Master of Science in Economics

Faculty / School

Faculty of Business Administration (FBA)


Department of Economics

Date of Submission



Dr. Muhammad Nishat, Faculty of Business Administration, Institute of Business Administration, Karachi

Project Type

MSECO Research Project

Access Type

Restricted Access


Pakistan has made remarkable efforts to transform its financial system since 1990s. After the introduction of the market based policy reforms in 1990, Pakistan’s financial system has experienced significant changes including privatization of public sector banks, public sector enterprises, introducing Islamic banks, Microfinance Banks, increased role of non-bank financial institutions including stock market, Insurance sector etc. and issuing license to new private banks. After reforms process started, Role of private financial institution increased specially role of commercial banks, as still today Commercial Bank play major intermediary role between lenders and borrowers in Pakistan. In case of Pakistan, previous studies focused on the aggregate data of financial sector to determine the connection between Financial Development and Economic Growth. In this project, empirical analysis is performed using annual data of Loans given to different sectors as a proxy of Financial Development for the period from 1974 to 2010. The results of Co-integration test suggest one co-integrating equation for the sectors including agriculture-etc, Commerce and Trade, Construction, Manufacturing and M2. All other sectors including Mining, Utilities, Transport Etc, Services and Other loans have no Co-integration relationship with GDP Growth in Pakistan. The justification of the result is that major chunk of the total commercial loans in Pakistan goes to manufacturing, commerce and trade and construction while an agricultural sector gets subsidies which are equivalent to the loan. Other sectors depends more on informal loans etc. I have used the Granger-causality test procedure under vector autoregressive model to determine the relationship between economic growth and Loans given to different Sectors. The analysis provided evidence that presence and direction of causality is affected by different sectors. One way causality existed for four sectors including FDI, Commerce and Trade, Services, Mining and M2 suggesting that GDP Growth granger causes FDI, Commerce and Trade, Services, Mining and M2. Reason for non-existence of causality between economic growth and financial development may be that privatization effect is yet to takeoff. It has inadequate to expect the effect of Privatization on GDP. It may be due to factors like, still our economy is more informal. A large no of people still do not access banks for financial services in Pakistan. Other factors include discontinuation of policies at National level, NPLs, power crisis, terrorism etc which leads to capital flight. However, to sustain the growth it is important to further remove market imperfections, access to those communities which ado not access banks, access of Islamic Banking services in small cities and towns, develop market based credit allocations and no rationing of credits and improve access to financing for private as well as small and medium-sized enterprises.


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