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The State Bank of Pakistan

The State Bank of Pakistan

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Published by aakiyanza

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Published by: aakiyanza on Feb 15, 2010
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04/19/2013

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THE STATE BANK OF PAKISTAN
 EVOLUTION & FUNCTIONS 
Introduction
The State Bank of Pakistan is the central bank of the country. Usually the starting pointfor a central bank is a banking system that is already in place - the banking systemnecessitates the presence of a central bank. But the State Bank of Pakistan (SBP) isunique in the sense that it started its function in a newly born country, where it also hadto holder responsibilities of developing and rehabilitating a Banking system and theeconomy, in addition to the traditional central banking Functions. Performance of theBank since its inception in 1948, as reviewed in Subsequent pages, shows that it hasfaced all the challenges with a great zeal and Commitment. The founders of the Bank set a multi-dimensional target before it That included not only regulation of themonetary and credit system but also the Growth of this system. The vision of itsfounders was a stable monetary system in Pakistan with fuller utilization of thecountry’s productive resources (SBP Act, 1956).In order to achieve the goals set before it, the State Bank of Pakistan performed all Thetraditional and non-traditional functions. The traditional functions, which are Generally performed by central banks all over the world, are classified into two Groups
The primary functions:
 
Issue of notes
Regulation of the financial System
lender of the last resort
Conduct of monetary policy
The secondary functions:
Management of public debt
Management of foreign exchange
Advising the Government on policy
Matters, anchoring payments system
Maintaining close relationships with international financial institutions.
The non-traditional or promotional functions:
 
Development of financial framework 
Provision of training facilities to bankers
Provision of credit to priority sectors
The State Bank has also been playing an active part in the process of Islamization of the banking system.1
 
 Primary Functions
Sole Authority to Issue Notes
One of the primary responsibilities of the State Bank is the regulation of currency Inaccordance with the requirements of business and the general public. For this purposethe Bank has been granted the sole right of issuing notes in the country Under Section24 of the State Bank of Pakistan Act, 1956.The overall affairs with respect to theissuing of notes are conducted through two notionally separate departments of SBP,viz., Issue Department which deals with the issue of notes, And the BankingDepartment which undertakes general banking business.
There are four issue departments one each in four provincial capitals viz.
Karachi
Lahore
Peshawar 
QuettUnder section 30 of the State Bank Act, 1956 the
 
assets of the Issue Department shouldat no time fall short of its liabilities (i.e.
 
total notes issued.
 
Of the total amount of theassets of the Issue Department, a stipulated amount,
 
which Government can vary from2
 
time to time, is to be kept in the form of gold
 
coins, gold bullion, silver bullion, specialdrawing rights held with IMF or Approved foreign exchange. Since 1965, the Bank has been required to keep a
 
minimum amount of Rs.1.2 billion in the shape of gold coins,gold bullion, and
 
Silver bullion or approved foreign exchange as the backing for noteissue. The
 
remainder of the assets of Issue Department should consist of rupee coins,rupee
 
securities and the internal bills of exchange and other commercial papers as areeligible for purchase by the Bank under Section 17 (2a, 2b, & 2d) of the SBP Act, 1956.The notes issued by the Bank constitute by far the largest portion of the currency Incirculation in the country. The other components being one-rupee coins, two-rupeecoins, and subsidiary coins. The issue of one rupee and subsidiary coins is the prerogative of the Federal Government. The Bank merely looks after the managementof their issue
 
on behalf of the Government. The State Bank also issues"Commemorative
 
(Yadgari)" notes and coins of different denominations at occasions of national
 
Importance.
Conduct of Monetary and Credit Policies
The State Bank of Pakistan is responsible to regulate the monetary and credit system of the country in such a manner that ensures monetary stability in the economy. Section9A of SBP Act, 1956 entrusts the Central Board of the Bank to formulate and monitor monetary and credit policy by taking into account the Federal Government's targets for growth and inflation, in accordance with the recommendation of the Monetary andFiscalPolicies Co-ordination Board (MFPCB). The State Bank has a number of instruments atits disposal to regulate the volume of credit and to ensure its flow to the priority sectors.
Instruments of State bank of Pakistan
The Bank has been equipped with both indirect (market oriented) and direct instrumentsof credit control. Indirect and market-oriented there are six types of instruments.Instruments are :-
Main Instruments
SBP 3-day Repo Rate
SBP provides a lending facility to the scheduled banks for up to 3 days through ReverseRepo transactions. The interest rate charged on this facility serves as the main tool togiveInterest rate signals to the money market. Increase in this rate gives a signal of monetaryTightening.
T-Bill Auctions
SBP 3-day Repo rate influences the yield of T-bills sold through auctions The cut off yield is determined by the Auction Committee, keeping in view monetary targets,current economic and financial conditions and expected market response. The Sixmonth T-bill is considered the most important benchmark by the money market.
Open Market Operation
SBP is conducting regular Open Market Operations (OMOs) since January 1995. Uptill October 1997, OMOs were unidirectional, i.e. the SBP used to mop up liquidityfrom the market in case of excess but it refrained to inject funds in case of liquidity3

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