Overview
The History of Pakistan began violently in the 1940s under the
British Raj. The country was granted independence August 14, 1947. Two
domestic Banks, the Habib Bank Ltd. and the Australasia Bank remained
open, preceding the State Bank of Pakistan, established July 1, 1948. The
State Bank was hastily set up as the central bank when the Indian capital
and expertise left along with most of the branch offices, and employees
of Indian Banks and industrial concerns . The nascent state was left with
only the bare minimum of financial reserves, an untrained shell of an
army, a two ship navy, and two squadrons of what had been the Royal Indian
Air Force. The 19 remaining foreign banks left only skeleton staff and
branch offices. Pakistan was on her own as Great Britain fell into
recession, and hostile neighbors began to assert themselves in South Asia.
The Americans were focused elsewhere, in Europe and Korea, while the
weakened Great Britain was able to offer only token support for fear of
alienating India . Pakistan was alone in the world. Only Islam held its
peoples together.
Pakistan was the first proclaimed Islamic Republic. All social
interaction, institutions, politics, commerce, and banking are influenced
by the Holy Quran, and the teachings of the Prophet. A process of
Islamization of all strata of Pakistani life was begun under the military
dictatorship of General Mohammad Zia ul-Haq in 1977. The process has
outlived his government, and continued for the past ten years. Islam is
practiced by 95% of the population and serves as the unifying element in
Pakistan, and as a source of tension in relating to the outside world.
Islam is the key to understanding Pakistan, and its people. The people
represent a wide variety of ethnicities, and nationalities with a history
of enmity and mistrust. The 1971 war with India was a product of this
enmity and geography, resulting in further partition of the Indian
subcontinent and the creation of Bangladesh. . The political spectrum is
dominated by the Pakistan Muslim League, PLM, and the Pakistan People's
Party, (PPP), and a variety of Muslim orthodox parties These parties
wield tremendous power and influence in the Senate, National Assembly, and
the regional assemblies. Islamization has spread to the economy,
especially the banking sector which now operates virtually interest free.
The combination of these influences has produced a modern Pakistan as
conflicted today, as in any time in its history, with only its faith
holding the nation together.
The People of Pakistan are ethnically diverse. " Pakhtuns, Baloch,
Punjabis, and Sindhis are all Muslim, yet they have diverse cultural
traditions and speak different languages. Ethnic, regional, and--above
all--family loyalties figure far more prominently for the average
individual than do national loyalties ." Nationalistic Islam has been
introduced by the Federal government, particularly under the military
junta of 1977-88, but the process has continued under the current
government of Mohammed Nawaz Sharif, and to a lesser extent under the
Bhutto governments. The ethnic groups are generally regional in the
provinces, but there is significant ethnic mixing which contributes to
social and political tension as each of the Pakistani provinces seeks some
measure of autonomy. Punjabis, are the largest ethnic group, dominate the
federal government and military, and have voice in all of the provinces.
However, they do not have the numbers or political power to suppress the
other ethnic groups. This allows other political issues to enter the
national agenda. Women's rights, and the Green movement have begun to
assert themselves, even here. All of Pakistan's social tensions and
political problems are exacerbated by a population growing beyond national
capacity, urbanization, and the corresponding breakdown in traditional
social values which has also been witnessed in many western countries.
The population of Pakistan increased 9.5% from 1990 to 1995. The
World Bank expects this trend to continue unabated over the next forty
years. The 1995 population of nearly 130 million is projected to reach
148 million by the year 2000. The Pakistani government, and the World
Bank peg the population at 137 million excluding 3.9 million residents of
Pakistani administered Janmu and Kashmir provinces, and more than 1.2
million Afghan refugees. The estimated population for 1997 is in line with
World Bank predictions which did not separate disputed province
populations or refugees from its population estimates. If the world Bank
population model holds Pakistan will have 167 million people in 2005, 187
million in 2010, and 274 million by 2035, making an already dire situation
far worse, further destabilizing the regime, and the region . Consider
that 34% of the population is urban, and that 28% of those people live in
conditions of abject poverty and you have a recipe for disaster. The
population density is ranked second in the world, 443.1 people per square
mile. Only 38% of the country is literate, and the education system has
been in decline for many years. Conditions in South Asia have the
potential to get far worse before they get better. As of May 1997
Pakistan, which the World Bank classifies as low income economy, is a
declared and recognized nuclear power engaged in an arms race with India
while engaged in a 41 year territorial dispute with the world's largest
democracy.
