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Nationalization of Banks

MAJOR HIGHLIGHTS OF NATIONALIZATION OF BANKS ACTS 1974, ALSO COMMENTS ON ITS SUCCESS OR FAILURE IN YOUR WORDS

Pakistan came into being as a state of Muslims in the Sub-Continent on 14th August, 1947. Pakistani banks follow the British pattern of banking system (Branch Banking). Before independence, there were 44 banks having 631 branches in the areas of Pakistan including East Pakistan (Now Bangladesh) and only 487 offices in the territories now comprising Pakistan.

At the time Pakistan was producing food grains and other agricultural raw material exports. There were particularly no important industries and agricultural produces were mostly being exported. However commercial banking facilities were provided fairly well here. But shortly after independence, the number of banks and their branches as the Hindu bankers migrated to India from Pakistan. In addition majority of Hindus residing in the territories now constitute Pakistan started transferring their assets to India. By 30th June, 1948, the number of offices of scheduled banks in Pakistan declined from 487 to only 195. Then this country faced great banking crises.

There were 19 non-Indian foreign banks with the status of small branch offices which were engaged financing of exports of Pakistani crops. There were only two Pakistani banks i.e., Habib Bank which transferred its office from Bombay to Karachi and The Australasia Bank which was in existence in the Pakistani territory. There was a panic of uncertain economic future which shook the confidence of the people. The Government, therefore, promulgated the Banking Companies Ordinance, 1947, to safeguard the interest of both the bankers and the public.

Under the prevailing critical situation at that time the Father of Nation Muhammad Ali Jinnah and his fellows in the Government felt much the need of sound was taken and the State Bank of Pakistan was established on 1st July, 1948.

After the opening the State Bank of Pakistan took initiative for the development of banking system. Many new commercial banks were established and they increased the number of their branches day by day. For the growth and development of agricultural and industrial sector specialized banks and other financial institutions were also setup and now the network of bank branches covers a very large segment of national economy. By June 1988 the number of bank branch office has increased to more than 7100 which are spreader over in every nook and corner of Pakistan.

 

Nationalization of Banks

The Government of Pakistan nationalized all the Pakistani banks on June, 1974. The ownership, management and control of these banks stood transferred to and vested in the Federal Government. The shareholders were compensated by 15 years Federal Government bonds.

By December 31, 1973, there were 14 scheduled Pakistani commercial banks with 3323 offices all over the country and 74 offices in foreign countries. In spite of this tremendous growth and development of commercial banks and their prominent role of financing in the country’s economy, it was felt that these banks failed to ensure that the resources flow in those sectors of economy where they would produces goods and services needed badly by a very large number of people in Pakistan. Therefore the nationalization of banks was considered necessary. On January 01, 1974, Pakistani Banks were nationalized under the bank (Nationalization) Act, 1974,

1.With following objectives.

  1. To provide the fair distribution of credit. All the sector of economy will enjoy the credit facility.
  2. The encourage and stimulate the effective nationalization of savings in the country.
  3. To provide social justice in the country by proper allocation of credit and financial resources to different classes of the society.
  4. To enable the Government to use the capital concentrated in the hands of a few rich bankers for the repaid economic development of the country and the more urgent social welfare projects.
  5. To co-ordinate the banking policy in various areas of feasible joint activity without eliminating healthy competition among banks.
  6. Short title, extent and commencement:

(1) This Act may be called the Banks (Nationalization) Act, 1974.
(2) It extends to the whole of Pakistan.
(3) It shall come into force at once and shall be deemed to have taken effect on the 1st day of January, 1974.
2. Act to override other laws:

The Act shall have effect not with standing anything contained in any other law for the time being in force or in any agreement, contract, award, memorandum or article of association or other instrument.
(4A) “loans and advances” means “loans, advances and credit” as defined in the Banking Companies Ordinance, 1962 (LVII of 1962);
(5) “prescribed” means prescribed by rules made under this Act;
(6) “State Bank” means the State Bank of Pakistan established under the State Bank of Pakistan Act, 1956 (XXXIII of 1956); and
(7) other words and expressions used but not defined in this Act shall have the same meaning as in the Banking Companies Ordinance, 1962 (LVII of 1962).
3.Transfer and vesting of ownership etc., of banks:

  • The ownership, management and control of all banks shall stand transferred to, and vest in, the Federal Government on the commencing day.
  • All shams in the capital of a bank held by persons other than the Federal Government, a Provincial Government, a corporation owned or controlled by the Federal Government or the State Bank shall stand transferred to, and vest in, the Federal Government on the commencing day, free of all trusts, liabilities and encumbrances.

