Banking Industry of Pakistan-Outlook on Reputational Risk

Table of Contents
1. Introduction.............................................................................................................................. 4
1.1 Historical Background of Banking in Pakistan................................................................ 4
1.2 Privatization of Banks in Pakistan ................................................................................... 6
1.3 Unfavorable Situation of Banking Industry ..................................................................... 7
1.4 Establishment of Islamic Banking.................................................................................... 9
The Categorization of Banks According to the Valuation of Their Assets ............................... 12
1.5 Reputational Risk: Description in terms of Organizational Repute ............................... 12
1.6 Some Other Big Risks for Today’s Banking Industry ................................................... 13
1.6.1 Fraudsters’ Tools..................................................................................................... 14
1.7 Objectives of the study................................................................................................... 15
1.8 Scope of the study.......................................................................................................... 16
2.1 Literature Review............................................................................................................... 18
2.2 Methodology...................................................................................................................... 31
2.2.1 Research Method ........................................................................................................ 31
2.2.2 Research Questions..................................................................................................... 32
3. Authorities in Banking Sector of Pakistan............................................................................ 33
3.1 Financial Regulatory Authorities in Pakistan................................................................. 33
i. State Bank of Pakistan (SBP)......................................................................................... 33
ii. Securities and Exchange Commission of Pakistan (SECP) ........................................... 35
iii. National Accountability Bureau (NAB)......................................................................... 35
iv. Banking Mohtasib of Pakistan ....................................................................................... 36
v. World Trade Organization (WTO)................................................................................. 37
vi. Pakistan Credit Rating Agency (PACRA) ..................................................................... 37

3.2 Financial Structure of Pakistan ...................................................................................... 38
i. Commercial Banks ......................................................................................................... 38
ii. Islamic Banks ................................................................................................................. 39
iii. Development Financial Institutions (FDIs).................................................................... 39
iv. Microfinance Banks ....................................................................................................... 39
v. Non-Banking Finance Companies (NBFCs).................................................................. 40
vi. Pakistan Stock Exchange ............................................................................................... 40
3.3 Present Situation of Pakistan.......................................................................................... 42
3.4 Linkage of State Bank of Pakistan with Other Institutions in Pakistan ......................... 42
3.5 Role of State Bank of Pakistan with respect .................................................................. 45
3.6 State Bank of Pakistan Departmentalization Overview ................................................. 50
3.8 Collaborative Functioning of International Institutions...................................................... 53
4. Essential Findings Related to Banking Industry................................................................... 61
4.1 Understanding the Suitable Risks .................................................................................. 61
4.2 Typical Understanding of Reputational Risks ............................................................... 62
4.2.1 Understanding the Risk Factor With Respect to Its Nature in Banking Industry... 63
4.3 Understanding Reputational Risk................................................................................... 65
4.4 International Risk Assessment Practices........................................................................ 68
4.4.1 Occurrence in the Great Britain .............................................................................. 69
4.4.2 Ukrainian Banking Upgrading................................................................................ 70
4.4.3 Miami’s Continental National Bank Case for Electronic Banking Risk ................ 72
4.4.4 Indian Context of Risk Identification and its Mitigation ........................................ 74
4.5 Managerial Implementations in Pakistan ....................................................................... 76
4.6 Theoretical Framework .................................................................................................. 76
4.6.1 Model Specification................................................................................................ 77

4.6.2 Variables Description.............................................................................................. 78
4.6.3 Sample Size............................................................................................................. 79
4.6.4 Key Implementations in Pakistan’s Banking Sector............................................... 82
Key Financial Performances in the Banking Sector ................................................................. 87
Market Share of Loans and Advances ...................................................................................... 90
References:.................................................................................................................................... 91

Chapter 1
1. Introduction
Banking sector is an essential role player for the financial performance of any economy.
Having strong base and solid foundation since September 1948, Pakistan’s banking sector
reforms are being under consideration. This indicated a firm foundation of banking industry in
Pakistan. Like many other sectors of the economy, banking industry also has its benchmark and
standardization based upon the performance measurements. Every bank in the banking industry
has its own reputation that has been built up by following the core competencies. Similarly, the
banks have their reputation in the industry that is built up by internal (Bank stakeholders) and
external (customers/clients) factors. By keeping in view of those factors, we would elaborate
their roles and characters in building up the banking image and banking industry performance.
1.1Historical Background of Banking in Pakistan
The banking sector of Pakistan initiated after the period of colonialism system in the
South Asia by the Great Britain in 1947. After separation of Pakistan on 14th August 1947, the
banking sector came into existence. In the beginning of this industry ‘the Reserve Bank of India’
was the bank to play a central role of monitoring the fiscal and monetary policies of Pakistan
(Wikipedia, Banking in Pakistan, November, 2017). It was dire need to have a separated system
that would be totally controlled by the Islamic Republic of Pakistan. By keeping in view of that
need, Pakistan’s founder Quaid e Azam Muhammad Ali Jinnah took step to establish a
Pakistan’s owned central bank. After his firm determinations and hard works, the central bank
for Pakistan inaugurated on 1st September 1948 (Wikipedia, State Bank of Pakistan, January

2018). Policies and constitutions were also built for the State Bank of Pakistan. Branches were
established in different cities with headquartered in the financial capital city of Karachi.
The State Bank of Pakistan constituted the role and regulations that a centralized bank
must play in the country’s economy. Therefore SBP has defined its roles to be played in
Pakistan’s economic reforms. The primary function of SBP is to issue currency notes that would
be regulated and circulated for all the purchasing, selling, trading, booking and any other
payments mode between the entities within the country and with outsiders (foreigners). Its
secondary functions include managing the fiscal and monetary policies in order to regulate the
economic system of the country. Also State Banks has its function to play its part in providing
advisory to the Government of the time about fiscal performance and monetary management for
the fiscal period of the present government. Moreover, SBPs secondary role also include the
maintenance of relationship with International Financial Institutions (IFIs) for the sake of
understanding the financial positions and monetary movements between Pakistan and other
countries. One of the main secondary functions of State Bank of Pakistan includes organizing the
Exchange rate of Pakistan’s currency with that of other countries’ currencies. Stabilizing the
Pakistani Rupee (PKR) as comparing with other countries’ currency notes are the responsibilities
of SBP. Some of the Non-Traditional roles of SBP are defined as; the establishment of banking
system within the country, facilitating the improvement of Microfinance institutions and
promoting the activities and systematic approach of Islamic Banking systems. Their non-
traditional activities also include training the banking staffs according to the requirement of time.
By focusing on the above functions being performed by SBP, they have departmentalized their
roles and every department has been assigned its core functions to perform in order to retain the
sustainability and efficiency. Moreover, it is traditionally the central bank’s responsibility to

sustain the macroeconomic environment of the country through proper monetary and fiscal
policy reforms as well as through the management of inflationary factors.
After the strong build-up of the State Bank of Pakistan, commercial banks were also
required to be emerged in the economy in order to establish a proper industry for the purpose of
managing the banking industry with support from Central Bank. After the establishment of
central bank for Pakistan’s economy, three banks became part of Pakistan’s economy including
Habib Bank Limited (HBL) and Allied Bank Limited (ABL). During the tenure of Zulfiqar Ali
Bhutto (1970s), the nationalization of banks took place in the country. Through that system
thirteen banks were brought utterly into the governmental control. The Pakistan Banking Council
was recognized to control all the nationalized banks. Moreover, those nationalized banks were
merged into six banks. Those six banks were defined to perform in the banking industry of
Pakistan. Consequently, the banking sector emerged tie after time. During 1980’s, the banking
sector defined the policies to assist the big entities of the country. Those big entities included
corporations, business tycoons, politicians and government officials. The main big flaw at that
time was board of directors and CEOs were not officially appointed in those banks and branches.
That brought the system disorders which led to the bad loans. (Khalabat, November 4, 2011)
1.2Privatization of Banks in Pakistan
Privatization is being done when an organization may not be able to get the targeted
performance. Through this process the ownership is transferred from government controls to
privately owners (individuals or groups). During the period of late 1980s and early 1990s, the
banking sector was not performing up to the mark due to which there needed to establish a
system where the performance would be illustrated in true sense and meeting the ultimate
requirements through setting of benchmarks. In 1990s, the process of privatization was

established in order to transfer the ownership of publicly owned properties to the private sectors.
State-owned Enterprises were vended with the amount of Rs 476 Billion. All these privatization
were done in different phases. (Shaikh, October, 2013)
Phases of Privatization Years of Privatization
1st Phase 1992-1996
2nd Phase 1997-2000
3rd Phase 2001-2008
Source: (Shaikh, October,2013)
By focusing on these phases, privatization was done for transferring the banks from
governmental controls to privately owners of the country. Moreover, the privatizations of other
companies were also kept under consideration including Pakistan Steel Mills and Pakistan
Airways (PIA).
1.3Unfavorable Situation of Banking Industry
During the tenure of nationalized system in Pakistan, the banks have directly and
indirectly linkage with other sectors and other businesses. Similarly, initially, the banking
industry (before privatization) was catering the state ownerships only that brought challenges to
the industries to have sustained and good performance of the businesses. Due to high fiscal
deficit of the government, there was dire need to fulfill that deficit. In order to fulfill that
shortage lending were being prioritized to the government and government owned corporations.

