Role of Commercial Banks in developing the Economy of Pakistan

2nd Assignment

Role of Commercial Banks in Developing the Economy of Pakistan

ALLAMA IQBAL OPEN UNIVERSITY (Department of Business Administration) Assignment # 2 Banking Law and Practice (5548)

TOPIC: ROLE OF COMMERCIAL BANKS IN DEVELOPING THE ECONOMY OF PAKISTAN Submitted to: Sir Kamran Mehmood Submitted by: Ishtiaq Ahmed

AH-526270

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2nd Assignment

Role of Commercial Banks in Developing the Economy of Pakistan

Acknowledgement All praises to Almighty Allah, the most Gracious, the most Beneficent and

the

most

Merciful,

who

enabled

me

to

complete

this

assignment. I feel great pleasure in expressing my since gratitude to my teacher, for his guidance and support for providing me an opportunity to complete my Project. My special thanks and acknowledgments to Mr. Zeeshan for providing me all relative information, guidance and support to compile the practical study at MCB. I will keep my hopes alive for the success of given task to submit this report to my honorable teacher Sir Kamran Mehmood, whose guidance; support and encouragement enable me to complete this assignment.

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Role of Commercial Banks in Developing the Economy of Pakistan

Executive Summary “A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets” The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank "bench, counter". “A commercial bank (or business bank) is a type of financial institution and intermediary. It is a bank that provides transactional, savings, and money market accounts and that accepts time deposits.” Commercial Bank is a back bone for any country. They play important role in the development of that country. Commercial banks perform a lot of function and provide many services for their customers. MCB is one of the largest banks of Pakistan, founded in 1947. It is supported by a strong Mian Mansha group. Muslim commercial Bank is playing an important role in the developing economy of Pakistan. But there are still some weaknesses in its system that can be taking some strong Steps.

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Role of Commercial Banks in Developing the Economy of Pakistan

Table of Contents Contents

Page No

1. Title page

01

2. Acknowledgement

02

3. Executive Summary

03

4. Table of contents

04

5. Introduction to the topic

05

6. Practical study of organization

22

7. Practical study of organization with respect 25 to the issue 8. SWOT analysis

14

9. Recommendations

35

10.

Conclusion

36

11.

References

37 4

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Role of Commercial Banks in Developing the Economy of Pakistan

Introduction to Topic Bank “A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets” Due to their critical status within the financial system and the economy generally, banks are highly regulated in most countries. Most banks operate under a system known as fractional reserve banking where they hold only a small reserve of the funds deposited and lend out the rest for profit. They are generally subject to minimum capital requirements which are based on an international set of capital standards, known as the Basel Accords.

Origin of the word: The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank "bench, counter". Benches were used as desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.

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Role of Commercial Banks in Developing the Economy of Pakistan

One of the oldest items found showing money-changing activity is a silver Greek drachm coin from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350–325 BC, presented in the British Museum in London. The coin shows a banker's table (trapeza) laden with coins, a pun on the name of the city. In fact, even today in Modern Greek the word Trapeza (Τράπεζα) means both a table and a bank.

History: Banking in the modern sense of the word can be traced to medieval and early Renaissance Italy, to the rich cities in the north like Florence, Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th century Florence, establishing branches in many other parts of Europe. Perhaps the most famous Italian bank was the Medici bank, set up by Giovanni Medici in 1397. The earliest known state deposit bank, Banco di San Giorgio (Bank of St. George), was founded in 1407 at Genoa, Italy.

Types of banks Banks' activities can be divided into retail banking, dealing directly with individuals and small businesses; business banking, providing services to mid-market business; corporate banking, directed at large

business

entities;

private

banking,

providing

wealth

management services to high net worth individuals and families; and investment banking, relating to activities on the financial markets.

Most

banks

are

profit-making,

private

enterprises. 6

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Role of Commercial Banks in Developing the Economy of Pakistan

However, some are owned by government, or are non-profit organizations.

Types of retail banks 1.Commercial bank: the term used for a normal bank to distinguish it from an investment bank. After the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital market activities. Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses.

2.Community banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners.

3.Community development banks: regulated banks that provide financial services and credit to under-served markets or populations.

4.Credit unions: not-for-profit cooperatives owned by the depositors and often offering rates more favorable than forprofit banks. Typically, membership is restricted to employees of a particular company, residents of a defined neighborhood, members of a certain labor union or religious organizations, and their immediate families.