As the government embarks on its Islamization program it has begun
to assert an even more significant influence on Pakistani life. In the
process however, the government has also become more responsible and
responsive to the people. This is a true democracy in fact as well as
name since the fall of the Zia ul-Haq dictatorship. The 1973 constitution
was restored, and elected government, though extraordinarily partisan has
continued for ten years. The parliament is overwhelmingly Muslim, though
ten seats of 227 are reserved for religious minorities, and 20 are
reserved for women, It is assumed that no minorities or women would be
elected to parliament otherwise. The Prime Minister enjoys the full rights
and responsibilities of a head of government under the British model.
Pakistan is a Federal Democracy with a bicameral Legislature. The upper
House is the Senate, while the National Assembly serves as the lower
house. The government is formed by the majority leader of the Senate at
the direction of the President. The President can also remove the Prime
minister and call for new elections. This was most recently done in
1996. The Annual Budget for FY 1995/96 was $14 Billion including capital
expenditures of $2.8 Billion. The debt service is consuming as much as
70% of revenues. The Debt in 1997 was a staggering $27 Billion . The
government has recently announced a series of reforms aimed at
redistributing the tax burden, easing bureaucratic red tape, and granting
the Central Bank autonomy in the wake of a failed Bhutto government, and
the ensuing caretaker administration. The government is making great
efforts to reshape its financial house into the image the IMF demands, but
their efforts have been frustrated by their own insistence on developing
nuclear weapons. The political climate is such that the nation's leaders
must rely on Islamic nationalism to hold the republic together. This was
the impetus behind their nuclear weapons program. That program has now
consumed the national economy in a fireball of their own making. As the
people look to the government the government must look to the people. The
blind have led the blind into disaster.
The politics of the region may be categorized as extremely
volatile. Pakistan is surrounded by Afghanistan, Iran, Tajikistan, China,
and India. As of October 3, 1998 Iranian troops are massing at the Afghan
Border, Afghan refugees are streaming across the Pakistani border, India
and Pakistan are due to begin further talks in the 41 year old Kashmir
conflict, which is obscured by a host of other issues. Both countries are
under pressure by the U. S. World Bank, and the United Nations to settle
their differences and sign the Comprehensive Test Ban Treaty. Both sides
have expressed reluctance to sign the treaty unilaterally, and are on
record that one will not sign without the other. Each wants to negotiate
their participation under the treaty to specific terms, which are not
relevant to this paper. The two nations are at an impasse at a very
dangerous time. The situation in both India and Pakistan is so severe
that the United States is contemplating adoption of the Brownback
Amendment, granting President Clinton authority to waive the requirements
of the 1977 Glenn Amendment. The Glenn Amendment prevents the United
States from aiding countries in violation of the non-proliferation
treaties. The waiver is sought to prevent the Asian Crisis from spreading
to India or Pakistan . The economy of Pakistan is in poor shape, though
doing well by regional standards.
The Financial Sector
"In Pakistan, the government adopted a comprehensive program to
strengthen macroeconomic policies and implement structural reforms
allowing the widening of macroeconomic imbalances and the threat of a
foreign exchange crisis in late 1996 and early 1997 ." The economy had
been showing strong signs of growth and improvement for the past several
years. However a decline in growth began in 1997, when Pakistan's local
trading partners started to feel the effects of the Asian Flu, The IMF
anticipated a recovery however, as late as May 1998. The economy is
operated by the government through the mostly independent State Bank of
Pakistan, which acts in the national interest. The State bank uses its
control of credit, money supply, and the State banks to influence the
actions of the small but active capital markets. There is no money market
to speak of. The Central bank exercises wide regulatory, and directive
power over the commercial banks at this time, but the larger banks are
being privatized with IMF support and approval. Applying the Zeisman
modeling scheme. Pakistan seems to operate under the Franco/Japanese
model, but with IMF support and approval is attempting to move toward the
development of more independent institutions and develop stronger capital
and secondary markets. It is hoped that by emulating the German model,
Pakistan's nascent industries will be able to take a larger role in their
own development. While Pakistan has begun the process of privatizing its
banks and allowing the State Bank of Pakistan more autonomy, tripartite
negotiation of predicted or actual adjustment is not yet possible . The
Capital Markets, and private institutions are not strong enough at this
point to complete the transition, and large scale government intervention
is still required to promote growth. The institutions of Pakistani
finance are not yet established to a degree to foster growth and
development on their own.