That was considered as low-risk and safe investment and banks were to make profits out of those
deposits. In fact, the actual situations were quite reverse. Those banks were in highly deficit due
to many mishappenings at administrative level as well as client (borrower) level. The banks gave
extremely poor returns because of the reasons; administrative costs turned out to be so high,
customer services were very poor, branches were filled due to overstaffing of the employees,
poor customer satisfaction, and non-profit (or comparatively loss giving) branches. Recovering
rates were also very low in banks that brought the factor of risk assessment at that time. Private
borrowings were not focused to give on merit based borrowers because of business linkage with
politicians, which comprised with the bad debt loans. (UKEssays, March, 2015)
In a presidential address in a seminar organized by Management Association of Pakistan
in Lahore in 2002, it was clearly addressed by the president of Pakistan that banking sector
performed remarkably poor and it was also mentioned that the sector had been facing several
problems including highly suffering from bureaucratic approach, overstaffing, unprofitable bank
branches and poor customer servicing that was being caused by the untrained bank staffs.
Nationalized Commercial Banks (NCBs) along with many other banks including Agriculture
Development Bank of Pakistan (ADBP), Industrial Development Bank of Pakistan (IDBP) and
national financial institutions like NDFC had high proportion of non-performing loans which
were merely not paid by the clients to whom the loan amounts were granted by these banks.
Consequently, these issues were brought to solve at governmental level by creating awareness
among banks in banking industry of Pakistan, because these banks (nationalized banks) played
vital role in the progression of Pakistan’s economic outlook. Therefore, these judgments
provided the seriousness of president and later on the state bank to take actions against non-

performing loans (NPLs) and that made possible to eradicate the unpaid loans in several ways.
Unpaid loans were amounted to Rs 260 billion at the time. (Address, August 2002)
Due to these disorders in banking sectors, many other business sectors were also
impacted directly and indirectly. Corporate taxation rate became all time high 58%. That brought
the risk factor to its immense state in the country. Bankruptcy and many other worse social
impacts began after that time period. During 1995, the profits of banks were also reduced due to
unstable financial brunt caused by nationalized banks and politicians. 14 Foreign banks had
collectively deposit of Rs 2 billion and their profits were Rs 5.1 billion. After the immense
effects of the situation their profits after taxation were reduced to Rs 4 billion. (Magazine, July
2017)
After evolution of systematic advancements in Pakistan’s industries and redefining the
role of Islamic societies, another stream of banking industry witnessed its existence. Now there
are two basic types of banking systems in Pakistan. One is conventional banking system which
refers to the core banking principles that have been adopted from the beginning of banking and
other is Islamic banking system that had been derived from the Islamic religious principles.
1.4Establishment of Islamic Banking
The actual Islamic system (including all business and financial) of activities was
familiarized about 1400 years ago when the religion of Islam was introduced. It took much time
to introduce Islamic banking system to the banks of different economies. Especially, there were
some difficulties to understand the Islamic banking systems even in Islamic countries because
these countries had already implemented the conventional systems. Initially in 1980s Islamic
banking system was introduced in Gulf countries. Later on, this system took pace and moved

towards Asia Pacific countries. Sooner, the system took much acceptance level and it became
popular to be implemented because of its discrete value due to Islamic teachings. The main
challenge for executing the system in the banks was to create awareness. Due to already
implemented and accepted conventional system, it was merely important and need to convert
those to Islamic compliance rule. Due to researches done by Muslim and non-Muslim scholars
on Islamic system, the positive outcomes made it possible for the system to be acceptable for
many developing countries. (Ali, December 2016)
In Pakistan, after witnessing the financial collapse in result of inefficiencies done by
politicians and by banks officials, there was dire need to implement a system that would be
accepted and should be followed by the banks to facilitate their every possible client without
discrimination of political and social status. By focusing on this criterion, in 1992, the Supreme
Court of Pakistan and Sharia Court jointly decided to convert all of the conventional banking
systems to Islamic compliance banking systems. Although these decisions were not implemented
immediately but after 10 years, a full-fledged Islamic principles based banking system was
adopted and introduced by a bank named as Meezan Bank, in 2002. It would be more interest to
know that majority of the conventional bank customers started converting from conventional
systems to Islamic system. (Ansari, August 2014).

Area wise distribution of Islamic Bank branches in Pakistan as of June 2017
AREAS Islamic Banks Standalone Islamic Bank
Branches
Sub Branches
Azad Kashmir 19 16 1
Balochistan 51 41 7
FATA 1 7 0
Federal Capital 59 51 9
Gilgit/Baltistan 5 5 0
KPK 84 167 7
Punjab 587 459 45
Sindh 413 221 65
Grand Total 1219 967 134
Source: State Bank of Pakistan
The data above also illustrate the acceptance of Islamic banking systems in Pakistan. As
the figures gives idea that huge number of Islamic banks have been evolved over the time.
According to recent official statistical data by state bank, numbers of branches have been
significantly increased by 8.1 percent from 2,146 in 2016 to 2,320 in June 2017, which clearly
depicts the acceptance level of this banking system in Pakistan. Also, there were increased
deposit amounts by 17.8% as compared to the last year statistical data. Moreover, the trends is

being under progress by converting from conventional investment to Islamic based investments
by understanding the main differences between both of the systems
The Categorization of Banks According to the Valuation of Their Assets
BANK TYPES ASSETS VALUATION
Large More than Rs 900 Billion
Medium Between Rs 150 and Rs 900 Billion
Small Less than Rs 150 Billion
Islamic Any of the Above Range
Source: KPMG Pakistan Banking Survey for the Year Ending 2016
The Above table illustrates the asset categorization of the banks in Pakistani context.
According to a study, it is assumed that the banks with asset valuation of $5.0 billion are
considered as large banks (Hunker, Jan 2010), so in Pakistan similar context is being followed
while dividing the banks according to their assets valuations. Islamic banks may fall any of the
three categories.
1.5Reputational Risk: Description in terms of Organizational Repute
Reputation is achieved first and then it is to be maintained. It is to be observed that
something that creates value brings reputation to the creator or maker of that thing. On the other
hand it is also understood that if the reputation has a certain value than anything that interrupts
the reputation is considered as a risk factor. To understand that risk factor or to manage that risk
factor we should need to realize to control risk aspects i.e. to manage the risk (either to face the
risk or not to face the risk). Some would face the risk in order to create good wealth and some
may avoid it. (First, n.d.). Organizational reputation has big impacts on the performance of the
company. If the company has tendency to manage these types of risk factors then they can
perform well according to the situations. It does not comprehensively easy to measure

reputational risk factors as accurately. Well, it would be better to evaluate the reasoning of
identifying and studying about the risk before analyzing the information related to reputational
risk.
1.6Some Other Big Risksfor Today’s Banking Industry
After inflation being witnessed during 2008, the alarming situations were being specified
all over the world. Due to technological advancements and upgraded lifestyles, the level of risks
has also been refined. The financial regulations and policies along with banking systems are also
tended to be changed after the big crisis (inflation) of 2008. John Burke described some other
risk factors that have evolved over time due to advancements in technology as well as
advancements of mindsets of people. The developments in banking facilities like ATM machines,
biometric verifications, mobile banking, e-commerce and several other electronic means of
transactions have built the new era of banking industry. On the other hand, these facilities
become curse if someone else from third party takes the advantage of snatching money from our
accounts unwillingly; these are the threats to the banks and for the accounts holder of the bank.
Ultimately, this leads to the mistrust of the customers and the bank authority. These types of
criminal activities have been categorized as ‘cybercrime’ because these involve the digital
contributing channels. These crimes can be propaganda against banks’ reputation and
challenging their acceptability within the public. (Burke, August 2016). Hackers from other
countries are taking advantages of stealing cash from ATMs and other online card facilities.
Recently, mainly Karachi had been a target for the group of hackers who had been
responsible for thieving amount an approximate amount of Rs 10 Million and it has been
acknowledged by 600 national customers from all over the country. They are the witnesses of
such illegal activity because they have faced it actually and have put forward their requests to

investigating agency (FIA) to proceed and get those culprits. Mainly HBL had been highlighted
as a bank which is facing this cyber-attack. (Siddiqui, December 2017). Consequently,
governmental agencies are taking actions against such criminal activities. These agencies
(including FIA) are ought to work properly on criminal laws and create the environment of
safety against banking transactions so that both bankers and customers have mutual
understandings. According to a news report it has been kept under consideration that both
Pakistani and Chinese nationals are involved in such activities of cyber-attacking and ATM
skimming in banking sector. (Saqib, December 2017)
1.6.1 Fraudsters’ Tools
A huge chunk of fraudulent activities were observed in the United Kingdom and they did
valuable researches to cope with the fraudulent activities which are merely considered as
challenges for many other banking industries worldwide. The main identified techniques
used by hackers or so called fraudsters are as under:
i. Entrapment Devices: In this technique the machine is already inserted inside the
cash machine. When the account holder wants to withdraw cash from that
machine the user inserts his card into the machine. That device retains the card
from the card slot and the user tries his pin code a plenty of times and finally
leaves that card over there. When the cardholder leaves that place, criminals
remove that device and use that card along with his pin number which he had
been trying to get access to it. This creates unwanted transactional activities
through that account.
ii. Skimming Devices: This fraudulent technique is similar to the previous technique.
In this method a magnet is attached to the cash machine in the card inserting

section of the cash machine. The user inserts his card and enters the required PIN
code to get access to withdraw cash from that machine by using his account.
When the pin is entered, the magnet inside along with miniature camera captures
the image of the card details. When the customer removes his card, the fake card
(using magnetic stripe) then used to get the cash by using the accounts which
were lastly entered.
iii. Shoulder Surfing: This is the simplest way of stealing cash from
the account holder’s account by using his card. As the technique name suggests,
in this method the hacker watches the card users on the spot and notices his PIN
code which he entered to get proper access to the cash machine. And after that,
the hacker or criminal steals the account holder’s card in his own ways which
ultimately results in stealing money from his bank account as he had already
noticed the card PIN code to get access. In this way, the criminal get successfully
accomplishment.
1.7Objectives of the study
Our main focuses in the report are to:
 Recognize the key role players that produce banks’ brand image and banks’ reputation
 Explore how different banks create their viability in banking industry
 Study the financial valuation of different banks that are linked to their performance
 Recognize the key performance indicators (KPIs) that create valuable outcome and create
brand image for the banks
 Identify the management’s role in determining financial feasibility of banks in the
industry