5.Postal savings banks: savings banks associated with national postal systems. 7

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Role of Commercial Banks in Developing the Economy of Pakistan

6.Private Banks: banks that manage the assets of high net worth individuals. Historically a minimum of USD 1 million was required to open an account; however, over the last years many private banks have lowered their entry hurdles to USD 250,000 for private investors.

7.Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks.

8.Savings bank: in Europe, savings banks took their roots in the 19th or sometimes even in the 18th century. Their original objective was to provide easily accessible savings products to all strata of the population. In some countries, savings banks were created on public initiative; in others, socially committed individuals created foundations to put in place the necessary infrastructure. Nowadays, European savings banks have kept their focus on retail banking: payments, savings products, credits and insurances for individuals or small and mediumsized enterprises. Apart from this retail focus, they also differ from

commercial

banks

by

their

broadly

decentralized

distribution network, providing local and regional outreach— and by their socially responsible approach to business and society.

9.Building societies and Landesbanks: institutions that conduct retail banking.

10.

Ethical banks: banks that prioritize the transparency of

all operations and make only what they consider to be sociallyresponsible investments. 8

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Role of Commercial Banks in Developing the Economy of Pakistan

Types of investment banks Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, and advise corporations on capital market activities such as mergers and acquisitions. Merchant banks were traditionally banks which engaged in trade finance. The modern definition, however, refers to banks which provide capital to firms in the form of shares rather than loans. Unlike venture capital firms, they tend not to invest in new companies.

Both combined Universal banks, more commonly known as financial services companies, engage in several of these activities. These big banks are very diversified groups that, among other services, also distribute

insurance—

hence

the

term

bancassurance,

a

portmanteau word combining "banque or bank" and "assurance", signifying that both banking and insurance are provided by the same corporate entity.

Other types of banks Central banks are normally government-owned and charged with quasi-regulatory responsibilities, such as supervising commercial banks, or controlling the cash interest rate. They generally provide 9

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Role of Commercial Banks in Developing the Economy of Pakistan

liquidity to the banking system and act as the lender of last resort in event of a crisis. Islamic banks adhere to the concepts of Islamic law. This form of banking revolves around several well-established principles based on Islamic canons. All banking activities must avoid interest, a concept that is forbidden in Islam. Instead, the bank earns profit (markup) and fees on the financing facilities that it extends to customers.

Commercial bank “A commercial bank (or business bank) is a type of financial institution and intermediary. It is a bank that provides transactional, savings, and money market accounts and that accepts time deposits.”

Origin of the word: The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth. However, traces of banking activity can be found even in ancient times. In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the words banco and bank are derived. As a 10

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Role of Commercial Banks in Developing the Economy of Pakistan

moneychanger, the merchant at the bancu did not so much invest money as merely convert the foreign currency into the only legal tender in Rome – that of the Imperial Mint.

The role of commercial banks Commercial banks engage in the following activities:  Processing

of payments by way of telegraphic transfer,

EFTPOS, internet banking, or other means.  Issuing bank drafts and bank cheques.  Accepting money on term deposit.  Lending money by overdraft, installment loan, or other means.  Providing

guarantees,

documentary performance

and

standby

bonds,

letter

securities

of

credit,

underwriting

commitments and other forms of off balance sheet exposures.  Safekeeping of documents and other items in safe deposit

boxes.  Sales/distribution or brokerage, with or without advice, of

insurance, unit trusts and similar financial products as a “financial supermarket”.  Cash management and treasury.  Merchant banking and private equity financing.

Traditionally, large commercial banks also underwrite bonds, and make markets in currency, interest rates, and credit-related securities, but today large commercial banks usually have an investment bank arm that is involved in the mentioned activities. 11

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Role of Commercial Banks in Developing the Economy of Pakistan

Types of loans granted by commercial banks” Secured loan A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally lent to the borrower, for example, foreclosure of a home. From the creditor's perspective this is a category of debt in which a lender has been granted a portion of the bundle of rights to specified property. If the sale of the collateral does not raise enough money to pay off the debt, the creditor can often obtain a deficiency judgment against the borrower for the remaining amount. The opposite of secured debt/loan is unsecured debt, which is not connected to any specific piece of property and instead the creditor may only satisfy the debt against the borrower rather than the borrower's collateral and the borrower.

