State Bank of Pakistan Karachi

Internship Report

Abubakar Riaz (478)

 10/28/11

Prof. Hafiz Abdul Rasheed

Hailey College of Commerce,
University of the Punjab,
Lahore.

SUBJECT: REQUEST FOR THE SUBMISSION OF

Hailey College of Commerce

INTERNSHIP REPORT
University of the Punjab

Section: “G” Morning

Session: 2006-2010

Abubakar Riaz
B.Com Honors

Presented By:
Presented to:
Dr. Liaqat Ali

Roll No.: 478

Principal

Respected Sir,
Hailey College of
Commerce
I conducted my University of
internship at the Punjab
State Bank of Pakistan,
Karachi. During this internship I
prepared a report on “Reserve

Date: 2011-10-28

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 Management Framework” and Selected International Markets and investment
Department (IMID).
I worked in this department with full concentration and hard work. Now at
the completion of this internship I request you please accept my internship report.

Yours obediently,

Abubakar Riaz
B.Com Honors
Roll No. 478
Section “G” Morning
Hailey College of Commerce,
University of the Punjab, Lahore.

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 ACKNOWLEDGEMENT
All the acclamation and appreciation is for Almighty Allah the most
merciful, gracious and beneficent who is entire source of all the knowledge and
wisdom endowed to mankind. All the thanks to the name of Almighty Allah, who
helped me in setting goals and objectives and blessed me to reach the
destination. Without His assistance none is capable of accomplishment.
I would be doing injustice without mentioning the name of the person who
helped me through out the report and made me understand the major concepts
of Reserve management framework. So my special thanks go to
Miss. Asma Yousaf.
Heartiest gratitude and compliments to my Parents, without their
continuous love and encouragement I could not complete this task and in the
end I would like to thank our worthy coordinator Mr. Mubashir without him I
would not be able to complete this task. The report in your hand is the collection
of my observations and research.
The source of information for the preparation of report includes a
thorough research conducted on the internet, SBP website, IMF publications,
and Central bank of Australia.

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 TABLE OF CONTENTS

Acknowledgement....................................................................................................2
List of illustrations.....................................................................................................5
Executive summary..................................................................................................6
Introduction of SBP..................................................................................................9
History......................................................................................................................9
Core Functions of State Bank of Pakistan..........................................................11
Regulation of Liquidity.........................................................................................11
Regulation and Supervision................................................................................12
Exchange Rate Management and Balance of Payments...................................13
Developmental Role of State Bank.....................................................................14
Statutory Obligations...........................................................................................15
Vision Statement....................................................................................................18
Mission Statement..................................................................................................18
Core Value..............................................................................................................18
Organizational Structure.........................................................................................19
Central Board of Directors..................................................................................20
Ratio Analysis.........................................................................................................21
Current Ratio.......................................................................................................21
Debt ratio.............................................................................................................22
Interest Coverage Ratio......................................................................................23
Operating Profit Margin.......................................................................................23
Net Profit Margin.................................................................................................24
Return on Assets.................................................................................................25
Trend Analysis........................................................................................................26
Horizontal Analysis Interpretation.......................................................................32
SWOT Analysis......................................................................................................42
Strengths.............................................................................................................42
Weakness...........................................................................................................44

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 Opportunities.......................................................................................................45
Threats................................................................................................................46
SBP Report.............................................................................................................47
Australia..............................................................................................................47
Framework..........................................................................................................48
Objectives of reserves management..................................................................48
Organizational and decision-making structure...................................................48
Institutional Framework.......................................................................................48
Organizational Structure.....................................................................................48
Decision Making..................................................................................................50
Transparency and accountability........................................................................51
Capacity to Assess and Manage Risk................................................................53
Benchmark Portfolios..........................................................................................53
Conclusion..............................................................................................................60
Recommendations.................................................................................................62
Glossary.................................................................................................................64
Appendix.................................................................................................................67
Training certificate...............................................................................................67
Letter of authorization.........................................................................................68
Latest annual financial statements.....................................................................69
Bibliography............................................................................................................73
Bibliography

