“Muslim Commercial Bank Limited”

Umar Farooq
Roll # 5450

Project Report submitted in partial fulfillment of the requirements

For the degree of Master of Business
Administration.

At

National University of Modern Languages

Islamabad, Pakistan
June, 2008

© Copyright by Umar Farooq, 2008

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2
 NATIONAL UNIVERSITY OF MODERN LANGUAGES
Faculty of Information Technology & Management Sciences

It is hereby certified that the report has been thoroughly and carefully read and recommended
to the Faculty of Management Sciences for acceptance of Final Project Report by Umar
Farooq (Student Name), Roll No. 5450, Session (Jan 2006 to Dec 2007) Morning, in partial
fulfillment of the requirements for the degree of Master of Business Administration of
National University of Modern Languages Islamabad.

Dated: __________

Supervisor: ______________________________

Observer: ______________________________

Head of Department: ______________________________

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 CHAPTER # 1

INTRODUCTION OF BANKING

INTRODUCTION OF BANKING

There are many definitions of the word “Bank” even the standard encyclopedia and law

books find it difficult to state exactly what a Bank is.

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There have been many attempts by different writers to explain the exact significance of the

term “Bank”. Here some of the definitions are quoted as follows.

According to the Banking Companies Ordinance 1962

Section 5 (b) defines

“Banker means a person transacting the business of accepting, for the purpose of

lending or investment, of deposits from the public, and withdrawal by cheques, drafts,

order of otherwise, and include any post office saving banks”

According to Crowther

”Bank is a dealer of debt, his own and of other people.”

According to Gilbert

“A bank is a dealer in capital or dealer in money. He is an intermediary party

between the borrowers and lenders.”

According to Samulelson

“Commercial banks provide certain services for customers and in return receive

payments from them.”

According to Holder

“The modern banker is primarily a dealer in credit.”

1.1 IMPORTANCE OF BANKING

Banks play very important role in the economic life of a nation. The growth of the economy

is dependent upon the soundness of its banking system. Although banks do not create new
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wealth but borrow, exchange and consume. These make generation of wealth. In this way

they become most effective partners in the development of that country.

To encourage the habit of saving and to mobilize these savings is its basic purpose. Banks

deposit surplus from the public and then advances these surpluses in the form of loans to the

industrialists, agriculturists, businessmen and unemployed people under different schemes so

that they set up their own business. Thus banks help in capital formation.

If there are no banks, then there would be concentration of wealth in few hands and great

portion of wealth of a country would be idle. In the fewer developing countries rate of saving

is very low and due to this, rate of investment and rate of growth is also very low. We can

take bank just like a heart in the economic structure and capital provided by it is like blood in

it. As long as the blood is in circulation, the organs will remain sound and healthy. If the

blood is not provided to any organ then the organ would become useless. So if the finance is

not provided to agriculture sector or to industrial sector, it will be destroyed.

Loan facility provided by bank works as an incentive to the producer to increase production.

Banks provide transfer of payment facility, which is cheaper, quicker and safe. Many

difficulties in the international payment have been overcome and volume of transactions has

been increased. These facilities are very much helpful for the development of trade and

commerce.

1.2 COMMERCIAL BANKING IN PAKISTAN

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It was very difficult for Pakistan to build up its own Banking system immediately after

independence without sufficient resources. Following the announcement of the partition plan

in June 1947 there was a haste movement on the parts of banks to transfer their funds and

accounts across the borders. The banks having their registered offices in Pakistan were

transferred to India. In an effort to bring about the collapse of the new state by the

persecuting an international policy of withdrawal, the Indian bank offices closed quickly.

Those banks, which stayed, were considering the winding up of their business. By 30 th June

1948 the number of schedule banks in Pakistan declined from mere scratch. Today there are

more than 7000 branches of commercial banks along with an established network of

supplementary financial institutions. All this development in the banking sect is the result of

untiring efforts of four decades.

1.3 PHASES OF BANKING IN PAKISTAN

Broadly speaking we can divide the development of commercial banking into four phases

PHASE-1 1947-1974 Establishment of Commercial Banking System

PHASE-2 1974-1979 Nationalization of Banks

PHASE-3 1979-1991 Islamisation Process

PHASE-4 1991-2000 Privatization Process

1.4 FIRST PHASE (1947-74)

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1.4.1 SET UP OF COMMERCIAL BANKING SYSTEM

This was the first phase of development of Pakistan’s commercial banking system, which

consist of the circumstances under which the development of banking was started in the

country.

1.4.2 INITIAL POSITION OF BANKING IN PAKISTAN

There were 19 non-Indian foreign banks in Pakistan at the time of independence with the

status of small branch network, whose policies and operations were controlled by their head

offices abroad. These banks were engaged solely in export of corps from Pakistan. There

were only two Pakistani banks, the Habib bank, which had transferred its head office from

Bombay to Karachi after the announcement of the partition plan, and Australian bank which

has been working in Pakistani territories prior to June 1947. The government of Pakistan

tried hard to eliminate the banking crises. Banking Companies Ordinance 1947 was

promulgated to safe guard the interest of both the bankers and the company’s customers. The

situation however showed no significant improvements. The imperial bank of India closed

down most of its offices in Pakistan, which had been working as the agent of the reserve

bank of India was not willing to purchase even token amounts of the government of Pakistan.

Securities on the plea that these securities were not marketable. The reserve bank of India

was hardly of any help. It refused to help government of Pakistan with advance argument

adhoc securities to enable them to make essential disbursements such as salaries and other

obligations to add to the difficulties.

The Indian government withheld Pakistan’s share of Rs. 75 crore in cash balances held at the

time of independence. The foregoing developments clearly brought home the urgency of

assuming control and currency in Pakistan and brought to the fore the need to setup a central

banking institution to take the place of reserve bank of India. Therefore it was agreed
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between the government of India and Pakistan to authority of Pakistan from 30th September

1947 to 30th June 1948

In order to make necessary arrangements of the establishment of the central bank of Pakistan

a committee was appointed to recommend the necessary steps. Consequently the Governor

General of Pakistan and father of the nation Quaid-e-Azam Muhammad Ali Jinnah

Inaugurated the State Bank of Pakistan on 1st July 1948. After the State Bank order was

promulgated on 12th May 1948.

1.5 SECOND PHASE (1974-1979)

1.5.1 NATIONALIZATION OF BANKS

The banking reforms turned out to be a transitional and temporary step and hardly after 18

months had the government nationalized the banking system. Thus through the

Nationalization Bank Act 1974, SBP and all commercial banks incorporated in Pakistan and

carrying on business in or outside the country were brought under the government ownership

with effect from January 1974. The ownership and management of all Pakistan banks stood

transferred and rested in the federal government. The shareholders were provided

compensation in the form of federal government bonds redeemable at par any time within a

period of fifteen years. The amount of compensation was equal to the break up value of the

shares in case of commercial banks. For the State Bank shares the amount of compensation

was estimated on the basis of average of the clearing quotations during the six working days

preceding nationalization. The chairman, director and chief executives of various banks were

removing from their offices other than those appointed by the federal government and the

state bank. The central board of banks, managing committees and similar other bodies were

dissolved. A Pakistani banking counsel was established for nationalized commercial banks to

co-ordinate their activities.

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As a result of merger of banks the following five major banking companies were formed:

1. National Bank of Pakistan

2. Habib Bank Limited

3. United Bank Limited

4. Muslim Commercial Bank Limited

5. Allied Bank of Pakistan

1.6 THIRD PHASE (1979-91)

1.6.1 INTRODUCTION OF ISLAMIC BANKING

In 1977 the Bhutto government was toppled. The martial law government planned to reform

the banking sector in a novel way. The overall policy was to Islamize the economy and the

banking system, being based on interest was an important target of the new policy. The most

preferred form of Islamic bank financing profit and loss sharing would require banks to

receive deposit without guaranteeing any return.

The Islamic bank cannot finance the project of an investor merely on the furnishing of

collateral. The bank will have to be a partner in the project. This will require to careful

security of the project and the assessment of risk involved because profits are the function of

the amount of risk in the project. Honesty and trust form both sides of the market are more

important to the system of Islamic Banking.