 Study the role of government policies on influencing the banks’ performance
 Know the role of ratings in providing the stability and reputation of the banks
1.8Scope of the study
It is important to identify the effects of risk factors and how to control those factors
through measurements i.e.: risk management aspects, especially the role of reputational risk on
the banks’ performance. Literally, we would be able to identify the issues related to the
reputational risks that banks (and financial institutions) face and how they manage to cover their
operational activities. As it is to be understood that role of government and governmental
policies play vital role in every business aspect of any country, similarly in Pakistan government
influences are essential to recognize in accordance with implementation the strategies to cover
the risks. (Shah, n.d.). As we know that banking system has been emerged and upgraded with the
passage of time. According to State Bank of Pakistan (in 2007) the Banking Industry of Pakistan
has achieved their assets value more than $60 billion. (Pakistan, Feb 2007) Moreover, we have
vast scope of comparing the current performances with that of the past in banking industry of
Pakistan and how banking industry has emerged throughout the time span since independence
year has been already identified in the introduction. The scope of technology in performance of
banks is to be understood. We would be able to identify the components which determine the
banks’ financial feasibility and banks’ ranking.
Through this project report we would be able to work on some key factors that play vital
role in developing the reputation of banking industry. The broader sense of reputational risk
would be assessed in the project report that will create instinct to mitigate this type of risk. In this
project report we would elaborate the maximum role of management’s performance in
developing the repute and brand image of banks in banking industry. Furthermore, the project

report will also be indicating the performance measurements to mitigate the risk factors that are
linked to banking industry. Our main focus would be on studying the main factors that cause
‘reputational risk’ and methods that are used to mitigate this risk. The scope of this study can be
forecasted as an essential part of determining different aspects and role of different factors in
determining the accurate performance of banking industry. Our primary choice of attempting the
project is to study the enlisted the factors that have direct and indirect impact on reputational risk.
We would also be viewing the factors of upgradation that played vital role in evolving the
banking systems and controlling the risk factors in the latest era. As technology itself is a reason
for the advancements in banking industry over the passage of time so we would be further
studying the scope of technological advancements in controlling the factors of reputational risk
in banks. Reputational risk is very important to understand, but before that, we would understand
the banks’ role to create their viability in the industry and how they sustain their customers and
clients.

Chapter 2
2.1LiteratureReview
 Perry and Fontnouvelle- 2005, contributed towards the developing the meaningful
linkage between stock market reactions and external factors on the operational
performances and financial stability of financial sector. They studied some past events
that had impacted on the performances of financial sector and have affected the sector’s
financial performances which have ultimately disturbed their market values. However,
they authors have put their efforts in defining the nature and types of risks that can be
impactful for the organization from any circumstances. Different types of risks included
credit risk, market risk, strategic risk, market value risk and reputational risk. They ought
to create linkage between decreasing value of the stock price in the stock market and their
reactions on to the operational losses that are being suffered by the financial institutions.
They considered the operational damage as any loss value that is suffered when the loss
value is actually more than that of the announced value in the market. They also assumed
that the banks may become unfamiliar of the risk that is actually affecting their internal
losses and indicating continuous demotion. Firms’ strong shareholders are important to
create good valuation of the organization, because the internal stakeholders appreciate
their strong rights and they become motivated to support their organization. Therefore,
the banks should be requiring focusing on building up strong internal control in order to
have a positive outcome. (Fontnouvelle, October, 2005)
 Shamshad- 2007 highlighted the changing environment and fluctuating standards of
Pakistani banking industry which have impacted on the performance of the industry. The

author showed interest to study the impact of changing monetary policy and some other
important economic environment impacting factors on banking performance for
Pakistan’s industry. The overall risk factors that resulted due to changing economic
situations and changing banking environment were discussed. Some important roles and
responsibilities that are ought to be managed by the bank regulations authorities were
identified to manage banking risk factors. The initiatives of central bank (State Bank of
Pakistan) in Pakistan to manage the risk factors in economic conditions and banking
industry were also studied by the author. Major banking risks that are related to
reputational and banking industry i.e.: market risk, credit risk and liquidity risks were
presented as the factors that affect the policies of individual banks and overall industrial
performance. Some important initiatives taken by the SBP to strengthen the banking
industry which included to introduce tools (capital adequacy ratio and other valuable
ratios) and Banking Supervision Risk Assessment Model (BSRA) to compute market
risks and credit risks to calculate ‘value at risk’ and ultimately forecasting for the future
regular time period. The author concluded with the views that changing paradigms have
adverse impacts on banking performance as it creates difficulties and complexities for the
banking sector to have profitability. SPB had tried to implement sound regulations and
strategic approach to handle risk related elements that can directly and indirectly effect
the industry in short term or long term. (Akhtar, March 2007)
 Peter Bonisch (M D, Paradigm Risk Limited Amsterdam the Netherlands) 2009 put some
reflections on the effects of reputational risk factors. In 2009, the economic crises were
somehow at the peak point and at that point the author studied some main events that
caused economic calamity throughout the economies. Especially, the roles of financial

institutions were highlighted where banks and other non-bank financial institutions lost
their reputation. The author put efforts to get to know about the core issue that mattered
to be indulged to ruin the economic activities on financial part. In his research paper “A
new era for reputation risk in banking: Reflections on the impact of reputation on the
banking crisis and the financial services regulatory agenda” he has considered the
character of individual banking systems to put emphasis on the whole economic
progression. Moreover, the writer also illustrated the role of senior management team on
banking performance and how they cater the reputational risk. His research paper was
established during severe economic crisis (recession 2008). He proposed to put efforts on
understanding the accurate regulations to be implemented in order to have controlled over
reputational risk through management’s role. (Bonisch, 2009)
 Sehrish, Faiza and Khalid- 2011, cooperatively gave the approaches and factors that
affecting the ultimate results and performances of banking industry in Pakistan. They
collectively studied the factors affecting performances of different banks. Factors
included some main internal factors and some external factors that play role in
development of banking performance. The external determinants include GDP, Inflation
and market capitalization and internal factors are size, capital, loan and deposits included
for their studies and pointing-out the linkage between these internal and external factors.
Their core objective contained within the explanation of relationship between these
internal as well as external factors. Similarly, they evaluated the statistical data comprised
the study of return on assets (ROA), return on equity (ROE), return on capital employed
(ROCE) and net interest margin (NIM). The authors compiled the data for the time span
of five years ranging from 2005-2009 with the sample size of top 15 banks of Pakistan (at

that time). They also took secondary data from reliable and official sources like State
Bank of Pakistan’s report in which they typically focused on the data like GDP (rate and
amount), consumer price index-CPI (inflation), and market capitalization (MC). They
gave two basic hypotheses for testing their significance. The hypothesis 1 indicated
microeconomic indicators whereas the hypothesis 2 specified the macroeconomic
indicators. By utilizing these data, the authors used simple linear regression methods to
find the relationship between the variables that have been defined. They concluded with
the explanation of their work which they had done by using their valuable data. Their
study explained the impact of specific macroeconomic indicators over banking sector
performances. Their assessment gave a thorough linkage between the goodness of
macroeconomic indicators and the banks’ (15 banks) performance indicators. This shows
the significant role of internal factors as well as external factors that play vital role in
development of sector’s growth measurements. (Sehrish Gul, March 2011)
 CGAP Focus Note-2011 proposed the understanding and characteristics of ‘Agents’ to
play their parts in banking operations. The writers have put efforts on appreciating the
role of agents in banking sectors worldwide. Four basic services offered by those agents
are; transmitting information, processing information, cash handling and electronic funds
transfer. The economies like Brazil and India, where the poor people might not be able to
understand the legalities and bank policies, agents play vital role to connect those clients
with the bank. This is an ultimate way to manage the reputation of the banks. In this way,
many banks in the world are managing their reputational and operational risks. Although
agent system itself a risky system (because of involvement of third party) but many banks
rely on this system. (Kate Lauer, December, 2011)