There is no financial tradition in the areas governed by Pakistan,
nor among any of the native ethnic groups remaining. As late as the turn
of the century, money lenders were the only facilitators of commerce, and
the system did not work to the benefit of the peasant farmers. . As Mr.
Aziz, the current Pakistani Finance Minster, explains in his speech before
the National Assembly the average Pakistani farmer has vivid memories of
the treatment they or their parents have experienced under the burdens of
money lenders and their debt collectors. The natural inclination of
Pakistanis is to delay, obstruct, or flee from both debt collectors and
tax collectors for as long as possible. There was no positive incentive
to pay off loans in south Asia, because of unfair terms in both the
purchasing of seed and supplies, and the sale of the produce. Though the
government has been able to provide some protection in this area, and an
Agricultural Development Bank has been formed, the average Pakistani does
not yet have faith in the system. Until this perception is corrected among
potential and current borrowers the problem will persist. As of June
1997, the party line was that Pakistan will continue to develop the
conditions necessary for the development of a strong banking sector where
borrowers and lenders may have confidence in the system and each other .
Pakistan is acting to instill consumer confidence via several
measures. "Economic adjustment has a better chance of succeeding if it is
preceded or accompanied by political adjustment. " The establishment of
an independent Office of the Ombudsman allows for independent
investigation of consumers complaints, and insure the equitable
distribution of finance capital to small borrowers. The ombudsman is a
symbol of strength, fairness, and access, as well as an entity with a
spotlight power which so far has generated swift government action. The
foundation for faith in this office, as well as the confidence in the
Pakistani Financial system rests with "Islamic Banking and Financial
Structures." While these structures are a handicap in dealing with the
outside world, even among other Islamic nations, their utility within
Pakistan cannot be understated. We return again to the core issue in this
Islamic Republic. Where nationalism, ethnicity, or geography hold other
nation-states together, the only force holding Pakistan together other
than inertia is Islam.
At Present there are only six Commercial Banks in Pakistan. The Commercial
Banks are the primary source of Finance Capital. The banks were
nationalized in 1974. In the past year movement has been made to
privatize Habib Bank Ltd., the National Bank of Pakistan, and United Bank
Ltd., but it is not clear to what degree they have been privatized from
the available material . It is safe to say that there is a very limited
degree of private ownership or shareholder control in any Pakistani bank.
The banks are handicapped by the transition to Islamic banking practices,
bad loans, and the folkways and morays of Pakistani society.
Islamic Banking structures are organized under the principles for
trade outlined in the Quran. "The Islamic system places equal emphasis on
the ethical, moral, social, and religious dimensions, [of Banking and
Finance] to enhance equality and fairness for the good of society as a
whole ." This arrangement may prove very stable in time, as Islamic banks
ban all debt based instruments, and enhance allocation efficiency. The
system as it develops is predicted and intended to promote
entrepreneurship, profit sharing, and greater access to investment capital
for small actors.
The Principles of Islamic Banking invoke the laws of Shariah which govern
the economic, social, political, and cultural aspects of society. The
first and key departure from western style banking is the prohibition of
interest, or riba This applies to sales of property on term, or lease,
and the borrowing or lending of money. The idea comes from the Prophet's
prohibition on gain through industry other than one's own, and is intended
to promote social justice, equality, and property rights. The second
principle is the promotion of risk sharing. This is intended to promote
sound and conservative investment with high returns. Suppliers of funds
become investors rather than creditors, and behave accordingly in the
selection of their investments, and in aiding their partners. Third,
Money is treated as potential capital, becoming capital only when joined
with other resources, to undertake a specific productive activity. Fourth
is a prohibition on speculative behavior. This tenet prevents bubbles and
fads from infecting the Islamic finance community. The fifth principle is
the sanctity of contracts. In Islam the completion of a contract is a
sacred duty, a matter of honor, rather than an obligation. No doubt is
left on the matter, in finance or in the law. Finally certain types of
investment are banned entirely. All investments pertaining to alcohol,
gambling, or casinos are strictly prohibited, and severely punished. The
invocation of an Islamic banking system has performed very well at its
critical objective, planting confidence among the farmer and the merchant
where none had grown before. The prospects for development of Islamic
banking, under these principles are very sound, and well worth investment
as long as other circumstances don't intervene .