1.7 FOURTH PHASE (1991-2000)

1.7.1 PRIVATIZATION AND DE-REGULATION

The government headed by Prime Minister Nawaz Sharif was not fully satisfied with the

performance of nationalized. The areas, which were severely criticized, were the falling

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standard of banking services and common red-tapism. There were complaints about the

services as delay in home remittances, dispatch of cheques, drafts, inefficient counter

services, bad debts of the banks etc. were on the rise. The government decided to privatize

these banks. In order to implement privatization policy a privatization commission was

established on 22nd January 1991. The commission has transferred two banks MCB and ABL

to the private sector. Till March 1994 there were 20 domestic scheduled banks with 9825

branches and 21 foreign banks with 66 branches in operation in the country. Overall

investment of the scheduled banks in the current year rose to 76.7%. At present there are 24

domestic scheduled with 8137 branches and 19 foreign banks with 71 branches are in

operation in the country. Total assets of domestic scheduled banks amounting to Rs. 1563.73

billion on 30th March 1996. Overall investment of the domestic scheduled banks in the

current year declined by 80% over the same period last year.

1. Bank of Commerce Al Habib Ltd.

2. Soneri Bank Ltd

3. Union Bank Ltd.

4. Mehran Bank Ltd.

5. Askari Commercial Bank Ltd.

Now Mehran bank has been absorbed by National Bank Ltd, due to its poor performance and

ultimate failure. Now the ABN AMRO Bank has also been included in the list of foreign

scheduled banks.

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 CHAPTER # 2

HISTORY OF NATIONAL BANK OF PAKISTAN

HISTORY OF NATIONAL BANK OF PAKISTAN

The normal procedure of establishing a banking company under the Companies Law was set

aside and the Bank was established through the promulgation of an Ordinance due to the

crisis situation that had developed with regard to financing of jute Trade. The Bank
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commenced its operations from November 20, 1949 at six important jute centers in the then

East Pakistan and directed its resources in financing of jute crop. The Bank’s Karachi and

Lahore offices were subsequently opened in December 1949.

State bank of Pakistan after its formation demanded from the Indian Reserve Bank the assets

against the Indian currency retired from Pakistan territory. Government of India refused to

hand over the assets worth about five hundred million rupees. The dispute is still unsettled

and these assets are still not delivered to Pakistan. Until June 1950, the Bank was engaged

exclusively on jute operation. With the passage of time its functioning diversified as they

take over the function of different institution with the passage of time like in past they took

over the function of Imperial bank of India and now of NDFC (National Development

Finance Corporation)

It is working as the agent of the state bank of Pakistan and performs its functions wherever

state bank of Pakistan is not present.

The government floated its 10 % of the shares in the open market in past and the ratio

became 60: 40 and in future they trying to make it 55: 45.

In 1999 national bank celebrated its golden jubilee during the last fifty years bank has made

substantial strides in the financial services industry in Pakistan.

In 1999 its market share was around 22% and it remains the largest financial institution in

Pakistan.

2.1 VISION AND GUIDE

“To be recognized as a leader and a brand synonymous with trust, highest standards of

service quality, international best practices and social responsibility”.

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“To enhance profitability and maximization of NBP share through increasing leverage of

existing customer base and diversified range of products”.

2.2 MISSION STATEMENT

NBP will aspire to the values that make NBP truly the Nation’s Bank, by:

• Institutionalizing a merit and performance culture

• Creating a distinctive brand identity by providing the highest standards of services

• Adopting the best international management practices

• Maximizing stakeholder’s value

• Discharging our responsibility as a good corporate citizen of Pakistan and in countries

where we operate

2.3 MANAGEMENT OF NATIONAL BANK OF PAKISTAN

An Executive Board composed of six Senior Executives of the Bank and the President who is

also the Chief Executive supervises the affairs and business of the Bank.

Syed Ali Raza Dr. Waqar Masood

Chairman & President Director

Iftikhar Ali Malik Syed Shafqat Ali

Director Director

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M. Zubair Motiwala Azam Faruque

Director Director

Sikandar Hayat Jamali Ikhlaq Ahmad

Director Security Board of Directors

2.4 NBP AWARDS & ACHIEVEMENTS

"Best Foreign Exchange Bank 2008” awarded by world's leading financial journal “Global

Finance."

Stable AAA/A-1+ (Triple A/A-One Plus) rating (Standalone Basis) by JCR-VIS (July 2007)

Best Return on Capital for 2006 amongst all Banks in Asia. -“Banker Magazine” in July

2007

"Best Foreign Exchange Bank – Pakistan” award for the year 2006 by world's leading

financial journal “Global Finance”.

Due to consistent improvement in NBP's Core Profitability, Asset Quality and Economic

Capitalization in recent years, Moody’s Investors Service upgraded the Financial Strength

Rating (FSR) rom E+ to D-, in November 2005.

“Best Bank - Pakistan” award for the year 2005 by world's leading financial journal “Global

Finance”.

The Asian Banker, a reputable financial journal, has published the report of its research

project on the ranking of 300 of Asia 's Strongest Banks based on a 11-Dimensional Dynamic

Scoring Criteria has adjudged National Bank of Pakistan as the Strongest Bank in Pakistan .
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On the basis of overall financial performance during 2004, NBP has been listed “Amongst

top 1000 banks in the world” and “ Number 1 Bank in Pakistan” by the prestigious “Banker

Magazine” in its issue of July 2005 .

The “Banker Magazine” in July 2005 recognized NBP as the 10th Best Bank in terms of

‘Profit on Capital' in the world.

“Bank of the Year” awarded for the year 2005 by the world renowned “The Banker”

magazine owned by the Financial Times Group, London.

On an all Pakistan basis National Bank of Pakistan was awarded the “Kissan Times Award”

for the year 2005 by the Prime Minister , Mr. Shaukat Aziz, for its services in the Agriculture

Sector .World's leading financial journal, “Global Finance” in an exclusive survey has named

NBP as the Best Emerging Market Bank from Pakistan for the year 2005.

“Bank of the Year” awards for the year 2004 by the world renowned “The Banker” magazine

owned by the Financial Times Group, London.

In May 2004, NBP's standalone long-term rating was upgraded by JCR-VIS Credit Rating

Agency to AA (double A) from AA -( double A minus) with “stable outlook”.

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 CHAPTER # 3

SERVICES OF NBP

SERVICES OF NBP

Services are the outputs of the firm which are in intangible form.

NBP offers the following services to the people.

3.1 DEMAND DRAFTS

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If you are looking for a safe, speedy and reliable way to transfer money, you can now

purchase NBP’s Demand Drafts at very reasonable rates. Any person whether an account

holder of the bank or not, can purchase a Demand Draft from a bank branch.

3.2 SWIFT SYSTEM

The SWIFT system (Society for Worldwide Inter bank Financial Telecommunication) has

been introduced for speedy services in the area of home remittances. The system has built-in

features of computerized test keys, which eliminates the manual application of tests that often

cause delay in the payment of home remittances. The SWIFT Center is operational at

National Bank of Pakistan with a universal access number NBP-APKKA. All NBP overseas

branches and overseas correspondents (over 450) are drawing remittances through SWIFT.

. 3.3 LETTERS OF CREDIT

NBP is committed to offering its business customers the widest range of options in the area

of money transfer. If you are a commercial enterprise then our Letter of Credit service is just

what you are looking for. With competitive rates, security, and ease of transaction, NBP

Letters of Credit are the best way to do your business transactions.

3.4 TRAVELER'S CHEQUES

Traveler’s cheques are negotiable instruments, and there is no restriction on the period of

validity of the cheques. Rupee traveler’s cheque is available at all branches of NBP. This can

be enchased in all branches of NBP. It is one of the safest ways for carrying money.

3.5 PAY ORDER

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NBP provides another reason to transfer your money using our facilities. NBP pay orders are

a secure and easy way to move your money from one place to another. And, as usual, NBP

charges for this service are extremely competitive. The charges of NBP are very low all over

the Pakistan. It charges Rs 50/- for NBP account holders on issuing one payment order. And

charges Rs 100/- for NBP non-account holders on issuing one payment order. It charges Rs

25/- for students on payment of fees of educational institutions.

3.6 MAIL TRANSFERS

Move your money safely and quickly using NBP Mail Transfer service. And NBP also offer

the most competitive rates in the market. They charges Rs 50/- exchange rate and RS 75/-

postage charges on issuing mail transfer.

3.7 FOREIGN REMITTANCES

To facilitate its customers in the area of Home Remittances, National Bank of Pakistan has

taken a number of measures to:

• Increase home remittances through the banking system

• Meet the SBP directives/instructions for timely and prompt delivery of remittances to

the beneficiaries

3.8 SHORT TERM INVESTMENTS

NBP now offers excellent rates of profit on all its short term investment accounts. Whether

you are looking to invest for 3 months or 1 year, NBP’s rates of profit are extremely

attractive, along with the security and service only NBP can provide.

3.9 National Income Daily Account (NIDA)

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The scheme was launched in December 1995 to attract corporate customers. It is a current

account scheme and is part of the profit and loss system of accounts in operation throughout

the country.