 Fatma Geçikli 2013- Gave the idea of corporate reputation with the understanding of
relating different concepts. In the Journal Report, it was mentioned to relate reputation
and risks. So, in a broader view we assumed that the author has put emphasize on
corporate reputation and risk associated in sustaining that reputation. Internal and
external emphasis on maintaining the managing risk and benefits of positive reputation
management were related and linked with each other in the journal. (Geçikli, April 2013)
 Malik and Rafique - 2013 elaborated the importance of achieving the optimal level of
liquidity in banking sector for Pakistan. They gave an outlook of significance of
macroeconomic indicators in banking performance (especially in maintaining their
liquidity level). They checked the measures of liquidity ratios of commercial banks. Their
sampling included 26 commercial banks from Pakistan in which they specifically focused
in the study of liquidity ratios and factors affecting those ratios. The data had been
collected for five years (from 2007- 2011) which included the period of financial crisis in
Asia. i.e.: 2008-2010 and particularly they studied and focused on secondary data
utilization. The authors gave a clear viewpoint that their hypotheses testing was done to
check the significance of liquidity that is being affected by; macroeconomic indicators
and Asian financial crisis time. The independent variables included non-performing loans,
capital asset (as size of the bank) valuation and return on equity (ROE) and another
model contains the macroeconomic indicators like inflation. They use the econometric
model and applied regression to test the viability and significance for each of their data,
to test the possible outcome for the dependent variable, so two models were considered
for conducting this study. After evaluation of their models, they concluded that there is
significant relationship between the financial crisis and liquidity of commercial banks

(negative relationship) which means that financial crisis would impact negatively on the
performance of liquidity of the banks the central bank play crucial role in managing the
inflation and monetary policy therefore the central bank has directly or indirectly impact
on the liquidity of the banks, that ultimately changes the banks’ assets valuation.
Therefore, the authors related their data to have significant outcome that ultimately relate
different elements of economy. (Muhammad Farhan Malik, June 2013)
 Abbas, Zaidi, Ahmad and Ashraf- 2014 jointly gave the studies on exposure and
performances of the banking sector of Pakistan. They provided the broader viewpoint and
the role of financial institutions to support the investing activities of savors from any part
of the profession. The authors presented a view of understanding the role of risk
management in banking sector, especially for the purpose of investments. Particularly,
they highlighted the credit risk management and linked that with the ultimate banking
performances of some banks in Pakistan. They effectively provided the idea and role of
technology in managing the role of credit risk. The authors utilized the methodology of
fixed effect panel data regression analysis, as this system eliminates maximum drawbacks
from the data that have been collected for the purpose of analysis. Their sample included
21 banks including foreign banks, public owned and some of the private banks. These
banks represented about 50% of the whole population that are using banks for their
business and other transactional activities. They used ratio analysis for measuring non-
performing loans that gave the data for managing credit risks. Some of the main
formulations (ratios) which have been considered for their study include; nonperforming
loan / total loan (NPL/TL), total loan and advances/ total deposits (TL + Adv. / TD) and
loan loss provision / total classified loan (LLP / NPL). Data had been utilized in

comparison form; hence the research paper gave the clear idea about the credit risk
management data. They concluded that all their variables found to be significant. The
significance of banking performance and degree of acceptance of reliability of data has
been observed as definite thing in their research report. Hence, they suggested that more
the banks utilize the advances (granting loans to the clients) there would be more
improvements in the banking performances in terms of profitability and asset
management. (Asad Abbas, January, 2014)
 Li Xiang and Yang Lina-2014 represented a research paper on recognition of reputational
risk within the banking sector of China. The research emphasized on the study of linkage
between commercial banks and their reputational risks. The research authors identified
the commercial banks’ efforts to mitigate reputational risks. Moreover, they also have
identified the key role of reputational risks in developing the goodwill for the banks in
China’s banking system. They also concluded that their banking system had not
developed up to the mark system to mitigate such types of threats which can be adversely
impact upon sustaining in the economy. (Lina, 2014)
 PWC-2014 explained the framework of risk management system within the banking
sector of Pakistan. It was clearly described about the evolution of the risk management
system in Pakistan since 2005 till 2013. This report gave clear outlook of the conceptual
framework, regulatory evolution and modern day evolution and role of reputational risk
within Pakistan. Furthermore, the report also compared the risk management assessment
of the SAARC countries. They gave compact overview of many aspects that are linked to
the risk assessment at managerial level within the banks. Also the report suggested
implementing suitable regulations that will help to build up strong capability of managing

risk factors, especially the reputational risk. Challenges and upcoming global trends were
discussed. (Anwer, March 2014)
 Ramzan and Zafar-2014, studied the part of liquidity risk management within Islamic
Banking sector especially in Pakistan. Initially, they told about the major financial role of
banks both of the conventional as well as Islamic banks in the worldly economy. The
authors focused on calculating the validity and consistency of the financial data that
represent the performance of Islamic banks in Pakistan. Proper measurements for
managing liquidity risks and other asset based management systems like return on assets
return on equity and net margin on utilizing the capital of the banks. Since the world is
evolving in Islamic banking system for over past three decades, many improvements and
upgradation has been observed by the time passed. Risk management issues are faced by
both of the banks Islamic Financial Institutions (IFIs) as well as conventional banks
(including commercial banks). The authors are focused to study the effects of liquidity
risks over balance sheet and other financial statements managements particularly in
Islamic banks of Pakistan. After evaluating, they ought to provide their valuable
suggestions and advising the improvements in IFIs’ liquidity management because the
liquidity represents the financial position of the banks. Their research included answering
the question of managing the liquidity risk through Islamic measurements in Islamic
banks. In order to get the effective results, the jointly studied the fully Islamic organized
banking systems. Methodology included a sample size of 5 Islamic organized banks in
Pakistan. The annual reports of these banks for the period of 2007-2011 were under
considerations therefore secondary means of data has been under studies for this research
project. Variables under studies are; liquidity risk as dependent variable and the rest of

variables such as asset size, networking capital, return on equity (ROE), return on asset
(ROA) and capital adequacy ratio were taken as independent variables for this project
studies. With these variables ‘fixed effect least square regression model’ had been utilize
to evaluate the variables’ reliability. They concluded with the views of improving the
Islamic banking system, they recommended that the Islamic banking must not be
practicing the prohibited ways of banking in Islamic society because it would not
represent the true image of Islam. (Professor Dr. Muhammad Ramzan, April 2014)
 Zaman, Arslan, Sohail and Malik- 2014, the influence of monetary policy implemented
by central bank over financial performance in Pakistan had been studied by the authors
collectively. Interest rate is an indicator of many other microeconomic and
macroeconomic performances that create impact on many industries and sectors in the
economy. Similarly, monetary policy has foremost impact on the performance financial
sector. The performance measurements of banking sector (ROA and ROE) were
considered to be depending upon the monetary policy implementation by the central bank.
Therefore, their relationship was picked to be evaluated in their research report. As
monetary policy plays essential part in development of sustainable economy that is why
the interest rates fluctuations affect the banking performances and their risks assessment.
The authors created theoretical concept to understand their findings which included
firm’s size and monetary policy as independent variables and firm’s performance
considered as dependent variable to know the impact of one variable on another. The
sample size of 20 banks was taken for studying their variables. Data had been taken for
the time of 5 years from 2007-2011 and annual reports of banks were kept under
observing so that their data could be taken as effective as possible. In order to measure

the inflation rate and monetary policy, official data from state bank’s website was taken.
The study provided a meaningful and contextual linkage between variables that had been
defined. The authors demonstrated the limited study to the banking industry to get the
effective outcome. (Rashid Zaman, 2014)
 Market Forces 2015- described the importance of operational risk on the performance of
commercial banks. The author worked on sample size of 8 banks and compared their
productivity according to different scales. They also highlighted a specific condition of
loss operational announcements by media and its ultimate impacts on banks performance.
Moreover, it is also highlighted to study the role of media news and operational loss news
over the capital valuation. Whether the share prices of banks fluctuate with the revolving
of those loss news or it is still unaffected, that was studied in the report. They concluded
with the view that operational losses news announcements cause the negative banking
performance within the banks. (Forces, June 2015)
 Raashid, Rasool and Raja projected a research based study that indicated some basic
relationship between the variables which defined the profitability measurements of the
banking sector. They mentioned the historical background of the existing banking sector
of Pakistan which highlighted the profit planning and proper evaluating the individual
role of their performances on to the sectorial performance. The experiential evidence had
been kept under consideration while focusing the data structure of Pakistan’s economic
outlook in order to evaluate the whole industrial performance. By means of getting the
consistent data, they focused on understanding the data theoretically and present that in a
way so that it can be measured easily through quantitative way. They considered
macroeconomic indicators from banks’ annual reports and highlighted some important

factors that determine the bank’s performances e.g.: return on assets (ROA), return on
equity (ROE), loan repayment time, Size of the bank, Earning Per Share (EPS) and
several other indications from the banks’ reports. Macroeconomic variables such as GDP
per Capita, Inflation and Inflation Rates had been focused. They also emphasized on
getting data from official sources such as State Bank of Pakistan (SBP), Federal Bureau
of Statistics (FBS) and Economic Survey of Pakistan (ESP). After critical analysis of
their variables, they concluded their study with the comments to appreciate the
governmental policies to provide a healthy and market compatible market environment
where the banking sectors would be flourish and ultimately they contribute towards the
economic performance of the country. They jointly provided gave brief necessary steps
that should be taken to run the banking industry towards prosperity. (Muhammad Raashid,
June 2015)
 Sáncheza, Palaciosa and Martínezb 2016- collectively studied the role of operational risk
management related issues that directly impact the bank’s performances and that relate
the bank’s reputational assessment throughout the industry. Essential factors have been
identified and discussed clearly in their research report. Some of the important events that
took place internationally and have affected worst in the banking sectors of the overall
countries have been discussed. Those important events included external fraudulent
activities (thefts and lack of proper security systems), internal fraudulent activities
(employees’ involvement in fraudulent activities and less assessable security systems and
unauthorized activities that are being done in the banks), malicious damages caused by
malicious activities such as badness or misconduct, less access to security checks for
clients and customers, labor practices and workplace safety measurements, disasters and

