Master of Business Administration Executive

Faculty / School

Faculty of Business Administration (FBA)

Year of Award


Project Type

MBA Executive Research Project

Access Type

Restricted Access

Executive Summary

The report evaluates role of banks in Pakistan specifically with regards to their contribution towards the economic growth of the country especially when it comes to financing the private sector. Banks in Pakistan are not doling out funds to the private sector, especially commercial and SME which has hampered economic growth. This decline in financing to the private sector is because of banks being overly risk aversive as they have suffered losses in last 10 years due to credit defaults by corporate giants. This is a perception prevailing in minds of most of the people but it appears that the actual situation is different.

Economy *^f Pakistan has stabilized in last few years and hence we see the country reserves increasing to a level of USD 20 billion which was mostly due to a surge in reserves of the Central Bank. Other major contributors towards stability are the declining oil prices which has reduced the balance of trade deficit and an increase in inward remittances which enabled Pakistan to post a GDP growth of 4.1%. However, apart from factors mentioned, we also observe that our economic growth is still being hampered due to low tax to GDP ratio, issues related to power and gas shortage, undocumented economy and government being the biggest borrower. With respect to banks that have a vital role in the development and growth of a country it was observed that in Pakistan the liquidity was moving mostly towards the sovereign because financing to private sector to date was only 46% of the total industry advances. Same figure in 2008 was 87% which shows that banks were following conventional concepts of intermediate and thus money was moving from surplus units to non-surplus units through corporate, commercial and SME channels. Now there has been a shift and all the banks a'e acting as investment banks.

As per public perspective, economy of Pakistan was not doing well and lack of advances to private sector was one of the factors. Most people supported that banks in Pakistan were not performing their core function of intermediate as they have become very risk aversion due to surge in delinquencies in last 10 years. However, upon extending the research and conducting interviews with a few industry experts it was concluded that banks are not risk averse, rather at this point in time they do not have to lend due to low economic activity. Even low interest rates have failed to 0 avenues boost credit off-take in the industry. Moreover, as GoP is also borrowing heavily to finance its fiscal deficit, therefore, the only option the banks have is to lend to the sovereign or its counterparts which would provide them a return and resolve issues of excess liquidity. Otherwise banks have the appetite and are ready to lend but there is no demand of financing in the market. It is expected that in 2016 due to CPEC, demand for financing will risk which will ultimately surge the GDP and growth of Pakistan economy.

The research concludes that economy of Pakistan was stable but business activity was low due to which bank lending towards private sector reduced significantly. This has compelled the banks to push their liquidity via their treasuries towards sovereign instruments as GoP is still the biggest borrower. In order to divert liquidity towards Commercial and the SME, GoP should establish specialized banks like SME bank established in 2002. However, it is imperative that these specialized banks are run free of corruption and if necessary are privatized once they find their path. Such specialized banks will become a conduit for private sector financing and mitigate risk associated with financing directly to the customer. Along with this the government should curtail its borrowing from commercial banks so that liquidity can be diverted to the Corporate, Commercial and SME.



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