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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT © 2012 Institute of Interdisciplinary Business Research 800

MAY 2012

VOL 4, NO 1

A COMPARATIVE STUDY OF ALLIED BANK OF PAKISTAN AND MUSLIM

COMMERCIAL BANK OF PAKISTAN IN PRE AND POST PRIVATIZATION ERA

Dr. Syed Asif Ali Shah

Assistant Professor

Department of Commerce

Shah Abdul Latif University Khairpur

Abstract

Reforms of the financial institutions in Pakistan were recognized by most of regional economies as well as by the

world donor agencies. The World Bank assistance to Pakistan necessitated the privatization of Banks and other

financial institutions. The effect of this act was seen and viewed profoundly into the researchers of Financial

Management. Present study is one of the interests developed in the wake of privatization of certain banks in

Pakistan. Three banks have been privatized since the privatization process started these include Allied bank of

Pakistan (ABL), Muslim Commercial Bank (MCB) and Habib Bank (HBL). For this study only two banks; ABL

and MCB are taken for the comparison within banks and within targeted periods of pre-privatization and post-

privatization era. The data used for this study were both primary and secondary. Initially, the balanced sheets of both

banks for the targeted years collected from different branches of ABL and MCB in Khairpur and Sukkur. The

Balance Sheet along with income Statements of those banks was also obtained for the analysis. For secondary

source, year wise reports from various published material was taken including the reports of State Bank of Pakistan.

The techniques used are the statistical models. Non-parametric and regression analysis were used to analyze the

impact of privatization in both pre-privatization and post-privatization periods. A new technique for the first time in

the field of Management Sciences is used to check the stability of various variables in both periods. The technique

is the reliability model. The results in all the three set of analyses were found approximately identical. The results

showed that the banks improved in deposits and assets with some other indicators whereas progress in employment

rate and income remained unchanged for both banks in post-privatization era. The difference between two banks

was also shown. The MCB progressed swiftly after privatization as compared to ABL. The reason was found to be

separate policy measures for both banks in both periods. The overall performance of both banks was increased,

however, after privatization and the privatization process yielded a positive impact over the business of the Banks.

Keywords: ABL, MCB, Variables, Privatization, Performance

Introduction

The countries like Pakistan, India and China are still lacking to implement fully the adaptability of capital account,

which is of key significance in economic development. The nationalized banks in these countries have still leading

role. The problem of fiscal policymaking is more aggravated then the countries introduced capital account earlier

and took up the policies more extensively. At that time, total 24 Banks were in operation from which seventeen

foreign banks and seven domestic banks were operated in Pakistan in 1990. The Foreign banks were holding only

7.8 percent of total assets and 7.0 percent of the total deposit base. Their activities were generally related to foreign

trade. The Pakistani banks had created huge percentage of NPLs, at this stage banking sector suffered under the

heavy burden of external debits, accounts were misappropriated by the end of 1980s, it was evident that the

pervasive monetary and credit policies allowed over the years and had given way to the repressed financial system,

affected adversely the growth and efficiency of the financial sector. It was in respective of that at the end of 1989, a

reform program initiated to reduce the market segmentation, instill competition, and switch over, to market-based

and relatively more efficient monetary and credit mechanism. The government ownership of commercial banks

resulted in political intervention into credit allocation and loan recovery decisions besides other institutional

inefficiencies. As a result, infected loans increased sharply, financial institutions suffered losses, and quality of

services plummeted. In participation of the private sector, such as transferring management and control of NCBs to

the private sector, and permitting it to open banks and NBFIs. These measures were designed to improve the level of

competition and efficiency in the financial system.

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The reforms of privatization and regulations in Pakistan are determined by five stages. The first stage from 1947 to

1970 is termed as the inspiring period. The second stage was the nationalization of institutions during 1971-77. The

nationalized institutions war again denationalized from 1977 to 1983 in the third stage. It was fourth stage when the

program of privatization was undertaken seriously. The wide-ranging program of privatization was carried out from

1988 to 1996 and more expensively in early decade of twenty-one century, which is termed as fifth stage of

privatization program. Mushtaque et al, (1997). The efforts of privatization in Pakistan began in 1988 with the

initiation of minority shares of Pakistan International Airlines Corporation. The steps were not taken for

privatization immediately after the Privatization Commission formed in 1991. While Privatization Commission’s

directive was initially restricted to industrial transactions, by November 1993 it had expanded to include Energy

also, Transport (including aviation, railways, ports and shipping), Telecommunications and Banking and Insurance

companies).