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 LIST OF ILLUSTRATIONS

Figures
Figure 1 Organogram.............................................................................................19
Figure 2 Current ratio.............................................................................................21
Figure 3 Debt Ratio................................................................................................22
Figure 4 Net Profit Margin......................................................................................24
Figure 5 Return on Assets......................................................................................25
Figure 6 Net Assets................................................................................................34
Figure 7 Total Assets.............................................................................................38
Figure 8 Assets and Liabilities...............................................................................40
Figure 9 Organizational Structure of RBA..............................................................49
Figure 10 Decision Making Structure.....................................................................50
Figure 11 Horizon Analysis....................................................................................54
Figure 11 Horizon Analysis
Tables
Table 1 Current Ratio.............................................................................................21
Table 2 Debt ratio...................................................................................................22
Table 3 Interest Coverage Ratio............................................................................23
Table 4 Operating Profit Margin.............................................................................23
Table 5 Net Profit Margin.......................................................................................24
Table 6 Return on Assets.......................................................................................25
Table 7 Horizontal Analysis: Balance Sheet of Issuing Department.....................26
Table 8 Horizontal Analysis: Balance Sheet of Banking Department....................27
Table 9 Horizontal Analysis: Profit and Loss Account...........................................30
Table 10 Vertical Analysis: Balance Sheet of Issuing Department........................33
Table 11 Vertical Analysis: Balance Sheet of Banking Department......................35
Table 12 Vertical Analysis: Profit and Loss Account.............................................39
Table 13 Official Reserve Assets of Australia........................................................47
Table 14 Currency, Asset, and Duration Benchmarks...........................................53
Table 15. Composition of Individual Portfolio Benchmarks...................................55
Table 16 Balance Sheet Issuing department.........................................................69
Table 17 Balance Sheet Banking department.......................................................70

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 Table 18 Profit and Loss Statement.......................................................................72
Table 18 Profit and Loss Statement

EXECUTIVE SUMMARY

In order to be able to cope with the changing environment it is necessary to

have some practical experience. As the students of Commerce & Business we
have to pass through a series of various managerial techniques. During this
practical course we are provided with an opportunity to learn that how the
theoretical knowledge can be implemented in practical grounds.
I selected to do my internship in State Bank of Pakistan, Karachi. I worked
there for six weeks & it gave me a greater practical knowledge about the
operations of the bank. The objective of this Internship was to explore the issues
relating to Finance and to find out problems regarding the theoretical concepts
with practical experience working in an organization during the internship and
study the system of State Bank of Pakistan Karachi. There are many possible
improvements, which we can make positive changes in the system.
The report includes the history of State Bank of Pakistan products and
services offered by the bank, its financial analysis, assignments handled at the
bank and some suggestion on the basis of my experience about the bank.
State Bank of Pakistan was inaugurated by Quaid e Azam on 1st July 1948
at Karachi. He said in his first address at that occasion that the bank will serve the
economy and bank will be responsible for issuing note and regulate the whole
monetary system the role and responsibilities of the bank was widened by State
Bank Act 1956.
SBP is performing traditional and non traditional functions for the banking
sector of Pakistan and is taking steps towards islamization of banking system.
➢ 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.,

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 and other functions like advising the government on policy matters
and maintaining close relationships with international financial
institutions.
State Bank is performing different kind of functions like regulation of liquidity it
controls the money supply in the county to avoid inflation and uses various tools to
control the supply of money e.g. it uses open market operation, discount rate. If it
wants to decrease the money supply it increased the discount rate and sells the T-
bills that are safer investment and the situation is reverse then it purchases the T-
Bills from banks and reduces the discount rate.
State bank is also a regulator and supervisor it devices various policies for
commercial banks and supervise whether they are complying the rules and
regulations for this purpose SBP has a separate dept that is inspection and
banking surveillance dept which ensures the compliance.
SBP is responsible for exchange rate management now the Govt of
Pakistan has adopted the floating exchange rate system balance of payment also
controlled by the SBP it provides the reserves to the government for the payment
of loans because it is custodian of reserves.
Being the controller of financial system it maintains certain type of reserves
from the commercial banks as statutory liquidity requirements(SLR) and cash
reserve requirements(CRR) it has placed restrictions on the of minimum capital
requirement(MCR).
State Bank has some core values that poses the major theme of work and
add uniqueness in image of Bank.
 Trust
 Openness
 Team work
 Courage
 Commitment to excellence
 Problem solving approach
Mr. Yaseen Anwer is the acting Governor of the bank after the resignation
Mr. Syed Saleem Raza. SBP has 33 departments which are housed in 10 stories
building.