Mortgage loan A mortgage loan is a very common type of debt instrument, used to purchase real estate. Under this arrangement, the money is used to purchase the property. Commercial banks, however, are given security - a lien on the title to the house - until the mortgage is paid 12

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Role of Commercial Banks in Developing the Economy of Pakistan

off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. In the past, commercial banks have not been greatly interested in real estate loans and have placed only a relatively small percentage of assets in mortgages. As their name implies, such financial institutions secured their earning primarily from commercial and consumer loans and left the major task of home financing to others. However, due to changes in banking laws and policies, commercial banks are increasingly active in home financing. Changes in banking laws now allow commercial banks to make home mortgage loans on a more liberal basis than ever before. In acquiring mortgages on real estate, these institutions follow two main practices. First, some of the banks maintain active and wellorganized departments whose primary function is to compete actively for real estate loans. In areas lacking specialized real estate financial institutions, these banks become the source for residential and farm mortgage loans. Second, the banks acquire mortgages by simply purchasing them from mortgage bankers or dealers. In addition, dealer service companies, which were originally used to obtain car loans for permanent lenders such as commercial banks, wanted to broaden their activity beyond their local area. In recent years, however, such companies have concentrated on acquiring mobile home loans in volume for both commercial banks and savings and loan associations. Service companies obtain these loans 13

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Role of Commercial Banks in Developing the Economy of Pakistan

from retail dealers, usually on a nonrecourse basis. Almost all bank/service company agreements contain a credit insurance policy that protects the lender if the consumer defaults.

Unsecured loan [Unsecured Loans] are monetary loans that are not secured against the borrower's assets (i.e., no collateral is involved). These may be available from financial institutions under many different guises or marketing packages:

Bank overdrafts: An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. If the POSITIVE balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply on;  Corporate bonds  Credit card debt  Credit facilities or lines of credit  Personal loans

Operations of Commercial Banks: 14

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Role of Commercial Banks in Developing the Economy of Pakistan

Commercial banks are authorized to engage in only the following types of activities:  Receiving interest-bearing and interest-free deposits (time,

demand and other) and other returnable means of payment;  Extending consumer loans, mortgage loans other credits both

secured and unsecured credits and engaging in factoring operations with and without the right of recourse, trade finance including

the

granting

of

guaranties,

letters

of

credit,

acceptance finance, and forfeiting.  Buying, selling, paying and receiving monetary instruments,

such as notes, drafts and checks, certificates of deposit, as well as securities, futures, options and swaps on debt instruments, and interest rates, currencies, foreign exchange, precious metals and precious stones.  Cash and non-cash settlement operations and the provision of

collection services.  Issuing

money

orders

and

managing

money

circulation

(including tax cards, checks and bills of exchange).  Securities brokerage services;  Trust operations on behalf of clients and funds management  Safekeeping and registration of valuables including securities;  Credit-information services;  Activities incidental to each of the above types of services.

Banking in Pakistan

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Role of Commercial Banks in Developing the Economy of Pakistan

Banking in Pakistan first formally started in Pakistan during the period

of

British

colonialisation

in

the

South

Asia.

After

independence from British Raj in 1947, and the emergence of Pakistan as a country in the globe, the scope of banking in Pakistan has been increasing and expanding continuously. Pakistan's oldest bank is the State Bank of Pakistan, which is also the central bank of the nation. Before independence on August 14, 1947, the Reserve Bank of India was the central bank of what is now Pakistan. After independence, Muhammad Ali Jinnah took actions to establish a central bank in Pakistan which resulted in the new founding of the State bank of Pakistan, with its headquarters to be based in Karachi. Only 7% of the population uses the banks, has tremendous potential but this needs to be pushed a little further The banking

sector

in Pakistan

has

been

going

through

a

comprehensive but complex and painful process of restructuring since 1997. It is aimed at making these institutions financially sound and forging their links firmly with the real sector for promotion of savings, investment and growth. Although a complete turnaround in banking sector performance is not expected till the completion of reforms, signs of improvement are visible. The almost simultaneous nature of various factors makes it difficult to disentangle signs of improvement and deterioration.