The previous paragraph outlined the ideal of the Islamic Banking
structure, as explained by Mr. Iqbal, and confirmed by Mr. Meenai, and Mr.
Kahn. Mr. Meenai's analysis was very useful, as was Mr. Kahn's in so far
as I was able to follow it. The Kahn book, Theoretical Studies in Islamic
Banking and Finance would be an excellent resource for advanced readers.
The model has strengths as well as weaknesses While Islamic Banks are
"going global" in search of capital, their progress and returns on
investment have been restricted by the "filtration" services of Western
style banks. There is no universal legal code or regulatory organization
to govern the Islamic banks transnationally. While the banks in Pakistan
are governed entirely under an Islamic system, most banks are not. Each
relies on local scholars to ratify policy, and conflicts in definition and
practice occur even within the Islamic world. There is no Islamic
financial center. While there are functioning stock markets in Karachi
and Islamabad, these are small, and not yet completely compatible with
Islamic principles. The secondary markets are also termed weak by World
Bank standards. In addition Islamic accounting practices need to develop
independently of the western model. This coupled with a shortage of
qualified personnel restricts further development. Finally, the absence
of a central Islamic religious authority or pan Islamic conference to set
policy on specific interests and issues, will result in each of the
systems growing further apart, as they mature, rather than converging.
The future of Islamic banking will depend on how and by whom these issues
are resolved. "The immediate need is to deploy human and financial
resources to enhance liquidity, develop secondary, money, and inter-bank
markets; perform asset/liability and risk management, and introduce public
finance instruments. " If these are accomplished quickly, and largely
with Pakistani labor the prospects for Islamic banking and economies will
improve.
The Pakistani economy is primarily service based, (48.7% of GDP).
Industry accounts for 26.5%, and Agriculture produces 24.8%. GDP for 1996
was estimated by the CIA at $296.5 Billion The labor force is of 36
million people is divided 47% agriculture, 17% mining and manufacturing,
17%, and 17% service. 19% of the workforce is engaged either in the
public sector, the military, or employed overseas. Though figures are not
kept Pakistan is known to export laborers who work primarily in the
Persian Gulf. Forced child labor is also a common practice. The
principal non-human exports are reported to be valued at $8.3 Billion for
Fiscal year 1995/96, including cotton, textiles, finished clothing, rice,
leather, and carpets. Figures for informal exports of illicit substances
were by definition elusive, but the CIA reports that Pakistan produced 75
tons of heroin and hashish, in 196, down from an estimated 155 tons in
1995. Pakistan is also a known refining center and transit point of
Southwest Asian heroin intended for western markets. No data was
available for how this trade affected Pakistan's balance of payments or
foreign currency reserves. Pakistani Imports for the same period were
valued at $12 Billion, including petroleum and related products, animal
fats, vegetable oils, and chemicals. The consumer price index for the
same year was 10.8%. The military posted a budget of $3.3 Billion, 5.3 %
of GDP, and nearly a quarter of the Federal Budget .
All figures in the preceding paragraph were compiled by the Central
Intelligence Agency for the Pakistani fiscal year of 1995/96, and
published in July of 1998. The information provided by the CIA World Fact
Book is consistent with that of the World Bank, the IMF, and the official
publications of the Pakistani Government though there are significant
variations that I am not prepared to speak on.. The figures reflect a
country in deep fiscal trouble, bowing under the pressure of an over
stimulated military, and disastrous balance of payments.
Politics of Globalization
In a speech before the National Assembly, Finance Minister Sartaj
Aziz, laid out an ambitious plan for accelerating the process of
globalization in Pakistan, Although the speech was rife with partisan
and nationalistic venom, the overall effect was a declaration of
commitment to the standards demanded by the IMF, World Bank, and the
United States. The Speech had many salient points, and gave a clear
insight into the official thinking of the Sharif government. The outline
of Pakistan's problems, was concise, direct, and honest for the summer of
1997, though most of that blame was placed on the Bhutto government, and
the remainder attributed to salutary neglect by the caretaker regime. The
Sharif government has been in place since February of 1997. Much has
happened since this original declaration, but the process of globalization
continues for Pakistan albeit at a slower pace than anyone anticipated or
desired. The dual influences of paranoia and nationalism contributed to
five nuclear explosions, eleven months later, and the brakes were put on
abruptly.
