The central banking institution is the State Bank of Pakistan (SBP), established in 1948 at Karāchi and with branches in the larger cities. The government holds 51% of the bank's paid-up capital; 49% is held by corporations, societies, and individuals. The State Bank has exclusive responsibility for the issuance of currency; it is the financial agent of the central and provincial governments, and is responsible for the flotation and management of the public debt. As of 2002, there were 44 commercial banks and 36 non-banking financial institutions (NBFI's) in Pakistan. Of the commercial banks, 25 were domestic (with over 7,000 branches) and 19 were foreign (with 78 branches). Citibank is the largest foreign bank operating in Pakistan. NBFI's included 10 development financial institutions, 16 investment banks, four housing finance companies, two venture capital companies, and four discount houses. Consumer banking in Pakistan is largely undeveloped; commercial banks lend predominantly to corporations. There is a minimum capital level of 8% on all risk assets. The total volume of default loans from all financial institutions in 1998 was $2.8 billion.
The nation's largest commercial banks were nationalized in 1974 and regrouped under five state banking institutions: the National Bank of Pakistan, Habib Bank, United Bank, Muslim Commercial Bank, and Allied Bank of Pakistan. The government-controlled banking system thus comprised all but a few of the nation's banks and accounted for a large share of total bank deposits and outstanding domestic credit. In 1981, in accordance with the Islamic condemnation of usury, virtually all banks opened special accounts for depositors who preferred, in lieu of interest, to share in the profits or losses from investments made with their money. In 1985, all savings accounts stopped yielding interest and converted to sharing in profit and loss. Pakistan instituted banking reforms in 1991. The Muslim Commercial Bank and the Allied Bank of Pakistan Ltd. reverted to private ownership shortly thereafter. In 1991 banking licenses were granted to private commercial banks that wanted to establish foreign bank branches in the country. Major weaknesses persist and are particularly marked in the case of the four remaining government-run commercial banks, which account for the bulk of deposits and advances. The government announced plans to privatize Habib Bank in 1998.
The portfolios of the state-owned development finance institutions, which provide the bulk of long-term lending to industry and agriculture, likewise tend to be of poor quality. Their lending is less diversified and more risky than that of commercial banks, while their costs are higher and margins lower. The state provides credit through the Agricultural Development Bank of Pakistan and the House Building Finance Corp. Industrial loans are made available through the Pakistan Industrial Credit and Investment Corp. (established in 1957), the Industrial Development Bank of Pakistan (1961), and the National Development Finance Corp. (1973). The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $15.6 billion. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was $26.6 billion. The money market rate, the rate at which financial institutions lend to one another in the short term, was 8.49%. The discount rate, the interest rate at which the central bank lends to financial institutions in the short term, was 10%.
There are stock exchanges at Lahore, Karāchi, and Islāmābād, with Karāchi accounting for a major share of the business. In 2001, there were 747 listings on the Karāchi Stock Exchange, the largest of the country's three bourses, down from a peak of 782 in 1996. Total market capitalization was $4.9 billion, down 25% from the previous year and well below the peak of $12.2 billion in 1994. The KSE 100 Index was also lower than the previous year, by 15.6% at 1,273.