became quite clear that the socio-economic objectives, sought through the nationalization of the banking sector, were not being achieved. Instead, the pre-dominance of the public sector in banking and Non-Bank Financial Institutions (NBFIs), coupled with the instruments of direct monetary control, were becoming increasingly responsible for financial inefficiency leading to the crowding out of private sector investment. The dominance of public sector banks at the beginning of the 1990s was apparent with a share of 92.2 percent in total assets of the banking sector. The remainder belonged to foreign banks, as domestic private banks did not exist at that time. Similarly, high shares existed for deposits of the public sector banks. With these characteristics, the banking sector at the end of (Fiscal year) FY90 did not provide a level playing field for competition and growth. The importance of state owned banks in many developing countries contrasts worryingly with recent research findings, which show that state ownership of banks is with negative effects.
The Privatization of government owned banks and other liberalization measures introduced by the Government of Pakistan were the cornerstone of the financial sector reforms initiated in the early nineties in order to revitalize the financial system of the country. As part of this policy, in 1991 two of the publicly owned banks, the Muslim Commercial Bank (MCB) and Allied Bank (ABL) were privatized. At the same time permission was granted for setting up of new banks in the private sector with 10 new banks getting licenses to commence their operations in 1991. End of the 2009 share of public sector banks in the assets of the banking system was reduced to just 41 percent compared to over 92 percent in 1990, while that of private banks had reached over 45 percent starting from nil in 1990. Similarly, the share of public sector banks in the deposit base of the banking system was reduced to 43.5 percent starting from 93 percent in 1990.
Towards the end of 2009, the structure of the banking sector in Pakistan had changed considerably as a result of the privatization/liberalization policies pursued in the broader canvas of financial sector reforms. The resultant efficient service delivery system, customer satisfaction, and the prevention of financial leakages are a clear evidence that privatization is better economic tool than nationalization.