Banking Sector Of Pakistan

As with all human actions, human resource practices must first be perceived and interpreted by the human beings before they can be responded to. Perception and interpretation are two constructs which are deeply rooted in the culture of the region and context of social-setting in which one is operating. This is to say that all HRM practices are bound to pass through cultural-cum-contextual prism before influencing employee attitudes and behavior . Thus, it is important to understand the culture of the country and context of the sector in which a particular research is conducted. This chapter is aimed at fulfilling this purpose.

Pakistan, officially ‘Islamic Republic of Pakistan’ celebrates its independence day on 14th of August every year. With a population of over 175 million, Pakistan has a culture rooted in religious ideologies, colonial past and western influences . The very foundation of Pakistan is based on religion as its independence is owed to the slogan of ‘Two Nation Theory’, a term used to describe the separate nationhood of Muslims living in undivided India before partition of 1947. About 96 percent of the total population has Islam as their religion. Social setup of Pakistan is mostly family-centered where obligation to one’s family is a ritual. Rules are usually sacrificed for the sake of groups like family and friendship, allegiance to which is considered more important than observation of rules .

Previous researches have shown that social-settings like family, school, college, neighborhood etc. influences the psychological and social makeup of individuals. Early socialization experiences define human personality which, ultimately, determines the work-related attitudes and behavior of the individuals at work, or simply employees . Due to a family-centered national culture, historically most of the Pakistani organizations have transformed ‘organizational life’ into ‘community life’, where relationships prevail over merit and influences human resource practices of selection, performance appraisal, promotion and even compensation. Decision making is limited to the top most echelons of the organization and employee participation and involvement in decision making is an alien concept. . Nevertheless, in last couple of decades much of the organizational life have changed, partly because of more university graduates who are taught American management practices at local business school and partly due to thrust of globalized economy. Today Pakistani entrepreneurs and managers are following American management models to run their businesses .

4.2 The Role of Banks in Economic Development

One of the major duties of a state is to ensure availability of necessities of life to its people. To achieve this purpose, governments around the globe constantly work to achieve persistent growth of their economies. Such a growth can neither be achieved nor maintained without a sophisticated financial system as capital accumulation is one of the required conditions for the economic development of a country. Banks, as one of the most important financial intermediaries, provide the necessary channel through which savings may be utilized as investments. Thus the role of banks in economic development of a country cannot be undermined.

Schumpeter noted that banks are one of the two main drivers of economic development in a country. Banks serves as the main tool of resource mobilization in a country as such their role in developing economies is much significant than that of developed economies where resources are relatively already more mobilized . Due to less developed money and capital markets, few financial instruments and less certain financial environment, banks assume the role of major intermediary in the financial system of a growing economy.

Studies conducted in a number of developed countries, for example, UK, US, Germany and Japan, have shown a considerable role of banking system in the economic development of these countries. In UK banks play major role in reinvestment of profits in large industries which lead to the rapid growth of industrial sector . Similarly banking sector contributed to the growth of US economy by providing needed capital to the industrial sector of the country .

During the recent times when the inflow of foreign capital has declined due a number of factors including terrorism, mistrust between government and foreign donors etc., the role of the commercial banks gain more significance as the governments have to rely on in-house resources to finance their expenditures. Thus, the banking sector becomes the major source of fund provider to the economy. In a bid to provide required resources for the developing economy, banks mobilize the existing deposits in a prudent manner so as to make the economy more efficient and productive.