3.9.1 Salient Features

• Rs 2-million is required to open an account and there is no maximum limit.

• Profit is paid on half yearly basis on monthly balances.

• The rates of profit vary according to the slabs of deposit. On Deposits of Rs.2 million

to 2,000 million, the rate fluctuates from 1.4% to 1.75%

3.9.2 Rates on NIDA

• From Rs 2/- million to Rs 50/- the rate is 1.4%.

• From Rs50/- million but less than Rs 500/-million, the rate is 1.5%.

• From Rs 500/- million but below Rs 1000/- the rate is 1.6%.

• From Rs 1000/- and above the rate is 1.75%.

3.10 COMMERCIAL FINANCE

NBP dedicated team of professionals truly understands the needs of professionals,

agriculturists, large and small business and other segments of the economy. They are the

customer’s best resource in making NBP’s products and services work for them.

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3.11 TRADE FINANCE OTHER BUSINESS LOANS

There are two types of trade finance.

3.11.1 AGRICULTURAL FINANCE

NBP provides Agricultural Finance to solidify faith, commitment and pride of farmers who

produce some of the best agricultural products in the World.

3.11.1.1 Agricultural Finance Services

“I Feed the World” program, a new product, is introduced by NBP with the aim to help

farmers maximize the per acre production with minimum of required input. Select farms will

be made role models for other farms and farmers to follow, thus helping farmers across

Pakistan to increase production.

3.11.1.2 Agricultural Credit

The agricultural financing strategy of NBP is aimed at three main objectives:-

• Providing reliable infrastructure for agricultural customers

• Help farmers utilize funds efficiently to further develop and achieve better production

3.11.1.3 Agricultural Credit (Medium Term)

• Production and development

• Watercourse improvement

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 • Wells

• Farm power

• Development loans for tea plantation

3.11.2 CORPORATE FINANCE

3.11.2.1 Working Capital and Short Term Loans

NBP specializes in providing Project Finance – Export Refinance to exporters – Pre-

shipment and Post-shipment financing to exporters – Running finance – Cash Finance –

Small Finance – Discounting & Bills Purchased – Export Bills Purchased / Pre-shipment /

Post Shipment Agricultural Production Loans

3.11.2.2 Medium Term Loans and Capital Expenditure Financing

NBP provides financing for its clients’ capital expenditure and other long-term investment

needs. By sharing the risk associated with such long-term investments, NBP expedites

clients’ attempt to upgrade and expand their operation thereby making possible the

fulfillment of our clients’ vision. This type of long term financing proves the bank’s belief in

its client's capabilities, and its commitment to the country.

3.12 INTERNATIONAL BANKING

National Bank of Pakistan is at the forefront of international banking in Pakistan which is

proven by the fact that NBP has its branches in all of the major financial capitals of the

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world. Additionally, we have recently set up the Financial Institution Wing, which is placed

under the Risk Management Group. The role of the Financial Institution Wing is:-

• To effectively manage NBP’s exposure to foreign and domestic correspondence

• Manage the monetary aspect of NBP’s relationship with the correspondents to

support trade, treasury and other key business areas, thereby contributing to the

bank’s profitability

3.12.1 NBP Offers

• The lowest rates on exports and other international banking products

• Access to different local commercial banks in international banking

3.13 Cash and Gold Finance

Cash and Gold finance means that loan is given against the gold. The gold is mortgaged with

the bank and loan is taken. It is the area of consumer finance. And borrower can take loan for

common use.

• Facility of Rs. 10, 000/-against each 10 gms of net weight of Gold Ornaments

• No maximum limit of cash

• Repayment after one year

• Roll over facility

• No penalty for each repayment

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3.14 Advance Salary Loan

This loan is given to those people who are Govt. servants. They can get a loan up to the

salary of fifteen months.

Easy installments of 1 to 60 months at your choice

• No minimum income collateral & insurance charges required

• Quick processing and fastest disbursement

3.15 NBP Karobar

Mera Apna Karobar

• Minimum down payment, 10% of asset price (5% for PCO & Telecaster)

• Tenure 1 to 5 years (for PCO 2 years)

• Grace period 3 months

• Maximum loan amount Rs. 200,000/-

• Age 18-45 years

• Mark-up (variable) 1 year KIBOR + 2.00% p.a.

• The customer will pay markup @ 6% p.a., rest will be borne by GOP

• Life & disability insurance paid by GOP.

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 CHAPTER # 4

DEPARTMENTS OF NBP

DEPARTMENTS OF NBP

4.1 CASH DEPARTMENT

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Cash department performs the following functions

4.1.1 Receipt

The money, which either comes or goes out from the bank, its record should be kept. Cash

department performs this function

4.1.2 Payments

It is a banker’s primary contract to repay money received for this customer’s account usually

by honoring his Cheques.

4.1.3 Cheques and their Payment

The Negotiable Instruments. Act, 1881,

“Cheque is a bill of exchange drawn on a specified banker and not expressed to be payable

otherwise than on demand”.

Since a Cheque has been declared to be a bill of exchange, it must have all its characteristics

as mentioned in Section 5 of the Negotiable Instruments Act, 1881. Therefore, one can say

that a Cheque can be defined as an:

“An unconditional order in writing drawn on a specified banker, signed by the drawer,

requiring the banker to pay on demand a sum certain in money to, or to the order of, a

specified person or to the bearer, and which does not order any act to be done in addition to

the payment of money”.

4.1.4 The Requisites of Cheque

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There is no prescribed form of words or design of a Cheque, but in order to fulfill the

requirements mentioned in Section 6 above the Cheque must have the following.

a) It should be in writing

b) The unconditional order

c) Drawn on specific banker only

d) Payment on Demand

e) Sum Certain in money

4.1.5 Parties to Cheque

The normal Cheque is one in which there is a drawer, a drawee banker and a payee, or no

payee but bearer.

a) The Drawer

b) The Drawee

c) The Payee

4.1.6 Types of Cheques

Bankers in Pakistan deal with three types of cheques

a) Bearer Cheques

Bearer cheques are cashable at the counter of the bank. These can also be collected through

clearing.

b) Order Cheque

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These types of cheques are also cashable on the counter but its holder must satisfy the banker

that he is the proper man to collect the payment of the Cheque and he has to show his

identification. It can also be collected through clearing.

c) Crossed Cheque

These cheques are not payable in cash at the counters of a banker. It can only be credited to

the payee’s account. If there are two persons having accounts at the same bank, one of the

account holder issues a cross-Cheque in favour of the other account holder. Then the cheque

will be credited to the account of the person to whom the cheque was issued and debited

from the account of the person who has actually issued the cheque.

4.1.7 Payment of Cheques

It is a banker’s primary contract to repay money received for his customer’s account usually

by honouring his cheques. Payment of money deposited by the customer is one of the root

functions of banking. The acid test of banking is the receipt of money etc. from the

depositors, and repayment to them. This paying function is one, which is the distinguishing

mark of a banker and differentiates him from other institutions, which receive money from

the publicCheques should be in a proper form

a) Cheque should not be crossed

b) Cheque should be drawn on the particular bank

c) Cheque should not mutilated

d) Funds must be sufficient and available

4.2 CLEARANCE DEPARTMENT

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A clearinghouse is an association of commercial banks set up in given locality for the

purpose of interchange and settlement of credit claims. The function of clearinghouse is

performed by the central bank of a country by tradition or by law. In Pakistan, the clearing

system is operated by the SBP. If SBP has no office at a place, then NBP, as a representative

of SBP act as a clearinghouse.

After the World War II, a rapid growth in banking institutions has taken place. The use of

cheques in making payments has also widely increased. The collection as settlement of

mutual obligations in the form of cheques is now a big task for all the commercial bank.

When Cheque is drawn on one bank and the holder (payee) deposits the same in his account

at the bank of the drawer, the mutual obligation are settled by the internal bank

administration and there arises no inter bank debits from the use of cheques. The total assets

and total liabilities of the bank remain unchanged.

In practice, the person receiving a Cheque as rarely a depositor of the cheque at the same

bank as the drawer. He deposits the cheque with his bank other than of payer for the

collection of the amount. Now the bank in which the cheque has been deposited becomes a

creditor of the drawer’s bank. The depositor bank will pay his amount of the cheque by

transferring it from cash reserves if there are no offsetting transactions. The banks on which

the cheques are drawn become in debt to the bank in which the cheques are deposited. At the

same time, the creditors’ banks receive large amounts of cheques drawn on other banks

giving claims of payment by them.The easy, safe and most efficient way is to offset the

reciprocal claims against the other and receive only the net amount owned by them. This

facility of net inter bank payment is provided by the clearinghouse.