It is generally believed that the financial institutes especially banks in Pakistan were declining with respect to

profitability. The heads in which the banking were being distressed were low production, high expenses on their

own formation, extending number of staff, bankruptcy of many of the branches, Troubles of banks related to scant

productivity, increasing costs of the capitals and mishandling of funds (Klien 1992). Lack of skill and knowledge

was another reason for this stress of financial institutes especially banks. There was lack in knowledge and skills on

one hand and inconsistency between the expertise pre-requisite for economic development and the proficiency

turned out from the academic institutions. These two features are main hurdles in development of financial

institutions in Pakistan. The bankrolling of those private producers, which produced substandard material and sold

out at high rates by the State bank of Pakistan was a serious issue. This issue was resolved by the financial reforms

of 1990s. The core objectives of these restructurings were to create the environment for competitive role of financial

institutions in order to enhance overall performance in all the sections of financial system. The reforms were also

intended to divide and deal the organization and ownership separately and build up system of accountability. Motive

behind this impression was to involve common people in the effective banking and financial system of Pakistan. The

government of Pakistan in its privatization measures not only privatized commercial banks but also endorsed private

firms to set up an environment of efficient participation of financial institutions including banking. These steps were

essential for economic progress and bringing the life of poor people above poverty line. By framing legal basis, the

privatization policy measures were underlining to integrate small-scale units into higher scale units.

In the wake of privatization process, two banks ABL and MCB were privatized and various banks were allowed to

open, domestic and foreign, to enhance the financial competition in Pakistan.

The Government of Pakistan during various periods reviewed the performance of public sector enterprises and made

it obligatory to privatize the institutions, which were posing heavy burden on the exchequer of the government. The

privatization process has been, however, slow for the reason that the governments concentrated more on some

financial institutes especially banks, services and transportation.

Methodology

The primary resource of data for empirical analysis is the balance sheets of target years collected from the different

branches of Allied bank and Muslim Commercial Bank in Khairpur and Sukkur. The balance sheets along with the

income statements of those banks were also collected.

For secondary source, year wise reports from various library sources were collected and studied. The reports from

the State Bank of Pakistan were also brought to the analysis to see the comparison and impact of privatization and

role of the central bank in the process of privatization.

The comparative analysis and efficiency levels were measured by using nonparametric statistical tests. In

nonparametric statistical tests applied were the Chi-square, Sign Test, Sign rank test, Wilcoxon, and Hotelling’s T

tests. Means were compared by using t-test. A time series model is also used to determine the sequential trend of the

components. The computation for analysis is done by the package SPSS version 17.0.

Comparative Analysis of ABL and MCB

A comparative study is made between the Allied bank Limited and the Muslim Commercial Bank in pre-

privatization period (1980-1991) and the post-privatization era (1991-2000). Four components are selected to assess

the impact of privatization on both banks and the reliability of components in both eras. Nonparametric tests,

regression and Reliability models are applied to see the progress within banks and within the nationalization and

privatization periods. The results show that the investment of ABL increased and surpassed the investment of MCB

in post-private period. However, the deposits of the MCB enhanced in post-privatization period as compared to the

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ABL. The income has no significant impact of privatization on both the banks. The ABL significantly improved its

pre-tax profit as compared to the MCB.

Table 1: Profitability of ABL and MCB in both periods

Allied Bank Limited Muslim Commercial Bank

Pre-Privatization Post-Privatization Pre-Privatization Post-Privatization

Deposit 90408 497288 195274 956451

Income 9198 58755 31814 23016

Pre-Tax

Profit

337 269456 1595 7444

Investment 32994 569354 66768 388334

The following figures show a comparative analysis of the progress of the components of both banks in both

study periods. The box plots clearly illustrate the overall evolution of the banks. The efficacy of the MCB in general

is has been increased rapidly after the bank was privatized.

Figure 2 Normal Q-Q Plot of pre-privatization of ABL and MCB

Figure 3 Box plot of ABL and MCB performance before privatization

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Figure 5 Normal Q-Q plot of ABL and MCB performance in post-privatization era

Figure 6 Box plots of ABL and MCB during post-privatization period

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Table 6.46 Paired Samples Statistics of pre and post-privatization of indicators and Banks

Mean N Std. Deviation Std. Error Mean

Pair 1 Pre-Privatization 53548.50 8 65478.424 23150.119

Indicators 2.50 8 1.195 .423

Pair 2 Post-Privatization 346262.25 8 328312.702 116076.069

Indicators 2.50 8 1.195 .423


Bank 1.50 8 .535 .189

Pair 4 Post-Privatization 346262.25 8 328312.702 116076.069

Bank 1.50 8 .535 .189


Post-Privatization 346262.25 8 328312.702 116076.069

Table 6.47 Paired Samples Correlations of Indicators and Banks

N Correlation Sig.