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 After that there is trend analysis in the report in which different years
financial statements are compared in horizontal and vertical analysis. Different
charts are also included in the report to enhance the understanding of the users.
All the results of analysis are compiled in tabular form and pie, bar charts. SWOT
analysis is also given in which different strengths are explained which the central
bank owns different problematic areas are also discovered which hinder the work
smoothness. Different opportunities that can improve the performance and system
of the bank.
At my stay at SBP a project was also assigned to me which I had
completed namely “Reserve Management Framework” and supervised by Miss
Asma Yousaf (Fund Manager) and presented in a joint session.
At the end of report some recommendations are also given based on my
observation and study of system of SBP.

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 INTRODUCTION OF SBP

State Bank of Pakistan is the Central Bank of the country. While its
constitution, as originally lay down in the State Bank of Pakistan Order 1948,
remained basically unchanged until 1st January 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.
Under the State Bank of Pakistan Order 1948, the Bank was charge 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". The scope of the Bank’s
operations was considerably widened in the State Bank of Pakistan Act 1956,
which required the 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".
Like a Central Bank in any developing country, State Bank of Pakistan
performs both the traditional and developmental functions to achieve macro-
economic goals. [8]

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

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 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.
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 Nationalization 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 Nationalization Act brought the end of the Pakistan Banking Council
and allowed the jobs of the council to be appointed to the Chief Executives,
Boards of the Nationalized 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.
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:
1. 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.

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 2. 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 islamization of the banking system.
Based on the specialization of functions all departments of SBP were
divided into the following four clusters.
1. Economic policy and research cluster
2. Banking cluster
3. Corporate services cluster
4. Financial markets and reserve management cluster
Each cluster contains groups and different groups include different
departments. [8]

Core Functions of State Bank of

Pakistan

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. 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.

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 To regulate the volume and the direction of flow of credit to different uses
and sectors, the Bank makes use of both direct and indirect instruments of
monetary management. Until recently, the monetary and credit scenario was
characterized by acute segmentation of credit markets with all the attendant
distortions. Pakistan embarked upon a program of financial sector reforms in the
late 1980s. A number of fundamental changes have since been made in the
conduct of monetary management which essentially marked a departure from
administrative controls and quantitative restrictions to market-based monetary
management. A reserve money management program has been developed. In
terms of the program, 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.

Regulation and Supervision

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. The rapid advancement in information
technology, together with growing complexities of modern banking operations, has
made the supervisory role more difficult and challenging. The institutional
complexity is increasing, technical sophistication is improving and technical base
of banking activities is expanding. All this requires the State Bank for endeavoring
hard to keep pace with the fast-changing financial landscape of the country.
Accordingly, the out dated inspection techniques have been replaced with the new
ones to have better inspection and supervision of the financial institutions. The
banking activities are now being monitored through a system of ‘off-site’
surveillance and ‘on-site’ inspection and supervision. Off-site surveillance is
conducted by the State Bank through regular checking of various returns regularly
received from the different banks. On other hand, on-site inspection is undertaken
by the State Bank in the premises of the concerned banks when required.
To deepen and broaden financial markets as also to diversify the sources
of credit, a number of non-bank financial institutions (NBFIs) were allowed to

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 increase substantially. The State Bank has also been charged with the
responsibilities of regulating and supervising of such institutions.
The "Prudential Regulations" for banks, besides providing for credit and
risk exposure limits, prescribe guide lines relating to classification of short-term
and long-term loan facilities, set criteria for management, prohibit criminal use of
banking channels for the purpose of money laundering and other unlawful
activities, lay down rules for the payment of dividends, direct banks to refrain from
window dressing and prohibit them to extend fresh loan to defaulters of old loans.
The existing format of balance sheet and profit-and-loss account has been
changed to conform to international standards, ensuring adequate transparency of
operations. Revised capital requirements, envisaging minimum paid up capital of
Rs.5 billion have been enforced. Effective December, 1997, every bank was
required to maintain capital and unencumbered general reserves equivalent to 8
per cent of its risk weighted assets.
The "Rules of Business" for NBFIs became effective since the day NBFIs
came under State Bank’s jurisdiction. As from January, 1997, modarbas and
leasing companies, which are also specialized types of NBFIs, are being
regulated/ supervised by the Securities and Exchange Commission (SECP),
rather than the State Bank of Pakistan.