4.2.1 In-Word Clearing Books

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The bank uses this book for the purpose of recording all the cheques that are being received

by the bank in the first clearing. All details of the cheques are recorded in this book.

4.2.2 Out-Word Clearing Book

The bank uses outward clearing register for the purpose of recording all the details of the

cheques that the bank has delivered to other banks.

4.3. Forms of Loans

In addition to purchase and discounting of bills, bankers in Pakistan generally lend in the

form of cash finance, overdrafts and loans. NBP provides advances to different people in

different ways as the case demand.

a) Cash Finance

This is a very common form of borrowing by commercial and industrial concerns and is

made available either against pledge or hypothecation of goods, produce or merchandise. In

cash finance a borrower is allowed to borrow money from the banker up to a certain limit,

either at once or as and when required. The borrower prefers this form of lending due to the

facility of paying markup/services charges only on the amount he actually utilizes.

If the borrower does not utilize the full limit, the banker has to lose return on the un-utilized

amount. In order to offset this loss, the banker may provide for a suitable clause in the cash

finance agreement, according to which the borrower has to pay markup/service charges on at

least on self or one quarter of the amount of cash finance limit allowed to him even when he

does not utilize that amount.

b) Overdraft/Running Finance

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This is the most common form of bank lending. When a borrower requires temporary

accommodation his banker allows withdrawals on his account in excess of the balance which

the borrowing customer has in credit, and an overdraft thus occurs. This accommodation is

generally allowed against collateral securities. When it is against collateral securities it is

called “Secured Overdraft” and when the borrowing customer cannot offer any collateral

security except his personal security, the accommodation is called a “Clean Overdraft”. The

borrowing customer is in an advantageous position in an overdraft, because he has to pay

service charges only on the balance outstanding against him. The main difference between a

cash finance and overdraft lies in the fact that cash finance is a bank finance used for long

term by commercial and industrial concern on regular basis, while an overdraft is a

temporary accommodation occasionally resorted to.

c) Demand Financing/Loans

When a customer borrows from a banker a fixed amount repayable either in periodic

installments or in lump sum at a fixed future time, it is called a “loan”. When bankers allow

loans to their customers against collateral securities they are called “secured loans” and when

no collateral security is taken they are called “clean loans”.

The amount of loan is placed at the borrower’s disposal in lump sum for the period agreed

upon, and the borrowing customer has to pay interest on the entire amount. Thus the

borrower gets a fixed amount of money for his use, while the banker feels satisfied in lending

money in fixed amounts for definite short periods against a satisfactory security

4.4 REMITTANCE DEPARTMENT

31
Remittance means a sum of money sent in payment for something. This department deals

with either the transfer of money from one bank to other bank or from one branch to another

branch for their customers. NBP offers the following forms of remittances.

a) Demand Draft

b) Telegraphic Transfer

c) Pay Order

d) Mail Transfer

4.4.1 Demand Draft

Demand draft is a popular mode of transfer. The customer fills the application form.

Application form includes the beneficiary name, account number and a sender’s name. The

customer deposits the amount of DD in the branch. After the payment the DD is prepared and

given to the customer. NBP officials note the transaction in issuance register on the page of

that branch of NBP on which DD is drawn and will prepare the advice to send to that branch.

The account of the customer is credited when the DD advice from originating branch comes

to the responding branch and the account is debited when DD comes for clearance

NBP CHARGES FOR DD

I. Up to Rs. 50,000/- is Rs 50/- only

II. Over Rs. 50,000/- is 0.1%

4.4.2 Pay Order

32
Pay order is made for local transfer of money. Pay order is the most convenient, simple and

secure way of transfer of money. NBP takes fixed commission of Rs. 25 per pay order from

the account holder and Rs. 100 from a non-account holder.

4.4.3 Telegraphic Transfer

Telegraphic transfer or cable transfer is the quickest method of making remittances.

Telegraphic transfer is an order by telegram to a bank to pay a specified sum of money to the

specified person. The customer for requesting TT fills an application form. Vouchers are

prepared and sent by ordinary mail to keep the record. TT charges are taken from the

customer. No excise duty is charged on TT. The TT charges are:

Telegram/ Fax Charges on TT = Actual-minimum Rs.125.

Cable telegram transfer costs more as compared to other title of money. In cable transfer the

bank uses a secret system of private code, which is known to the person concerned with this

department and branch manager.

4.4.4 Mail Transfer

When the money is not required immediately, the remittances can also be made by mail

transfer (MT). Here the selling office of the bank sends instructions in writing by mail to the

paying bank for the payment of a specified amount of money. Debiting to the buyer’s

account at the selling office and crediting to the recipient’s account at the paying bank make

the payment under this transfer. NBP taxes mail charges from the applicant where no excise

duty is charged. Postage charges on mail transfer are actual minimum Rs. 40/- if sent by

registered post locally Rs.40/- if sent by registered post inland on party’s request.

4.5 DEPOSIT DEPARTMENT

33
It controls the following activities:

a) A/C opening.

b) Issuance of Cheque book.

a) Current a/c

b) Saving a/c

c) Cheque Cancellation

d) Cash

4.5.1 Account Opening

The opening of an account is the establishment of banker customer relationship. Before a

banker opens a new account, the banker should determine the prospective customer’s

integrity, respectability, occupation and the nature of business by the introductory references

given at the time of account opening. Preliminary investigation is necessary because of the

following reasons.

i. Avoiding frauds

ii. Safe guard against unintended over draft.

iii. Negligence.

iv. Inquiries about clients.

There are certain formalities, which are to be observed for opening an account with a bank.
34
• Formal Application

• Introduction

• Specimen Signature

• Minimum Initial Deposit

• Operating the Account

1. Pay-In-Slip Book

2. Pass Book

3. Issuing Cheque Book

a) Qualification of Customer

The relation of the banker and the customer is purely a contractual one, however, he must

have the following basic qualifications.

• He must be of the age of majority.

• He must be of sound mind.

• Law must not disqualify him.

• The agreement should be made for lawful object, which create legal relationship

• Not expressly declared void.

35
b) Types of Accounts

Following are the main types of accounts

1) Individual Account

2) Joint Account

3) Accounts of Special Types

 Partnership account

 Joint stock company account

 Accounts of clubs, societies and associations

 Agents account

 Trust account

 Executors and administrators accounts

4.5.2 Issuing of Cheque Book

This department issue cheque books to account holders.

Requirements for issuing cheque book

a) The account holder must sign the requisition slip

b) Entry should be made in the cheque book issuing book

36
c) three rupees per cheque should be recovered from a/c holder if not then debit his/her

account.

4.5.3 Current Account

These are payable to the customer whenever they are demanded. When a banker accepts a

demand deposit, he incurs the obligation of paying all cheques etc. drawn against him to the

extent of the balance in the account. Because of their nature, these deposits are treated as

current liabilities by the banks. Bankers in Pakistan do not allow any profit on these deposits,

and customers are required to maintain a minimum balance, failing which incidental charges

are deducted from such accounts. This is because the depositors may withdraw Current

Account at any time, and as such the bank is not entirely free to employ such deposits.

Until a few decades back, the proportion of Current Deposits in relation to Fixed Deposits

was very small. In recent years, however, the position has changed remarkably. Now, the

Current Deposits have become more important; but still the proportion of Current Deposits

and Fixed Deposits varies from bank to bank, branch to branch, and from time to time.

4.5.4 Saving Account

Savings Deposits account can be opened with very small amount of money, and the depositor

is issued a cheque book for withdrawals. Profit is paid at a flexible rate calculated on six-

month basis under the Interest-Free Banking System. There is no restriction on the

withdrawals from the deposit accounts but the amount of money withdrawn is deleted from

the amount to be taken for calculation of products for assessment of profit to be paid to the

account holder. It discourages unnecessary withdrawals from the deposits.

37
 CHAPTER # 5

SWOT ANALYSIS

38
SWOT ANALYSIS

SWOT analysis is an acronym that stands for strengths, weakness, opportunities, and threats

SWOT analysis is careful evaluation of an organization’s internal strengths and weakness as

well as its environment opportunities and threats.

“SWOT analysis is a situational which includes strengths, weaknesses, opportunities and

threats that affect organizational performance.”

“The overall evaluation of a company strengths, weaknesses, opportunities and threats is

called SWOT analysis.”

