The Prospect of Operating Sound Banking System in Developing Countries: The Case of Pakistan

This thesis discusses the prospect of establishing and maintaining a sound banking system in developing countries particularly in Pakistan. This thesis examines the contribution of legal infrastructure, corporate governance, effective regulations, and enforcement mechanisms of these regulations through the Central Bank. This research has discussed that the banking System in Pakistan has adopted Basel Accord and sound corporate governance due to conditions imposed by the International Monetary Fund. Nevertheless, the State Bank of Pakistan, despite publishing positive outcomes of the adopting international standards, could not stop political interference, even after extensive banking reforms. This had resulted in accumulating huge non-performing loans, money laundering, and use of commercial banks by the Government to fund government’s projects. Therefore, this research also touches upon the judicial system of Pakistan and its contribution towards strengthening or weakening the banking system and consequential effect it may have on the economy of the country that continues to rely on borrowings and foreign aid to meet its budget deficits. This research argues that the prospect of establishing a sound banking system does only require elements such as good corporate governance, effective regulations, and enforcement of these regulations through the Central Bank, but a stable political situation and strong legal infrastructure must be established to give effect to the said elements. The need for a stable banking system is also emphasised with reference to its role in building the economy of a country. Although the title of the thesis suggests that the thesis is to cover developing countries in general, the focus is limited to the banking System of Pakistan. Some comparative references of the Pakistan banking system with the other banking systems both of developed and developing world are to be found in this thesis.