accidents recovering management and the technical failures due to technology. Moreover,
they also focused on the measurements of operational risks at international banking sector.
That focused on the systems of managing operational risks at managerial level. Such as
top-down management focus, bottom up management focus, internal measurements,
classical approach and the last focus on causal models are the practices that are being
performed to manage the operational risks at management levels in banking sectors in
overall international economies. Theoretically, they focused to do analysis through
Bayesian network for their statistical measurements. After evaluating through Bayesian
approach, the writers concluded their research with the views that individuals of the
banks have proper impact on the bank’s performances because they have proper
interactions with the customers, with internal affairs and ultimately that is linked to the
industrial performances. Moreover, they also concluded with their study that operational
risk data has been evaluated through different statistical analysis to get the result that
would be close to the perfection. They interestingly provided a good linkage between
industrial practices and the theoretical teachings by using Bayesian approach in their
research. (José Francisco Martínez-Sáncheza, 2016)
 Hanif and Khan 2017- gave the clear idea about the transformation of banking sector in
Pakistan from year 1990. They collectively studied the Boone Indication of banking
industry of Pakistan and also gave their impacts on the upcoming periods. Their study
paradigm involved to analyze the sample size of 24 commercial banks of Pakistan. Cost
Function under competitive environment, market share fluctuations and Trans log cost
function were main focus of discussions in the report that was officially published by
State Bank of Pakistan. In the conclusion, they stated to get focused in the competitive

environment where policies are being made to run control the monetary transmission.
Competition increases, so in this way the banks perform efficiently and their profitability.
(Mahmood ul Hassan Khan, July 2017)
 World Economic Forum-2017 explained the vital role of social, economic, political,
policy making and global perspectives of risk management systems. The report more
focused in the study of economic conditions in the US, European countries. They overall
focused on the socio-economic development of those countries. Some of the core
objectives to fulfill the credibility and reliability in every sector of the economy.
Geopolitics, building and strengthening the communities to operate businesses.
Accounting implications for new systems were kept in views. Challenges for political and
social reforms were also highlighted in depth. Western democracy could be in hazard due
to instability of political situations. These were key points to illustrate the role of risk
management at every level whether it is corporate, banking industry, social level or
political level. (Forum, 2017)
 Stojanović-2017 put efforts in studying the role of electronic equipment on banking
operations. The author effectively compared the variables of electronic banking (also
referred as e-banking) with that of risks associated with banks during banking operations.
All the facilitations included ATMs, mobile banking, telephone banking, debit cards and
credit cards have become vital in today’s era. It is very important to have clear agenda of
implementing those electronic means of banking. Similarly, risks associated with those
banking systems are also important to understand because that can be proved as risky to
burglary which is directly linked to the banks’ reputational risk and other risks.
(Stojanović, October 2017)

2.2 Methodology
2.2.1 Research Method
Qualitative data to be collected through interviews, non-numeric sources and
general views of the people that are directly or indirectly linked to our research based
analyses. While that of quantitative data, mostly secondary sources e.g: magazines,
newspapers, official statistical data and reports from officials that provide numeric based
data would be our source of data analysis. (Methodology, n.d.) We would be attempting
our research based analyses that are built upon both of the data types.
In generic terms, our topic of research is merely to know the acceptability of our
subject. By focusing on the outcome, conclusive research would be specifically required
to obtain the required outcome in our research project. Conclusive research would be
done in order to attain the required results after evaluating the hypotheses. This is to be
compiled as structured and designed by using common language. (Methodology, n.d.)
Descriptive research is the suitable research type of our project report which is for
educational purpose and it is stated as to analyze the content of the subject and finding
the results based upon historic events. (Siege, n.d.)
In this project report we would be working on data collection by utilizing both
quantitative data and qualitative data. Furthermore, the data collected would be further
analyzed and examined in order to getting the elaborated outcome. That outcome would
be assessing the reasoning of banking performance and the role of management in banks’
operational activities. Related newspaper articles, journals, magazines, survey reports,

financial reports, official announcements, and many other related data would be
expectedly collected from reliable sources and official sources.
2.2.2 Research Questions
Some of the research questions to be focused are as under:
1. Does management have impacts on goodwill of the bank?
2. Does bank’s reputation is totally dependent upon its management?
3. Does political changes affects the performances of management?
4. Does political fluctuations affects the bank’s reputational risks?
5. Does stock market performance also impacts on banks’ goodwill and repute?
6. Does banking industry have proper systematic approach to manage reputational risk?
After evaluating the above questions and looking for the suitable answers to these questions,
we would be able to achieve our core objectives and necessary goals would be achieved. We also
have set questionnaire which has been attached with the end chapter of description (Chapter 4) in
order to have a proper understanding of our findings and results oriented effects in banking
industry of Pakistan.

Chapter 3
3. Authorities in Banking Sector of Pakistan
A number of regulators and central controlling institutions are necessary for the proper
systematic and proper implementation of policies. The presences of these institutions secure the
sector and are responsible for regulating and check & balance the area’s or sector’s activities.
Any business that is linked to production, division, supplying and any other numerous nature
must be having a centralized authentic controlling to which that business should be reporting its
activities. Similarly, there are some regulators in banking and finance industry to which the
banks and financial institutions are accountable to present their progress for the purpose of
assuring good governance.
3.1Financial Regulatory Authorities in Pakistan
Here are the core regulators and policy implementing institutions that are functioning
effectively in Pakistan:
i. State Bank of Pakistan (SBP)
Introduction: State Bank of Pakistan or SBP was founded in 1948 as a centralized
authoritarian of banking and economic system of Pakistan. It has the distinctive
responsibility and power in the country.
Responsibilities: The SBP focuses on implementing their policies through proper
inspection and instruction that have been carried through important acts. The SBP follows the
provisions and regulations that are mentioned in the Banking Companies Ordinance-1962.
Moreover, the State Bank monitors the whole sector through legislations including; the

Bank’s Nationalization Act-1974, State Bank of Pakistan Act-1956, the Financial Institutions
(Recovery of Finances) Ordinance-2001, Companies Ordinance-1984 and Statutory
Regulatory Orders (SROs). All these lawmaking regulations are concerned with the
functioning of banking sector of Pakistan. SBP also established a department named as
‘Banking Policy & Regulation Department’ which was assigned to take the responsibility of
proper surveillance of banking industry and making it possible to adapt international
practices in banking industry to make the banking sector as compatible and comparable with
international standardization. Other departments are also established to be involved with SBP
to control their associated departments of the financial and banking industry in Pakistan.
The SBP is also tangled in establishing the innovation & upgradation through proper
adaption of foreign banking systems. The SBP authorizes the protection of consumers’
accounts, deposits and other legal rights that are essential for the proceedings in a bank.
Prudential Regulations (PR) for different sectors also introduced by the SBP to contribute for
corporate world, Small and Medium Enterprises (SMEs) and consumer financing in order to
defend the rights of individuals and institutions collectively. Banking industry ought to
follow the Prudential Regulations so that the banks fulfill every legal requirement that is
essential requirement to apply the governance. Every branch of every bank must have to
regularize the Prudential Regulations in their branches. The licensing policies for banks have
been updated over the passage of time, which also supports the banks and non-bank
institutions.

ii. Securities and Exchange Commission of Pakistan (SECP)
Introduction: The regulatory authority that was established under the enactment of the
Securities and Exchange Commission of Pakistan Act 1997 on 1st January, 1999 with the
enforcement of regulations. Headquartered in Islamabad
Responsibilities: The SECP has major role of contributing the financial sector of
Pakistan with the administrative power and also the power of financial check and balance
among the national financial institutions. Companies get proper registration with SECP to
ensure their credibility and solvency in the sectors that ultimately provides the positive image
of the stakeholders of the companies. Important financial regulations for corporate sectors are
decided and regulated by SECP.
iii. National Accountability Bureau (NAB)
Introduction: NAB is an anti-corruption organization with the vision of being efficient,
credible and effective enough for making the society corruption-free and setting the
environment as free from any sort of financial dishonesty and exploitation. There are regional
offices of NAB in big cities like Islamabad, Lahore, Karachi, Quetta, Peshawar, Multan and
Rawalpindi. The NAB follows constitutions that were established under the ordinance of
National Accountability Ordinance (NAO). (NAB)
Responsibilities: There are various operations that are conducted under NAB within the
country including; prosecution, investigations and recoveries of accounts. The main
responsibility of NAB is to make the political, social and financial environments as free from
any exploitation that can harm the dignity of country’s financial sector. The major
contribution of NAB is to identify and capture those entities which tend to be the responsible