In SWOT analysis the best strategies accomplish an organization’s mission by:

1. Exploiting an organizations opportunities and strength.

2. Neutralizing it threats.

3. Avoiding or correcting its weakness.

SWOT analysis is one of the most important steps in formulating strategy using the

organization mission as a context, managers assess internal strengths distinctive

competencies and weakness and external opportunities and threats. The goal is to then

develop good strategies and exploit opportunities and strengths neutralize threats and avoid

weaknesses.

39
5.1 STRENGTHS

5.1.1 OLDEST INSTITUTION

NBP in one of the oldest bank of Pakistan and first nationalized bank Hence its customer

base is strength from this plus point as customers have more confidence in the bank. The

additional value services as the privilege for the bank.

5.1.2 ALTERNATE DUTIES IN SBP ABSENCE

The NBP performs additional services for its customers as well as the other bank customer in

the absence of SBP.

5.1.3 MORE DEPOSITS THAN OTHER BANK

NBP has the relative competence in having more deposits than the other bank. This is

because of the confidence the customer have in the bank. The bank being the privileged and

oldest bank in banking sector of Pakistan enjoys this edge over all others, lacking it.

5.1.4 EMPLOYEE BENEFITS

The employers at NBP are offered reasonable monetary benefit. Normally two bonuses are

given on Eid-Ul-Fitar & Eid-Ul-Azha. This serves as an additional benefit and competency

for the bank and a source of motivation for the employees.

40
5.1.5 BROAD NETWORK

The bank has another competency i.e. it has broad-basses network of branches throughout the

country also more than one branch in high productive cities. The customers are provided

services at their nearest possible place to confirm customer satisfied.

5.1.6 RELATION BETWEEN STAFF AND OTHER EMPLOYESS

The bank enjoys a good plus point when it comes to the employee manager relationship the

hearing as removing of discrepancies if any, between the employees, and between the

manager and employees.

5.2 WEAKNESSES

5.2.1 LACK OF MARKETING EFFORT

The bank does not promote its corporate image, services, etc on a competitive way. Hence

lacks far behind in marketing effort .A need for aggressive marketing in there in the era

marketing in now becoming a part of every organization.

5.2.2 NBP UNDER POLITICAL PRESSURE

The strong political hold of some parties and government and their dominance is affecting

the bank in a negative way.

5.2.3 FAVORITISM AND NEPOTISM

The promotions and bonuses etc in the bank are often powered by senior’s favoritism or

depends upon their wills and decision. This adds to the negative factors, which

41
 denominate the employees thus resulting in affecting their performance

negatively.

5.2.4 LACK OF FINACIAL PRODUCT

The bank falls far behind when the innovative and new schemes are considered. It has not

been involved in the tug of war between the competitors to the accounts and strengthens the

existing customer base.

5.2.5 INEFFICIENT COUNTER SERVICES IN THE RUSH HOURS

During the rush hours, the bank is founded out to be a total flop to handle the mob of people

peaking from windows and doors. The bank has deficiency to operate in the stages of rush

hours where the people find them services entangled in a situation of no where because they

are not well served.

5.2.6 LACK OF COMPUTERIZED NETWORK

The bank lack the strength of being powered by the network of computers, which have saved

time, energy and would have lessened the mental stress, the employees have currently. This

would add to the strength if it were powered by network of computers.

5.2.7 LACK OF MODERN EQUIPMENT

The bank lacks the modern Equipment that is note counting machine computers. Even if

there is any equipment they lack to fall in the criteria of being rearmed as update and

upgraded

5.2.8 UNEVEN WORK DISTIBUTION

42
The workload in NBP is not evenly distributed and the workload tends to be more on some

employees while others abscond away from their responsibilities, which server as a

demotivation factor for employees performing above average work.

5.3 OPPORTUNITIES

5.3.1 ELECTRONIC BANKING

The world today has become a global village because of advancement in the technologies,

especially in communication sector. More emphasis is now given to avail the modern

technologies to better the performances. NBP can utilize the electronic banking opportunity

to ensure on line banking 24 hours a day. This would give a competitive edge over others.

5.3.2 MICRO FINANCING

Because of the need for micro financing in the market, there are lot of opportunities in this

regard. Other banks have already initiated, now the time has arrived when the NBP must

realize it and take on step to cater an ongoing demand.

5.4 THREATS

5.4.1 EMERGENCE OF NEW COMPETITORS

The bank is facing threats with the emergence of new competitors especially in terms of

foreign banks. These foreign banks are equipped with heavy financial power with excellent

and innovative ways of promoting and performing their services. The bank has to take

initiative in this regard or will find itself far back in competition.

5.4.2 CUSTOMERS COMPLAINTS

43
There exists no regular and specific system of the removal of customer complaints. Now a

day a need for total customer satisfaction is emerging and in their demanding consequences

customer's complaints are ignored

CHAPTER# 6

FINANCIAL ANALYSIS

44
FINANCIAL ANALYSIS

Financial analysis, though varying according to the particular interests of the analyst, always

involves the use of various financial statement primarily the balance sheet and income

statement.

6.1 National Bank of Pakistan Five Years Performance at Glance

Years 2009 2008 2007 2006 2005

Total assets 1032603 888080 66606 471860 432803

Deposits 692721067 62493901 44458 395568 362866

Investment 208662871 17082249 15887 166196 143525

After tax

profit 9689846 12673707 54654 4198 2253

Earning per

share 5.84 7.32 8.1 10.23 5.49

Return on

assets 2.8 2.2 2.1 2% 1.40%

No of

Branches 1517 1499 1472 1468 1462

From the above table it is very much clear that the NBP performance is going higher and

higher total assets are at the crest in 2009. If we draw a graph this will shows that the graph is

upward trend. Profit is increasing from year to year.

45
6.2 RATIO ANALYSIS

Financial analysis is the process of identifying the financial strengths and weakness of the

firm by properly establishing relationship between the items of balance sheet and profit and

loss account, in order to make rational decision in keeping with the objective of the

organization, for that purpose the management use analytical tools. To evaluate the financial

condition and performance of the business entity, the financial analyst needs to perform

"checkups" on various aspects of the business financial health.

A tools frequently used during these checkups is a financial ratio analysis, which relates two

piece of financial data by dividing one quantity by the other we calculate ratios because in

this way we get a comparison that may prove more useful than the raw number by

themselves. The business itself and outside providers of capital (creditors and investors) all

undertake financial statement analysis.

6.3 Parties Interested in Ratio Analysis

• Trade Creditors

• Suppliers of Long-Term Debt

• Investors

• Management.

6.4 Ratio analysis

Ratio is the comparison between two figures of balance sheet and income statement.
46
6.4.1 Cash Ratio

“This ration is obtained by dividing cash by current liabilities / liabilities”.

This ratio shows that the cash is enough for payment of current liabilities or not.

It is calculated as cash Ratio=Cash/current liabilities

Table 1

Year 2002 2003 2004 2005 2006 2007 2008

Cash Ratio 0.118 0.169 0.19 0.21 0.22 0.15 0.134

Graph 1

Cash Ratio

0.25
0.2
0.15
Ratio
0.1
0.05 Cash Ratio
0
2002 2004 2006 2008
Years

It means that how much cash is available for payment its current liabilities. This ratio of NBP

shows a downward trend. Because of high advances cash is less to cover its current

liabilities.

47
6.4.2 Gross Profit Margin Ratio

“This ratio shows the profit margin in Sales/ Revenue”.

This is calculated as.

Gross Profit/ Interest Earned

Table 2

Year 2002 2003 2004 2005 2006 2007 2008

Gross Profit Margin

% 24.8 27.7 28.9 29.59 39.67 46.6 51.9

Graph2

Gross Profit Margin%

Years

2008
2006 Gross Profit
2004 Margin%

2002
0 20 40 60
Ratio

Gross profit margin relates profit of the organization to its sales (interest earned in case of

Bank).

48
From calculation it is very much clear that the gross profit margin ration have upward trend

which shows that how much they using their deposits to earn interest.

6.4.3 Net Profit Margin

This ratio measure the firm’s profitability of sales/ interest earned after taking account of all

expenses and income taxes.

This ratio can be calculated as:

Net profit margin ration = Net Profit after Taxes / Interest Earned

Table 3

Year 2002 20003 2004 2005 2006 2007 2008

Net Profit Margin

% 0.2 1.6 1.7 1.55 3.67 3.18 21.6

Graph3

Net Profit Margin %

30
Ratio

20 Net Profit
10 Margin %
0
06

08
02

04
20

20

20

20

Years

49
From the calculation and graph it is very much clear that the performance of NBP is very

good. And the trend is upward. It tells us a firm’s net income per rupee of revenue. As the

trend is upward it shows the high profits in revenue per rupee in case of NBP

6.4.4 Return on Equity

Dividing profit after taxation by share holder’s equity. ROE compares net profit after taxes to

the Share holder’s Equity.

