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WEEKLY NEWSLETTER
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Pakistan
Index
The State Bank of Pakistan was established in 1948 and
remains the country's central bank and financial adviser
to the
government. It is the sole bank of issue, holder of gold
and
currency reserves, banker to the government, lender of
last
resort to other banks, supervisor of other banks, and
overseer of
national credit policy. In October 1993, legislation
reduced
government control of the bank, but without giving it
complete
autonomy.
From 1974, when all Pakistani banks were nationalized,
until
1991, all local banks were in the state sector. In 1991,
as part
of the government's general program of economic
liberalization
and the privatization of state enterprises, two small
banks--the
Muslim Commercial Bank and the Allied Bank--were
privatized. In
1991 the government also instructed the State Bank of
Pakistan to
approve proposals for new private commercial banks. In
early
1994, there were twenty-four commercial banks, including
ten
private banks that had opened since 1991, two privatized
banks,
and twelve banks that remained in the state sector. One of
the
new private banks, Mehran Bank, was closed down in early
1994
amidst allegations of massive fraud. The number of new
private
banks was expected to increase in 1994. In March 1993, the
total
assets of all Pakistani banks amounted to Rs1,090 billion.
Pakistani banks had 119 foreign branches and operated
joint
banking ventures in Malaysia, Oman, Saudi Arabia, and the
United
Arab Emirates.
Twenty-one foreign banks operated in Pakistan in 1994.
They
had sixty-one branches, most of which were located in
Karachi.
United States banks with branches in Pakistan included
Citibank,
Chase Manhattan Bank, American Express Bank, and Bank of
America.
In the 1970s and 1980s, the Bank of Credit and Commerce
International (BCCI) was an important foreign bank in
Pakistan.
The bank had many close links with the Pakistani political
and
commercial elite. It was founded in 1972 by Agha Hasan
Abedi, a
leading Pakistani banker. Prime Minister Nawaz Sharif's
family
company, Ittefaq Industries, was a major borrower. BCCI's
international operations were run from London, but there
were
three important branches in Pakistan. Abedi resigned as
president
of BCCI in 1990, when the ruling Al Nuhayyan family of Abu
Dhabi
obtained a majority share in the company. BCCI collapsed
in July
1991 when the Bank of England closed BCCI's operations
amid
allegations of massive losses, fraud, racketeering, and
laundering of drug money. The Pakistani branches continued
to
operate for some time after BCCI had been closed
elsewhere, and
there were many allegations that Pakistani businessmen and
politicians had profited from the bank's illegal
activities.
Abedi was later indicted in the United States for fraud
and
racketeering. In 1992 Pakistani operations of BCCI were
amalgamated with Habib Bank.
In 1991 four Punjab-based financial cooperatives,
together
known as the Pakistan Cooperative Societies, failed amidst
allegations of misappropriation of public funds. Estimates
of
money lost by depositors ranged from Rs10 billion to Rs23
billion, with up to 2.6 million accounts affected. Two of
the
four cooperatives were owned by relatives of then Prime
Minister
Nawaz Sharif, but an official inquiry cleared him and his
family
of any wrongdoing.
From independence until the mid-1970s, the commercial
banks
were poor providers of long-term capital because the
interest
rate structure favored short-term over long-term financing
and
long-term deposits over long-term loans. As a result, the
government encouraged the growth of nonbanking financial
institutions to act as sources of long-term credit and
equity
finance. These institutions continued to play an important
role
in the early 1990s.
The Industrial Development Bank, established in 1961,
provides medium- and long-term credit primarily to smalland
medium-sized firms in the private sector, while the
Pakistan
Industrial Credit and Investment Corporation provides
long-term
assistance in local or foreign currency to private
companies in
the industrial sector, arranging foreign loans for large
projects. The National Development Finance Corporation,
founded
in 1973, provides similar services for the public sector
and in
the early 1990s also began to provide financing for the
private
sector. The Agricultural Development Bank gives credit to
agriculture and to cottage industries, while the House
Building
Finance Corporation provides interest-free housing
finance,
taking a percentage of the property's rental income. Other
specialized financial institutions include the Investment
Corporation of Pakistan, the Small Business Finance
Corporation,
the National Investment Trust, and Bankers Equity. All
these
organizations, with the exception of the Pakistan
Industrial
Credit Corporation, which is 35 percent foreign owned, are
government owned, although they often act as channels for
foreign
aid.