for the harming the Public Finance accounts and National Treasury accounts because these
are the major sources of Pakistan’s economic structure that run the country’s monetary plans.
Also, their duties involve identifying the money-trails against perpetrators or defaulters.
Moreover, NAB has direct approach to different level of courts in which cases are registered
and preceded for further hearings and NAB’s duty is to prosecute those trials.
iv. Banking Mohtasib of Pakistan
Introduction: A very essential authority in Pakistan which provides justice and secures
the rights of customers. The Banking Mohtasib is centralized at Karachi secretariat and
having branches in different cities of Pakistan. The set-up was established in May 2005 by
the efforts of Government of Pakistan under the influence to solve clashes between the banks
and their customers. The Mohtasib is appointed by the President of Pakistan. (Education)
Responsibilities: The major responsibilities of the Mohtasib including to provide
banking freedom to the nationals and giving them rights to complain the incorrect banking
practices that are being faced by them. The Banking Mohtasib plays the role of being a
neutral and justice providing entity between both the parties (banker and customer) and also
assures to have done proper righteousness among them. Their representatives in different
cities and different locations handle the cases that are forwarded by customers of the bank
about any of the incorrect activities (misconduct of the bankers, cash mismanagement,
incorrect policy implementations, and bank deceiving) and many other such circumstances
that hurt the agreeableness between the bank and the customer. Mohtasib initially allows the
bank to resolve the issues within 45 days, later on if the issues are not resolved, then the
matters are taken to the Banking Mohtasib by following the steps that are defined by in their
(Mohtasib) official website. (Mohtasib)

v. World Trade Organization (WTO)
Introduction: Previously it was called as the General Agreement on Trade and Tariff
(GATT) which is now upgraded and by following the new regulations and negotiations
between the nations. Pakistan has become one of the members of WTO since 1 January, 1995
for the target of achieving exports equal to $18 Billion by 2008, and formerly member of
GATT since 30 July, 1948. Since Pakistan has opened the boundaries for other countries for
trading and different transactional relationships, there was required a trading organization
that fulfills the gap of agreements of trade settlements between countries. Therefore, the
WTO controls trading and economic activities between different countries on an international
scale. (Khatoon, January 2010)
Responsibilities: The WTO is responsible for creating impact on Pakistan’s economic
outlook by creating linkages in the shape of agreements between Pakistan and other
countries. WTO also plays its part in managing the rules and regulations of international
banks with the collaboration of SBP. SBP joined the commitments of WTO and collectively
started looking after the operating activities of international banks’ branches in Pakistan with
effective from 31December 1997. Provided that the international banks should have limited
number of branches i.e. maximum 3 branches only. The new banks would be permitted by
certain circumstances which include abiding by the local laws and regulations.
vi. Pakistan Credit Rating Agency (PACRA)
Introduction: The organization that was established as a result of joint agreement
between International Finance Corporation (IFC), Fitch Ratings and Lahore Stock Exchange
(LSE) on June 15, 1994. PACRA is a joint venture organization that was founded for the
purpose of assessing the performances of financial institutions that are running in Pakistan.

PACRA is the first agency that had been assigned with the responsibility to measure the
credibility of financial institutions with assessment of various important dimensions.
Moreover, PACRA is a joint venture of different organizations and authorities with the
shareholding as; Fitch (44.45%), LSE (33.33%) and IFC (22.22%). It is an accomplishment
of PACRA that it is one of the establishing members of Association of Credit Rating
Agencies in Asia (ACRAA).
Responsibilities: Their core objectives are to establish a system of purity and
transparency in their systems to rank the institutions according to their accurate performance
standards. PACRA’s core products (in terms of services) are including; entity rating,
financial instrument rating, financial structure ratings, insurer financial strength (IFS) rating,
project grading, funds stability rating, star ranking/ fund performance ranking, capital
protection rating (CPR), asset manager rating and security agency grading. (PACRA)
3.2Financial Structure of Pakistan
Pakistani economy consists of many financial institutions that are under operations with
the effective laws and regulations that are already defined. A large number of banks and financial
institutions are working in Pakistan to support the economic plans of the country.
i. Commercial Banks
According to proper definition, commercial banks are categorized as the types of banks
which accept deposits, generate businesses (income) by utilizing those deposits, give loans and
mortgages, offer checking accounts services and other financial services to their customers.
(Investopedia). In a brief, commercial bank plays vital role and bridge the financial transaction

gap between the individuals, businesses and corporations locally and internationally. They
generate income through the difference of lending and collecting back rates (known as spread).
ii. IslamicBanks
Islamic banks are those banks that perform many of the functions similar to commercial
banks but there is difference of rules and regulations in the nature of Islamic banks. Islamic
banks follow the principles of Islam which are totally based upon the Islamic teachings and
Islamic laws. The basic difference between Islamic banking and commercial banking is the
sharing of profit and loss as well as the collection of interest based financial transactions
(payments) by lenders and investors. (Investopedia, Islamic Banking)
iii. Development Financial Institutions (FDIs)
The financial institutions that merely focus on personal lending and focuses on business
development projects which require some amount of investments through proper financial
institution. It is also referred as ‘Community Development Finance Institutions (CDFIs)’ yet the
functions are same i.e.: to provide funding to private sectors to meet their requirements.
(Investopedia, Development Financial Institutions). These institutions also provide investment
instruments that are considerable contain high risks, and are supported by governmental
institutions to provide stability to the economy. Hence, these institutions are crucial in
development of economic activities through investing activities. (Wikipedia, June 2017)
iv. MicrofinanceBanks
Also referred as ‘microcredit’ that provides the banking services to those who are low-
income or unemployed individuals or groups. Start-up projects and any other entrepreneurial
ideas are required for these banks to fulfill their initial financial requirements. In a criteria set by
the US economy, the Microfinance banks’ lending limit varies between $100 and $25000
depends upon the nature and requirements of the investment projects. (Investopedia,

Microfinance Banks). There are also microfinance banks in Pakistan that re completely working
under same circumstances and same regulations. These businesses are comparatively ethically
better and safety measures (in terms of finances) are evaluated before investing.
v. Non-Banking FinanceCompanies (NBFCs)
The financial companies that do not have any banking laws and are not ought to follow
banking regulations but they conduct banking practices. NBFCs do not hold banking license,
they do not offer cheques to their clients and they don’t take deposits from their clients.
Generally, these banks provide facilitations like retirement plans, credit expeditions, money
market instruments and underwriting activities. In Pakistan, these banks are controlled under
official regulatory bodies like SECP and SBP. They invest money in money markets, equity
markets, currency exchanges and commodities markets to generate profits. (Investopedia,
NBFCs)
vi. Pakistan Stock Exchange
Stock exchange is a market in which the shares are traded between issuers and borrowers
for the core purpose of fulfilling their requirements. Companies get themselves registered in the
exchanges for the purpose of generating capital from the market and investor purchase the shares
which are issued by those companies, and eventually they become a part of the company.
Pakistan Stock Exchange (PSX) has headquartered in Karachi and other locations are Lahore and
Islamabad. Banks and non-banks institutions are also listed in these stock markets for the prime
purpose to generate capital and ultimately they can proceed to fulfill their requirements. PSX is a
market where the companies and banks get their prominent image through different financial
analysis which makes them reputable.

Banks that are working under supervision of State Bank of Pakistan
Scheduled Banks 37
Development Financial Institutions 6
Microfinance Banks 2
Islamic Bank 13
Composition of Commercial Banks in Pakistan
Nationalized Banks 3
Privatized Banks 3
Private Sector Banks 15
Foreign Banks 14
Provincial Scheduled Banks 2
Specialized Banks 4
Source: State Bank of Pakistan official website data (Pakistan)

3.3 PresentSituation of Pakistan
Pakistan was ranked 102nd among 113 countries by the World Justice Project in terms of
the Rule of Law that was being experienced by the citizens of the country. The survey was
conducted by the Rule of Law in 2015 but the recent report indicates demolishing situation of
Pakistan’s governance. In 2016, the survey report conducted by World Justice Project (WJP)
showed that Pakistan’s ranking had been decreasing as compared with other South Asian
countries. Pakistan stood at 106th, Sri Lanka 68th, India 66th and Nepal remained highest with 63rd
ranking in the Rule of Law ranking. These stats also demonstrate the whole picture of the socio-
economic progress of Pakistan. (Manzoor, October 2016).
Therefore, a lot of efforts in terms of proper actual progress are required by the support of
governmental policies that will tackle the international defamation risk factors. Similarly,
political instability, truthful leadership should be emerged and other factors that are essential for
the economic development must be planned properly.
3.4Linkage of State Bank of Pakistan withOther Institutions in Pakistan
The state Bank of Pakistan collaboratively attempts to do its operational activities with
other institutions which include all types of banks (commercial, Islamic, investment banks) to
regulate their policies and their operative activities. SBP also plays important part in developing
the Pakistani structure of law and orders for financial stability, therefore, SBP also implement
policies related to money flow (monetary policy) as well as the control over inflation rates and
factors affecting in fluctuations of inflation and inflationary activities.

