Economics Projects

7/31/2019 Economics Projects

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MANAGERIAL ECONOMICS PROJECT

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History/background:

At the time of independence, the areas which now constitute Pakistan were producing only food

grains and agricultural raw material for Indo-Pakistan subcontinent. There were practically no

industries, and whatever raw material was produced was being exported from Pakistan.

However, commercial banking facilities were provided fairly well here. There were 487 offices

of scheduled banks in the territories now constituting Pakistan.

As a new country without resources it was difficult for Pakistan to run its own banking system

immediately, so it was decided that the Reserve Bank of India should continue to function in

Pakistan until 30th September 1948, and Pakistan would takeover the management of public debt

and exchange control from Reserve Bank of India on 1st April, 1948. by 30th June 1948, the

number of offices of scheduled banks in Pakistan declined from 487 to only 195, because

registered banks transferred from Pakistani territories to India.

At that time there were 19 non Indian (foreign banks) and only 2 Pakistani banks (Habib Bank,

Australian Bank). In 1 July 1948, of the total bank deposits of Rs. 1.1081 billion held in

Pakistan, as much as 73% was held by foreign banks whose activities were largely confined to

foreign trade.

In the first eighteen months of the operation of State Bank of Pakistan, 51 new branches were

opened in both East and West Pakistan of which:

28 were Pakistani Banks 12 were Indian Banks 4 were Exchange Banks 7 were newly formed NBP of which 6 were in East Pakistan. By December 1949, there were 35 scheduled banks in Pakistan of which: 4 were Pakistani Banks 23 were Indian Banks


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Current performance/present states

Contribution towards the Economy (Profit or Losses)

Pakistans banking sector has remained remarkably strong and resilient, despite facing

pressures emanating from weakening macroeconomic environment since late 2007, said the SBP

report. While financial markets (money market and foreign exchange market) remained resilient

to developments in the macroeconomic environment and functioned well in maintaining

financial stability, the imposition of the floor of 9,144 points on the KSE-100 index in August

2008 has adversely impacted investor sentiments by effectively blocking the exit mechanism

generally taken for granted in a market based system.

The review said the banking system is on strong footing and has long term potential a feature

which has served to attract a substantial amount of FDI in the sector, with established global

financial institutions now active participants in the domestic financial sector. FDI increased from

a mere $1 billion in 1999 to $8.4 billion in 2007.

Stress tests conducted on June-2008 data indicate that the large banks are relatively robust, with

the medium and small-sized banks positioning themselves in niche markets, it added. Capital

adequacy of the banking system is strong, 12.1% at end-June 2008, well above the

internationally acceptable minimum requirement of 8.0%, it said and added core capital

constitutes about 80.0% of the total capital, and Tier 1 to risk weighted assets ratio of the

banking system is at 9.7%.

Profitability of the banking system continues to be impressive, largely emanating from the

persistent growth in high-yield earning assets and expanded business volumes. A relatively rapid

rebound is expected in 2010, with a projected revival of GDP growth to 7.2 per cent. In spite of

the international economic crisis, continuing political turmoil and rising militancy in Pakistan,

the financial services sector has held up fairly well in the last year. Its future, however, remains

tied to a measure political stability in the country that allows economic activity to occur

unhindered. Lets hope the nations political and ruling elites can find a way to find a peaceful

way forward.


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Revenue/Subsidy Generation to Govt.:

Sources in banking industry said that revenue shortfall, rising current expenditures and

high subsidies have compelled the government to enhance its reliance on banking system, as the

federal government has already promised cut in borrowing with the State Bank.

The government had shifted away from central bank financing during the second half of last

fiscal year (2010-11) and this shift towards commercial banks financing was required to manage

inflationary expectations, as the SBP and the Ministry of Finance has came to an understanding,

in late 2010, to keep government borrowing below September 2010 levels.

According to State Bank of Pakistan, domestic debt and liabilities (DDL) have reached Rs 6.8

trillion by end FY11, compared to Rs 5.4 trillion at end of fiscal year 2010.

The federal government is intending to borrow Rs 675 billion from banking sector,

through short-term and long-term investment bonds, during the third quarter (Jan-March) of

current fiscal year 2011-12, to meet rising financial needs.


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Employment generation

Minister of State for Finance Omar Ayub said Saturday about 3,52000 jobs were

generated in industrial and banking sectors in the last five years.

Delivering budget speech here, he said some 100 million families have benefitted from the job

opportunities created as a result of increased industrial activities in the country.

The State Minister said banking sector also provided 35,207 jobs to educated youth that are

generating handsome income and contributing towards fast increasing economic growth.

