Risk Management and its effects on the performance of the conventional banking sector in Pakistan

Abstract

Pakistan's banking sector has undergone three phases. The first phase is the Pre nationalization. There were only two banks such as Habib bank limited, and Australian Bank limited in their pre nationalization period following the partition of Pakistan and India on 14 August 1947. Only one bank was the Central bank for both countries such as the Reserve bank of India. There was a need to develop Pakistan's banking sector since the Pakistani banking industry was not doing its functions equally for the Indian Reserve Bank. In 1948, Pakistan's government established Pakistan State Bank and in 1949 Pakistan's National Bank. “State Bank of Pakistan” Act was initiated around 1956 and 1962 implemented banking companies’ ordinances for the development of Pakistan's banking sector. Phase two started in 1974. By combining all banks and setting up five banks, the Government has agreed to nationalize the banking industry. In 1990 final process started named "post-nation,” when the state privatized the banking sector by amending the National Act of 1974 and denationalized the two financial organizations. The policy of opening private banks the government relaxed and facilitated the growth of the private sector. The bank sector in Pakistan includes nationalized commercial banks, private banks, banks in the public sector, international banks, Islamic banks, and microfinance banks. In 1993, 33 business banks operated, 19 international banks, and 14 local banks. As of the end of 2001, there has been a rise of 43 commercial banks, 19 of which were international and 24 locals (Akhtar et al, 2010). In 2010, a total of 9,348 banks comprising 25 domestic banks, five public commercial banks, four specialized banks, and six international banks came into operation ( (Khalabat, 2011). Today, 46 banks consisting of 39 local banks and seven foreign banks are controlled by the “State Bank of Pakistan”. The local banks comprise four banks with specialization in microfinance, five government banks, five Islamic banks, and 17 private banks (State Bank of Pakistan, 2012).