Pakistan’s Banking Sector can be classified under the following broad categories:

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Role of Commercial Banks in Developing the Economy of Pakistan

Category State Bank Pakistan

Description Central Bank and the Autonomous of and Governing Body for all banking operations in the country

Nationalized Scheduled Banks

Private Banks

These deal primarily in industries of banking and capital markets. They offer a host of unique policies, banking training, services and products which include loans, credit cards, savings and consumer banking

Banks engage in channeling funds Scheduled from depositors to lenders against the primary objective of acquiring profit i.e. Bank Spread

Foreign Banks

Development/ Cooperative/ Investment Banks

Specialized Banks

These concentrate primarily on International Trade Finance, Innovative Credit Orientation and Plastic Money Investment Banks act as underwriter or agent serving as intermediary between an issuer of securities and the investing public These banks are created with specific interest thus specializing and catering to a particular sector industry. 17

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Role of Commercial Banks in Developing the Economy of Pakistan

Categorical Listing of Operating Banks Central Bank Nationalized Scheduled Banks

State Bank of Pakistan First Woman Bank Ltd. National Bank of Pakistan Zari Taraqiati Bank (ZTBL) Industrial Development Bank of Specialized Banks Pakistan Punjab Provincial Cooperative Bank Ltd Askari Commercial Bank Limited Bank Al-Falah Limited Bolan Bank Limited Faysal Bank Limited Bank Al-Habib Limited Metropolitan Bank Limited KASB Commercial Bank Limited Prime Commercial Bank Limited PICIC Commercial Bank Limited Soneri Bank Limited Private ScheduledUnion Bank Limited Meezan Bank Limited Banks Saudi-Pak Commercial Bank Limited Crescent Commercial Bank Limited Dawood Bank Limited NDLC-IFIC Bank Limited (NIB) Allied Bank of Pakistan Limited United Bank Limited Habib Bank Limited SME Banks Foreign Banks

ABN Amro Bank N.V Albaraka Islamic Bank BSC (EC) American Expresss Bank Limited Bank of Tokyo Mitsubishi Limited Citibank N.A Deutsche Bank A.G. Habib Bank A.G. Zurich Hongkong & Shanghai Banking 18

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Role of Commercial Banks in Developing the Economy of Pakistan

Corp Limited Oman International Bank S.O.A.G Rupali Bank Limited Standard Chartered Bank Limited Crescent Investment Bank Limited First International Investment Bank Limited Atlas Investment Bank Limited Security Investment Bank Limited Fidelity Investment Bank Limited Prudential Investment Bank Limited Islamic Investment Bank Limited Asset Investment Bank Limited Al-Towfeek Investment Bank Limited Jahangir Siddiqui Investment Bank Limited Franklin Investment Bank Limited Orix Investment Bank (Pak) Limited

Investment Banks

Role of Commercial Banks in the Economic Development of Pakistan Banks play an important role in the economic development of a country. It the banking system is unorganized and inefficient, it creates

maladjustments

development.

In

and

Pakistan,

impediments

the

banking

in

the

system

is

process very

of

well

organized. The State Bank of Pakistan established on July 1, 1948 stands at the apex and is responsible for the operation of the banking system in Pakistan. The other banks which form the banking structure in Pakistan are playing an active role in the economic development of the Country. 19

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Role of Commercial Banks in Developing the Economy of Pakistan

The role of the commercial banks in the growth and development of sound and healthy economy of the Pakistan is briefly discussed as under:

1. Saving mobilization. The commercial banks namely National Bank of Pakistan, Habib Bank, Allied Bank, United Bank and Muslim Commercial Bank has opened up branches in urban and rural areas to

mobilize

savings

of

the

people.

2. Financing development project. The banks and other development finance institutions like IDBP, Zarai Taraqiati Bank Limited, PICIC etc. advance short and medium term loans for financing of the development projects both in the private and public sectors and thus help in accelerating the rate of economic development

in

the

country.

3. Facilitating trade activities. The credit institutions collect the savings of the people arid make them available for facilitating trade activities both inside and outside the country.

4. Creating climate for capital formation. A developed banking system is a stimulant to growth and is creating favorable climate

for

capital

formation

in

the

country.

5. Helping SBP in achieving monetary policies. The commercial banks under the supervision and guidance of the State Bank of Pakistan help in implementing and achieving the objectives of

the

monetary

policy

which

vary

from

time

to

time.