He said that due to consistent, transparent and sincere policies of the present government foreign

investment was also increasing.

He said that people have full trust in the present policies which had build up confidence of

investors.

Changes in the nature and the structure of employment internationally observed also apply

slightly but steadily in banking market. The transfer of duties to external parties is already a fact

and is further motivated by the practice of making production cost more elastic. As a result, low

skilled duties such as cash and teller are characterized by short term employment contracts, low

wages, almost no trade union activity exemplified.

The study revealed that there was reduction in employment in the banking industry between

1999 and 2001 before the banking consolidation exercise. There was appreciable increase in

employment from 2006 to 2008. Five banksMCB, HBL, ABL, NBP, and BOP account for

46.56% of total employment in the banking industry.

According to a recent study conducted by Telenor Group and Boston Consulting Group, wider

access to mobile financial services in Pakistan could lead to the creation of 1 million new jobs by

2020. An estimated US$ 2 billion could be added annually to government revenues, helping raise

Pakistans GDP growth by 3%.


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Nadeem Hussain, President & CEO Tameer Microfinance Bank, in his comments spoke about

the positive impact of mobile financial services on the economy. He said:

The study shows that mobile financial services can help create new jobs and boost government

revenues. GDP growth can be stimulated by increased access to credit, which prompts new

business creation, and by formal remittances and increased savings. Mobile financial services

can facilitate public services by providing e-government options and help reduce costs of

financial transactions such as the disbursement of aid.

In conclusion Banks should endeavor to increase the number of their domestic branches to

increase employment in the economy as it is only the number of domestic branches of banks that

was a significant variable in explaining the variation in employment in banks.

Contribution to Economic Growth

The additional deposits mobilized in the last twelve months amounted to Rs. 382

billion i.e. a growth rate of 16.8 percent. This growth rate took place despite deceleration in

the volume of Resident Foreign deposit accounts. So if the deposit rates were unattractive

then this high growth rate in deposits mobilized by the banks appears to be puzzling. The

reason for this high growth is that the fresh deposits were fetching an average return of 6.2

percent in March, 2010 compared to 3.5 percent in July, 2009 rise of 270 basis points in

nine months. In the coming months the average rate is likely to move further upwards

bringing them to positive real interest rates.

This trend reflects that the return on the new deposits mobilized is much higher than

what the average rate indicates. The old deposits are earning much lower rate because they

were lodged at the time when the overall structure of interest rates had come down

significantly. This lag is adjustment between the deposit and lending rates is due to the costsincurred by the depositor in shifting deposits from one bank to the other.

Foreign banks have shown the highest growth rate in terms of deposits in the last

three years. State-owned banks averaged an annual growth of 12.7 per cent over the three-

year period 1998-2001, while the recently privatised nationalised commercial banks averaged


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18.2 per cent and foreign banks, 31.4 per cent. Foreign banks are also more efficient in terms

of controlling administrative costs per branch. For example, growth of administrative costs

averaged 19.7 per cent for state-owned banks, 18.3 per cent for the recently privatised banks,

and 17.6 per cent for foreign banks. As a percentage of assets, administrative costs are the

lowest for foreign banks.

The gross revenues of foreign banks have grown at a much faster pace than the rate of

growth of their costs. For Pakistani banks, the difference in the growth rates is extremely

narrow, if not negative. Bank deposits have grown significantly in recent years primarily

because of the rapid growth of money supply, which increased by around 18 per cent and

20.6 per cent during 1999- 2000. Money has also flowed into the banking system from the

informal economy with the change in incentives following the recent slide of the stock

market and the significant slump in the real estate market. Demand deposits constitute about

47-50 per cent of total bank deposits which is much higher than other countries. This also

explains why the cost of funds have been low for commercial banks.

Technological Advancement

Technology helps to catalyse competence in the provision of financial services and

ultimately determines the winners in the fiercely competitive financial markets of the economic

system. Technological advancements have paved the way for fundamental changes in the

financial industry. Calculated business plans have taken into account new ways of doing

businesses, expansion in brick and mortar branches with more technology enablement, more

refined risk management systems and better and suitable customer services by some of the up

market banks are prime examples of technological advancements.

