Role of

State Bank of Pakistan

 Why a Central Bank
• Money printed by government & Central Bank is
authorized to print it.
• History suggests that some mechanism is a must
to restrict the amount of money which is printed.
• Otherwise, inflation will take hold with dangerous
effects on peoples lives.
• Compromise, the essence of democracy, so
individual ideas are combined for common
purpose.
 Why a Central Bank
• Two inherent powers are entrusted to it:
• Control of interest rates
• Control of money supply or inflation
• An economic stabilizer
• Monopoly of money supply
• Creates and lends money to Government
and debt is created consequently.
 Why a Central Bank
• Not only supplies money in the economy, but
also loans money to government at interest,
which leads to debt.
• It loans money to small banks and public.
• Single regulator for all financial services
• Monopoly issuer of legal tender bank notes-
Cash
• Sole banker to government
• Banker to banking system
 General functions
• Issuance of Currency
• Management of Exchange Rates
• Management of Gold reserves
 Bankers Bank
• Licensing and Supervising authority.
• Holds deposits of Financial Institutions.
• Sets reserve requirements
• Provides lending facility.
• Applies additional measures when
required i.e penalty restrictions.
 Government Bank
• Holder of government account.
• Management of debt.
• Advises on economic policy.
 Benefits of central bank
• Lower cost of bank finance to non-banks
• Increased flexibility of bank finance to non-
banks
• Takes deposits from government and
banks
 Role in Monetary Policy
• Control of money supply, i.e through
circulation.
• Changing the interest rates.
• Managing the exchange rate
• Other measures, i.e reserve ratios and
banking legislation
 Role of Central Bank
Important for all organizations
• Commercial organizations
• Non commercial organizations
• Banking sectors
• Non banking sectors
 European Central Bank
• Since 1998, all national central bank part
of European system.
• Currency, Euro now issued through ECB,
national central bank acts as an agent for
ECB in printing notes and minting coins
• Exchange rates are controlled by national
central banks
 European Central Bank
• Interest rate on which lending to other
banks is through ECB, thus can control the
overall amount of credit extended.
• Also controls the reserve ratios of Banks
ECB: Regulatory role of national
central banks
• Still acts as a banker to the Government
• However, amount which can be lent out & manner
in which borrowing takes place in controlled at EU
level.
• So, now role of national central banks within EMU
is to carry out the policy agreed at European level
• Thus, independent monetary policy, concerning
money supply, interest rates or exchange rates
has ceased for Eurozone.
 Monetary Policy Framework in
Pakistan
• Objective(s) of SBP’s monetary policy is to
strike a delicate balance on inflation
containment and maintaining/supporting
economic growth.
• Change in the monetary policy stance is
communicated through adjustment in the
policy rate – the overnight rate at which
SBP provides collateralized cash to bank(s)
 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.
 History
• On 30 December 1948 the British
Government's commission
distributed the Bank of India's
reserves between Pakistan and
India - 30 percent 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, Mr. Jinnah took steps to
establish the SBP immediately. These
were implemented in June 1948, and
the State Bank of Pakistan commenced
operation on July 1, 1948.
 Management Structure
Chairperson with 9 Directors.
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.
• President of Pakistan appoints the
Governor of State Bank of Pakistan.
• SBP is an autonomous body
• Decisions are taken independently.
 Functions
• Under the SBP 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 SBP Act, 1956,
Banking Companies Ordinance, 1962
and Banks Nationalisation Act, 1974.
• These changes gave full and
exclusive authority to the SBP to
regulate the banking sector, to
conduct an independent monetary
policy and to set limit on government
borrowings from the SBP.
 Role

• Issuance of Bank notes (Primary duty)

• BOT/BOP
• Monitoring by SBP of banking sector
(sending their auditors)
 Dealing with under Hand
Policies
• Under hand deals Between Commercial
banks, for setting the rates of markup and
profit.
• If these are deviated from rates of SBP
even if difference is of 1% it creates a lot
of difference
• Auditors determine the deviation has taken
place they revert them to suspend the
license of Bank.
• 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 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.
Nationalization:
• 1974, Government took charge of all
financial institutions.
• Duty to monitor these organizations,
however Govt. is not liable for monitoring
that resulted in De-Nationalization, and
Major Financial institutions came under
the control of Private sector control.
 Due Diligence
• Assets and liabilities are judged and value of
shares are is determined
• This concept is important in acquisition or mergers
• Recent examples acquisition or mergers
are ;
1)Standard Charted and Union Bank,
2)ABN Amro and Prime Bank.
3) RBS and Faysal bank
Functions of State Bank of Pakistan

Primary Secondary
functions functions
 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, 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 SBP has also been entrusted
with the responsibility to carry out
monetary & credit policy in
accordance with Govt targets for
growth & inflation with the
recommendations of the Monetary &
Fiscal Policies Co-ordination Board
without trying to effect the
macroeconomic policy objectives.
• The SBP also regulates the volume &
the direction of flow of credit to different
uses & sectors, the state bank makes
use of both direct & 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.
 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.
• 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 Regulations
• Small Medium Enterprises
(SMEs) Regulations
• 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
 Conclusion
• SBP plays important role important in
every sector of economy
• Industrial sector
• Agriculture sector
• Consumer sector
SBP provides guidelines to each one of
these sectors to uplift the economy.