This ratio is calculated as:

ROE= Profit after Taxes/Share holder’s Equity

Table 4

Year 2002 2003 2004 2005 2006 2007 2008

Return on Equity 0.67 5.3 0.2 2.7 6.55 9.4 23.1

Graph4

Return on Equity

30
20
Return on
10
Ratio Equity
0
02

04

06

08
20

20

20

20

Years

50
From the calculation it is clear that the ROE Ratio have an upward trend of NBP. It is

because of high net profit they have earned. It tells us the earning power on the shareholder’s

investments. It is because of high investments by NBP and effective expense management.

6.4.5 Return on Assets

This ratio shows the efficiency of organization that how efficiently utilizes their assets. This

ratio relates profits to assets.

It is calculated as:

= Profit after Tax/Total Assets

Table 5

Year 2002 2003 2004 2005 2006 2007 2008

Return on Assets 0.01 0.16 0.008 0.124 0.225 0.52 0.9

Graph 5

Return on Assets

2008
Years

2006 Return on
2004 Assets

2002
0 0.5 1
Ratio

51
From calculation it is clear that this ration of NBP is going high and high. It shows that NBP

using it’s assets very efficiently. That is why they are earning very high profits.

6.4.6 Investment Deposit Ratio

This ratio shows the comparison of investments and deposits. This is calculated as.

Investment deposit Ratio= Investment/Deposits

Table 6

Year 2002 2003 2004 2005 2006 2007 2008

Investment Deposit

Ratio 42.9 37.7 31.03 22.94 20.54 39.66 42.01

Graph6

Investment Deposit ratio

50
40
30
Ratio
20 Investment
10
Deposit Ratio
0
2002 2005 2008
Years

From above table and graph it is very much clear that NBP are using their deposit very

efficiently and earning high profits. The ratio has an upward trend, which shows the

performance of NBP is very good.

52
6.4.7 Debit to Equity Ratio

This ratio shows the amount contributed by creditors and shareholders. It is computed simply

dividing the total debt of the firm by its shareholders equity.

This calculated as:

= Total Debt / Shareholder’s equity

Table 7

Year 2002 2003 2004 2005 2006 2007 2008

Debt to equity

ratio 32.42 31.4 30.4 20.9 22.7 28.6 24.5

Graph7

Debt to equity ratio

2008
Years 2006 Debt to equity
2004 Ratio
2002
0 20 40
Ratio

53
From the table and graph it is clear that this ratio is decreasing which show the high

efficiency of NBP. In 2005 it was high but in 2006 it decreases to 24.5 from 28.6 which is a

good sign.

6.4.8 Debt to Assets Ratio

This ratio shows that to which extent the organization assets are financed by debit. It is

calculated as.

= Total Debt / Total Asset

Table 8

Year 2002 2003 2004 2005 2006 2007 2008

Debt to asset

ratio 0.94 0.944 0.957 0.954 0.92 0.954 0.961

Graph8

Debt ratio

0.98
0.96
0.94
Ratio
0.92
0.9 Debt Ratio
0.88
2002 2004 2006 2008
Years

This ratio is directly related to risk high ratio means high risk and low ratio means low risk.

From calculation it is clear that the ratio is decreasing which show low risk. This ratio serves

54
the similar purpose to the debt to equity ratio. This ratio is high because of more deposits in

the bank, and deposits are the liability of customer on bank

6.4.9 Advances Deposit Ratio

This ratio show that how much efficiently the bank advances the deposits of their customer to

borrower.

It is calculated as:

Advances Deposit Ratio = Advances/ Deposit

Table 9

Year 2002 2003 2004 2005 2006 2007 2008

Advances

Deposits Ratio 0.414 0.399 0.416 0.443 0.487 0.387 0.406

Graph9

Advances Deposits Ratio

0.5
0.4
Ratio 0.3
0.2 Advances
0.1
Deposits Ratio
0
2004 2006 2008
Years

55
From above table and graph it is clear that the ratio is going high. Which means the

efficiency of NBP is good and they use their deposits efficiently in advancing to borrowers.

Here high ratio is required. The next side of the picture is that the people will think that is

risky to deposit the money in the bank.

6.4.10 Assets Turnover Ratio

The relationship of net sales /revenue to total assets is known as the total asset turnover ratio.

It is calculated as.

= Total Revenue / Total Assets

Table 10

Year 2002 2003 2004 2005 2006 2007 2008

Assets Turnover Ratio 0.099 0.097 0.093 0.079 0.075 0.079 1.07

Graph10

Assets Turnover Ratio

2008
Years
2006
2004 Assets Turnover
2002 Ratio
0 0.5 1 1.5
Ratio

56
This ratio shows us the relative efficiency with which a firm utilizes its total assets to

generate revenue. We can see that the ratio is going high and which is a good sign and shows

that NBP is utilizing its assets efficiently.

6.5 ANALYSIS OF REVENUES IN BANKING SECTOR

6.5.1 NET INTEREST REVENUES

6.5.2 INCREASING RELIANCE ON NIR ALONG WITH HIGH MARGINS

Pakistan’s banks have been experiencing increasing trends in terms of their reliance on Net

Interest Revenues (NIR). This has occurred in line with the increase in margins. This is also

reflective of weak fee generation in this market and the effects of improving asset quality.

However, we do not expect this increasing trend to continue to rise to higher levels.

6.5.3 MCB HAS SHOWN THE MOST IMPRESSIVE GROWTH IN NIR

Looking at the individual bank’s above, the banks with better margins (NBP, UBL AND

MCB) generally gave a higher exposure to this type of revenue source helped by relatively

lower funding costs and captive deposits. The recent growth rates in NIR have been
57
impressive although the average figures mask a considerable difference in terms of individual

banks. MCB has clearly out performed all others by more than doubling its NIR in 2005.

This growth was more of a result of better margins than volume or loan growth which

increased by only 31% in 2004 for MCB. The rising interest rate scenario in 2005 helped

banks with cheap deposit bases to boost their margins. This was particularly true for MCB,

NBP and UBL. In 2005, NBP and BAFL showed NIR growth less than the average. The

reason in NBP’s case was already huge base of Rs.14.39 bn in 2004.

The outlook for NIR is driven by two factors, volume of loan growth and the outlook for

margins.

6.6 ANALYSIS OF COSTS

58
6.6.1 PAKISTAN BANKS SHOW SURPRISING COST EFFICIENCY

When using the cost-to-income ratio Pakistan banks surprisingly appear to be fairly efficient.

We would like emphasize that a possible explanation for the decreasing cost-to-income ratios

may be that income is increasing at apace much greater the rate of increase in costs.

Moreover, the expenses necessary for technology related expenses on their agenda for the

coming years. Therefore, we can certainly expect these ratios to increase.

6.6.2 DECLINING COST RATIOS

The ratio has generally been on a decline which is encouraging. Post privatization large

banks like UBL and MCB cut back on their expenses and have aggressively sought to

improve this ratio. However, our view is that there is certainly scope for further

improvement.

6.6.3 BAFL’S COSTS HIGHEST DUE TO BRANCH EXPANSION

59
Looking at individual banks we find that BAFL’s ratio has been increasing over the years

and in 2005, it sported the highest cost-to-income ratio in our selection. This is because of its

aggressive branch expansion from 59 branches in 2003 to 147 in 2005.

As margins get squeezed in this sector, we will see further pressure on these ratios. An

alternative measure is to use cost-to-assets ratio, and in this regard, the Pakistan sector

generally looks attractive. The average has been declining consistently and in 2005 stands at

1.76%. This reduction may also be attributed to the banks’ asset base expansion. We expect

this ratio to further decline as banks continue their asset expansion plans.

6.6.4 BOP MOST EFFICIENT IN TERMS OF COSTS

Looking at individual banks we see the impressive performance of BOP. Its cost-to-assets

ratio stands at 1.15% in 2005 which is the lowest in the industry. It has also shown the most

impressive improvement in our selection decreasing from 1.68% in 2004 to 1.15% in 2005.

6.6.5 STAFF COSTS FROM THE LARGEST PART OF BANK COSTS

60
The largest portion of banks costs is staff cost. The tables below show some detail relating

staff numbers to various ratios. The large banks (MCB, NBP and UBL) have been

maintaining a tight control on their staff costs with minimal increases in the number of

employees in the past couple of years. MCB has in fact reduced its number of employees

from 10,164 in 2003 to 9,377 in 2005. The ratios, such as revenue per employees and

deposits per employees have generally exhibited a rising trend suggesting a productive

workforce. BAFL’s performance has not been impressive looking at its revenue per

employees which deteriorated in 2004 from 2.53 to 1.40% and did not show any change in

2005. Comparing it to the deposit per employee ratios it seems that BAFL’s workforce has

been instrumental in mobilizing deposits but not necessarily profitable ones. A more

plausible reason may be that it has aggressively increased the size of its workforce by 145%

in two years, the benefits of which are yet to be realized. FABL’s performance has been the

most impressive as it continues to improve its deposits mobilization. However it must be kept

in mind that FABL has lower than average reliance on NIR.

