Department of business administration

“IDENTIFYING AND MEASURING FACTORS

INFLUENCING IN SHORT TERM DECISION
OF COMMERICAL BANKS OF PAKISTAN”

SUBMITTED BY:
ASMA MASOOD
MBA-(III)
ROLL #12-A

SUBMITTED TO:
MUHAMMAD MAZHAR MANZOOR

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STATEMENT OF THE PROBLEM:

Identify and measuring factors influencing in short term decision of
commercial banks of Pakistan.

RESEARCH OBJECTIVES:
The objectives of research are:

1. To consider whether any of the investment policies and procedures being

operated by the companies studied or they should be recommended for
better profitability and improvement.

2. One of the aims of my research is find out the investment strategies

which should be recommended as being the practices most likely to
bring about improved profitability. Either it is NPV, IRR or some other
strategy which can help managers to earn more for their company.

3. To find out sources of finance and evaluate the factors taken into account
before taking a project.

4. To assess and evaluate the reason for failure to research target rate of
return on investment.

5. To assess the firm’s effort to improve investment performance.

INTRODUCTION:
Identifying factors of influencing in short term decision making of banks are
important as it is cornerstone of progress and creates jobs for the economy.
To have a view that banks in Pakistan using proper budgeting techniques
and are responsible for creating jobs for the economy this research is
conducted. In this research work visionary investment strategy expected to
improve profitability and defensive investment strategy which is concerned
with efficiency through the replacement of obsolete or worn out assets with
their modern equivalents are considered.

Investment decision has come to be regarded as an important influence for

future well being of a company for the following reasons:

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1. It is recognized that capital expenditures may well be tactical

expressions of the directing management’s strategy or the firm’s
profitable continuance and development.
2. Capital spending demands a certain amount of faith, present resources
(capital, people, know how, etc.) are being committed in the
anticipation of earning worthwhile benefits in the future.

Therefore the profit consequences of capital spending must be thoroughly

appraised before approval to go ahead because mistakes cannot be put right
except at great cost to the business. Yes it is not just how decisions to invest
are taken nor whether sophisticated techniques for investment evaluation are
used, which are so vital for the achievement of adequate returns to capital
expenditure. The whole process of strategic planning and management of
corporate investment program is necessary to examine and utilize effectively
in order to secure the successful outcomes of long term spending.
In this research work visionary investment strategy expected to improve
profitability and defensive investment strategy which is concerned with
efficiency through the replacement of obsolete or worn out assets with their
modern equivalents are considered.
Study will attempt to examine the various sources of finance. Hence the
study will attempt to examine the various sources of investment finance
available to firms and it will also reveal whether or not optimum use has
been made.

LITRATURE RIVIEW:-

According to Serguieva1, The soft computing approach allows for market

fluctuations well beyond the probability type of uncertainty, does not impose
predefined data or market behavior, and efficiently works out a solution,
producing better investment appraisal and allowing project revaluation.
Investment projects are typically chosen on the basis of restricted
information set, while the volatility claims that stock prices are too volatile
to accord with simple present value models. To approach the problem, we
model the restricted information and incorporate price uncertainty into
calculations. Uncertain share prices and dividend yields, associated with a
family of possible streams of future cash flows, as well as uncertain discount
rates are handled by the introduction of fuzzy variables, whose values are
restricted by possibility distributions. Neutral networks yield a mechanism to
facilitate the solution of the fuzzy criterion. Once trained to evaluate a

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project, a neutral net provides investors with a simple re evaluation tool

when the information available is subject to change.

According to Khakasa, This research is that in the banking industry, the

level of usage of sophisticated techniques that integrate financial and
strategic analysis to appraise IT investment is low compared to the usage of
“traditional” appraisal techniques that focus on the financial return of an
investment. This study helps to establish banking industry-wide benchmarks
and best practices in IT investment evaluation, thereby assisting IT
executives to make more informed decisions future investments.
IT investment appraisal as “the weighing up process to rationally assess the
value of any acquisition of software or hardware which is expected to
improve the business value of organizations information systems.” Although
there is potential for appraisal of an IT investment to be carried out at five
different stages of the project, namely feasibility, development,
implementation, post implementation and in routine operations, in practice,
the most critical appraisal takes place prior to acquisition or development
when the costs, benefits, risks and value of the proposed investment are
assessed.

According to EKANEM, Investment decision-making is

currently discussed in the literature as existing traditional
mainstream techniques are said to be inadequate in certain
situations. These situations include the evaluation of
investment in research and development and technological
innovations, mainly because of the intangible nature of the
benefits involved and coping with the uncertainties of the
environment. In this regard, DCF is found incomplete and
may lead to decisions that destroy the value of the firm. This
paper examines the motivations and informalities of owner-
managers as a logical first step to understanding the actual
investment decision-making behavior in the context of small
firms. The core finding in this paper is that small firms use
‘bootstrapping’ techniques in their investment decision-
making instead of formal methods recommended in the
financial management literature. The Payback method
estimates the period of time taken for the future net cash
inflows to match the initial cash outlay. In order words, it
measures the length of time taken to recoup the original
investment. Whilst theory have condemned the use of
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payback as misleading in making investment decisions

because of its theoretical weaknesses, which include
ignoring all cash flows beyond the payback period and failing
to take account of the time value of money, it continues to
be widely applied as an appraisal technique.

