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MGT604 - Management of Financial Institutions - Lecture Handout 06

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STATE BANK OF PAKISTAN

The State Bank of Pakistan (SBP) is the central bank of Pakistan. While its constitution, as originally lay down in the State Bank of Pakistan Order 1948, remained basically unchanged until January 1, 1974, when the bank was nationalized, the scope of its functions was considerably enlarged. The State Bank of Pakistan Act 1956, with subsequent amendments, forms the basis of its operations today. The headquarters are located in the financial capital of Pakistan, Karachi with its second headquarters in the capital, Islamabad.

History

Before independence on 14 August 1947, the Reserve Bank of India (central bank of India) was the central bank for what is now Pakistan. On 30 December 1948 the British Government's commission distributed the Bank of India's reserves between Pakistan and India - 30 percent (750 M gold) for Pakistan and 70 percent for India.

The losses incurred in the transition to independence were taken from Pakistan's share (a total of 230 million). In May, 1948 Muhammad Ali Jinnah (Founder of Pakistan) took steps to establish the State Bank of Pakistan immediately. These were implemented in June 1948, and the State Bank of Pakistan commenced operation on July 1, 1948.

Functions

Under the State Bank of Pakistan Order 1948, the state bank of Pakistan was charged with the duty to "regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in Pakistan and generally to operate the currency and credit system of the country to its advantage".

A large section of the state bank's duties were widened when the State Bank of Pakistan Act 1956 was introduced. It required the state bank to "regulate the monetary and credit system of Pakistan and to foster its growth in the best national interest with a view to securing monetary stability and fuller utilization of the country’s productive resources". In February 1994, the State Bank was given full autonomy, during the financial sector reforms.

On January 21, 1997, this autonomy was further strengthened when the government issued three Amendment Ordinances (which were approved by the Parliament in May 1997). Those included were the State Bank of Pakistan Act, 1956, Banking Companies Ordinance, 1962 and Banks Nationalization Act, 1974. These changes gave full and exclusive authority to the State Bank to regulate the banking sector, to conduct an independent monetary policy and to set limit on government borrowings from the State Bank of Pakistan. The amendments to the Banks Nationalization Act brought the end of the Pakistan Banking Council (an institution established to look after the affairs of NCBs) and allowed the jobs of the council to be appointed to the Chief Executives, Boards of the Nationalized Commercial Banks (NCBs) and Development Finance Institutions (DFIs). The State Bank is having a role in their appointment and removal. The amendments also increased the autonomy and accountability of the chief executives, the Boards of Directors of banks and DFIs.

The State Bank of Pakistan also performs both the traditional and developmental functions to achieve macroeconomic goals. The traditional functions may be classified into two groups:

  1. The primary functions including issue of notes, regulation and supervision of the financial system, bankers’ bank, lender of the last resort, banker to Government, and conduct of monetary policy.
  2. The secondary functions including the agency functions like management of public debt, management of foreign exchange, etc., and other functions like advising the government on policy matters and maintaining close relationships with international financial institutions.

The non-traditional or promotional functions, performed by the State Bank include development of financial framework, institutionalization of savings and investment, provision of training facilities to bankers, and provision of credit to priority sectors. The State Bank also has been playing an active part in the process of islamisation of the banking system.

Regulation of Liquidity

The State Bank of Pakistan has also been entrusted with the responsibility to carry out monetary and credit policy in accordance with Government targets for growth and inflation with the recommendations of the Monetary and Fiscal Policies Co-ordination Board without trying to affect the macroeconomic policy objectives.

The state bank also regulates the volume and the direction of flow of credit to different uses and sectors, the state bank makes use of both direct and indirect instruments of monetary management. During the 1980s, Pakistan embarked upon a program of financial sector reforms, which lead to a number of fundamental changes. Due to these changed the conduct
of monetary management which brought about changes to the administrative controls and quantitative restrictions to market based monetary management. A reserve money management programme has been developed, for intermediate target of M2 that would be achieved by observing the desired path of reserve money - the operating target.

Banking

The State Bank of Pakistan looks into a lot of different ranges of banking to deal with the changes in economic climate and different purchasing and buying powers. Here are some of the banking areas that the state bank looks into;

  • State Bank’s Shariah Board Approves Essentials and Model Agreements for Islamic Modes of Financing
  • Procedure for Submitting Claims with Sbp In Respect of Unclaimed Deposits Surrendered By Banks/Dfis.
  • Banking Sector Supervision in Pakistan
  • Micro Finance
  • Small Medium Enterprises (SMEs)
  • Minimum Capital Requirements for Banks
  • Remittance Facilities in Pakistan
  • Opening of Foreign Currency Accounts with Banks in Pakistan under new scheme.
  • Handbook of Corporate Governance
  • Guidelines on Risk Management
  • Guidelines on Commercial Paper
  • Guidelines on Securitization
  • SBP.Scheme for Agricultural Financing
  • Bank Assets and Liabilities

This is a chart of trend of major assets and liabilities reported by scheduled commercial banks to the State Bank of Pakistan with figures in millions of Pakistani Rupees.

Year Deposits Advances Investments
2002 1,466,019 932,059 559,542
2006 2,806,645 2,189,368 799,285

Departments

  • Agricultural Credit
  • Audit
  • Banking Inspection
  • Banking Policy
  • Banking Supervision
  • Corporate Services
  • Economic Policy
  • Exchange and Debt Management
  • Exchange Policy
  • Human Resource
  • Information System
  • Islamic Banking
  • Legal Services
  • Payment System
  • Research
  • Statistics
  • Real Time Gross Settlement System (RTGS System)
  • Small and Medium Enterprises

Governor

The principal officer of the SBP is the Governor. During December 2005, the President of Pakistan appointed Dr. Shamshad Akhtar as the new Governor of the State Bank for a three year term, to replace Dr. Ishrat Hussain, who retired on December 1, 2005.