Given the role played by banks in stabilizing the financial system of a country, many developing economies have undertaken reforms to strengthen and revitalize the banking sector of their respective countries. Reform measures include privatization of commercial banks, deregulation of economy, and a more effective role of central of state bank. Pakistan also undertook major reform measures to improve its ailing banking sector. These reforms included restructuring of its financial regulatory framework as per the recommendations of the Basel Accord and implementation of service guidelines called ‘corporate governance of banks’

4.3 Evolution of Banking Sector in Pakistan

Banking sector in Pakistan has undergone tremendous changes since its inception. In March, 1947, 99 commercial banks listed on the Second Schedule of Reserve Bank of India were operating a network of 3,496 branches in united India. After the announcement of partition plan on 3rd June, 1947, all the banks having their registered offices in Pakistan transferred them to India. Further, following a policy of withdrawal, Indian banks closed a large number of their offices in Pakistan, due to which the number of scheduled bank offices declined from 487 in March, 1947 to only 81 on 30th June, 1948. This meant a reduction of about 83% in total number of branches catering the needs of commerce and industry in such hard times.

Figure 4-1: Number of Registered Bank Branches in Pakistan Before and After Partition of India

Banking sector at the time of partition was primarily consisted of about 19 non-Indian foreign banks and only two domestic scheduled banks, namely Habib bank and Australasia bank. Of these two, Habib bank had transferred

its office to Karachi from Bombay (now Mumbai) after the announcement of partition plan while the Australasia bank was the only one having its head office in Pakistan before partition. There was even no central bank of the country at that time which was later established in July 1948.

One of the important tasks of newly established ‘State Bank of Pakistan (SBP)’ was the creation of national banking system. This was done by all out helping the existing Pakistani banks to expand their organizations on one hand and by setting up the National bank of Pakistan on other. To further the growth of banking sector it was also decided by State Bank of Pakistan, “to earmark internal banking for Pakistani banks” . The policies of SBP coupled with both external and internal political and economic environment resulted in a rapid growth of banking system during 1947-74. This is apparent from the fact that total advances made by Pakistani banks to different sectors rose from 38 percent in 1952 to about 89 percent in 1970 .

Bank Nationalization Ordinance was promulgated on 1st January, 1974, resulting in nationalization of 14 banks, of which 13 were merged to become 5 nationalized commercial banks (NCBs). The 14th bank was the ‘State Bank of Pakistan’ which was also nationalized at that time; however it was later denationalized in 1977. Section 5(1) of the ordinance stated, “The ownership, management and control of all banks shall stand transferred to, and vest in, the Federal Government . . .”

Nevertheless following the liberalization and deregulation of economy the number of banks operating in Pakistan increased manifolds in the last 30 years. As a result a total of 46 banks, having 8169 registered branches, were working in Pakistan as of 31st December 2007. Of these 46 banks, 34 are Pakistani banks while remaining 12 were foreign banks having their branches in Pakistan. Detailed list of these banks is given in Annexure-V while summary is produced below:

These banks are further classified as Public Sector Commercial Banks (PSCBs), Specialized Banks (SBs), Domestic Private Banks (DPBs) and Foreign Private Banks (FPBs). Summary about the number of these banks and their registered branches is given below while detail in provided in Annexure IV:

4.4 Post Nationalization HR and Customer Service Scenario in Pakistani Banks

In the years following nationalization, the performance of NCBs was much criticized for “inefficiency and deteriorating service standards” . As on 30th June, 1990 twenty four (7 domestic and 17 foreign) commercial banks were operating in Pakistan. Five of the seven domestic banks were fully owned by the federal government while the remaining two, one each was owned by provincial governments of Punjab and NWFP. These domestic banks, with about 90 percent of total assets and total deposits of banking sector, were looking after most of the commercial banking needs of the country. Commenting on the work behavior of employees working in these banks, Husain wrote, “. . . the staff worked like typical government employees, coming to office at 9:00 a.m., checking files; having nothing important to do and leaving at 5.00 p.m. without doing much work.”. This may be the case because their incentives were little tied to their actual performance, as in most of the government departments. The quality of services offered by these banks at that time were termed ‘poor’ .

Ishrat Husain, who served as the governor of State Bank of Pakistan from 2000 to 2006 and whose tenure is known for major banking sector reforms, implicitly pointed towards a linkage between employee attitudes/behavior, customer satisfaction and branch profitability. Commenting on the employee-customer interaction he noted that, ” . . . people used to go to the banks and the staff treated them shabbily, was generally uncooperative and unfriendly” . This was the same time period, he further noted, during which banks were known for “. . .unprofitable branches and poor customer service.”