6. Assisting in the development. The commercial banks are profit seeking enterprises. In order to maximize the profits, they have the incentive to maximize the loans. An organized banking 20

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Role of Commercial Banks in Developing the Economy of Pakistan

system keeps a balance between liquidity and profitability and thus assists

in

the

planned

development

of

the

economy.

7. Provision of agency services. The commercial banks provide agency services to the clients. They receive and pay cheques. They collect dividends and pay interest and premium on behalf of the clients. They keep their valuables in safe custody. They help in the mobility of capital and thus stimulate capital in the country.

8. Making capital available for investment. The organized banking system helps in directing physical resources into productive channels. It also keeps a balance between the availability and requirements

of

the

capital

in

the

country.

9. Less reliance on foreign capital. A planned banking system by launching a vigorous campaign of mobilizing idle saving in the country can meet the capital development requirements from within the country. The country will thus have to rely less on foreign capital for financing the development projects

10. Profit, sharing scheme. The commercial banks receive surplus balances of households and business and pay interest on the deposits of the clients. The banks have now introduced interest free banking in Pakistan. The depositors instead of having a fixed return on the deposits will share in the profit and loss of the banks. The Profit and Loss Sharing (PLS) arrangement which is an alternative to interest under an Islamic Economic System is now operating in Pakistan.

11. Provision of Qarze Hasna. Qarz-e-Hasna Scheme has been prepared and launched by Pakistan Banking Council through 21

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Role of Commercial Banks in Developing the Economy of Pakistan

nationalized commercial banks. Under the Qarz-e-Hasria Scheme, financial assistance is provided to the students of in sufficient means and of outstanding caliber who are unable to pursue their studies due to financial difficulties. Loans are provided for pursuing studies both within and outside Pakistan.

12. Export promotion cell. In order to boost the exports of the country, the banks have established Export Promotion Cell for the information and guidance of the exporters.

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Practical Study of the Organization

Vision Statement: “TO BE THE LEADING FINANCIAL SERVICES PROVIDER, PARTNERING WITH OUR CUSTOMERS FOR A MORE PROSPEROUS AND SECURE FUTURE”

Mission Statement: “WE ARE A TEAM OF COMMITTED PROFESSIONALS, PROVIDING INNOVATIVE AND EFFICIENT FINANCIAL SOLUTIONS TO CREATE AND NURTURE LONG-TERM RELATIONSHIPS WITH OUR CUSTOMERS. IN DOING SO, WE ENSURE THAT OUR SHAREHOLDERS CAN INVEST WITH CONFIDENCE IN US”

History of the Organization: 23

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Role of Commercial Banks in Developing the Economy of Pakistan

MCB

Bank

Limited (Formerly

Muslim

Commercial

Bank)

was incorporated by the Adamjee Group on July 9, 1947, under the Indian Companies Act, VII of 1913 as a limited company. The bank was established with a view to provide banking facilities to the business community of the South Asia. The bank was nationalized in 1974 during the government of Zulfikar Ali Bhutto. This was the first bank to be privatized in 1991 and the bank was purchased by a consortium of Pakistani corporate groups led by Nishat Group. As of June 2008, the Nishat Group owns a majority stake in the bank. The president of the bank is M.U.A Usmani. Founded in 1948, Nishat Group is one of the leading and most diversified business groups in Pakistan. The group has strong presence in the most important business sectors of the country such as banking, textile, cement and insurance. Mian Mohammad Mansha is the Chairman of the group (and also MCB). MCB is Pakistan’s largest bank by market share 18% its assets are of PKR 605 bln (apprx.)(US$ 7.02 billion) in 2011, and the largest by market capitalization having a market capitalization of US$ 1.8 billion. The Bank has a customer base of approximately 4.5 million and a nationwide distribution network of 1,130 branches, including 8 Islamic banking branches, and over 600 ATMs, in a market with a population of over 160 million. (July 2011 record) In 2011, MCB reported a profit after tax of PKR 15.5 billion (appx. US$183 million) and generated a return on average equity of

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27.35% and a return on assets of 3.25%. The Bank’s asset quality is strong with a gross NPL ratio of 8.62%. Office in Dubai, UAE. The Bank has also formed a private company in Hong Kong (fully owned subsidiary of MCB) in partnership with Standard Chartered Bank, handling trade transactions of select countries in the Asia-Pacific region.

