Pakistan Institute of Development Economics



Impact of Financial Liberalisation and Deregulation on Banking Sector in Pakistan (Article)

The paper analyses the market perception about the performance of Pakistani commercial banks in the wake of financial liberalisation and deregulation measures taken by the central bank over the last two decades. For this purpose, it uses the Survey approach. Out of 35 commercial banks, 15 banks have been chosen for analysis purposes. The paper mainly finds that key banking reforms have helped in removing the flaws in the banking sector of Pakistan. In particular, privatisation of banks, the deregulation and institutional strengthening measures, switching towards market-based monetary and credit management systems were instrumental in streamling banking operations. Similarly, the removal of restrictions on entry of private banks and operational restrictions on foreign banks also significantly contributed to the provision of quality banking services. The resultant competitive environment is the key factor behind improved efficiency of banks in Pakistan. The banks devised a number of strategies to respond to the competitive market conditions in the country. However, they faced various constraints in this regard, especially lack of managerial skills, and in hiring IT professionals, etc. As a part of future strategy, banks are likely to form more strategic alliances with foreign banks and undertake the expansion of business through widening of branch network. Despite a number of successful stories on different fronts, the central bank could not succeed in narrowing down the banking spread which is one of the key measures of banking performance. High domestic inflation, large non performing loans (NPLs) of banks, high administrative expenses, larger intermediation costs, and poor debt recovery are identified as important factors behind widening of banking spread.


The banking sector of an economy generally performs three primary functions: the facilitation of payment system, mobilisation of savings, and allocation of funds to stakeholders like government, investors, consumers, and business community who can utilise them for generation of economic activities.1 By virtue of its pivotal role, the banking sector can exert its positive influence on various segments of an economy. This gives it a privileged position among other sectors. In view of its significant role, economic managers always endeavour to devise such policies which  could help provide the sector a level-playing field, thereby enabling it to operate on sound, efficient, and competitive footings.

As in other emerging market economies, banks have been playing an important role in Pakistan also. However, the financial landscape of the country changed significantly in the 1970s with the nationalisation of Pakistani commercial banks. The Government also took various regressive steps, which included, among others, the initiation of subsidised bank credit schemes, the introduction of a complex system of credit ceilings, and imposition of controls  on interest rates.3 These policy measures severely affected the efficiency of the banks. By the end of the  1980s, it was felt that Pakistan’s banking sector was not able to meet adequately the financial needs of the country.4

 Kalbe Abbas and Manzoor Hussain Malik