Pair 1 Pre-Privatization & Indicators 8 -.545 .163

Pair 2 Post-Privatization & Indicators 8 -.235 .575

Pair 3 Pre-Privatization & Bank 8 .332 .422

Pair 4 Post-Privatization & Bank 8 -.008 .985

Pair 5 Pre-Privatization & Post-

Privatization

8 .860 .006

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Table 5.53 Summary Item Statistics for ABL and MCB

Mean Minimum Maximum Range

Maximum /

Minimum Variance

N of

Items

Item Means 99953.688 1.500 346262.250 346260.750 230841.50 2.760E10 4

Item Variances 2.802E10 .286 1.078E11 1.078E11 3.773E11 2.832E21 4

Inter-Item

Correlations

.067 -.545 .860 1.405 -1.580 .214 4

Table 5.54 Scale Statistics of ABL and MCB

Mean Variance Std. Deviation N of Items

399814.75 1.491E11 386097.893 4

Table 6.48 Paired Samples Test Indicators and Banks in pre and post-privatization periods

Paired Differences

t df

Sig. (2-

tailed)

95% Confidence

Interval of the

Difference

Mean Std. Deviation

Std. Error

Mean Lower Upper

Pair 1 Pre-Privatization -

Indicators

53546.000 65479.075 23150.349 -1195.877 108287.87

7

2.313 7 .054

Pair 2 Post-Privatization -

Indicators

346259.750 328312.983 116076.168 71783.227 620736.27

3

2.983 7 .020

Pair 3 Pre-Privatization – Bank 53547.000 65478.247 23150.056 -1194.184 108288.18

4

2.313 7 .054

Pair 4 Post-Privatization – Bank 346260.750 328312.706 116076.070 71784.459 620737.04

1

2.983 7 .020

Pair 5 Pre-Privatization - Post-

Privatization

-292713.750 274009.993 96877.162 -521791.837 -63635.663 -3.021 7 .019

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Figure 6.23 Comparison of performance of Banks in both periods

Table 5.5 Analysis of Variance for ABL and MCB in both periods

Sum of Squares df Mean Square F Sig

Between People 2.609E11 7 3.727E10

Within People Between Items 6.624E11 3 2.208E11 8.855 .001

Residual 5.237E11 21 2.494E10

Total 1.186E12 24 4.942E10

Total 1.447E12 31 4.668E10

Grand Mean = 99953.69

Figure 6.22 Box Plots of Pre and Post-Privatization Indictors of ABL and MCB on next page

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Figure 6.24 Comparison of Indictors of ABL and MCB in both periods

Conclusion

A comparative analysis was conducted by taking two banks i.e. Allied Bank Limited and Muslim Commercial Bank

into consideration. The focus was given on the impact assessment of privatization on both banks during the period

mentioned in the research from 1980 to 2000. The results obtained were mixed. The indicators analyzed individually

at first instance to examine their validity, reliability, efficacy and growth in both the periods of nationalization and

privatization. Thereafter, the components of the bank performance were compared from bank to bank and era to era.

In the end the overall progress of two banks were taken and measured their stability, reliability, development and

efficacy in both, pre-privatization and post-privatization periods. The analysis is concluded as under:

Both the banks i.e. Allied Bank and The Muslim Commercial Bank had their own competitive environment before

the privatization. The banks improved regularly the deposits, investment, pre-tax profit and assets. The government

of Pakistan from the year 1991 took measures to raise capital and bring the financial institutions into an open

environment of competency. In wake of financial reforms, the privatization program was launched which proved to

be landmark in the development of economy of Pakistan in 1990s.

Some indicators like employment rate and the income were progressing slowly and remained unchanged even after

the privatization process. That is to say that the privatization process brought about no impact on some of the

components of banking development. Reason behind this lacking may be the policy reforms in financial matters by

the frequently changing governments and legal obligations of the privatization process.

The Allied Bank Limited showed a slow progress as compared to the Muslim Commercial Bank throughout the

privatization period. The reasons explored are the transfer of the bank from pre-nationalization to the nationalization

without taking in account of the capital dividends on certain vivid policy measures. The other reason found that the

bank shares were sold to its own employees and the employees despite of showing honest struggle could not

achieved the high targets as compared to the Muslim Commercial bank, which was sold to group of companies. It

was only in 2004 that the shares of the ABL were relocated to a group of companies.

The progress of the Muslim Commercial Bank was satisfactory even in the pre-privatization era. Therefore, overall

development in the indicators under study remained satisfactory after the privatization act. The performance

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increased not in the technical efficacy but in technological incursion in the environment of competition client

satisfaction. The sampled banks were privatized during 1996-1999 and were compared in terms of their performance

before and after their privatization.

The time series model is applied in order to examine the sequential trend of privatization before and after the task

was accomplished. The plot of the model shows that the deposits and investment declined before privatization

whereas less or more the pre-tax profit, income and expenditure remained persistently in growth throughout the pre-

privatization period. On the contrary, in the post-privatization era, the deposits and investment jerked to high level o

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