61
6.6.6 BRANCHES OF SMALLER BANKS APPEAR MORE PRODUCTIVE

Alternatively we can focus on branch network as a possible driver of costs going forward.

The next tables details the growth in branch networks in recent years and generally highlights

the facts that Pakistan’s large banks have been restraining branch network expansion while

the smaller banks have done just the opposite. UBL and MCB have actually been closing

down branches (see tables below) .This has had the effect of very low deposits growth for

MCB but UBL has been impressive because its deposits growth outstripped the industry even

when it was effectively reducing the number of branches. These figures do mask the fact that

62
UBL not only closed down problem branches but also opened new ones and the net result

was a decline.

6.7 ANALYSIS OF PROFITABILITY

6.7.1 OPERATING PROFIT GROWTH SUPERB IN 2005 SLOW DOWN IN 2006

We believe operating profit growth i.e. before loan loss provisions (LLP) is a far better

measure for growth than other alternatives based on a balance sheet number .Operating profit

growth has been spectacular in the past few years albeit a brief down turn in 2004. In 2006,

operating profit growth is expected to be lower than the growth in 2005. This is justified by

the high GDP growth and somewhat developing state of the sector .The previous high growth

is mainly attributed to strong margins and high loan growth.

63
6.7.2 BOP SHOWS CONSISTENT GROWTH IN PROFITS

BOP is one bank that has seen a consistent operating profit growth even when other banks

were experiencing a downturn in 2004. The reason it has been a spectacular loan growth

(61%,in 2005, highest selection ) . Its loan growth going forward is expected to slow down to

a more stable level. NBP too has been able to show a positive growth for 3 years (2003-

2005).MCB and UBL showed impressive growth in 2005 on their cheap deposit bases.

6.7.3 ROE MEASURE FOR THE SECTOR IS ON THE RISE

Profitability measures have also been attractive to Pakistan banks in addition to underlying

growth. Return on equity ( ROE) has been on a rise at a very healthy level of 29% .this is

even more impressive when viewed with the levels of rising levels of capitals in the banking

system .strong margins in the industry are the primary reason behind the rising profitability .

This is even more commendable when we take into an account the higher than the average

levels of capital of the bank. The other bank are more or less converging while there was a

considerate difference in ROE’s in 2003. We expect a gradual rise in equity- to assets of

64
most banks and consequently a slight depression in ROE’s but by no means to low levels

UBL and BAFL have also provided consistently good returns in the past 3 years.

6.7.4 ROA’S HIGH IN SPITE OF HIGH ASSET GROWTH

An alternative measure is to use Return on assets (ROA) and again Pakistan banks have

shown consistently high ROA over the past few years .Compared with the fact that asset

growth had also been accelerated in this period, the ROA is indeed impressive. With the

industry asset growth stabilizing in the future we expect even further improvement in this

measure.

6.7.5 MCB SHOWS THE MOST IMPRESSIVE RETURNS

Looking at individual banks we can see that MCB has shown the highest ROA in 2005 while

it figured below average in the past few years, the reason being its enormous profit growth in

the year 2005. Profit After Tax (PAT) increased by 3.5 times in 2005 from PRs2.5bn to

PRs8.9bn.FABL on the other hand has shown consistent above average returns on the back

of its relatively smaller asset base.

CHAPTER # 7

65
 OBSERVATION

OBSERVATION

I have divided general observation in four parts. Which are as under. This analysis is mainly

based on my general observation.

• Problems at the Branch.

• Function Analysis.

• Administrative Analysis.
66
 • Personal management’s Analysis.

7.1 PROBLEMS AT THE BRANCH

7.1.1 Customer Satisfaction

In NBP customer dealing is well, but during rush hour the customer has to wait for a long

time for their turn. It’s quite hard for a new customer or potential customer to get the required

information.

7.1.2 Poor Record Management and Filing System

During my internship I observed that filing system of branch is not good. When certain

record is needed the staff has to struggle to find it out and a lot of time is wasted.

7.1.3 Unequal Distribution of Work

Work is not equally distributed. On one hand some employee have to work all day without

relaxing while some others have nothing to do at all. This not only creates confusion among

employees but also hurting and disturbing for overall setup of the bank. And above all it

67
7.2 FUNCTIONAL ANALYSIS

7.2.1 Formal Organization

Formal organization includes the activities of two or more person, which are cautiously

determined groups and coordinated towards a given objective. It provides base when people

are able to communicate with other, when they have common purpose and they are willing to

work.

In NBP, we find a formal organization. Bernard referred to an organization as a formal when

the activities of two or more persons are coordinated towards a given objective. The formal

organization comes into being when people are able to communicate with one another or

willing to act and share a purpose.

7.2.2 Difference between Theory and Practice

A vast difference exists between theory and practice and NBP has written procedure but

practical work done by employees is a bit different from written procedures.

7.2.3 Bank Duty to Maintain Secrecy

They don’t care about maintaining secrecy, especially during the rush hours. They speak

loudly about the account position and while getting clearance of cheque the person can easily

get the whole information from the ledge. The deposit clerk must be careful while passing

any cheque.

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7.2.4 Excessive paper work

It is notified that due to the lengthy procedure of paper work the bank employee are over

burdened. They are unable to give proper attention to the clients and face difficulties in

getting their job done. One reason for lengthy procedure and excessive paper work in the

bank is the lack of computerized technology.

7.2.5 More Accounts Fewer Deposits

Efficient banking is one which does not emphasize on number of accounts but on greater

amount of deposits. NBP is more interested in increasing its number of account irrespective

to its deposit. The main reason behind it is that bank does not provide personalize service to

all the account holders and does not improve its quality and services

7.2.6 Delegation of Authority

Manager has very limited authority; he has to take the approval from his management

authority i-e. In case of advance he has to take the approval of general and regional manager.

The other problem is created, when the manager is not present in his office, the customer

have to wait for hours

7.3 ADMINISTRATIVE ANALYSIS

7.3.1 Job Analysis is not effective

Only on the basis of job analysis it can be decided how a right person can be hired, trained,

compensated or promoted. It is very important for an organization that nature of the job is

described and job specifications are mentioned. Most of the employees are simple graduate

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and do not have proper background about their job. This creates problems both for

organization and for the employees.

7.3.2 Lack of Specialized Training

NBP does not provide adequate facility of specialized training to their staff. Training is

generalized rather than specialized. As the worker finishes his training, he is inducted into a

specific field without having great deal of knowledge about the field.

7.3.3 Poor Job Rotation

There is absence of job rotation in NBP 1316 branch. A person placed in one department

remains their forever. Job rotation is very important for employee especially for those who

are newly recruited. The newly recruit should be rated in all department of the banking in

order to get familiar with working of different departments so that when they get a

responsible position they have know how of the whole system.

7.3.4 Lack of Appreciation

Another very important thing which is ignored in the bank is appreciation if the employee on

their good performance. If hard work and performance of employees is not recognized and

appreciated they become dishearten which results in decline in performance.

7.4 PERSONAL MANAGEMENT ANALYSIS

7.4.1 Need for Better Training Program Need of training is greatly emphasized all around

the world. Training of the personnel is part of human resource management. It has been

noticed that the training program of NBP is not adequate.

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Once the candidate is selected and placed on the respective job. It becomes essential to train

him adequately for the task. They should learn new methods for motivating customers. The

training programmed of the bank should include scientific techniques to improve the decision

making and interpersonal as will individual needs of the employee both specialized to fresh

as well as on job to maintain the high standards of service.

7.4.2 Developing Managerial Leadership

Leadership is a practical term of visible, clear on objective and communicating better control

on financial and administrative matters. Manager is not only responsible for their own units

in business, but also in people terms i.e. training, recruiting, grievance handling and taking

immediate initiative in crisis situation to take major decision affection the future of the bank

and banking community.

7.4.3 Recruitment policy

Human resources are the lifeblood of the organization. If the personnel are recruited carefully

they can become asset to the organization in the case of carelessness a liability on the

organization. Bank is not following its recruitment policy properly due to favoritism,

nepotism and political pressure. Both the top authority and staff union tries their best recruit

their favorites, indulgence of political pressure add salt to the wounds. The persons selected

through these channels are infantile and do not work for the betterment for the bank.