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. 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.
The Bank is responsible to keep the exchange rate of the rupee at an
appropriate level and prevent it from wide fluctuations in order to maintain

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 competitiveness of our exports and maintain stability in the foreign exchange
market. To achieve the objective, various exchange policies have been adopted
from time to time keeping in view the prevailing circumstances. Pak-rupee
remained linked to Pound Sterling till September, 1971 and subsequently to U.S.
Dollar. However, it was decided to adopt the managed floating exchange rate
system w.e.f. January 8, 1982 under which the value of the rupee was determined
on daily basis, with reference to a basket of currencies of Pakistan’s major trading
partners and competitors. Adjustments were made in its value as and when the
circumstances so warranted. During the course of time, an important development
took place when Pakistan accepted obligations of Article-VIII, Section 2, 3 and 4
of the IMF Articles of Agreement, thereby making the Pak-rupee convertible for
current international transactions with effect from July 1, 1994.
After nuclear detonation by Pakistan in 1998, a two-tier exchange rate
system was introduced w.e.f. 22nd July 1998, with a view to reduce the pressure
on official reserves and prevent the economy to some extent from adverse
implications of sanctions imposed on Pakistan. However, effective 19th May 1999,
the exchange rate has been unified, with the introduction of market-based floating
exchange rate system, under which the exchange rate is determined by the
demand and supply positions in the foreign exchange market. The surrender
requirement of foreign exchange receipts on account of exports and services,
previously required to be made to State Bank through authorized dealers, has
now been done away with and the commercial banks and other authorized
dealers have been made free to hold and undertake transaction in foreign
currencies.
As the custodian of country’s external reserves, the State Bank is also
responsible for the management of the foreign exchange reserves. The task is
being performed by an Investment Committee which, after taking into
consideration the overall level of reserves, maturities and payment obligations,
takes decision to make investment of surplus funds in such a manner that ensures
liquidity of funds as well as maximizes the earnings. These reserves are also
being used for intervention in the foreign exchange market. For this purpose, a
Foreign Exchange Dealing Room has been set up at the Central Directorate of
State Bank of Pakistan and services of a ‘Forex Expert’ have been acquired.

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 Developmental Role of State Bank
The responsibility of a Central Bank in a developing country goes well
beyond the regulatory duties of managing the monetary policy in order to achieve
the macro-economic goals. This role covers not only the development of important
components of monetary and capital markets but also to assist the process of
economic growth and promote the fuller utilization of a country’s resources.
Ever since its establishment, the State Bank of Pakistan, besides
discharging its traditional functions of regulating money and credit, has played an
active developmental role to promote the realization of macro-economic goals.
The explicit recognition of the promotional role of the Central Bank evidently
stems from a desire to re-orientate all policies towards the goal of rapid economic
growth. Accordingly, the orthodox central banking functions have been combined
by the State Bank with a well-recognized developmental role.
The scope of Bank’s operations has been widened considerably by
including the economic growth objective in its statute under the State Bank of
Pakistan Act 1956. The Bank’s participation in the development process has been
in the form of rehabilitation of banking system in Pakistan, development of new
financial institutions and debt instruments in order to promote financial
intermediation, establishment of Development Financial Institutions (DFIs),
directing the use of credit according to selected development priorities, providing
subsidized credit, and development of the capital market.

Statutory Obligations
Statutory Cash Reserve
In terms of Section36(1) SBP Act, 1956, every scheduled bank is required
to maintain with State Bank a balance the amount of which shall not at the close
of business or any day be less than such percentage of Time & Demand Liabilities
in Pakistan as may be determined by State Bank.

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 Presently the requirement is 5% on weekly average basis subject to daily
minimum of 4% of Time & Demand Liabilities (reference BSD Circular No.29
2008).

Statutory Liquidity Requirement

In terms of Section 29(1) of Banking Companies Ordinance, 1962 every
banking company shall maintain in Pakistan in cash, gold or un-encumbered
approved securities valued at price not exceeding "the lower of cost or the current
market price" an amount which shall not at the close of business in any day be
less than such percentage of the total of its time & demand liabilities in Pakistan,
as may be notified by State Bank from time to time.
Presently the requirement is 9% (excluding CRR) of the total of its time and
demand liabilities in Pakistan (BSD Circular No.26 of 2008).

Maintenance of Liquidity against Certain

Liabilities
In terms of Rule 6 of NBFIs Rules of Business, all NBFIs are required to
invest 14% of their liabilities defined in the Rule, in Government Securities, NIT
Units, and shares of listed companies or listed debt securities in the prescribed
manner. For the purpose of this rule, liabilities shall not include NBFIs equity,
borrowings from financial institutions including accruals thereon, lease key money,
deferred taxation not payable within 12 months, dividend payable within two
months, advance lease rentals and deposits from financial institutions. In addition,
they are also required to maintain cash balance with State Bank, which shall not
be less than 1% of their liabilities as defined above.