However, some of the changes in technology that we are witnessing currently have been

exceptional, such as the boom in internet usage and mobile phone technology. The use of ATMs

and e-banking products has gained prevalence and almost all banks have established networking

of their ATMs with the interconnectivity of switches. Better outreach offered by ATMs has

enhanced the customer base offering more alternatives and choices to customers. The relatively


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Regression analysis between GDP and Industry growth

Row 1 Row 2 Row 3 Row 4 Row 5 Row 6 Row 7

Year GDP IndustryGrowth

Rate

Xt-x yt-y Row 4 *Row 5

(Row4)power2

1 4.18 9.40 -0.884 -5.58 4.93272 0.781456

2 3.91 9.00 -1.154 -5.98 6.90092 1.331716

3 1.96 14.80 -3.104 -0.18 0.55872 9.634816

4 3.11 18.60 -1.954 3.62 -7.07348 3.818116

5 4.73 19.60 -0.334 4.62 -1.54308 0.111556

6 7.48 19.10 2.416 4.12 9.95392 5.837056

7 8.96 15.10 3.896 0.12 0.46752 15.17882

8 5.82 19.30 0.756 4.32 3.26592 0.571536

9 6.81 15.30 1.746 0.32 0.55872 3.048516

10 3.68 9.60 -1.384 -5.38 7.44592 1.915456

N=10 5.064 14.98 0 0 25.4678 42.22904

b=0.6030

a= 11.9265

Regression line: Yt= 11.93 + 0.60Xt


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Business Connections and Efficiency (Backward/Forward Linkages)

Backward Linkages

Following are the backward linkages of banks:

Salaried Persons

Business men Private/Registered companies Govt. Allowances Self Employment

Forward Linkages

Following are the forward linkages of banks:

Loans to Business Persons Loans to Govt. LC Loans to Private/Registered companies

Role of Govt. for boosting:

In order to meet the challenge of financing Pakistani exports, the government established

the National Bank of Pakistan in November 1949 ahead of schedule. Originally the NBP was to

be established in 1950. Since Dhaka was occupying an important position those days because of

jute which was on top of the exports list in the early days of Pakistan hence the first branch of

NBP was established in Dhaka, the capital of the then East Pakistan. The NBP was founded as a

public sector entity with 25 per cent of the paid up capital sponsored by the government of

Pakistan. Both SBP and NBP performed well because the managements of these two banks was

in the hands of the young professionals having rich experience of working in Reserve Bank of

India and The Bank of India.

With the passage of time the number of Pakistani banks which were 4 in 1948 increased to 5 in

1955. The total number of branches of these banks took a quantum jump from 23 branches to


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163 during that period yet the number of foreign banks however declined from 34 to 27 similarly

their branches also registered a decline from 172 to only 88.

The government owned most of the banks. In the government banks the staff worked like typical

government employees, coming to office at 9:00 a.m., checking files; having nothing important

to do and leaving at 5.00 p.m. without doing much work.

These banks suffered from a high bureaucratic approach, overstaffing, unprofitable branches and

poor customer service. Administrative costs were high reducing profits of depositors.

First, the governments fiscal deficit was so high that most of the deposits the banks used to get,

were loaned to the government and government corporations. This was safe lending which

fetched good returns and the banks made good profit out of it. Naturally, there was little

incentive for them to do anything else except lend to the Government which was both risk freeand highly remunerative.

SWOT Analysis:

STRENGTHS:

Valuable contributor to GDP over a period of 15 years and of pivotal importance to theIslands economy.

High standard regulatory environment. Flexible work permit system and good quality staff offering personal client service.

WEAKNESS:

Weak retail and mass affluent customer proposition. General perception of Isle of Man as vanilla jurisdiction that is is not attractive to the

up-scale clients required.

Lack of legitimate access to markets. Lack of competitive differential with other financial centers. Rigid legislation that inhibits business development.


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OPPORTUNITIES:

The policies of the new government to uplift the economy and pursue financialsector reforms are expected to yield positive results in the banking industry of the

country. Banks are very well praised to avail promising opportunities. As a result of

the different steps taken by the Government regarding the betterment of the

economy, small borrowers are attracted to get the financing and start small

businesses. So, the banks have an opportunity to attract the customers by giving

them attractive schemes. They have wide area network in all over the Pakistan, if

banks can make it possible the fast delivery of fund from abroad through online

banking, it can cover the major market of Pakistan

Unified trade body to lead finance sector programme change. Active and aggressive targeting of corporate & private clients, and institutions. Coordinating business relationships across the finance sector to increase revenue,

thus investing in the ecosystem.

THREATS:

First threat is that of political influence. The biggest threat in the banking sector is the continuous downfall of the country

economy since the last few years.

Freezing of foreign currency accounts. Continued stagnation in economic activities and low growth. Downsizing and reduction in banking operations in favor of rival jurisdictions. Outsourcing to cheaper jurisdiction.

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Economics Projects