STATE
BANK OF
PAKISTAN
(SBP)
Commercial
Banks
Islamic
Banks
Microfinance
Banks
DFIs
NBFIs
PACRASECP MOHTASIB
NAB

The above diagram illustrates the connection between State Bank with other organizations that
include; relationship with banks, non-banks and other financial institutions as well as the
relationship of SBP with other regulatory and rating bodies that are active in Pakistan to regulate
in the sector. The upper part (square) indicates the association of banks and non-banks and
financial institutions which are to be operated under the instructions of SBP and SBP regulations.
With the instructions and regulations defined by the SBP, banks and non-bank institutions are
ought to follow the guidelines that are delivered by the central bank. This involves two ways
communication between the banks (and other institutions) and the central bank SBP and the
other between SBP and regulatory authorities that are working in Pakistan for different purposes
to provide safety, surety, evading corrupt activities and other financial securities.
The upper portion of the diagram (dotted square) indicating the foremost importance of
SBP while regulating the banks (including conventional and Islamic), Non-bank financial
institutions and other financial institutions under its supervision. The SBP plays vital part in
development and standardize the circle between the central bank as well as the institutions. The
institutes and banks provide imperative updates to the central bank (SBP) for the purpose of
proper check and balance of everything in the industry because every transaction must be audited
and approved after proper reconciliation by the banks and SBP. Moreover, the SBP is also
responsible for settlement of inflation rate, lending rate, saving rate and other essential
transactional rates are being determined by the SBP. Importantly, the SBP is not answerable for
the individual banks and institutions culture for maintaining their accountability but SBP plays
its part for creating awareness about recent and updated policies which tend to change over
specific period of time.

3.5Role of State Bankof Pakistan with respect
As we can illustrate through the previous diagram that the SBP being a central authority
of banking industry practices similar roles as other countries’ central banks perform in the world.
On that way, the SBP has two major functions defined as primary functions as well as secondary
functions. (SBP)
a. Primary Functions: That involves traditional types of functions that are being
performed by the central bank involves; issuance of currency notes in the economy,
supervising and regulating the banking system for the provisions of financial system
and monetary policy management and implementations (to the Government). Also,
SBP being a central bank has right to protect the banks from financial crisis and
provide them the loans when they require, this feature or function of SBP (or any
other central bank) is known as ‘the lender of last resort’.
b. Secondary Functions: Involving some other functions of SBP for being a central
authority include; to act like an agency in government or public accounts (to manage
the public debt), managing foreign currency exchange rates, proposing financial
policies matters to the government and lastly to sustain the progressive relationship
with international financial institutions for better understanding to be developed
between Pakistan and other countries’ financial institutions. Also, the SBP is
responsible for issuing government bonds to raise funds for different purposes that are
defined by the government officials under the management of SBP.

The central bank in Pakistan also has some functions that are thought to be non-
traditional functions but are essential to be performed. Those functions include; developing a
proper financial agenda for the country’s fiscal and monetary policies, executing the procedure
of institutionalization of different savings and investment schemes, providing proper agenda for
training the bankers and other bank staff and also providing credits facilitation to the prioritized
sectors. Additionally, since past decade, being a part of an Islamic Republic state SBP is playing
its active role in realizing the true Islamic concepts and practices in the banking industry.
Since, the central bank is the main body of the whole banking sector therefore they also
build up connections with other official regulatory authorities for the effectiveness of good
governance in the industry. State Bank of Pakistan consequently, link their roles and
responsibilities with other government investigating and assessment officials that include FIA,
PACRA, NAB, SECP and Banking Mohtasib. State Bank is answerable to these officials in order
to maintain the supremacy and uniqueness in handling the banking affairs in the industry. There
are some major rights to accountability which is merely done by the SBP only because it has
proper authorities to do so (being sole administrator of the industry): (SBP)
i. Liquidity supervision: under the supervision of SBP being a central bank of the country,
the SBP is responsible to define the credit as well as monetary policy in order to
formulate the system in such a way that the required targets and achievable targets can be
evaluated effectively. SPB collaborates with the government’s officials to map-out the
achievable growth targets by keeping in the assessments of inflation rates. Liquidity
management by SBP has being supervising through proper flow of credit systems in the
sector which was already set and upgraded in the late 1980s. Furthermore, a reserve cash
monitoring system was developed in which the banks were authorized to put a defined

amount of cash as reserve in the SBP so that they can utilize that as a standby amount in
the hours of need. In these ways, the SBP regulates the banks and mandate the banks to
sustain their financial ratios that would be more effective for the monetary flow.
ii. To ensure the steadfastness of Financial System: Another core responsibility that SPB
performs is to make sure the steady financial system of the economy through managing
different indicators that determine the financial performance of the economy. State Bank
of Pakistan attempts those challenges through some methods.
a. Supervising and Regulating- One of the main reasons for soundness in financial
systems of the banks are the interests of depositors with which they deposit their cash in
the banks for the sake of getting some paybacks in upcoming future periods. Therefore,
SBP securitize the safe depositing systems to have an effective system of financial
stability. Due to improvements in technology and rapid advancements in systems it has
become more challenging for SBP to supervise in the current era of technology. Due to
this upgradation of system, the system has become more complex due to which strategic
approaches are the need of today’s banking system. In this regards, the systems
(including softwares) which were out-dated has been replaced and updated with the new
ones. Banking transactions have been keeping under supervision by the banks
individually to report the central banks. In these ways, SBP take the on-site and off-site
inspections to check and balance the activities that are done within the premises of SBP
and outside the premises so that they can be informed later on. Another important in this
perspective is that the proper guidelines have been prescribed to manage credit risks
related to long-term and short terms. Proper classification of these branches as credit
management for long-term and short-terms have been prescribed to cope with the

regulatory framework and exposure to limitations for using bank accounts and bank
transactions. The regulations under which these activities are defined and controlled for
the banks are called as ‘Prudential Regulations’.
b. Management of Exchange Rates: Another fundamental tool for managing the financial
system of Pakistan under State Bank of Pakistan’s supervision is to manage the currency
exchange rates between Pakistan with other countries. This is being done under the
principles defined in ‘The Foreign Exchange Act-1947’. The understanding exchange
rates effect is essential because of its direct impact upon Pakistan’s payments and receipts
with other countries in other currencies. Balance of payments (refers to the cash balance
which is done through foreign currencies) are directly impacted upon changing the
exchange rates. Pakistan’s imports and exports of goods are done while settlement of
exchange rates. Moreover, international banks and local banks with foreign currency
accounts are also affected through exchange rates effect. A number of factors are
affecting the exchange rates of Pakistan’s currency rate including; exports and imports,
exchange rates fluctuation management, market-rate flotation, reserves in foreign
countries and many other factors. Two-tier exchange system for the currencies was
introduced in 1998 after nuclear experiment. After understanding the role of exchange
rate effect and constituting many policies for this, SBP built-up a department which
specifically has been assigned to manage the rates of currencies with respect to Pakistani
Rupees, therefore, Foreign Exchange Dealing Room for this purpose has been settled at
the location of Central Directorate of State Bank of Pakistan (Karachi). It would be also
interesting to note that these days Pakistani currency’s power is determined by comparing

it with the United States Dollar USD, but previously before 1971, Pakistani Rupee was
determined as compared it with Pound Sterling’s value.
c. Role as an effective Developer: SBP being a central bank of the economy plays its core
role in development of not only monetary policies and monetary flow but also towards
the strategic goals of the country’s progression. Likewise, SBP evaluated the core
requirements of healthy financial system of Pakistan and established a system in which
the SBP’s described plans and policies are implemented. Economic progress at macro
level is also important to realize while managing the financial aspects of the economic
policies. By keeping in these views, SBP has been playing its important part in the
attainments of stock markets of Pakistan. Likewise, for the development of good
credibility between financial institutions and investors SBP established a financial
intermediary between both of the entities which can be defined as ‘Development
Financial Institutions (DFIs)’. Under the settlement of priorities, DFIs take the money
from investors and invest in different projects and purposes under the supervision and
directions that are defined by State Bank of Pakistan in order to ensure the reliability of
usage (fair usage policies).
In these circumstances, the State Bank of Pakistan has been establishing proper
infrastructure since 1948that would be more suitable for every entity in Pakistan’s economy. Due
to advancement in banking systems and other advancements that create complexities, SBP has
put forward a policy for all the commercial banks in Pakistan to introduce Islamic branches in
the country which would behaving totally different from conventional operations.

3.6State Bank of Pakistan Departmentalization Overview
State Bank of Pakistan being a sole entity in regulation of banking sector of the country
has functionalized its different roles and objectives with the help of separating their duties in
discrete departments. SBP has channelized the functional role in different and discrete
departments so that the accuracy of tasks and effectiveness to achieve future goals would be
easily attainable rather than facing the complexities in operational activities. Due to complex
financial structure of economy SBP solely cannot control all necessary activities by small
structure or limited access only. Therefore, workloads ought to transfer from sole management to
different departments for the purpose effective results in the form of positive economic
indications. With the passage of time, the requirements for effective banking industry
management also become more complex due to availability of much data access and its
manipulation. In this way, the SBP could not only manage the banking industry like it had been
doing before in earlier decades.
The table below indicates a clear illustration of categorization and departments that are
working under the supervision of State Bank of Pakistan. Different functional groups according
to their discrete features and branch of operations were established and those groups have also
developed separated departments to have a strong grip on the core objectives.
(Pakistan, Departments)

State Bank of Pakistan Functional
Groups
Departments under Groups
Banking Policy & Regulation Group  Banking Policy and Regulation Department
 Exchange Policy Department
Banking Supervising Group
 Banking Inspection Department-I
 Banking Inspection Department-II
 Banking Conduct and Consumer Protection
Department
 Off-Site Supervision & Enforcement
Department
 Financial Stability Department
Development Finance group
 Islamic Banking Department
 Agricultural Credit and Microfinance
Department
 Financial Inclusion
Financial Market and Reserve Group
 Domestic Market and Monetary
Management Department
 International Markets and Investments
Department
Financial Resource Management  Finance Department
 Risk Management Department
 Treasury Operations Department

