Principles of Bank-
ing & Currency
Banking
in
Pakistan
Prof. Waseem Subhani [IBA],
University of the Punjab
Banking in Pakistan
The Banking Sector
In March 1947, there were 487 offices of
banks situated in the area which now
comprises Pakistan, but soon after inde-
pendence many banks closed their
branches and offices.
On June 30, 1948 there were only 195
bank branches left in Pakistan.
This situation posed a great threat to the
economic position of Pakistan.
(cont’d..)
1
Prof. Waseem Subhani [IBA], University of the Punjab
The Banking Sector– cont’d
The Reserve Bank order of 1947 states,
that Indian notes will continue to be legal
tender both in Pakistan and India. Bank of
India would function as Central Bank of
Pakistan uptill April, 1948.
However, Reserve Bank of India did not
work fairly for Pakistan it refuse making
advances to the
Prof. Waseem Subhani [IBA], University of the Punjab (cont’d..) 2
The History – cont’d
4. The Indian coins will be valid and they will
remain legal tender in Pakistan for at least
one year from the date of issuance of Pak-
istani coins. The Pakistan government will
issue its own coins from October 1, 1948.
5. The Reserve Bank of India will transfer
the Pakistan’s share of 75 crore to gov-
ernment of Pakistan till September 30,
1948.
3
Prof. Waseem Subhani [IBA], University of the Punjab
Establishment of SBP
On December 30, 1948 the British Gov-
ernment’s commission distributed the Bank
of India’s reserves between Pakistan and
India as 30 percent for Pakistan and 70
percent for India.
The share of Pakistan was 75 crore.
Irrespective of the provisions of the Mone-
tary system and Reserve bank Order 1947.
The reserve bank of India did not perform its
function with diligence and good faith for Pak-
istan. (cont’d..) 4
Establishment of SBP – cont’d
Also this bank refused to tranfer Rs. 550
million which Pakistan was entitled to re-
ceive as the proportionate share of reserves of
undivided India.
Further the losses incurred in the transi-
tion to independence which were amounting
to Rs. 23 crore were taken from Pakistan’s
share.
(cont’d..)
5
Establishment of SBP – cont’d
Keeping in view all this, the government of
Pakistan decided not to rely on the Indian
bank. So the Indian bank was relieved of
its functions earlier than it was previously
decided and the Governor General of Pak-
istan Quaid-i-Azam Muhammad Ali Jin-
nah issued the order of the establishment of
SBP on 12 May, 1948.
This order is known as the “State Bank of
Pakistan Order 1948” and under this order
the SBP started its operations on July 1, 1948.
6
Prof. Waseem Subhani [IBA], University of the Punjab
Establishment of SBP – cont’d
Share Capital
The State Bank of Pakistan had the share
capital of Rs. 3 crore divided into 3 lac fully
paid up shares of Rs. 100 each. Of the share
capital, 51% was contributed by the Cen-
tral Government and the remaining 49%
was subscribed by the public.
(cont’d..)
Prof. Waseem Subhani [IBA], University of the Punjab 11
Establishment of SBP – cont’d
Fundamental Changes
During year 1994, the State Bank was given
full autonomy. It was the milestone in the his-
tory of SBP. Autonomy granted to the SBP
has strengthened its supervisory and regula-
tory powers and SBP has become the sole regu-
latory authority.
(cont’d..)
Prof. Waseem Subhani [IBA], University of the Punjab 12
Establishment of SBP – cont’d
Management
The power to supervise and control the
functions of the bank is vested with a Cen-
tral Board of Directors. The central board of di-
rectors consists of 10 persons including:
A governor and one or more deputy gover-
nors.
Prof. Waseem Subhani [IBA], University of the Punjab 13
Functions / Role of the SBP
Issue of Note
Banker to the Government
Banker’s Bank
SBP as clearing house
Advisor to govt.
Lender of last resort
SBP as controller of authority
SBP and economic growth
Establishment of Specialized credit institutions
Prof. Waseem Subhani [IBA], University of the Punjab 14
Functions / Role of the SBP
SBP and banking infrastructure
SBP and External Value of Rupee
SBP and Special Funds
Public Debt Management
Custodian of Foreign Exchange
Exchange Centre
Relations with International Agencies
Economic Information
Prof. Waseem Subhani [IBA], University of the Punjab 14
[Link] of Note
It was the first factor that formed the basis
of central banking. Central bank enjoys
complete monopoly over note issue.
[Link] to the Government
It is Banker to the Govt. because his cus-
tomer is Govt. central bank provide his all
services to the Govt. like lending money
etc.
[Link]’s Bank
All commercial banks hold some reserves
with the central bank and further the central
bank provide commercial banks very nearly
the same services as those provided by
commercial banks for their clients. Thus cen-
tral bank can very rightly be called bank of
commercial banks.
Functions / Role of the SBP
4. SBP as Clearing House:
By acting as a clearing house the SBP /
NIFT introduces flexibility in the banking
operations and also remains informed
about the liquidity position of various
banks.