In the 1980s, three new financing corporations--
Pakistan-Libya Holding, Pakistan-Kuwait Investment, and
Saudi-Pak
Industrial and Agricultural Investment--were established.
These
three institutions are jointly owned by the Pakistan
government
and the respective foreign governments; most of their
funding
comes from the foreign governments.
The adoption of Zia's policy of Islamization led to
changes
in the practices of financial institutions because of the
Islamic
prohibition against usury. In July 1979, the Investment
Corporation of Pakistan, the National Investment Trust,
and the
House Building Finance Corporation opened interest-free
accounts
that operate on a profit-and-loss-sharing basis. In 1981
the
commercial banks followed suit. Under this system, profits
and
losses on projects financed with deposit sums are shared
in an
agreed-on proportion between lender and borrower. In 1985
regulations prohibited new interest-bearing loans and
interest-bearing rupee deposits. These regulations cover
rupee
deposits in foreign banks but not deposits made in foreign
currencies. In 1990 more than 63 percent of funds on
deposit were
held in profit-and-loss-sharing schemes.
In addition to the profit-and-loss-sharing system,
lending
takes two other forms: interest-free loans on which banks
make
service charges at rates determined by the State Bank of
Pakistan, and approving finance for purchasing goods or
real
estate under which the bank purchases the item and agrees
to
resell it to the client at an increased price. All these
modes of
finance are subject to criticism by some advocates of
Islamization on the grounds that they contain a provision
for a
guaranteed rate of return that can be construed as the
equivalent
of interest.
In November 1991, the Federal Shariat Court declared
all laws
pertaining to the payment or receipt of interest and
markup
contrary to Islam. It also ruled against the indexation of
financial assets for inflation. The federal and provincial
governments were ordered to amend all relevant laws by
June 30,
1992, but appeals by banks and the central government
rendered
the deadline inoperative. As of early 1994, no higher
court
decision had been announced
(see Politicized Islam
, ch.
2).
The National Credit Consultative Council formulates
annual
credit plans. The council includes members from
government,
financial institutions, and the private sector. The credit
plan
sets a limit on the expansion of the money supply, taking
into
account the targets of the development plan and the
government's
fiscal objectives, as well as prevailing rates of growth
and
projections for GDP. In the late 1980s and early 1990s,
money
growth tended to run well ahead of plan targets. (OTR; EIU
1992-93, 41)
Rapid expansion of the money supply, coupled with the
impact
of the 1991 Persian Gulf War on domestic energy prices,
pushed up
the consumer price index by 13 percent during FY 1991.
Although
energy prices fell in FY 1992, heavy government borrowing
from
the central bank kept inflation relatively high in FY 1992
and FY
1993, at around 9 percent. Some independent observers,
including
the World Bank, believed that the official inflation
statistics
understated the real rate in FY 1993, which they put at
about 13
percent.
The principal stock market is the Karachi Stock
Exchange,
although there are also small stock markets in Lahore and
Islamabad. The stock market expanded greatly during the
1980s. In
1991 there were almost 550 companies listed, with a market
capitalization of US$4.3 billion. The turnover ratio was
12.6
percent, which represented a traded value of US$542
million. In
1991, as part of the government's deregulation policies,
restrictions on foreign investment in shares of listed
Pakistani
companies were lifted, as were constraints on the
repatriation of
investment proceeds, gains, and dividends. Initially, most
foreign investment was carried out by portfolio managers
and
institutional investors based in Hong Kong and Singapore.
Data as of April 1994
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