Summary Commercial banks play important role country’s economic growth: Nabeel Ahmad
LAHORE: (Web Desk) - Commercial banks are the major source to provide banking services to individuals, small businesses and large organizations." Commercial banks act as intermediaries between those who want to transfer money and those who want to receive money.
There are numerous other functions of commercial banks such as financial advisors, provide safety of valuable assets, performing agency functions and collection of statistics about money, trade, banking and commerce.
In developing countries like Pakistan, economic growth has direct relation with the banking sector s allocation of credit.
It is an important need for developing economies to have developed banking sector due to the impact of banks on the growth in the initial stages than market oriented financial system.
Commercial banking industry was growing rapidly in Pakistan until 1974 when Zulfiqar Ali Bhutto brought the nationalization policy in which thirteen banks went under government control and reduced to six nationalized banks.
With the passage of time, the financial sector expanded to serve large corporate business, politicians and the government.
It was compulsory for banks to save 30% of deposits to meet the requirements of government securities and 5% in the form of cash for central bank. These conditions led to poor returns for bank s portfolios.
By 1991, the bank nationalization act was amended which eliminated the barriers for investors to enter into the banking industry.
Many nationalized banks such as "Muslim commercial bank" and "Allied bank" went to private sector. By 1997 there were 21 domestic banks and 2 foreign banks.
The banking sector reforms during 90 s have transformed the industry into a more profitable and competitive industry.
According to the State bank report(12 November 2006) the reforms include the promotion toward competition by eliminating barriers, privatization of public financial institutions, the flexibility of interest rates and eliminating of controls on lending.
The result of these reforms was that it lead to improved efficiency of the investment, and growth in the financial sector due to services of the banks.
Two years back a research concluded that with the increment in the market power, the instability in market also increases.
Although banks capital is stable in less competitive markets, their default risk remains higher. In the competitive environment, banks take more risk. But with economic growth, it is neutralized.
History has proved that efficiency is dependent on the privatization of commercial banks. Although post liberalization period has shown mixed results (Arby and Farooq, 2003), still there is a dire need of privatization. State cannot become entrepreneur.
If the liberalization and privatization continues, we will see more improved situation for the banking sector.
