IMPACT OF TRADITIONAL ECONOMIC ON BANKING SECTOR

Bank is being defined as a financial institution. Bank is a financial institutions that deals with
money and other financial instruments and conduct business. It issues license to receive deposit
from individuals and make loans by the deposit amount. Through this process banks earn profit.
Profit is the main objective of banks. But banks are different from other financial institutions. So,
the objectives of banks are also different in some aspect. Here we are discussing some objectives
of banks.
OBJECTIVES OF BANKS
There are two common types of bank commercial banks and central bank. In Pakistan
commercial bank are regulated by Central Bank (STATE BANK OF PAKISTAN).Banks also
have business and social objectives.
COMMERCIAL BANKS
Commercial Banks provide several services such as deposit and withdrew money, various
accounts services for their customers such as saving account , current account, profit and loss
account, fixed account etc. Commercial Banks also provide debit and credit. Some objectives of
commercial banks are given below.
Business Objectives
 Marketing profit
 creating utility of currency
 Rendering service
 Receiving deposits
 Making loans
 Ensuring safety
 Investment
Marketing Profit
The main task of all commercial banks except central bank is to get marketing profit. Banks
generate profit by these transactions it takes more interest from debtors and give less interest to
depositors. These two difference payment amount make profit for banks.
Creating utility of currency
Banks use different type of monetary instruments to generate utility and speed up the flow of
economy. Commercial banks work actively for utility currency.
Rendering service
Commercial banks provide various services to people through different activities or ways.
Through serving the people bank earns the profit and increase the goodwill.
SOCIAL OBJECTIVES
 Employment
 Capital formation
 Economic development
 Developing living standard
 Industrialization
 Creating savings
Economic development
Economic development and banks are inter link with each other. Generally bank increase the
credit creation, remittance, internal trade financing, infrastructural development etc.
Developing living standard
Banks helps to people to make their life easier, standard and flexible. Banks gives loans to
various sector for the development of those sectors. Bank gives standard salary to their
employees.
Employment
Banks creates employment for educated people as well as in some way uneducated people.
Central Banks
Central Bank are responsible for currency stability. Central Bank controls inflation, money
supply in the countries market as well as dictate monetary and fiscal policies and manage
demand and supply of foreign currency in the market. Commercial banks and central banks
works jointly for controlling the money market. Only Central banks has power to issue the notes.
Commercial banks make the availability of notes in the market. No other bank can issue the
notes accept central bank.
ROLE OF BANKS IN ECONOMIC DEVELOPMENT
Banks play a key role in economic development and prosperity of Pakistan as well for any
country. This sector is being consider as a backbone of any economy specially Pakistan which is
under developed country. Banks play diversify role in industry and trade. The main contribution
of the banks are given below.
 Capital formation
 Creation of credit
 Fuller utilization of resources
 Bank rate policy
 Encouraging right type of industry
 Finance to government
  Bankers as employer
 Banks are entrepreneur
 Banks monetize debt.
Creation of credit
For development of projects, banks create credit to provide more funds. Credit creation causes to
increased production, sales, prices, and employment. However tis causes fast economic growth.
Bank rate policy
By changing in bank rate policy it lead to change in country’s money supply, it is the believe of
economists. Interest rate is being paid by bank to depositors and charged by borrower on loan.
Finance to government
In under developing countries government is playing role as a promoter of industries for this
purpose finance is needed. Banks provide long term loan to the government by investing their in
government securities and short term finance by purchasing treasury bills.
Encouraging right type of industries
Banks helps to extend right type of industries through giving loan by right person or right
industry. In this way, they helps to improve the country’s industrialization and the economic
development.
OUTCOMES OF BANKING SECTOR ON ECONOMIC DEVELOPMENT

Economic development, including the fairness or equity of vulnerability of constituent

populations, is the foundation on which resilience is based. It is the prerequisite for all other
adaptive capacities. Economic development is the level and diversity of economic resources, as
well as the equitable distribution of resources. The overall level of economic development
determines the level of available resources. The diversity of economic resources influences how
rapidly the community is able to mobilize in a disaster. If some of the populations in a
community or society are vulnerable because of the unfair and inequitable distribution of high-
quality resources, then the community or society is also vulnerable to disaster.

AN OVERVIEW OF ISLAMIC BANKING

Islamic banking is a financial system whose main objective is to achieve the teachings of the
Quran. Islamic law reflects the commandments of God,
and organizes all aspects of Muslim life, and therefore directly involved in Islamic finance,
spirituality and social justice. Based on the theory of Islamic
banking on the concept that is strictly forbidden in the interest of Islam and the teachings of
Islam which provide the necessary guidance is based on the work
of the banks. The fundamental principle that has guided my work in Islamic banking is that,
despite the ban on trade in interest in Islam, and encourages
and profit. Traditional bank uses the interest rate mechanism for the implementation of its
financial operations. It was developed by Muslim scholar’s
completely different model of banking services that do not use, but the interest is based on
change in the distribution of income for purposes of financial
intermediation. The basic principle of Islamic law is that exploitation contracts or contracts of
unfair risk or speculation are not permissible. Under Islamic banking, and all partners involved in
financial transactions involved in the risk and the gain or loss on the project and not get a return
on a pre-determined. This direct relationship between investment and profit is the main
difference between Islamic and conventional banks, which has a main objective to maximize
shareholder wealth.

ROLES AGAINST ISLAM IN BANKING SECTOR

Islamic banking is different from the conventional banking as it is interest free. Islamic banking
operates under different principles and they have different risk profiles. The Islamic banks have
regulations of two types; first is the government and the central bank that govern the
conventional banks as well and the other is the Shariah Supervisory Board that approves the
products of the Islamic banks and keeps a check over the implementation of the rules defined by
the board. The central bank defines some rules which are specific to the Islamic banks. For
example, minimum capital requirements are higher to establish an Islamic bank than the
conventional banks. Islamic banks have to pay more taxes and registration costs because it is
asset-based banking and the bank has to own the goods it further sells which eventually are paid
by the client, but it increases the cost.

The present study is confined to the profitability, efficiency and liquidity comparison between
two types of banking, that is, Islamic and conventional banking. For this purpose, two big
Islamic banks, i.e. Meezan Bank Pakistan and bank Islam are taken in the study for the
comparison of their performance with two large commercial banks of Pakistan, i.e. Standard
Chartered Bank Pakistan and MCB Bank during the year 2013–2017. The importance of this
period is higher because it is the latest available data and it shows the performance of the banks
during the recession (financial crisis) period. So, the results also depict the impact of this crisis
on both types of banking. Also, the selected banks are the representative of the both the
categories as they are most well known in their field.