general description and management functions about State Bank of Pakistan

1. State Bank Of Pakistan
Submitted by:
Hamza Arif
Usman Pervez
Sohail Mumtaz Khan

2. Introduction
• About SBP
• Origin

3. Introduction
ORIGIN
• At the time of Partition, the new state was without a central bank and a
proper banking system was almost non-existent. Most of the banks had
their head offices in India. Out of 3,496 branches of the scheduled banks,
only 631 were situated in Pakistan. To complete the picture of misery, the
entire banking structure was dominated by Hindus. With the
announcement of the Partition Plan of June 3, 1947, the Hindu started to
withdraw their deposits from the banks located in Pakistan. As a result,
many banks had to close down their operations.
• Since Pakistan had no central bank of its own, it was decided to assign the
monetary operations of the new state to the Reserve Bank of India for a
period of one year (till September 30, 1948). However, it was soon realized
that if this situation continued for too long, the country’s interests would
be hurt. Accordingly, the State Bank of Pakistan Order was issued on May
12, 1948 and Pakistan (Monetary System and Reserve Bank) Order, 1947
was amended according to which the Reserve Bank of India was to stop
functioning in Pakistan on June 30, 1948, with the new central bank taking
over on the next day.

4. GOVERNORS (1948-Onwards)

5. GOVERNORS (CONT.)
Mr. Ashraf Mahmood Wathra
(29-4-2014 TO 2017)

6. Function of State Bank of Pakistan
Traditional Functions
Primary functions
issue of notes
regulation and supervision of the financial
system
bankers’ bank
lender of the last resort
banker to Government
conduct of monetary policy
Secondary functions
management of public debt
management of foreign exchange
advising the government

7. Non-traditional or promotional
functions
• 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.

8. Main Responsibilities of The State
Bank of Pakistan
• The main functions and responsibilities of the
State Bank can be broadly categorized as
under.
1. Regulation of Liquidity
2. Ensuring the soundness of financial system
3. Exchange rate management and balance of
payments

9. REGULATION OF LIQUIDITY
• Being the Central Bank of the country, State Bank of
Pakistan has been entrusted with the responsibility
to formulate and conduct monetary and credit policy
in a manner consistent with the Government’s
targets for growth and inflation and the
recommendations of the Monetary and Fiscal
Policies Co-ordination Board with respect to macro-
economic policy objectives.

10. REGULATION OF LIQUIDITY(cont.)
• The basic objective underlying its functions is
two-fold i.e. the maintenance of monetary
stability, thereby leading towards the stability
in the domestic prices, as well as the
promotion of economic growth.

11. REGULATION OF LIQUIDITY(cont.)
• A reserve money management program has
been developed. In terms of the program, the
intermediate target would be achieved by
observing the desired path of reserve money -
the operating target.
• While use in now being made of such indirect
instruments of control as cash reserve ratio
and liquidity ratio, the program’s reliance is
mainly on open market operations.

12. ENSURING THE SOUNDNESS OF
FINANCIAL SYSTEM
State Bank performs its role of ensuring the
soundness of financial system by exercising the
following:
1. Regulation and supervision
2. Exchange rate management and balance of
payments
3. Developmental role of state bank

13. ENSURING THE SOUNDNESS OF
FINANCIAL SYSTEM(cont.)
• One of the fundamental responsibilities of the
State Bank is regulation and supervision of the
financial system to ensure its soundness and
stability as well as to protect the interests of
depositors.

14. EXCHANGE RATE MANAGEMENT AND
BALANCE OF PAYMENTS
• One of the major responsibilities of the State
Bank is the maintenance of external value of
the currency. In this regard, the Bank is
required, among other measures taken by it,
to regulate foreign exchange reserves of the
country in line with the stipulations of the
Foreign Exchange Act 1947.

15. EXCHANGE RATE MANAGEMENT AND
BALANCE OF PAYMENTS(cont.)
• As an agent to the Government, the Bank has
been authorized to purchase and sale gold,
silver or approved foreign exchange and
transactions of Special Drawing Rights with
the International Monetary Fund under sub-
sections 13(a) and 13(f) of Section 17 of the
State Bank of Pakistan Act, 1956.

16. EXCHANGE RATE MANAGEMENT AND
BALANCE OF PAYMENTS(cont.)
• As an agent to the Government, the Bank has
been authorized to purchase and sale gold,
silver or approved foreign exchange and
transactions of Special Drawing Rights with
the International Monetary Fund under sub-
sections 13(a) and 13(f) of Section 17 of the
State Bank of Pakistan Act, 1956.