MCB Bank Ltd

Type

Public (KSE:[2])

Industry

Banking Capital Markets

Founded

1947

Headquart ers

Registered Office: Islamabad, Principal Office: Karachi Pakistan

Key people

Mian Mohammad Mansha(Chairman)

Products

Loans, Credit Cards, Savings, Consumer Banking etc.

Revenue

PKR 35.782 Billion (2011) 25

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Role of Commercial Banks in Developing the Economy of Pakistan

Net income

PKR 26.753 Billion (2011)

Total assets

USD 6.02 Billion

Website

www.mcb.com.pk

CORPORATE PROFILE Board of Directors Mian Mohammad Mansha

Chairman

Mr. S. M. Muneer

Vice Chairman

Mr. Tariq Rafi

Director

Mr. Saleem

Director

Shahzad

Mr. Sarmad Amin

Director

Mr. Mian Mansha

Raza

Director

Mr. Mian Mansha

Umer

Mr. Aftab Khan

Ahmad

Mr. Mushtaq

Manzar Director

Director

Director

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Role of Commercial Banks in Developing the Economy of Pakistan

Mr. Ahmad Alman Director Aslam Dato' Seri Ismail Shahudin

Director

Mr. Abdul Farid Bin Director Alias Mr. M.U.A. Usmani President / CEO

Practical Study of the Organization with respect to the Issue Role of Muslim Commercial Bank in the Economic Development of Pakistan Muslim Commercial banks playing an important role in the process of economic development of Pakistan, which is clear from the following points: 

Capital Accumulation or Formation:

Capital formation refers to the increase in the existing stock of capital goods in an economy. Muslim Commercial banks remove the capital deficiency by encouraging saving and investment. The Muslim commercial bank is promoting capital formation in the country by moving the resources to the productive uses. Rate of capital formation is 5 % in Pakistan. 27

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Role of Commercial Banks in Developing the Economy of Pakistan 

Mobilization of Savings:

There operates vicious circle of poverty in developing countries like Pakistan. So, savings remain at the lowest level. Savings of people are very low due to international demonstration effect in Pakistan. Muslim

Commercial

Bank

is

playing

important

role

in

the

mobilization of saving by introducing a variety of saving schemes. Banks induce the people to earn interest through saving and it provides various facilities in a country to create a will and power to save. Domestic savings are 9.5 % of GDP. 

Availability of Funds:

An additional point of role of banks is more availability of funds. Poor population has poor resources for the economic development in poor countries like Pakistan. The activities like inventions and innovations,

research

and

development

and

initiatives

(effectiveness in responding to challenges) are impossible due to insufficiency of funds in these countries. Banks remove the deficiency of capital by providing different types of funds that leads to economic development. 

Attaining Self Sufficiency:

A major problem faced by the developing countries is burden of foreign

debts

and

dependence

on

other

countries.

Muslim

Commercial bank provides incentive for the entrepreneurs to take risks and to use idle resources for more and better production. So, banks are helpful in attaining self-sufficiency. Banks provide loan to develop the various economic sectors. It results in reduction in

28

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imports and increase in exports. Accordingly, banks are very important to achieve the self-sufficiency. 

Implementation of Modern Technology:

Economic development without use of advanced and the most upto-date technology is impossible. Almost in all the economic sectors backward techniques of productions are used due to poverty in third world countries like Pakistan. Muslim Commercial bank provides more funds to people to make it possible to use the modern techniques of production. Due to implementation of modern technology, there is increase in production level, decrease in cost and save in time. 

Development of Agriculture Sector:

All the regions and all the sectors of the economy are not equally efficient and developed in an economy. There is big need to develop the backward regions and sectors for the economic development. Rural areas and agricultural sector is still backward n Pakistan. Muslim Commercial Bank is playing an important role in the development of rural and agriculture sector. Growth rate of agricultural sector is 1.2 %. 

Development of Industrial Sector:

Industrial sector is the backbone of their economies in rich nations. It is still backward in Pakistan and other poor countries. Muslim Commercial

bank

provides

different

types

of

loans

for

the

development of industrial sector. Industrial development leads to agricultural development and it results in economic development. Growth rate of industries is 1.7%. 29

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Role of Commercial Banks in Developing the Economy of Pakistan 

Expansion of Market:

Muslim Commercial banks help in the expansion of market. They help in the formation of sound economic infrastructure in order to raise living standards and to expand trade and commerce of an economy.

