Saturday, August 22, 2009

Causes of the Failure of Banking System

If we look into the banking system of Pakistan, we find several causes of its failure. The main causes of the failure of the system are discussed below.
The number of bank office in Pakistan is yet not adequate. For this reason people can not enjoy the fascilities which banks can offer. In the absence of banks, people do not get encouragement for saving and capital of country does not grow. The credit Inquiry commission’s report in Pakistan revealed the in adequate banking fascilities in the country. It revealed that there is only one bank office per 1,50,000 people. But in USA and the UK there is one bank office per 7,000 and 4,000 population respectively. The scheduled banks in Pakistan advance loans in greater number. This difference in the distribution of banking fascilities is a sign of defect in our banking system. There should be adequate number of banks in the country to encourage people to saving habit and to extend credit to the industrialists, agriculturists, traders, and other needy people for the development of the country. The banks of Pakistan must launch campaign to popularize, the banking habit. Because our people do not have the banking habit, i.e. they are not acquainted with the valuable services that banks can render them.
Secondly Pakistan has no developed money market. The money market in Pakistan is undeveloped due to the absence of the bill market. Without a developed bill market, the central bank cannot effectively control the credit system adopting open market operation. Besides the bank rate policy of central bank cannot be operative if the money market is not well-developed and well integrated.
Thirdly the large concentration of credit with a limited number of industrialists of bigger means is another defect in our banking system. According to the report of the Credit and Inquiry Commission banks advance loans only to the bigger industrialists. So credit is inadequate to small business industries. Fourthly the seasonal fluctuation in the volume of credit is another defect which is the cause of failure of our banking system.
Lastly seasonal variation and wide fluctuation in the rate of interest is another important problem of our banking system. During excessive demand for accommodation in the busy season of sowing and harvesting associated with festival and marriage season has been invariably followed by higher rate of interest.
It is obvious from the above points that our banking system has some defects due to which it is failed. These defects may be removed if the following measures are taken.
(i) Adequate number of banks should be opened in the rural areas of the country. If banks are opened in rural areas, villagers will get fascilities to save their small income depositing the same in the banks. At present National Bank of Pakistan is being given subsidy with a view to encouraging it to open branches in backward areas of the country. Other banks should also be given such subsidy.
(ii) To give loans to small industrialists the branches of specialized financial institutions should be set up and the State Bank of Pakistan should adopt such policies which will help the flow of credit from undesirable to desirable channels.
(iii) To avoid the seasonal fluctuations of the volume of credit the State Bank of Pakistan in cooperation with the other banks should try to solve this seasonal stringency.
It should be noted that the present banking structure of Pakistan stands on stronger footing. The Government of Pakistan and State Bank of Pakistan are trying to improve the banking system of the country. It may be hoped that within a very short period the banking system of our country will be able to keep pace with the banking system of developed countries.

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