17. Functions that State bank does not
entertain
• It is not a peoples bank
– Receiving the deposits
– Loan accommodations
– Safe keeping of valuables
• It does not act as a trustee or referee or agent or
adviser for the general public
• It does not collect utility bills
• It does not purchase or sell securities for the corporate
customers
• It does not engage in collection or payment on behalf
of general public or companies.
• It does not monitors the actions of borrowers

18. Development Role of State bank
Pakistan
• The scope of Bank’s operations has been
widened by including the economic growth
objective under the State Bank of Pakistan Act
1956.
• Under this role, SBP assist the process of
economic growth and promote the full
utilization of resources for the betterment of
country.
• The central bank design its policies to meet
the goal of rapid economic growth

19. Differences between commercial and
central bank
features Central bank Commercial bank
• ownership Owned by state Owned by private companies
• Authority Supreme bank of country Agent of central bank
• Note issuance Has the power to issue notes Can’t issue notes
• Governing Act Governed by SBP act 1965 Governed by co. ordinance 1984
• Motives Non-profit seeking institution Driven by profit motives
• Relationship Direct relation with state Direct relation with public
• Powers Has the powers to influence
economic change
Have no such powers
• Credit Control Has the power to control credit Obey Central bank advice on
credit control
• Lender of the last
resort
Last resort for commercial banks Hold reserves with the Central
bank
• Foreign exchange Responsible for maintaining
foreign reserves
Only deal with foreign exchange
according to the central bank

20. Similarities between commercial bank
and central bank
• Loans
– Commercial banks make consumer and business loans
while central bank make loans to their member banks.
• Deposits
– Both types of banks offer deposits to their respective
customers or members.
• Services
– Commercial and central bank offer their clients a wide of
services

21. Accountability Tools
• Parliament Reports
– The reports on the state of the Pakistan’s economy
provided by the State Bank to the Parliament are an
important contribution in an assessment of the
performance of the central bank.
– The reports aim to provide a candid and objective review
of economic policies.
• Economic Coordination Committee od the Cabinet (ECC)
– The ECC is the highest economic policy making body formed by
the Cabinet to take decisions pertaining to various economic
issues transactions involving government interests and reviews
key economic indicators.

22. Accountability tools (cont.)
• Monetary and Fiscal Policies Coordination Board (MFPCB)
– The instruments of Monetary and Fiscal policies have an important
bearing on the overall economic management of a country particularly
on saving and investment decisions of the general public.
– The policies supplement each other in achieving national economic
goals.
• External Audit
– In terms of SBP Act 1956, the accounts of State Bank of Pakistan are
required to be audited every year by practicing Chartered Accountancy
firms.
– Two firms of Chartered Accountants audit the financial record and
statements of State Bank.

23. Accountability Tools (cont.)
• Auditor general of Pakistan
– The Director General Commercial Audit carries out
audit of operations of State Bank of Pakistan every
year.
– The auditors carry out a comprehensive audit of
the business transactions and submit their report
to the Auditor General of Pakistan.

24. Accountability Tools (cont.)
• International Financial Institutions (IFIs)
– The governor of SBP along with finance minister enters into
agreement with IMF. As a part of this agreement Pakistan has to meet
a number of performance criteria and benchmarks.
– The IMF sends a review mission regularly to monitor the progress
– The main performance criteria being observed are as follows

25. Credit control by State bank Pakistan
• Main objective:
To save economy from inflation and deflation and
to stabilize the economy and prices.
• Methods of Credit control
Quantitative Methods Qualitative Methods
Bank rate policy Moral suasion
Open market operations Method of publicity
Variable reserves ratios Direct action
Liquidity ratio
Credit rationing

26. Quantitative methods
• Bank Rate (or Discount Rate) Policy:
– Bank rate is the rate at which central bank rediscounts bill
of exchange or provides credit to commercial banks.
– For controlling credit central bank may increase or
decrease bank rate.
• Open Market Operation
– Buying and selling of government securities by the central
bank with a view to influencing money supply is called
open market operations.

27. Quantitative Methods
• Variable reserve ratios
– The amount of money which the banks are legally required to
keep with the central bank is termed legal cash reserve ratio or
requirement.
– This will cause fall in the rate of money expansion. A decrease in
ratio has an opposite effect.
• Liquidity ratio
– In Pakistan, liquidity ratio refers to the amount of assets which
banks are legally required to hold in the forms of (i) cash in
hand, (ii) balances with SBP/NBP and (iii) approved securities.
– The increase in it causes a fall and decrease in it a rise in the
rate of credit expansion.

28. Quantitative Methods (cont.)
• Credit Rationing
– The central bank may recommend ceilings (an
upper limit) on the overall credit extended by
each commercial bank.

29. Qualitative Methods
• Moral Suasion
– By virtue of its special position, the central bank can
persuade commercial banks to follow a specific credit
policy.
• Publicity
– The central bank through its different publications may
give publicity to desirable credit policy in the form of a few
broad principles.
• Direct Action
– if commercial banks do not follow the credit guidelines of
central bank then central bank can impose a penalty or
refuse to discount bill of exchanges of commercial banks.

30. Difficulties in Controlling Credit
• Absence of developed money markets.
– In underdeveloped countries, central bank control over bank credit is
rendered very difficult by the absence of well-developed money
markets.
• Existence of non-monetized sector.
– In less developed countries there exists a large non-monetized and
rural subsistence sector. Thus a big section of the community is quite
unaffected by monetary policy.
• Large-scale deficit financing.
– A large-scale deficit financing by the government may make the central bank
powerless in controlling the amount of credit and inflationary pressures. Thus,
unless it is prevented, the credit control measures will have little value.
• Cooperation of banks.
– It is very difficult for a central bank to control credit if commercial banks do
not extend their full cooperation.
• Conflicting objectives.
– The greatest difficulty in the way of the central bank in controlling credit is the
simultaneous achievement of conflicting objectives. For example controlling
inflation and increasing employment opportunities are conflicting objects.

31. Thank You