Muslim

Commercial

bank

causes

development

of

industrial as well as agriculture sector. Accordingly, there is expansion of market that results in economic development. 

Essential for Foreign Trade:

Foreign trade is one of the most important needs of all the countries of the world. Today international trade, without involving banks, is so difficult. International trade is necessary for the economic development. Muslim Commercials bank is helpful in increasing international trade through following ways:  Provision of credit facilities  Low rate of interest for the exporters  Opening of letter of credit (L/C)  Arrangement of foreign exchange  Opening of foreign currency accounts  Muslim

Commercial bank have $ 2.2571 billion of foreign

exchange reserves 

Remove Budget Deficits:

The Muslim commercial bank is very helpful for the government. Now a day, the government has to face the budget deficits because of increased expenditures and falling revenues. In this situation, government has to depend upon deficit financing to meet the budget deficits. To cover the gap between the expenditures and 30

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revenues, government borrows from the banks. As a result, the development process can be started through borrowed money from banks. 

Optimum Utilization of Resources:

Muslim Commercial bank helps in the just and optimum allocation of resources. Some mega projects cannot be started due to the lack of capital. Muslim Commercial bank provides loans and removes the problem of deficiency of capital. Due to use of resources in an economy, there is increase in production, income and employment etc. Increase in these things leads to economic development. 

Creators and Distributors of Money:

Creation of money and distribution of money are the two main objectives of Muslim commercial bank. Muslim Commercial banks move the finances toward productive uses. There are a lot of problems in the way of economic development like inflation, deflation, low investment and saving etc. All these problems are possible to remove through creation and distribution of money by Muslim commercial bank. So, fluctuation in the supply of money can attain the economic development. 

Provision of Valuable Services:

The Muslim commercial bank is providing a lot of valuable services for the economic development. Some of the most important services provided by Muslim commercial bank are as under:  Due to use of credit instruments like cheques, drafts and bills of exchange, banks have reduced the use of currency at the cheapest costs and in the safest manner. 31

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Role of Commercial Banks in Developing the Economy of Pakistan

 Banks serve as business and commercial agents of their customers.  Banks provide locker facility.  Banks accept the various utility bills.  They guide the investors while making investment decisions.  Banks advance loans for education in foreign countries. 

Modern Facilities:

Now Muslim commercial bank is providing various modern facilities like:  PC & Internet banking since 2003, PC banking available to all

MCB customers in 14 cities.  ATM & Online facilities & Balance ready cash etc.  Mobile Banking and Call Centers, Smart Card and Debit Card.

 DD issuance, Statement inquiry and credit cards.

SWOT analysis The acronym SWOT stands for a firm is internal Strengths and Weaknesses and its external Opportunities and Threats. The purpose of such analysis is to build on company’s strengths in

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Role of Commercial Banks in Developing the Economy of Pakistan

order to exploit opportunities and counter threats and to correct company’s weaknesses. SWOT analysis is based on the assumption that if managers carefully review such strengths, weaknesses, opportunities, and threats, a useful strategy for ensuring organizational success will become evident. Strengths

and

weaknesses

typically

relate

to the internal

environment of an organization, whereas opportunities and threats are brought about by the external environment of an organization. In the following section both internal and external analyses of MCB are outlined:

Strength: Strength can be defined as an area where a company is best at doing something or a feature that puts the company at an advantage in comparison to its competitors. MCB enjoys the following strengths:  MCB is a well established bank enjoying long history of over 55 years of experience and profitable operation.  MCB is the largest private bank in Pakistan and third largest bank among all banks.  It has the largest branch network among private banks of Pakistan.  MCB is the market leader in introduction of e-banking and it has the largest ATM network in the country. 33

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Role of Commercial Banks in Developing the Economy of Pakistan

 MCB has the ability to bring innovative products and services like

personalized

service,

electronic

funds

transfer,

sophisticated financial products such as electronic banking, auto-teller machines and evening banking.  Excellent branches appearance gives an edge to MCB over other banks. The branches are well furnished even in less developed areas where other banks branches give a poor view.