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 Submission of Annual Audited Accounts by
NBFIs
Under Rule 17 of NBFIs Rule of Business, all NBFIs are required to invest
to submit their annual audited accounts within a period of 6 months after the close
of their accounting year.

Annual Accounts
At the expiration of each calendar year every banking company
incorporated in Pakistan, in respect of all business transacted by it, and every
banking company incorporated outside Pakistan, in respect of all business
transited through its branches in Pakistan, shall prepare with reference to that
year a balance-sheet and profit and loss account as on the last working day of the
year in the prescribed forms (Section 34 of Banking Companies Ordinance, 1962).

Submission of Returns
The accounts and balance-sheet referred to in section 34 together with the
auditor’s report as passed in the annual General Meeting shall be published in the
prescribed manner, and three copies thereof shall be furnished as returns to the
State Bank within three months of the close of the period to which they relate
(Section 36 of Banking Companies Ordinance, 1962).

Minimum Capital Requirements

In terms of Section 13 of Banking Companies Ordinance, 1962 no banking
company shall commence business unless it has a minimum paid up capital as
may be determined by the State Bank or carry on business unless the aggregate
of its capital and unencumbered general reserves is of such minimum value within
such period as may be determined and notified by the State Bank from time to
time for banking companies in general or for a banking company in particular.
As present, all banks operating in Pakistan are required to maintain capital
and unencumbered general reserve, the value of which is not less than 8% of their

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 risk weighted assets. Additionally they are also required to maintain a minimum
paid up capital of Rs.5 billion.

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 VISION STATEMENT

To transform the SBP into a modern and dynamic central bank, highly
professional and efficient, fully equipped to play a meaningful role on
sustainable basis in the economic and social development of Pakistan.

MISSION STATEMENT

To promote monetary and financial stability and foster a sound and

dynamic financial system, so as to achieve sustained and equitable economic
growth and prosperity.

CORE VALUE

1. Trust
2. Openness
3. Team work
4. Courage
5. Commitment to excellence
6. Problem solving approach

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 ORGANIZATIONAL STRUCTURE

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Figure 1 Organogram
 Central Board of Directors
1. Yaseen Anwar Acting Governor Chairman

2. Mr. Salman Siddique Member

3. Mr. Kamran Y. Mirza Member

4. Mr. Zaffar A. Khan Member

5. Mirza Qamar Beg Member

6. Mr. Asad Umar Member

7. Mr. Waqar A. Malik Member

8. Mr. Aftab Mustafa Khan Corporate Secretary

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 RATIO ANALYSIS

Current Ratio
Current ratio=Current AssetsCurrent Liabilities

Table 1 Current Ratio

Current Assets Current Liabilities Current Ratio
2008 212,566,111 81176181 2:61
2009 470,360,068 71152175 2:98

Figure 2 Current ratio

Interpretation
The current ratio is one of the most used ratios that measure the solvency
of firm and its ability to pay the short term obligation. As shown in the table in
2008 the bank has 2:61 ration which means that if it has two rupee it has to pay
61 paisa as liability that is pretty much good ratio in banking sector. If we look at
the 2009 the ration has increased to 2:98 means for every two rupee it has to pay
98 paisa as liability. This ratio is adverse as compared to 2008 because the
liabilities have increased due to IMF loan and other conditional foreign loans.

Debt ratio
Debt ratio=Total LiabilitiesTotal Assets * 100

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 Table 2 Debt ratio
Total Liabilities Total Assets Debt Ratio
2008 803,915,612 1,126,761,585 71.34%
2009 979,089,234 1,377,964,974 71.05%

Figure 3 Debt Ratio

Interpretation
The debt ratio measures the proportion of assets financed by the outsider’s
money. The higher the ratio the greater the amount of other people’s money being
used to generate the revenue. The bank has almost same ratio in the two years
that shows its assets are financed up to 71% by the credit money that is not a
good sign because it reduces the confidence of investors and this is acceptable
up to 60% only. This ratio shows that bank has taken so many loans to run its
affairs.

Interest Coverage Ratio

Times Interest earned ratio=Operating IncomeInterest Expense
Table 3 Interest Coverage Ratio
Operating Profit Interest Expense Int coverage Ratio
2008 165,235,507 3,748,759 44.07

Interpretation
This ratio shows either the firm is able to meet its contractual interest
payment. The higher the ratio the higher the ability to make its interest payment
the state bank has well figure that shows it can easily meet its interest obligations
in 2008. On the other hand it has also good current ratio that depict that it is able
to meet its obligations.