4-A. Sale of shares:

Notwithstanding anything contained in this Act or any other law for the time being in force, the Federal Government or a corporation owned or controlled by the Federal Government may from time to time, sell all or any of its shares in the capital of a bank and transfer management and control of a bank other than the State Bank, to such persons, and on such terms and conditions, as the Federal Government may determine; and
5. Compensation for transfer of ownership of shares in a bank:

  • Every person who stands registered as the holder of any share of a bank the ownership, management and control of which stands transferred to the Federal Government by virtue of Section 5 shall be entitled to receive from the Federal Government by way of compensation per share an amount determined accordance with the provisions of section 7 in the form of bonds of the Federal Government, repayable at par at any time within a period of fifteen years in accordance with a redemption programme formulated by the Federal Government and bearing interest at the rate of one percent, above the bank rate notified by the State Bank from time to time:
  • The bonds shall be negotiable and eligible as security for advances.

6. Assessment of compensation:

The amount of the compensation shall be the amount equal to the break up value of the share as determined by an auditor appointed by the Federal Government from the balance-sheet of the bank as on the 31st December, 1973, according to the principles laid down in rule 8 of the Wealth Tax Rules, 1963:
7. Removal of previous management:

Every person holding office in any bank as Chairman, Director or Chief Executive by whatever name called, other than a person who holds such office by virtue of his appointment or nomination by the Federal Government or the State Bank, shall stand removed from his office on the commencing day and his removal shall not entitle him to any compensation and no such claim shall be entertained by any Court, Tribunal or other Authority.

ADVANTAGES OF NATIONALIZATION

Following were the main causes of nationalization:

1. Equal Distribution of Wealth
The government nationalized the industries and banks to provide equal distribution of wealth. Because few families had full control over the major portion of national wealth. So government decided to provide equal chances of earning to the people by nationalizing the units.
2. End of Monopoly
There was complete hold of few capitalists over the supply of the market. They were charging higher prices from the consumers. To remove the monopolies government nationalized the industries, so that goods should be provided to the public at lower price.
3. Check on Smuggling and Hoarding
The government nationalized the various banks on this ground that capitalists were misusing the savings of the whole nation. They used the credit for hoarding and smuggling.

4. Fair Distribution of Credit
The banks were nationalized to provide the fair distribution of credit. All the classes of the public will enjoy the credit facilities. Small farmer and small businessman was ignored by the banks before nationalization.

5. Economic Stability
It was also argued that all the business institutions will adopt uniform policy after nationalization. It will provide economic stability.

6. Effective Planning
It was also argued that after nationalization government will prepare the plans more effectively and the rate of out put will rise.

7. Increase in Production
It was also argued that after nationalization the labor will work more honestly and efficiently to increase the production of these units.
8. Increase in Social Welfare
Before nationalization all the profit of industries and banks was in few hands. But after nationalization it will be used for the best interest of the whole nation.

9. Price Stability
It was also climes that state bank can minimize the fluctuation in the economic activity with the help of nationalized commercial bank.

DISADVANTAGES OF NATIONALIZATION

1. Increase in Corruption
The nationalized industrial units were handed over to the government officials and it increased the corruption in this sector. Efficiency of the units reduced after nationalization.

2. Fall in Production
After the nationalization production of various units decreased and rate of profit removed. The managers of those units did not pay proper attention.

3. Sick Industries
In the short period these industries suffered a loss and were declared sick industries.

4. Carelessness of Labor
After nationalization workers became careless about their duties and this attitude of labour affected the production adversely.

5. Public Sector Over Weighted
Public sector has become overweight and it is health risk for the economy. More over public sector is flourishing at the expenses of private sector.

6. Private Sector Discouraged
The nationalization policy discouraged the private sector, and due to this rate of investment decreased. Even the target of private investment in the 8th five year plan could not achieved due to the fear of nationalization.

Arguments for Nationalization

  1. They benefit from economies of scale (Bigger is better) which means that the prices to consumers is relatively lower than if we had a number of small firms.
  2. A monopoly owned, run and controlled by the government will stop the consumers being exploited.
  3. The government can manage the economy by controlling the important industries.
  4. The government can invest money and make their service more efficient.
  5. Companies owned and run by the people for the people take social costs (pollution etc.) into account and the profit goes back to the people.
  6. The gap between the wealthy and poor will be reduced by more equitable distribution of income.

Arguments for Privatization

  1. Nationalized industries are inefficient due to a lack of competition. Competition means efficiency improves.
  2. Competition leads to more choice for consumers.
  3. Better quality.
  4. Firms produce what people want and they innovate and use new technology

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