Commercial Banking: Pakistan

Commercial banking in Pakistan has recorded dynamic growth over the years. In the initial years after Independence the banking system was largely dominated by foreign banks. Bank offices were almost exclusively located in large cities and banks engaged themselves primarily in the financing of foreign trade and commerce. With the passage of time, the position has undergone a marked change both as a result of conscious policies pursued to promote the growth of Pakistani banks as well as the structural changes in the economy. Pakistani banks now occupy a predominant position both in respect of the branch network and the scale of banking operations. Banking facilities have been extended to cover even small towns and semi- urban and rural centres. There has been a significant diversification in their lending activities, with the share of the commerce sector in total bank credit recording an appreciable decline and the shares of other sectors, particularly manufacturing, showing a substantial rise.

The commercial banking sector in Pakistan is by far the largest intermediary between savers and investors. It mobilises the savings of the community by offering various types of deposit facilities and savings schemes. Resources thus mobilised are used for lending in various sectors of the economy and for investment in securities and shares. Like commercial banks in other countries they also discount trade bills, issue guarantees, provide remittance facilities and render miscellaneous agency services. At present most of the operations of the banks are conducted on the basis of interest.

This Section suggests alternative mechanisms for replacing interest in domestic banking transactions. As pointed out in the preceding Section, complete elimination of interest from international trade transactions cannot be achieved by the lone efforts of a single country. In the present global perspective, commercial banks operating in Pakistan will have to transact business with foreign banks on the basis of interest. However, measures should be taken to minimise the element of interest even in international trade transactions to the extent possible, and the steps that would need to be taken in this context have been indicated at appropriate places in this Section.

The modalities of the new system in regard to the operations of commercial banks are set out here.

Source: Money and Banking in Islam, Ziauddin Ahmed; Munawar Iqabal; M. Fahim Khan. Republished with permission.