7.4.4 Promotions

Promotion in NBP is purely on the basis of seniority, so the new young person having high

qualification remains behind for quite a lot of time. Top management and staff union put

pressure for the promotion of their favorites, which gives a sense of deprivation to the

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deserving employee and their efficiency is affected. As the concept of promotion is attached

with better in terms of greater responsibility, more prestige, greater skills and increased rate

of salary. Thus a better and impartial policy of promotion needs to be followed.

7.4.5 Transfer

Transfer means when a person is shifted from one place to another place. It is done either that

person is needed more on the other branch or for improving his skill variety. It is the policy

of the Bank to transfer each employee 3 to 4 years.

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 CHAPTER # 8

SUGGETIONS

&

RECOMMENDATIONS

CONCLUSION

To sum up, internship repot is like FIRST FLIGHT for a fresh business graduate. The public

sector banks focused on superior services, niche marketing and the intensive use of

technology to capture dissatisfied customers, in this industry segment, NBP widely regarded

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as top level bank because of their financial strength in the term of their capital position,

prudent management and deposit security. The second tier included bank such as Prime

commercial Bank, Bank Al-Habib, Soneri Bank and Metropolitan Bank. While Bolan Bank,

Union Bank, Prudential bank and the Bank of Punjab are in the third and last tier. These tiers,

especially the second and third, are very competitive and are increasingly characterized by a

widening performance gap. National Bank is in the unique position of finding a balance

between the strengths and weaknesses of a corporate image that strongly identified main

accounts of Pakistan government... All the new private commercial banks suffered from a

problem of credibility, as well as the collapse of the Punjab Co-operatives, Pakistan’s

equivalent of the American savings and loan crisis

A system of regional management is in the place to ensure greater trust and improved

productivity. As far as internship is concerned it is a good career opportunity in general is

scarce in Pakistan. Internship opportunities in particular are quite limited. Internship

programs take some effort to set up and not/ all companies support the internship programs.

In my opinion good interns bring fresh ideas, perspective and energy and create goodwill

and are well worth the effort. I strongly recommend the internship program to all students

contemplating the idea work experience significantly increases the chances of employment

after internship. After all, when an employer compares two résumés, one student with work

experience against another student with none, it is quite evident which student they would

most likely choose.

SUGGETIONS & RECOMMENDATIONS

NBP is an effectively operating and profit making organization and carrying out its activities

under a specified system of procedure. The main regulatory body is State Bank of Pakistan,
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which provides policy guidelines and ensures that the money market operates on sound

professional basis. While the head office specifies the whole procedure of function and

operations. This procedure has been modernized with the passage of time with a view to

streamline the approach and underlying procedure for effective overhauling of its own

capabilities so as to bring them at par with international practices.

Here I am giving some suggestions, which in my view can add some input for efficiency and

better performance of NBP as an organization in genera and this branch in particular. The

recommendations are as follows:

8.1 Professional Training

NBP staff lacks professionalism. They lack the necessary training to do the job efficiently

and properly. Although staff colleges in all major cities but they are not performing well. For

this purpose these staff colleges should be reorganized and their syllabus should be made in

such a way to help the employee understand the ever changing global economic scenario.

Banking council of Pakistan should also initiate some programs to equip the staff with much

needed professional training.

8.2 Delegation of Authority

Employees of the bank should be given a task and authority and they should be asked for

their responsibility.

8.3 Performance Appraisal

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The manager should strictly monitor the performance of every staff member. All of them

should be awarded according to their performance and result in the shape of bonuses to

motivated and incite them to work more efficiently.

8.4 To Overcome Problem of Space and Furniture

In the critical analysis this, problem is discussed. To overcome this problem it is suggested

that a special section should be made inside the branch. Which should only handle the

treasury function, salaries and pensions of federal personnel or the bank should do these

functions in the evening time. Also management should purchase more furniture and arrange

them in such a way which provides maximum space and convenient particularly in deposit

department and there should also be convenient sitting place for customers.

8.5 Transfer

Transfer is not properly carried out. Some of the employees are continually serving at the

same post. They are simply rotated at the same branch. Therefore it is recommended that

evenly rotation of every employee should take place after every three years in different

braches of the bank.

8.6 Need of Qualified Staff

Required, qualified staff should be provided to branch in order to improve the functioning of

the branch. Especially a telephone operator should be appointed.

8.7 Credit Card

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National bank of Pakistan should start its operation in credit card. These cards are very

helpful for the ordinary customer in general and the business people in particular. To make it

mores secure and to eliminate the misuse of it, the management is required to keep proper

security against the card.

8.8 Installing Validator and ATM

Validator machine is used to count the currency notes and its installation will help to

eliminate to counting errors and will save time.

This branch is situated near the City, which is supported to be the hub of business activates.

In this area an auto teller machine (ATM) is the need of the businessmen can easily check

their balance in the bank and also withdraw their money conveniently.

8.9 Clean Loans

Clean loan or clean overdraft is the credit facility extended to the customers to the customers

without any security. These types of small term loans should not be extended to anybody,

because sometime these loans are provided to blue-eyed people of the management and they

become a part of bad debts.

8.10 Decreasing Administrative Expenses

Bank should decrease their administrative expenses. This was Rs 8 billion in the year 2000.

That can be done by lying off the surplus pool of employee with golden handshakes scheme.

The branches that are not much used could also be closed. Employee can also be how to

control the bank expenses. That will give positive results in the future.

8.11 Technological Advancement

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I would like to suggest that at least all the main branches of NBP should be fully

computerized in order to expedite the dealing process among bankers and their customers.

Every department should be provided a computer with adequate training (especially

Advances, Deposits and Foreign Exchange departments).Daily records should be entered

directly into these computers, (instead entering the overall daily transactions after the

banking hours). It will not only reduce transaction time, will increase accuracy but will also

be efficient as well.

8.12 Staff Relationship

Good relationship among staff member leads to the peak performances in any organization. I

observed that the staff relationship was normal other wise but some time I noticed that there

existed a little conformity among the staff members. Another syndrome from which the staff

suffered was that all of them considered themselves more important than others. Some of the

officers used to say that if I am absent for a day the bank would stop working. So this sort of

attitude is not good because it mars bank image and junior’s willingness learn and work hard

and in the end will hurt the whole team.

8.13 Improper Distribution of Work

Proper distribution work leads to success in every organization. Proper distribution of work

prevents the employee from over and under work situation. So for a smooth running of an

organization proper distribution of work is the hint to be followed. During my internship I

observed that there was no proper distribution of work in the bank. I saw that some of the

employee worked like ants other sat idle starting here and there. So this created a lot of over

work situation for while relaxation for other.

8.14 Favoritism and Nepotism

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In this branch during my internship I saw that when some of the employees are transfered to

other places, due to their relation with influential people and with top management they can

cancel their transfer in few weeks, when they are unsatisfied at that place.

So I suggest that in the organization there should be no favoritism, politics and their transfer

and promotion should be made on merit and according to the rules and regulations of the

bank and provided favorable environment to the employee to show their performances.

8.15 Inter Departmental Transfer

I watched during my internship that, there is number of employee who have worked on one

seat for many a year. It can have negative effects motivation of employee who is hard

working and intelligent. Take the example of advances section. In advance section if the

employee is transfer after sixth month or seven month, how can he be able to show his

performances and how can he be able to know the bank customer in a short period of time.

REFERENCES
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1. Annual Reports of different years, published by NBP, Head Office Karachi

2. Brochure- NBP Awards & Achievements.

3. Economic Bulletin, Vol. 34, No.5 September – October 2007, published bi-monthly

by Economic Research Wing, National Bank of Pakistan.

4. Economic Bulletin, March-June 2008, published bi-monthly by Economic Research

Wing, National Bank of Pakistan.

5. Economic Indicators Pakistan, January 2008 published by Economic Research Wing,

Credit

6. Fundamentals of Financial Management by James C. Van Horne 12th Edition

7. Management Group, NBP Head Office Karachi.

8. Managerial Finance by Jae K. Shim & Joel G.Siegel International Edition

9. Management Brief, January 2008 published by Human Resources

Management and administration Group, National Bank of Pakistan Head Office

Karachi.

10. Website of the Bank www.nbp.com.pk

 http://www.nbp.com.pk

 http://www.nbp.com.pk/An_Report.htm

 http://www.secp.gov.pk

 http://www.sbp.gov.pk

 http://www.Googal.com

 http://www.wekipedia.com

 Staff Members of National Bank of Pakistan

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