Review of The History of Conventional Banking System and Evolution of Banking in Pakistan

Conventional banking system: On the other hand, conventional banking systems are much longer than Islamic banks. Thanks to experience and product selection, traditional banks are more advanced. The conventional bank is based on a full-fledged intermediary model that lends borrowers to suppliers and then loans to companies or individuals. They provide marginal interest rates between loan rates and loans.

They also provide banking services, such as credit cards and guarantees. They derive some of their profits from cheap budgets that are received through demand deposits. Conventional banks are prohibited from trading, and their assets are heavily restricted to a small portion of their net worth. For conventional bank financing activities, they are mainly based on interest. Conventional banks essentially pay their customers if they pay more to the bank. However, their rental products require a more detailed explanation of the rental section.

Obviously, interest-based transactions are prohibited and completely prohibited. As a result, financial transactions from trusted banks are not authorized by Shariah. However, transactions / services such as transfer, authorized service charges, etc., are contrary to the principle of sharia law. As a result, they may be authorized to provide these services and associated fees.

In other words, a conventional bank belongs to a supermarket that sells Halal and Haram products. He sold pigs and wine in one part, as well as fruits and vegetables sold in other parts.

In such a situation, it is clear that it should never be concluded that all transactions in supermarkets are in violation of Sharia law. In such a situation, a fair and equitable view is that some transactions in this supermarket are unacceptable, while others are permitted by law. The argument above clearly shows that a conventional bank is not completely un-Islamic. People who think that conventional banks are completely illegal and say they are not responsible for teaching the law are wrong. Now that we know that some common gang gangs are allowed, we do not need to consider sharia lawsuits for such agreements.

History

The history of conventional banks can be divided into 4 eras.

60’s Pre-Nationalization

A large number of privately owned banks dominated the market. These banks were sponsored by large business houses that used these banks for their own funding needs. Their scope of operation was restricted to major urban cities.

70’s Nationalization

All conventional banks were nationalized in 1974. Now fifteen privately owned banks were consolidate into four nationalized commercial banks namely Habib Bank Limited, United bank Limited, Muslim commercial bank Limited, Allied bank Limited. Rapid branch expansion was under-taken to improve the coverage of banking services. The politically motivated heavy lending aggravated the risk and earning scenario of the commercial banks.

80’s Post Nationalization

Foreign banks consolidated their position in the market at the expense of inefficient Nationalized Commercial Banks. Profit and loss sharing scheme was introduced. Financial market expanded as brokerage houses, leasing, modarbas, investment banks entered the market.

90’s Deregulation

The private sector was allowed to enter into the banking business. Muslim Commercial Bank and Allied Bank of Pakistan were privatized. Prudential regulations were introduced. The ceiling was replaced by CDR. Later on CDR was abolished.Foreign and private sector banks started emphasizing on retail banking.

The Evolution of banking system in Pakistan

The banking system of Pakistan evolved out of the crisis that followed the partition of India. It had been decided before partition, to keep Pakistan’s monetary system under the control of the Reserve Bank of India until September 30, 1948. But after partition, there was outright hostility from India in the form of cutbacks on Indian scheduled bank offices in Pakistan (from 487 before partition to 195 as on June 30, 1948) and a rush on banks to transfer funds and accounts. All this compelled Pakistan to establish indigenous banking system on war footings. The Australasia Bank was already functioning in Pakistani territory and the owners of Habib Bank, established in 1941, were successfully persuaded to bring their offices from Bombay to Karachi.

Lack of cooperation from the Reserve Bank of India Precipitated the creation of the State Bank of Pakistan on ist July 1948 despite reservations expressed by foreign experts about its viability in the absence of adequately trained staff. The National Bank of Pakistan was established in November 1949 as a first step towards creating a national banking system. Many of the banks showing unsatisfactory performance were stopped from accepting deposits whole others brought into liquidation. Steps were also taken to create money market in the country. The banking sector proved vigilant in the management of crisis-like situations such as the non-devaluation decision of the GOP in 1949, as well as in grabbing the opportunities offered for example by the Korean boom.

A down turn in commercial activities after the Korean war paved the way for shifting of accumulated resources to industrialization and culminating in the establishment of specialized credit institutions. The Development Finance Corporation had already been established in 11949 which was converted into IDBP in 1961. The Agriculture Development Bank was also established in 1961 to provide inputs/ machinery loans and to a smaller extent agro-based industries. Other development finance institutions established subsequently were NIT (1962) , Equity Participation Funds (1970) , SBFC (1972), NDFC (1973), BEL (1979) , Pak Kuwait Investment Company (1979) , Pak Libya Holding Company (1980), Suadi Pak Industrial and Agricultural Investment company (1981) and Regional Development Finance Corporation (1985).

A major event in the history of banking system in the country occurred on January 1st 1974, when all the 13 domestic banks were nationalized and merged into five nationalized commercial banks. The recent economic reforms have also transformed the banking sector as NCB’s are being privatized and a number of new banks have been set up in the private sector.