Governor Office
 External Relations Department
 Office of the Corporate Secretary
 Internal Audit and Compliance Department
Human Resources  Human Resources Department
Chief Economic Advisor
 Monetary Policy Department
 Research Department
 Economic Policy Review Department
 Statistics and Data Warehouse Department
 Library
Operations
 Information Technology Strategy and
Project Management Department
 Information Systems Department
 Information Technology Department
 Payment Systems Department
 Legal Services Department
 Museum and Art Gallery Department
 Strategic Planning Department

i.
3.8 Collaborative Functioning of International Institutions
By keeping under consideration about these objectives and purposes to solve the financial
analytical problems, SBP has developed associations with four (and more) internationally
renowned financial institutions. Each organization has its discrete importance and functional role
in the financial area of different economies. State Bank of Pakistan collaboratively achieving its
strategically financial and management (administrative) objectives in the country with the
collaboration of four major banks, institutions and organizations:
Banking
Department
Managing
Conventional
and Islamic
Banking
Policies and
Regulatory
activities
Domestic &
Money Market
Management
Its objectives
including
management
of monetary
policies and
Government
debts. Also
Foreign
Exchange
Research
Department
Proper
checking the
updated
policies,
structure and
reforms after
intervals
Financial
Department
Maintenance
of accounts
of different
sectors in
Government
officials
STATE BANK OF
PAKISTAN

a. International Monetary Fund (IMF)
b. Asian Development Bank (ADB)
c. United Nations Development Fund (UNDF)
d. World Bank (WB)
International Monetary Fund (IMF)
The organization was established since 1945 and emerged as a renowned financial
services provider for worldwide countries especially to developing countries including
Pakistan. The IMF has emerged after the core objectives of fulfilling financial and
technical assistances that are required by the countries to sustain their economic outlook.
Developing countries like Pakistan get assistances from IMF in terms of financial grants
and loans for pre-defined objectives. Worldly maintenance of monetary policies is the
core objective of IMF. Pakistan also takes loans from IMF and governmental officials of
the time request for the assistance for granting the amount. Therefore, the IMF ought to
impose loan terms and conditions because their money is to be utilized in pre-defined
purposes. Additionally, the IMF also supervises the proper check and balance of
monetary flow in countries. They perform different surveying activities and other data
collection methods to collect the meaningful outcome for strategic decision making roles.
Pakistani governments are merely dependent upon the association and collaborative
approvals of foreign agencies like IMF. (UKEssays, March 2015)
There is also dark side of IMF loans and grants for receiving nations because there is
nothing free or granted without any cost-free policies. IMF implements terms and
conditions to the receiving countries of the loans they grant. It would be critical to know
that the conditions merely are not as simple to be accepted because those terms and

conditions are including the management of inflation rate most importantly. Usually, IMF
suggests the Pakistani government to raise the inflation rate, taxation and duties to raise
the money for the payback of loans. These conditions are difficult for the nations because
they have to pay collaboratively the loan amount plus the interest on that loan to IMF. In
another view, after 2007 the Pakistani federal government became purely democratic in
which the ministers for their own interest took loan amounts from IMF in the name of
public project and fled-away that money. Countries have to sign up the IMF Articles of
Agreement which are so called as the basic requirements for attaining loans from IMF for
the purpose of economic reforms. Due to poor recovery policies and lack of government
interests, the country has become more dependent upon foreign financial aids and grants
to meet its public debts. Therefore, we can understand that loan amount by IMF is merely
providing adverse effects rather than prosperity to the economy.
a. Asian Development Bank (ADB)
ADB was developed in early 1960s in collaboration with Asian countries with the
objectives to nurture the economic growth for poor and weak countries which might not
be having big purchasing powers for economic establishment. The origin took place in
Philippines where 31 members from different nations took part in the first ever meet-up.
Japanese national Takeshi Watanabe became President of ADB. With the views to build
up strong financial capabilities among poor countries, ADB has intentions to support the
right and needy nationals who are not be able to survive for their daily expenses. (Bank)
ADB collaboratively took initiatives with Pakistani officials to jointly take eradicate
worst social impacts and supporting financially. The ADB took an initiative in Pakistan

to support the government for improvement in connectivity, productivity and linkage to
the market performances with the written form of strategies. The Country Partnership
Strategy (CPS) in commemoration with Pakistan had been signed to improve the
infrastructure through providing assistance to different sectors at small scales.
On average, around 1.2 billion US$ interim based investments packages for annual
systems had been approved by ADB for Pakistan since 2015 till 2019 after signing up the
agreements for partnering. The major focus was to assist six basic sectors of Pakistan that
including energy sector, agriculture, natural resources with rural development, transport,
urban sector infrastructure & water management and most importantly the finance sector
reforms. With the efficient utilization of cash management systems the ADB urged to
train the private sectors towards their training for earning sources development.
Especially the training of rural population became important with the hope to tackle the
current economic situations. Different project based investments have been done in recent
years and also they have proper planning for further implementations till 2020 as per
agreements and policies. (Bank A. D.)
b. United Nations Development Fund (UNDF)
It is a subsidiary of United Nations which specially focuses on development of capital
and investment nature at micro levels. UNDF mainly focuses on poor countries
(including African countries and some Asian countries) to invest in these countries so
that they can generate enough cash requirement to support their economies as well as
their households. The UNDF (formerly known as UNCDF) began to support least 48
countries of the world in early 1974. UNDF conferred with governmental officials to

introduce UNDF in their countries to train the people and implement welfare benefited
projects. (Wikipedia, United Nation Capital Development Fund, June 2017) United
Nation’s (UN) capital agency acts as a direct role player for supporting financially to the
initiatives.
A huge crunch of social crisis in the country are being focused under the supervision of
UNDF through which they take steps to solve those problems through collaborative
involvement of nations as well as other NGOs. In most recent years UNDF provided the
financial assistant to solve the most important issues including; water crisis, disability
livelihood projects, drinking water project, climate change awareness programs,
understanding cultural diversity related issues, collaborative role of UNDP & USAID to
solve FATA related economic issues and many other educational as well as training
related programs have been conducted. UNDP supports Pakistan to develop the youth of
the country and providing them with technical expertise. Technical expertise is provided
to educate the young people for data utilization by collecting the right data and good
quality data collection. They use that data to manage the social issues and looking for the
optimal solutions that have already been implemented in other countries. (Pakistan U. ,
2017)
c. World Bank
World Bank’s history began with the changing economic environment of worldly
economies before 70 years. It was founded in 1944. After struggling in improvements of
systems and solving problems of different countries and nations, World Bank Group has
emerged to become world’s largest development institution. The World Bank Group

works with other Governmental and non-governmental organizations to cope the major
issues that are being faced by the nationals of specific country.
World Bank Group also collaboratively works with the International Monetary Fund to
provide monetary solutions to the countries which are in need of them and want to grow
their economic prosperity. Worldwide (mainly in developing countries) different
manufacturing projects and social development projects are controlled by the World
Bank. One big plus point for World Bank is they strategically implement the knowledge
sharing programs, in order to train the youth and educated populations of the world to
make them literate. Global changes are highly considered under developmental programs
of World Bank and they strategically join other groups and governments to implement
‘Global Practices’ in different sectors, regions and nations. (Group, 2014)
World Banks plays important role in functioning of rural regions of Pakistan. They lend
to people for specific period of time and required to fulfill particular terms and
conditions. World Bank supportively invest in water saving projects, water purifying
projects, electricity projects, educational projects, small and medium scale investments
required projects, social projects and several other sectors’ project for the unemployed
house women to play effective role in cultivating their fields of crops as well as the field
of economic cycles. Just like ADB, World Bank has also consulted through Country
Partnership Strategy (CPS) program with Pakistan. Through this collaboration, they
urged to grow the potentially transformational areas and attention gaining sectors of
Pakistan. Their core function for Pakistan is to focus of so called 4E’s concept which
includes; Economy, Energy, Education and Extremism for the forthcoming vision by
2025. Pakistan’s renowned income supporting program “Benazir Income Supporting

Program” in which the poorest people (almost 22 million) are supported financially, was
actually taken as initiative in collaboration with the World Bank Group. They circulate
the monthly income to over 32 districts of Pakistan. Moreover, the conflicting areas of
Pakistan (FATA and KP) are also being covered by World Bank Group’s efforts through
Multi-Donor Trust Fund program. (Bank T. W., April 2014)
Another important linking factor that the State Bank of Pakistan comprehends, it creates
linkages between international financial regulators and international financial institutions (IFIs).
In order to sustain the monetary policy in confronted global environment SBP has developed
connections externally with other major institutions and associations which create impact in
managing the monetary flow of cash and other activities. Similarly, the inflation control and
monetary policy management decisions for future implications are initially properly planned by
SBP
International
Monetary
Fund
Asian
Development
Bank
United Nations
Development
Fund
World
Bank

SBP in collaboration with International Monetary Fund (IMF). In these ways, Pakistan’s
financial sector is supported through national institutions as well as international renowned
institutions. The country’s sectors are merely interests for not only the local governments but
also for international governments and institutions.

Banking Industry of Pakistan-Outlook on Reputational Risk

Banking Industry of Pakistan-Outlook on Reputational Risk

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