Weakness: A weakness is defined as an area in an organization where the organization is not as good at doing something as its competitors or a thing which an organization lacks thus putting the organization at disadvantage in comparison to its competitors. Based on the above definition, MCB has the following weaknesses.  Though MCB is third largest bank in Pakistan, yet the fact remains that it is not market leader as HBL and NBP.  The overseas branch network of MCB is limited. It has only four overseas branches,

branches three

whereas subsidiaries,

HBL two

has

twenty

affiliates,

overseas and

one

representative office. Similarly NBP has fifteen overseas branches, one subsidiary, and four representative offices.  Employees at branch level are not properly motivated to work by heart. They take the all routine activities as a boring job.  Most of the employees lack managerial training as they are not properly educated. Due to seniority, they have moved up on the hierarchy line to Grade-I, II or III positions having hardly bachelor degrees. This type of senior staff cannot apply the 34

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Role of Commercial Banks in Developing the Economy of Pakistan

modern and innovative techniques of management in decision making.

Opportunities: An opportunity can be defined as a change in external environment which if properly exploited with the organizational strengths will result in enhanced sales market share or income. Using its strengths MCB can avail the following opportunities.  It can introduce debit card system or may convert the existing ATM cards into a complete debit card.  New products like personal loans mortgage and auto leasing and each management which diversify credit risk and add to revenue generating products are currently provided in big cities like Lahore, Islamabad, Karachi and Rawalpindi, these products may be tested for success in other areas like Peshawar, Quetta and Sargodha.  Developing network for electronic transaction require huge

investment which can’t be made all at once, there exists an opportunity for MCB to enter into agreement with other banks to use each other’s ATMs which will result in an increased convenience to MCB customers and customers of other banks.  As all around the world remittances of money are strictly monitored so as the money remitted may not fall in hands of so called terrorists for that all conventional money laundering through Hundies have been stopped there is an opportunity for MCB to extend its branch network to various countries 35

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Role of Commercial Banks in Developing the Economy of Pakistan

emphasizing mainly on introducing electronic fund transfer facilities.

Threats: Threat can define as a change in external environment which if not met with proper strategies will result in loss of revenues market share or income. In the context of MCB’s external environment the following potential threats exist:  Change in interest rate from SBP.  The frequent reduction on 6-month and 12-month Treasury Bills discount rates by SBP may create pressure on the banks profitability.  The low discount rates are also negatively influencing the advances rates which may affect the banks profits from the other side.

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Role of Commercial Banks in Developing the Economy of Pakistan

Recommendation First of all, the management needs to overlook the major problems that the organization is currently facing and then develop strategies to solve them. Some of the suggestions that I would like to give at the end are:  MCB does not offer any chances of chances of social gathering

for staff. There should be some informal meeting arrangements to restore the atmosphere of mutual trust and confidence and to give them respect. Job rotation for employees.  MCB is not currently giving owner ship to employees. It should give certain percentage of shares to employees to develop a feeling of belonging in them. When employees own the on. They own its strengths and weal nesses also. So they readily start working for its progress.  In

MCB, there is no culture of encouraging new ideas.

Employees should not be considered on Robots. They have brains of their own. They should be thought to use the brains on well on hand. Because they won the night people who are as possible for operations and can give best suggestion. 37

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Role of Commercial Banks in Developing the Economy of Pakistan  MCB has not built any connection with its customers. For

knowing their suggestions about you services. There should be a proper channel for them.

Conclusion I have concluded that.  “A bank is a financial institution and a financial intermediary

that accepts deposits and channels those deposits into lending activities, either directly or through capital markets” The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank "bench, counter".  “A commercial

bank (or business bank) is a type of

financial institution and intermediary. It is a bank that provides transactional, savings, and money market accounts and that accepts time deposits.”  Commercial Bank is a back bone for any country. They play important role in the development of that country. Commercial banks perform a lot of function and provide many services for their customers.

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Role of Commercial Banks in Developing the Economy of Pakistan

 MCB is one of the largest banks of Pakistan, founded in 1947. It is

supported

by

a

strong

Mian

Mansha

group.

Muslim

commercial Bank is playing an important role in the developing economy of Pakistan. But there are still some weaknesses in its system that can be taking some strong Steps.

Reference Project report “Role of Commercial Banks in developing the Economy of Pakistan” www.slideshare.com http://www.mcb.com.pk/ http://www.mcb.com.pk//whyMCB.php http://en.wikipedia.org/wiki/MCB_Pakistan

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Role of Commercial Banks in Developing the Economy of Pakistan

http://www.scribd.com/doc/24651033/HR-REPORT-culturalcompatible-practices-inMCB

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