On June 13, 1997 Aziz stood before the National Assembly and spoke
of the following issues; 1. national interest over small group, and self
interest in government, banking and industry, 2. expanding the role of
small actors and larger industry in the economy independent of government,
3. self reliance, 4. Development of essential health, education, and
welfare infrastructure, and 5. Modernization of industrial information and
practices . Mr. Aziz spoke on the lack of confidence in and resulting
inefficiency in tax collection and administration, and the commitment to
correct this through a less regressive tax structure, and civil service
reform. The government has continued the "Social Action Program," begun
under the Previous Sharif administration to address social measures.
These commitments were kept through the time of this writing, though
developments continue on a daily basis. The Pakistanis are holding their
breath, and trying to maintain these reforms as they await passage of the
Brownback amendment, and the resulting lifting of economic sanctions.
On October 10, 1998 the World Bank web site offered a summary of
the current Pakistani effort at Globalization. The publication is a
progress report of sorts. That progress is good, in planning, commitment,
initiative, and investment. Pakistan has managed significant economic
growth in spite of regional conflicts, and political instability. Social
indicators have improved steadily and are above regional norms, though
literacy, and the gap between men and women is far below that for most
other low income countries. Immunization rates, and access to health care
have improved. The government stabilization and structural reforms
outlined in the previous paragraph have resulted in measured progress.
Real gross GDP has grown 5.4% over the 1997-98 fiscal year. The growth
rate was a mere 1.3% for the 1996-97 fiscal year. Inflation declined to
8% from 12%, and the budget deficit was kept within the planned ceiling.
The current account of the balance of payments was reduced from 6.3% to
2.7% of GDP. However, the overall balance of payments performance fell
short of program objectives due to large shortfalls in the capital account
. This laudable analysis fell apart in May 1998, following nuclear
tests, The balance of payments has deteriorated rapidly, as have other
financial indicators. Investor confidence has also fallen, and capital
has left the entire region. The government has imposed exchange controls,
delayed debt servicing, devalued the currency through a dual exchange rate
system, and tightened fiscal policy. The Pakistani government has also
put out a call to all Pakistani Citizens and expatriates to donate local
and hard currency to a self sufficiency fund, which has recently met its
goal of more than $250 million. The world Bank reports that even with
these measures, the balance of payments remains extraordinarily fragile,
and the Pakistani economy is vulnerable to external shocks . Official
government sources are no longer given the same stock they had enjoyed
just one year ago, when Mr. Aziz spoke. The extent of the damage will
become clear in the next year, when international observers are able to
make an independent evaluation. A year's work and perhaps much more
evaporated in a long hot summer.
The World Bank strongly recommends fostering competition,
strengthening and legitimizing the legal and institutional framework, and
investing in the efficiency of the civil service. These reforms are
essential to reducing fiscal imbalances, which will lead to macroeconomic
stabilization. Past efforts were hampered by structural weaknesses in the
tax administration and reliance on tax rate increases rather than
broadening the tax base. The government has also failed to arrest
interest rates, and public sector wages.
The government has addressed these criticisms in the past year through
expansion of items covered in the general sales tax, and expansion of the
tax on agricultural income. The Pakistan Revenue Service, is in the
process of restructuring at the direction of the Sharif government. The
strength of initiative to improve the civil service will be seen only with
time. The government has undertaken an aggressive move toward
privatization of small and medium sized utilities, including banks, and is
moving to privatize all banks, and government owned utilities. The
government has also continued efforts to strengthen the banking system,
granting further independence to the state bank, and strengthening the
powers of the banking courts. The government is addressing agricultural
dislocation, by limiting the role of the public sector, removing policy
distortions in factor and output markets, and assisting in natural
resource management and environmental protection. It is not clear how
long this resolve will last without continued support, and oversight by
the World Bank, and the IMF.
