Impact of Financial Liberalisation and Deregulation on Banking Sector in Pakistan

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.