INTRODUCTION

Banks over the years has developed into an important aspect of an economy. With the very last episode depression the position of banks has become all the more in the way of working of the money and therefore economy of the nation. The banking sector forming a portion of the financial sector primarily facilitates as a fiscal mediator generating money supply. From the uncommon macroeconomic models banks has been found to be a part of the supply segment of the nation. However ended the period banks have been transformed from money generating organizations to multitasking entity.

Inside the capitalist economies, banks participates the role of the intermediaries linking Lenders and borrowers. Two of the mainly valuable reasons representing their efficiency are that banks diversify risks due to the great digit of projects they confront and with the intention of their experienced increasing returns to extent in search and monitoring activities with the desired to determine potentially profitable projects.

Financial sector foreign direct investment in emerging economies has surged ended the earlier period decade. While the reimbursement of delicate financial sector efficiency and better risk management are widely acknowledged, foreign ownership poses challenges pro host countries due to the migration of decision-making and the incongruence of the organizational structures of foreign-owned banks and host country officially authorized and regulatory systems. Many of these challenges will be finest met by comprehensive coordination on the part of supervisors and central banks.

Pakistan is one of the key emerging markets of South Asia with a entire population of more than 170 million. Macroeconomic stability and financial sectors reform are under fire to hold a affirmative, significant effect on real economy. The banking sector in Pakistan consists of Commercial Banks and Specialized Banking Institutions.

At current there are 55 scheduled banks, 8 DFIs, and 7 MFBs working in Pakistan whose activities are regulated under the supervision of State Bank of Pakistan. The commercial banks made up of 4 nationalized banks, 20 private sector banks, 7 foreign banks, 5 Islamic Banks, and 4 specialized banks.

Liberalization in financial sector is intended to provide equal opportunity in favor of fiscal institutions to access international market or reduce restriction from the native regulatory authority. Banking industry liberalization is one of the generally valuable agendas in fiscal sector liberalization in the preceding few years. This research will assess the role of foreign banks in Pakistani economy in order to provide an apparent picture of the impacts on Pakistani economy and responses from local market authorities to international operation of foreign banks.

Foreign banks could adopt a comprehensive management strategy in order to achieve competitive advantages against native banks and to increase profits. The comprehensive strategy of foreign banks deploys their resources together with funds, public, contemporary products and technologies to their overseas branches and subsidiaries. However, this international surgical procedure pays a little attention to stability and sustainability of community and regional economies. This research is intended to discuss the strategy of foreign banks operation in local markets and the responses of local banks towards increasing competition. The foremost argument will be focused on the impacts of foreign banks on local economy and the policies of the Pakistani government to increase contribution of foreign banks.

RATIONALE

The arguments in favor to foreign bank operations in emerging economies, generally based on assumption that the foreign banks are more efficient, more innovative and better managed than their domestic banks. There is furthermore argued that foreign banks can put in to the stability of domestic financial market and balance of payment in support of domestic government. Furthermore argues that foreign banks can boost operational efficiency of domestic financial system and enrich market discipline on government policies.

However, (Weller, 2000 and 2001) moreover argues that foreign layer presence increases competition, which could furthermore impair the development of domestic banks. Foreign banks are more competitive in nature due to their abilities to provide more competitive products with cheaper prices.

Letting them fully access to the less develop market will squeeze the domestic players in the banking industry from competition. This impair competition could furthermore advantage to focus of domestic banks in superior risk lending as good borrowers pick lesser price with more variety services. In the event of economic turmoil, here is a risk for foreign banks to transmit their function to other countries in order to reduce their highest losses.

Foreign banks could chase their customers by opening their operation in other countries in order to perform multinational companies, which have been served in the home countries. The companies feel comfortable and pay lesser cost to deal with the same banks for their international operations. Majority of foreign banks in emerging economies normally concentrate in financing for corporations originated from the same home countries. Foreign banks have a little probability to provide financing for SME as the operation of foreign banks normally is in the financial highlight. Serving SME will need more labors, which is too expensive for the foreign banks as the salaries of their personnel are relatively more than domestic banks. It is the justification in emerging economies where communication infrastructure in the rural area is unable to support the consolidation; therefore, the rural administrative operation requires more labors.

The foreign bank entrance in the Central and Eastern Europe has various reason, which is very much correlated to the privatization in transition time in the ex- communist countries from centralized economy to market-based economy as one of the efforts to be acknowledged as the EU member. Historically, foreign bank entrance through branching is the largely favorable for foreign banks as the head quarters have more flexibility to control the operations and branching is officially dependence from the home country jurisdiction. (Pigott, 1986) mentions that foreign bank entrance in Asia mostly conducted through branching or representative.

SIGNIFICANCE

Foreign banks play very important role in the development of the economy. Their first impact on the economy is that they bring FDI in the home nation. As we know that foreign banks from developed economies bring more sophisticated corporate culture and new product and services which enhance the market competition in the domestic banks.

Another argument pro foreign bank presence in other countries is to explore competitive advantages in the less efficient banking practice with the hope to increase their operation by competing with local banks. Restructuring of domestic banks in Latin America, Asia and Central Europe must include the opening of these markets to foreign banks. As evident, foreign bank markets boost significantly in Latin America and Europe. The market share of foreign banks in Asia is still very low even though foreign banks entry is fully opened for foreign investors.

The performance of foreign banks in host countries is one of parameters to evaluate the contribution to the stability of domestic financial sectors. Most of those studies conclude that foreign banks in developed countries are fewer efficient that those in emerging countries as a consequence of dense competition against domestic banks in developed countries. Foreign banks reports higher returns on equity and lesser cost-to-income and credit ratios than do domestic not more banks.

LITERATURE REVIEW

Consistent with traditional arguments in hold of capital account liberalization, foreign bank existence is argued to increase the amount of funding available to domestic projects by facilitating capital inflows. Foreign bank existence may also increase the stability of accessible lending, by diversifying the capital and funding bases supporting the supply of domestic credit, an argument that appears especially persuasive for small and/or volatile economies.

Foreign banks are argued to improve the excellence, pricing, and accessibility of financial services, both directly as providers of such improved services and indirectly through competition with domestic financial institutions (Levine, 1996). Foreign bank existence is argued to improve financial system infrastructure, including accounting and transparency, financial regulation, and through stimulating the increased presence of such supporting agents as rating agencies, auditors, and credit bureaus (Glaessner and Oks, 1994).

A foreign presence may also improve the ability of financial institutions to successfully measure and manage risk. Foreign bank presence may import financial system regulation and supervisory skills from home country regulators. While many of these goals may ultimately be achievable without foreign financial institutions, increased foreign presence may meaningfully speed up the process. The efficiency of foreign banks in Australian economy within the contexts presented by comparative advantage theory and new trade theory.

(Claessens, Demirguc-Kunt, and Huizinga, 1998) examine the effects of foreign bank entry on the domestic banking sector. They show that in developing countries foreign banks tend to have greater profits, higher interest margins, and higher tax payments compared to domestic banks. But the reverse is true in developed countries. Another interesting conclusion is that both

Profitability and overhead expenses of domestic banks fall with forei