The world Bank has approved 95 loans, and advanced 140 credits to Pakistan
since 1952. The commitment stands at more than $10 Billion. $4.2 billion
is currently committed to 41 projects aimed at improving conditions. The
current aid package is fpcused on, but not limited to social programs,
energy production, and the agriculture sector. The World Bank and the IMF
are working to build fiscal MIS infrastructure, and expertise, conducting
an expenditures, audit, and assisting the government in strategic planning
initiatives. The World Bank is actively working to privatize the
agricultural initiatives, and privatization initiatives in other
industries, which are long term commitments, threatened by economic
sanctions. All new aid, and ongoing efforts have been severely restricted
however since May of 1998.
Conclusions and Limits on Research
The main theme running throughout this project and Pakistan itself
is the influence of Islam in every aspect of Pakistani life. Similar
patterns will develop n the later study of India. As Islam is to
Pakistan, Hinduism is to India. Their allegiance to ideology and strong
faith is one of the most dynamic influences on their lives and destinies.
Their faith is a link which ties them together, yet, drives them apart as
well. Developing an understanding of the underlying basis for conflict
and its influence on the countries' approach to globalization will be
critical to any comparison. That is difficult for an American Catholic,
but hopefully not impossible.
However, I do have a better idea of where to go from here
in preparing for the India component. I intend to include a detailed
comparison of Pakistan's Islamic Banking system with India's banking
system in the next iteration of this project. I don't know what influence
if any Hinduism has on Indian banking. I also have no basis for
determining the effect of the weight of the debt servicing problems
Pakistan is facing at present. I anticipate that the issue will become
more clear once I study the same issues in India.
Bibliography
1Britanica Online, "Pakistan: Physical and human geography: The ECONOMY:
Finance" http://www.eb.com180/cgi-bin/g?DocF=macro/5004/83/13.html
2 Central Intelligence Agency, The CIA World Fact Book Online 1998, CIA,
Langley, VA, http://www.cia.gov
3 Choudhry, Maher, Elahi, An Insight into Banking and Stock Market,
Economic and Industrial Publications, Karachi, Pakistan, 1993.
4 The Institute of Bankers in Pakistan, Development of Money and Capital
Markets in Pakistan, Karachi, Pakistan, 1993.
5 The Institute of Bankers in Pakistan, Interest-Free Banking in Pakistan,
Karachi, Pakistan, 1983.
6 The Institute of Bankers in Pakistan, Legal Framework for Islamic
Banking: Pakistan's Experience, Karachi, Pakistan, 1991.
7 Library of Congress, "Federal Research Division /Country Studies/Area
Handbook," The Library of Congress, Washington D. C.
http://lcweb2.loc.gov/frd/cs/pktoc.html#pk0146
8 Iqbal, Zamir, "Islamic Financial Systems," The World Bank,
http://www.worldbank.org, 1997.
9 Kahn, Moshin, S., Mirakhor, Theoretical Studies in Banking and Finance,
The Institute for Research and Islamic Studies, Houston, TX, 1987.
10 Meenai, S. A. Money and Banking in Pakistan 3rd Edition, Oxford
University Press, Oxford, England, 1984.
11 Omar, Kaleem, "There is No Brownback Amendment as yet." The News,
Internet Edition, Islamabad, Pakistan, October 1, 1998
http://wnc.fedworld.gov/cgi-bin/retrieve.
12 Privatization Commission, Government of Pakistan,
http://www.privatisation.gov.pk/.
13 Pakistan Government Website
http://www.pak.gov.pk/govt/economy/(96-97).htm
14 Snider, Lewis, Growth, Debt, and Politics, Economic Adjustment and the
Political Performance of Developing Countries, Westview Press, Boulder,
CO, 1996.
15 The World Bank Group, "Countries: Pakistan," The World Bank Group,
Washington, D. C., http://www.worldbank.org/html/extdr/offrep/sas/pk2.htm
16 The World Bank, "Pakistan Population Projection Table," (pak_pop),
World Development Indicators CD-ROM, New York, NY, February 1997.
17 Yaqub, Muhammad, State Bank of Pakistan Annual Report FY 1993-1994,
Islamabad, Pakistan, 1994.
18 Zysman, John, "Government, Markets and Growth," Cornell University
Press, Ithica, NY, 1983.
Christopher Kane
ckane@gov.utexas.edu
Teachng Assistant
The University of Texas at Austin
(512)491-5090