The Effect of Ownership on Organizational Performance: A Case Study of Banking Sector in Pakistan

Abstract: Aims: The main aims of this research are to provide more empirical evidences for theory of property rights and public choice theory and to test these theories in a new environment i.e. banking sector of Pakistan. This research compares performance of public and private banks in Pakistan on the basis of four performance measures, profitability, liquidity, solvency and efficiency. It also studies the effect of politics on public banks. Method: Mainly quantitative approach is utilized in this thesis to compare performance of public and private banks in Pakistan in terms of profitability, liquidity, solvency and efficiency. Ratio analysis is used for this purpose. Qualitative analysis is based on qualitative study of empirical findings of quantitative analysis with respect to elections and observing lending behavior of public and private banks along with study of net interest margin during election years. Major Findings: The theory of property rights and public choice literature support private ownership for superior performance as compared to public ownership. From empirical findings, very weak support is found for both theories. Out of twelve ratios used in ratio analysis, ten ratios support public ownership for superior performance as compared to private ownership and only two ratios quote that private ownership is superior in performance than public ownership. From empirical findings it can be concluded that performance of public banks is superior to private banks in Pakistan in terms of profitability, liquidity, solvency and efficiency. Similarly, out of twelve ratios, only six ratios provided evidence of effect of elections on performance of public ownership which is a weak support for public choice theory. Moreover, lending behavior of public and private banks along with study of net interest margin has totally ruled out the presence of political influence on public banks. It can be concluded from these empirical findings that either political influence on public banks is minimized or political influence is affecting both sectors of banks in Pakistan. As banking sector in Pakistan is highly competitive now due to introduction of financial reforms in Pakistan, it can be concluded that theory of property rights and public choice theory do not work well in competitive markets especially Pakistan. It can also be concluded from empirical findings that privatization is not the only solution to poor performance of public ownership. The introduction of competition can substantially improve performance of public ownership.