4.5 Reforms undertaken to Improve HR Management and Customer Service in Banking Sector of Pakistan

As already noted at the end of section 4.3, to improve the efficiency of banking sector in general and state owned banks in particular, major reform measures were designed and implemented during the last almost two decades. Privatization is promoted as one major intervention for such improvement. However, the advocates of privatization were rightfully aware that it (privatization) is just a tool for delivery of better services to the customers. In his speech delivered at the 50th annual general meeting of Institute of Bankers, Pakistan on 24th, February 2001, the then governor SBP said, “. . . privatization should not be considered as the sole remedy of removing all financial and administrative ills of these institutions. A hardened effort to improve the level of services would be most desirable to impart the fruits of privatization to the consumers.”

The importance of customers and thus customer services in the success of a bank is well understood and time and again underlined by researchers and practitioners of the field. In her address to Institute of Bankers, Pakistan convocation held on 13th March, 2008 in Lahore, Shamshad Akhtar (Governor, SBP, 2007-09) called upon the bankers to “. . . adopt good governance practices and customer service standards in order to build public confidence in credibility of their operations.”

One of the crucial governance areas, for banks, with direct link to customer services is human resource (employee) management. Validating the importance of human resource management in achieving better organizational performance, State Bank of Pakistan in its quarterly performance review of banking system (September 2007) observed that, “. . . improvement in quality of human resource of the banking sector have positively impacted the profitability of the banking industry.” .

4.6 Need for Strategic HRM Research in the Context of Banking Sector in Pakistan

Considering the importance of sound banking sector in the economic development, the observation of the SBP is an indication of the fact that human resource management (HRM), as a functional area of organization, is now being recognized as one of the key contributors to nation’s economic development. Nevertheless, to fully exploit the potentials of human resource management (HRM) as a tool of economic development, it is must that we shall engage in serious academic research with an aim to explore the mechanisms through which the former contributes to the later, especially in the context of a developing country like ours. Research of such a nature will be of immense value as it would have the potential to fulfill at least three important objectives. First, it will help in identification of HR practices which, by the virtue of our unique social, cultural, religious and economic makeup, are most influential in the achievement of desired organizational outcomes. Secondly it will add to our theoretical understanding of HR-Performance linkage, and third, it will also help human resource professionals in designing their HR systems in most optimal way. This study is an attempt to meet the aforesaid objectives.

Given the corporate governance reforms undertaken by the State Bank of Pakistan and the emphasis laid down on improved HR systems to enhance banking performance it is high time to test the Central Bank’s observation regarding the positive impact of ‘quality of human resources’ on ‘profitability of banking industry’. A firm’s future profitability is best indicated by its ‘customer satisfaction ratings’ . Studies have found customer satisfaction significantly associated with increased profitability , stockholder value , and return on assets . Thus, in order to design effective human resource systems, which contribute to economic development of the country, by influencing bank’s profitability, we must answer two fundamental questions: (1) What (human resource practices) leads to improved quality of human resources (skilled and committed employees)?, and (2) How (the process through which) this improvement is transformed into customer satisfaction? Strategic human resource management is an area of organizational analysis which provides the necessary framework to answer these questions.

The governor State Bank of Pakistan in HR heads forum meeting held on 22nd November, 2004, (for complete minutes of meeting see Annexure-IV) identified following areas of importance for managing human resources in banking industry:

Recruitment

Compensation and Benefits

Performance Management and Career Progression

Training and Development

Severance/End of Service

As the purpose of this study is to examine the relationship between human resource practices and customer satisfaction in banking sector of Pakistan, it obviously makes good sense to analyze the relationship between the practices which industry leaders and experts consider important and customer satisfaction. Research model of this study adequately covers most of the above mentioned HR practices which are deemed important by the Heads of Banking Firms in Pakistan.