An Empirical Analysis of Financial Reforms in Pakistan: Does it Affect Economic Growth?

Abstract

Banks indulge in catering the needs of government, public sector organization and private businesses. Government of Pakistan introduced several financial reforms for the improvement of banking sector. State Bank of Pakistan (SBP) has taken many influential steps in order to increase performance of the banking sector in Pakistan. This study aimed to enlist the major financial reforms undertaken by the Government of Pakistan and explore their impact on economic growth of Pakistan; furthermore it has explored correlation among economic growth, deposits, lending, real interest rate, savings, and inflation, taking data of thirty six years (1973- 2008). Regression analysis using E-Views was applied and explored a positive impact of financial reforms on economic growth. It is recommended to remove the interest rate ceiling and overcome the problem of inflation. Banks indulge in catering the needs of government, public sector organization and private businesses. Government of Pakistan introduced several reforms for the improvement of banking sector. Fewer lending to small and medium enterprises was given before the reforms. Medium enterprises generated most of development and employment in the country. State Bank of Pakistan (SBP) has taken many influential steps in order to increase performance of banks in Pakistan. Economic development of a country can be ensured either by optimally utilizing the available resources or revamp the procedures to employ already available resources. The banking sector plays a vital role in the developmental activities, as they offer financial resources to the public and private sector for achieving the developmental goals. Before the reforms there was no balanced structure in banks. In mid 1980s public sector banks were dominating the financial sector. At that time foreign banks were more in numbers than state owned but they were not in direct competition with state-owned. Government allowed local private banks to operate and privatize national banks in 1990s. Main aim of these reforms was to restructure banking sector and make banks compatible. Non performing loans were the main concern of the banking industries, as they failed to recover these loans.