According to Fouche, This paper aims to investigate the appraisal methods

employed by South African unit trust portfolio managers when evaluating
investments in listed equity securities. This survey I have known that South
Africans use technical analysis slightly more and the CAPM slightly less
than analysts do in the UK and USA. Earnings per share are the most used
forecast figure by analysts figure by analysts from all countries. Forecasts
tend to be made for between two and five years ahead. Multiplying forecast
earnings by an appropriate price-earnings ratio to obtain an estimate of
fundamental value is currently the most popular security valuation technique
used by South African unit trust portfolio managers.

According to Sudarshan Gooptu In this article is to examine the

determinants of short term lending by commercial banks to the less
developed countries.. The literature on the subject is extremely sketchy and
scarce. The determinants of short term commercial bank lending to
developing countries. In order to get a clearer picture of a country's external
payments obligations at any point in time and to ensure the availability of
pertinent information to policy makers within the LDC governments for
them to devise an appropriate external debt management strategy for their
country, it will be useful to record such disaggregated information on the
country's short term commercial bank debt on a systematic and consistent
basis. We found that countries with higher growth prospects, represented by
higher investment to GNP ratios, will receive greater amounts of short-term
credits. And we knew the conventional notion that short-term credits are
usually intended to finance countries with significant trade deficits. The
results indicated that higher levels of external indebtedness will be coupled
with higher levels of short-term external indebtedness from commercial
banks Finally, but not least important, we have known that there are country
specific elements which affect the volume of short-term lending available to
a country. That is, even if all other things remain the same, some countries
will find it more difficult to get easy access to short term financing from
commercial banks than others further, it would also have to examine the
creditor side of the market for short term financing. This includes an in
depth analysis of the prospects for future short term lending by financial
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institutions to developing countries, given the commercial banks' exposure

levels; creditor country tax, regulatory and accounting considerations which
banks have to conform with; e- the possibilities for renewed growth in the
industrialized countries.

According to Mohammad Hanif Akhtar, Banking industry acts as life-blood

of modern trade and commerce acting as a bridge to provide a major source
of financial intermediation. Thus, appraisal of its efficiency is vital in
context of an efficient and competitive financial system. This study fills the
gap in literature by exploring the issue of x-efficiency of banks in Pakistan
for the year 1998, a time period by which the pace of deregulation is
believed to have gathered momentum and competition intensified with the
explosive growth in information technology. The concept of x-efficiency
consists of two components: technical efficiency, which reflects the ability
of a firm to obtain maximum output from a given set of inputs, and a
locative efficiency, which indicates the ability of a firm to use the inputs in
optimal proportions, given their respective prices. Efficiency of financial
service firms and the strategy being followed by them is largely reflected
through the information condensed in their balance sheets and profit and loss
accounts. The critical issues in efficiency of service organizations like banks
using the DEA approach. They have studied the efficiency of 20 banks in
Turkey. In this article used number of bank transactions as output of banks
while labor, number of accounts and credit applications were considered to
be the inputs. Operating efficiency of 33 banks in Taiwan is measured. They
have used the DEA approach to measure such efficiency using the factors
like loan services, portfolio investment, interest income and non- interest
income as banking output while factors like staff employed, bank assets,
number of bank branches, operating costs and deposits as inputs. Provides
an extensive account of x-efficiency analysis of 29 Australian Banks. He has
used two outputs and three inputs with their respective prices as well in his
quest for x-efficiency analysis. The outputs included loans and demand
deposits while inputs represented labor, capital investment and loan able
funds. Per capita expenditure on employees, per capita expenditure on
premises and fixed assets and average interest expense on deposits were
treated as input prices.
The DEA approach to estimate the efficiency of 48 Croatian commercial
banks. They have used three inputs, which include fixed assets and software,
number of employees and deposits. The two outputs used were total loans
extended and short-term securities. Banking Sector in Pakistan Till the end
of 1980s, Pakistan’s banking sector was heavily regulated in most of the
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areas of activities. The regulated and nationalized banking system created an

industry structure where competition was unknown to management of the
banks. Forced by the structural reforms agenda and the desire to strengthen
its financial system, Pakistan moved towards liberalization and financial
sector deregulation. It started with the privatization of state-owned
commercial banks and induction of new ones from private sector to establish
a market-based banking system. The government seems to be conscious
about improving the efficiency of banking sector in Pakistan. Few
considerable efforts have been made in this regard which include enhanced
capital adequacy, strengthening asset quality, improving management and
increasing earnings.
Furthermore, interest rate deregulation, abolition of credit controls and
further developments in capital market have also led towards a more
competitive banking environment. Pakistani banks are found to be utilizing
the inputs and outputs in an optimum manner as the allocate efficiency
appeared to be very high. The banks need to be consistent in this drive and
share the benefit of increased efficiency with their clients.

