CAHAPTER # 3

NATIONALIZATION OF BANKS (1974)

The banking reforms turned to be transitional and interim step and when they were hardly eighteen months old the government nationalized the banking systems, with the following main objectives. To enable the government to use the capital concentrated in the hands of a few rich bankers for the rapid economic development of the country and the more urgent social welfare objectives. To distribute equitably credit too different classes sectors and regions. To coordinate the banking policies in various area of feasible joint activity without eliminating healthy competition among banks. The act passed for the nationalization of banks is known as the banks Nationalization Act 1974. Thus under this act the state bank of Pakistan and all the commercial banks incorporated in Pakistan and carrying business in or outside the country were brought under government ownership with effect from Jan 1, 1974. The ownership, management and control of all Pakistani banks stood transferred to and vested in the Federal government. The shareholders were provided compensation in the form of federal government bonds redeemable at par anytime within the period of fifteen years. Under the Nationalization act, the Chairman, Directors and Executives of various banks, other than those appointed by federal government were removed from their offices and the central boards of the banks and all local bodies were dissolved. Pakistan banking council was established to coordinate the activities of the Nationalized Commercial banks. At the time of Nationalization on December31, 1973 there were following 14 Pakistani commercial banks with 3323 offices allover Pakistan and 74 offices in foreign countries: National banks of Pakistan Habib bank limited

Habib bank (overseas) limited United bank limited Muslim commercial bank limited Commerce bank limited Standard bank limited Australia bank limited Bank of Bahawalpur limited Premium bank limited Pak Bank limited Sarhad bank limited Lahore commercial limited Punjab provincial co-operative bank limited The Pakistan banking council prepared a scheme for the recognition of banks. The bank (amalgamation) scheme 1974 was notified in April, providing for the amalgamation of the smaller banks with bigger ones and following the five units in there phases: National bank limited Habib bank limited United bank limited Muslim commercial bank limited Allied bank of Pakistan limited

The first phase was completed on 30th June. 1974. When the bank Bahawalpur was merged with the National Bank of Pakistan. The premier Bank Limited with Muslim Commercial Bank limited and Sarhad Bank Limited and Pak bank limited and renamed as Allied Bank of Pakistan limited. The second phase was completed on 31st Dec.1974, when the commerce bank limited merged with the United Bank limited. The third and the final phase were completed on 30th June, 1975 when the standard bank limited was merged with Habib Bank limited. The nationalization was very smooth and gave very positive results. The number of branches, which stood at 3397 on Dec31, 1973, reached on 7661 by end June 1992. The bank deposits which stood at Rs. 1925 corers at the end 1973 reached the highest mark about 323 corers.1 3.1 Islamization of Banking Another major development in the history of Pakistan Banking System was the introduced of interest free banking in selected Commercial Banks with effect form Jan1, 1981. This followed the effort to eliminated interest from the operation of Nation investment trust, the House Building Finance Corporation of Pakistan. Certain amendments were made in banking and other laws with the object of ushering in a new system of banking, which would confirm of Sharia. A new law Modaraba Companies Ordinance 1980 was promulgated. Separate interest free counters began to operate in all the nationalized commercial banks free counters began to operate in all the nationalized commercial banks. The state bank provides finance against participation term certificate and also against promissory notes supported by Modaraba certificate. In order to cover interest free transactions certain banking definitions such as creditors, debtor, and advances credits and deposits were revised. Stipulations concerning form of business in which banking companies may engage may also have been modified schemes were introduced to provide interest free loans to formers and deserving students.

A private Limited Company named as Bankers Equity limited was incorporated in 1979 to provide financial assistance to the industrial sector primarily on interest free basis. A scheme to extend interest free productive loans to farmers and fisherman has also been introduced. Instead of interest, a system based on mark-up in price, exchange rate differential, and profit and loss sharing accounts were introduced. Different financial schemes introduced in the Islamization process are: 2 Musharika Financing. Hire Purchase Financing. Modaraba Financing. Specific Purpose Modaraba. 3.2 Dis-Investment and Deregulation of Banking 1991 When it was realized that the role of public sector in the economy is over extended and the banking sector has more earning potential in the private sector the process of privatization banking sector restarted in 1991 by the Muslim League Government. Muslim Commercial Bank was Dis-invested in to two phases while ABL was sold to its employees. Since then allot of investment is being made in the banking sector and several new banks were established and still the process is going on. Now only NBP is government bank other than SBP. The performance of this bank will be analyzed and judged in the following chapters. 3.3 INTEREST FREE BANKING A new concept of interest free banking was introduced in 1981 and by now it has been established on sound footing and new trends and techniques are being implemented to make this system result oriented. New products and their systematic consumption are making Pakistani banking comparable to their several modern counterparts anywhere in the developed world. 3.4 HISTORY OF NBP:

The NBP was established vide NBP Ordinance No. XIX of November 9. 1949. British Govt. devalued its currency in September 1949, India devalued its rupees but Pakistan did not. It led to a crisis in trading between the two countries and India refused to lift the Pakistan Jute. To solve this problem i.e. to export jute NBP was established through an Ordinance of GOP. National Bank of Pakistan maintains its position as Pakistan's premier bank determined to set higher standards of achievements. It is the major business partner for the Government of Pakistan with special emphasis on fostering Pakistan's economic growth through aggressive and balanced lending policies, technologically oriented products and services offered through its large network of branches locally, internationally and representative offices. The Bank in 1950 had one subsidiary The Bank of Bahawalpur on December4, 1947 by the former Bahawalpur State. NBP was undertaking Treasury Operations and Managing Currency Chests or Sub Chests at 57 of its offices where the turnover of the business under the head amounted to Rs.2460 million. i) Deposits held by NBP constituted about 3.1% of total deposits of all

Pakistani Banks in 1949, which rose to 38% in 1952. ii) Growth in Deposits was accompanied by increase in Bank portfolio in advances. NBP

lent out to Textile, Yarn, Iron and Steel and played a pioneer role in support of agriculture and commerce. iii) NBP advances reached Rs.554.4 million by December 1959, which was one third of the total schedule bank credit.3 3.4.1 MISSION STATEMENT Bank complete and competitive with all international performing, quality of, operations, staff, financial strength. To make the Standard in And products and services To

develop a culture of excellence in every spare of activity of the bank4. 3.4.2 GOALS AND OBJICTIVES

An organizational objective is the intended goal that prescribes definite scope and suggests direction to the panning efforts of a organization.6 3.4.3 GOALS AND OBJICTIVES NBP To be the pre-eminent financial institution in Pakistan and achieve market recognition both in the quality and delivery of service as well as the range of product offerings.7 3.4.4 BOARD OF DIRECTORS Table 1 NAME Ali Raza Dr Waqar Masood Ifthikhar Ali Malik Syed Shafqat Ali Shah Jamoti M Zubair Motiwala Sikandar Hayat Jamali M. Khalid Malik S.M. Rafique
(Source Annual report 2003)

DISIGNATION Chairman & President Director Director Director Director Director Director SEVP & Sectorary to BD

3.5 MANAGEMENT Management is a distinct process consisting of activities of planning, organizing, actuating and controlling performed to determine and accomplish stated objectives with the use of human being and other resources.8 The management has two types. 1 Centralized. 2 Decentralized. Centralized Management tends to concentrate decision making at the top of the Organization . Decentralized disperses decision making and authority throughout and further down the organizational hierarchy.9 NBP have a centralized type of management because all the decisions are taken by the top management. 3.5.1 SENIOR MANAGEMENT OF NBP. Table 2 SEVP & Group Chief, Corporate & Masood Karim Sheikh Investment Banking Group and Chief Financial Officer S. M. Rafique Derick Cyprian Imam Bakhsh Baloch SEVP & Secretary Board of Directors SEVP & Group Chief, Special Assets & Remedial Management Group SEVP & Group Chief, Compliance

Group Shahid Anwar Khan EVP & Group Chief, Commercial & Retail Banking Group EVP & Group Chief, Information Technology Group EVP & Group Chief, Audit &

Nadeem A. Dogar

Muhammad Sardar Khawaja Dr. Asif A. Brohi Javed Mehmood

Inspection Group EVP & Group Chief, Operations Group EVP & Group Chief, Risk Management Group EVP & Group Chief, Treasury

Muhammad Nusrat Vohra Amim Akhtar Dr. Mirza Abrar Baig

Management Group EVP & PSO to the President Group Chief, Human Resources

Management & Administration Group Group Group Chief, Organization D&T

Uzma Bashir
(Source www.nbp.com.pk)

3.6 Net Work of Branches: NBP have wide range of branches inside the country and outside the country. In Pakistan it has 29 regional offices, 1189 Branches and 4 Subsidiaries. In overseas it has 16 overseas branches, 6 other branches.10 .3.7 Objectives of NBP

National bank of Pakistan is also a commercial organization and its main objective is profit maximization. This is achieved in two ways:

1. By increasing deposits. 2. By charging interest on loans provided to the private sector and business community. These are explained as: 3.7.1 Increase in deposits: Competition in banking is intense and every bank whether it is Pakistani, foreign, private or nationalized tries to increase its deposits by providing better facilities to its customers. By increasing its deposits a bank can extend greater amount of loan and hence achieves higher profit. NBP is also improving its facilities and services to attract customers with higher volume of deposits. There are two main factors involved in increasing the deposits. These factors are improving the services and courtesy. NBP is continuously working on these two factors to increase its deposits. 3.7.2 Extension of loans:

The profitability of a bank largely depends on the amount given to people as loan and the type of people to whom credit is given i.e. the credit worthiness of the borrowers. This strategy has worked quite well for NBP. Deposits are collected from the people and invested in different projects. NBP prefers to give loans to financially sound and reliable parties, after securing the collators. NBP has an extremely well organized section. The staff is adequately trained, and educated and competent. They carry out extensive financial analysis before deciding on the loan. Interest charged on the loans potentially contributes to higher profits. Some of the other objectives of NBP are: i. Improve customer services. ii. Quick disposal of credit cases. iii. Efficient operation of the branches. iv. Better Public Relations.

v. Operational and advisory services for foreign exchange accounts activities

3.8

Functions of NBP

Since NBP is a commercial bank, it performs a variety of functions. Like other commercial banks, NBP is engaged in financing international trade. Its other major functions include receiving deposits, advancing loans and discounting of exchange. The functions performed by NBP are: 3.8.1 Accepting Deposits

This function is important because banks largely depend on the funds deposited with them by its customers. Deposits are of many types: i. Current deposits

Current deposits are also called demand liability on current deposits. NBP pays practically no interest on current deposits. Businessmen usually open current accounts. In NBP current account can be opened with a minimum amount of Rs.500/-. ii. PLS saving deposit

Profit and loss sharing deposits (PLS) are also called checking accounts. One can deposit and draw money easily. Profit on PLS is calculated every month but paid after six months. PLS account can be opened with a minimum amount of Rs.500/-

iii

PLS term deposits

Fixed term deposits are deposits with the bank for certain fixed period before the expiry of which they cannot be withdrawn unless giving due notice. In this case the rates of profit will be different depending upon the time period. 3.8.2. Discounting bills of exchange Discounting of bill is practically speaking lending for exchange at their market rate i.e. it pays to holder of the bill an amount equal to the face value after deducting interest at the current market rate for the period. This bill has to be mature. This is the common way used for keeping a part of assets of the bank in a liquid form. 3.8.3. Agency service NBP also provides best and unique service to its valued customers. NBP provide the following agency services to the customers: i. Collection of dividends

As NBP deals with the purchase and sale of various types of securities, therefore NBP also provide dividend or interest earned on share or bonds or invested money. ii. Collection of Cheques

In the collection and payment of Cheques, bills and promissory notes etc. National bank of Pakistan acts as an agent for its customers. iii. Acting as an agent NBP also acts as an agent correspondent or representative for its customer at home or abroad. iv. General utility services: Utilities provided by NBP are as follows: a. Clearance of utility bills

NBP provides the service of clearing the utility bills i.e. electricity, gas and telephone bills of its customers. For this purpose it also provides evening banking services. b. Lockers facility National bank of Pakistan also provides locker facilities to its customers to keep their valuable assets in it. The charges of different size of lockers are different. c. Acts as a referee NBP provides useful services to its customers by acting as a referee to their credit worthiness. d. Supply of information NBP provides operational and advisory service for foreign exchange accounts/activities. 3.9 Unmatched Banking Facilities Deposit security, Guaranteed by Government of Pakistan. Highest rates of return to attract the savings. Lowest rates on exports and other borrowings. Largest contribution towards Government and Semi-Government requirements. Agents of the SBP handling Treasury Functions, receipts of Taxes & other Revenues. Handling of salaries & pensions of federal/provincial/defense personnel. Utility Bills collections. Hajj arrangements. Sale and encashment of prize Bonds. Sale and encashment of Defense Savings and Special Savings Certificates.

 Safe Deposit Lockers for customers. Rational Human Resource Management. The prestigious periodical The Banker UK recognized NBP as the best bank for 2001-2002 and NBP is the bank of the year for 2003-2004 of Pakistan. i. AAA rating awarded JCR-VIS Credit co. Ltd and affiliated of Japan Credit Rating Agency for 2001. ii. AAA+1 rating awarded JCR-VIS Credit Co.Ltd and affiliated of Japan Credit Rating Agency for 2002 3.10 NBP at the forefront of Pak-Afghan trade

i. Booth at dry port Peshawar ii. Booth at Pak Afghan border (Torkham) NWFP iii. Booth at Pak Afghan border (Chamman).Baluchistan. iv. Establishing branch at Kabul in near Future.11

REFRENCES
1 Bank Nationalization act 1974.

2 3 4 5 6 7 8 9

Islamic Banking. www.nbp.com.pk Annual report 1998. www.nbp.com.pk Terry and Franklin Principles of Management. www.nbp.com.pk Terry and Franklin Principles of Management. Terry and Franklin Principles of Management.

10 Annual report 2003. 11 www.nbp.com.pk