SBP / NIFT helps commercial banks to set-
tle inter-bank transactions with the mini-
mum use of cash. (cont’d..)
Prof. Waseem Subhani [IBA], University of the Punjab 15
Functions / Role of the SBP
SBP as Clearing House – cont’d
By acting as a clearing house, SBP / NIFT
also keeps a check on unwanted and harm-
ful competition among commercial banks.
The clearing house function of the SBP
also helps the commercial banks. In times
of need and crises, they can help one an-
other by deferring early payments.
Prof. Waseem Subhani [IBA], University of the Punjab 16
Functions / Role of the SBP
[Link] to Government
Central bank enjoys extraordinary powers, rights and
authorities. It also enjoys special control on monetary
and fiscal matters. From time to time, it advises govt.
on different financial and economic matters.
[Link] of Last Resort
Central bank job is to examine and guide the banking
system in the best national interest. In case, commer-
cial banks face any problem, shortage of reserves, then
central bank comes to their help.
17
[Link] as Controller of Credit
Open Market Operations
Bank Rate Policy
Changes in Reserves Ratio
Changes in Margin Requirements
Change in Liquidity Ratio
Moral Persuasion
Publicity
Functions / Role of the SBP
8. SBP and Economic Growth
SBP was primarily set up for fastening eco-
nomic growth and prosperity.
9. Establishment of Specialized Credit Insti-
tutions:
HBFC House Building Finance Corporation
ICP Investment Corporation of Pakistan
EPF Equity Participation Fund
(Cont’d..)
18
Functions / Role of the SBP – cont’d
Establishment of Specialized Credit Institutions- cont’d
NIT National Investment Trust
IDBP Industrial Development Bank of
Pakistan
ZTBL Zarai Taraqiati Bank Limited
(formerly Agricultural Development
bank of Pakistan)
NDFC National Development Finance
Corporations
19
Functions / Role of the SBP – cont’d
10. SBP and Banking Infrastructure
SBP gave considerable attention towards the
advancement of banking culture and towards
growth of the banking world.
11. SBP and External Value of Rupee
To maintain external value of rupee is the re-
sponsibility of SBP. Also state bank has to
administer and control exchange rate in the
country.
20
Functions / Role of the SBP – cont’d
SBP and External Value of Rupee – cont’d
Till September 1971, Pakistan rupee remained
linked to UK Pound. However, in September
1971, it was unlinked from pound and linked to
US Dollar. This remained so until January 1982.
From January 1982, we adopted manage floating
exchange rate system. Under this, the rate was
determined on daily basis vis-à-vis basket of cur-
rency of major trading parterres. Presently we
are on a market based floating exchange rate sys-
tem. Under this the rate is determined by the
demand and supply in foreign exchange market.
21
Functions / Role of the SBP – cont’d
12. SBP and Special Funds
State Bank of Pakistan earns huge profits from
its operations. These profits are allocated to-
wards establishment of several funds for economic
progress. These funds aim at promoting wide-
spread growth in different regions and fields.
The rural credit fund was established in 1961
with the objective of providing financial assistance to
co-operative banks and rural credit agencies.
(cont’d..)
22
Functions / Role of the SBP – cont’d
SBP and Special Funds – cont’d
In 1972 the export credit fund was established
with the view to finance exports.
A Housing Credit Fund has also been estab-
lished to finance the housing industry.
23
Functions / Role of the SBP – cont’d
13. Public Debt Management
Pakistan has been facing debt burden since long.
The debts are both internal and external. The
SBP holds a key position in the debt management
framework of Pakistan.
24
Functions / Role of the SBP – cont’d
14. Custodian of Foreign Exchange
SBP is also the custodian of all gold, silver and
foreign exchange reserves. It regulates foreign ex-
change reserve in accordance with foreign ex-
change Act 1974.
15. Exchange Centre
The SBP is responsible for enforcing exchange
control. It administers the inter banks interest and
exchange rates.
25
Functions / Role of the SBP – cont’d
16. Relations with International Agencies
SBP maintains relations with different inter-
national financial institutions such as IMF, WB,
etc. as the agent of the government of Pakistan. It
negotiates different contracts with these institu-
tions on the behalf of Govt.
26
Functions / Role of the SBP – cont’d
17. Economic Information
SBP collects economic and fiscal data from all
over the country throughout the year. It also annu-
ally publishes its report which is an extremely
important document.
27
Prohibitions
Apart from extensive powers and an extremely impor-
tant and significant role. SBP has been prohibited from
the following:
To engage in trade, as to have any direct interest
in any commercial matter.
To make unsecured advances or loans.
To purchase its own shares or shares of any
other bank or company.
(cont’d..)
28
Prohibitions – cont’d
To become the owner of any immovable prop-
erty except when the ownership is essential.
To draw or accept bills payable otherwise on
demand.
29
thank U
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