STATE BANK OF PAKISTAN:History, Regulation of Liquidity, Departments

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Management of Financial Institutions - MGT 604

Lecture # 6

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 Nationalisation 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 Nationalisation 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 Nationalised 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:

Management of Financial Institutions - MGT 604

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.

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, institutionalisation 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

Procudure 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.

Handbok of Corporate Governance

Guidelines on Risk Management

Guidelines on Commercial Paper

Guidelines on Securitization

SBP.Scheme for Agricultural Financing

Bank Assets and Liabilities

Management of Financial Institutions - MGT 604

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 Aktar as the new Governor of the State Bank for a three

year term, to replace Dr. Ishrat Hussain, who retired on December 1, 2005.

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