According to Don Dayananda, Financial management is large concerned

with financing, dividend and investment decisions of the firms with some
overall goal in mind. Corporate finance theory has developed around a goal
of maximizing the market value of the firm to its share holders. This is also
known as chare holder wealth maximizing. Although various objectives or
goals are possible in the field of finance. As such, capital budgeting
decisions have a major effect on the value of the firm and its Share holder
wealth. This article deals with capital budgeting decisions the capital
budgeting process and identifies one of the most crucial and complex stages
in the process. Project analysis in the real world involves voluminous,
tedious, complex and repetitive calculations and relies heavily on computer
spread sheet package to handle these evaluations.

According to Saroj Rijal, This paper attempts to examine the application of

management control system in Nepalese commercial banks. The Nepalese
commercial banking sector is very competitive. The commercial banks are
competing mainly in service and many of them adapting differentiation
strategy. The priority of the majority of commercial banks is customer
retention. Commercial banks are encouraging employees to upgrade their
knowledge and skill. The working environment is also congenial in
Nepalese commercial banks and the informal organization and

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communication system also gradually exist in some of the commercial banks

of Nepal. However, the future research needs to examine the relationship
between management control system and effectiveness of the commercial
banks of Nepal. Privatization of some of the government owned enterprises
and deregulation changed the competitive environment in Nepalese business
environment. Large number of joint venture commercial banks and
development banks were established and the process is being continued.
Commercial banks play significant role in the economic development in the
nation. In Nepal 19 commercial banks are in operation and providing
services to the business and industries through long-term and short-term
loans and facilitating business for foreign exchange and remittance via
national and international network.

PURPOSE OF RESEARCH:
The purpose of the study is exploratory. This is a sensitive area and
companies shout not rush into decisions because the commitment of fund to
capital projects gives rise to a management decision problem, the solution of
which if incorrectly arrived at may seriously impair company’s profitability
and growth, alternatively, the proper use of evaluation techniques should
enable management to make more effective decisions which result in future
success.

RESEARCH METHODOLOGY:

RESEARCH APPROACH:
Qualitative research approach that is use of statistical tool for the quantifying
the data and analyzing the data patterns.

REASERCH DESIGN: Descriptive research design has been followed for

the studies

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DATA COLLECTION:
PRIMARY DATA:

VARIABLES
Risk analysis
Time saving
Acceptance of new
technology
Cost benefit analysis
Return on investment
Pay back period
Interest rates
Inflation rates
Money market rates

SECONDARY DATA:
Secondary data has been collected from the research papers.

SAMPLING DESIGN:
Non probability sampling is used and done by convenience sampling.

SAMPLE SIZE:
Commercial banks of Pakistan

HYPOTHESIS:
H0: companies select projects on the basis of NPV then they get high
earning.

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H1: companies select projects on the basis of NPV then they do not get high
earning.

LINE OF ACTION:
I select the topic because I want to identify the factors which influence in
short term decision of Commercial Banks in Pakistan.
The reason is that I want to enhance my analytical skills and can take good
decisions for organization growth.

SCOPE OF STUDY:
The study highlights different strategies like types of projects undertaken,
how cash flows assessed, who take investment decision, what methods of
investment appraisal they use, use of technology, source of finance, factors
taken into consideration before investing in a project, efforts to improve
investment performance, revision of methods of investment appraisal,
effectiveness of investment decision etc.

REFERENCE:
• Serguieva1, Autoaneta1, and el, Soft Computing in Investment
Appraisal, Dept. of Economics&Finance Brunel University,
Uxbridge UB8 3PH, UK

• Khakasa, , Elsie, Evaluating Information Technology Investments -

A Survey of Kenyan Commercial Banks, Strathmore University,
Kenya
eonsongo@strathmore.edu

• EKANEM, IGNATIUS, THE INVESTMENT DECISION-

MAKING PROCESS IN SMALL MANUFACTURING
ENTERPRISES: THE CASE OF PRINTING AND CLOTHING
INDUSTRIES IN THE UK, Middlesex University Business School,
London

• Fouche1, S1 and Rensburg2, P van2 , A survey of the investment

appraisal techniques used by South African unit trust portfolio
managers

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• Gooptu1, and Maria Soledad1, Factors That Affect Short-Term Commercial

Bank Lending to Developing Countries

• Mohammad Hanif Akhtar1, X-EFFICIENCY ANALYSIS OF

COMMERCIAL BANKS IN PAKISTAN: A PRELIMINARY
INVESTIGATION

• Don Dayananda , Financial appraisal of investment project

• Application of Management Control System in

Saroj Rijal ,
Nepalese, The Journal of Nepalese Business Studies, Vol. III No. 1
Commercial Banks

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