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 Operating Profit Margin
Operating profit margin=Operating profitRevenue(interest)
Table 4 Operating Profit Margin
Operating Profit Revenue O.P Margin
2008 165,235,507 180,054,065 91.76%

Interpretation
The operating profit margin shows the percentage of each rupee remain as
profit after the deduction of costs and all expenses except interest and taxes. The
91.76% shows that bank is earning almost 92 paisa and 8 paisa is going under
the head of expenses. The higher the ratio better the firm is earning.

Net Profit Margin

Net profit Margin=Net ProfitRevenue * 100

Table 5 Net Profit Margin

Net Profit Revenue Net Profit Margin
2008 164,793,359 180,054,065 91.52%
2009 204,212,004 222,428,693 91.81%

Figure 4 Net Profit Margin

Interpretation
The net profit margin shows the percentage of each rupee remain as profit
after the deduction of costs and all expenses including interest and taxes. Higher
net profit margin is preferable. The SBP net profit margin has increased in 2009
as compared to 2008 which shows that bank has greater profit in the year of 2009.

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 Return on Assets
Return on Assets=Net ProfitTotal Assets * 100

Table 6 Return on Assets

Net Profit Total Assets Return on Assets
2008 164,793,359 1,126,761,585 14.62%
2009 204,212,004 1,377,964,974 14.81%

Figure 5 Return on Assets

Interpretation
This ratio measures the effectiveness of management that how it uses the
available assets to generate revenue. Higher the ratio better is the position. In
case of SBP it is also increased from 14.62 %to 14.81% in the FY of 2009 which
shows the good indicator of bank performance.

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 TREND ANALYSIS

Table 7 Horizontal Analysis: Balance Sheet of Issuing

Department

Balance Sheet
Horizontal
Analysis in %age
State Bank of Pakistan: Issuing department
based on year
2007
Balance Sheet
(Rupees in ‘000’)
Items
2007 2008 2009 2008 2009
Assets
Gold reserves held
81,277,106 130,970,552 157,543,551 61.14 93.84
by the Bank
Foreign currency
685,468,587 439,104,769 378,121,392 -35.94 -44.84
reserves
Special Drawing
12,383,051 11,632,215 6,318,150 -6.06 -48.98
Rights of the IMF
Notes and coins:
Indian notes
representing
638,249 683,678 727,665 7.12 14.01
assets receivable
from the Reserve
Bank of India
Coins 3,012,270 2,718,036 2,496,236 -9.77 -17.13
Total: notes
3,650,519 3,401,714 3,223,901 -6.82 -11.69
and coins
Investments 108,830,311 458,259,765 675,410,375 321.08 520.61
Commercial 78,500 78,500 78,500 0.00 0.00
papers held in
Bangladesh
(former East

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Pakistan)

Assets held with

the Reserve Bank 1,740,325 2,591,897 3,021,743 48.93 73.63
of India
Total Assets 893,428,399 1,046,039,412 1,223,717,612 17.08 36.97

LIABILITY
Bank notes issued 893,428,399 1,046,039,412 1,223,717,612 17.08 36.97

Table 8 Horizontal Analysis: Balance Sheet of Banking

Department
Balance Sheet
Horizontal
Analysis in %age
State Bank of Pakistan: Banking department
based on year
2007
Balance Sheet
(Rupees in ‘000’)
Items
2007 2008 2009 2008 2009
Assets
Local currency 135,646 181,913 196,449 34.11 44.82
Foreign currency
162,815,117 197,206,165 430,086,636 21.12 164.16
reserves
Earmarked foreign
56,822,188 952,112 33,959,461 -98.32 -40.24
currency balances
Special Drawing
418,534 3,137,123 6,117,522 649.55 1361.65
Rights of the IMF
220,191,485 201,477,313 470,360,068 -8.50 113.61

Reserve tranche with

the IMF under quota 10,881 13,286 15,048 22.10 38.30
arrangements

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Securities purchased
under agreement to 33,715,973 -100.00 -100.00
resale
Current account of
the Government of 40,915,860
Punjab
Current account of
the Government of 4,820,407 13,908,793 7,127,734 188.54 47.87
Baluchistan
Current account of
the Government of
0 518,564 0
Azad Jammu and
Kashmir
Investments 373,066,806 635,739,865 495,348,215 70.41 32.78
Loans, advances and
288,091,460 242,880,410 331,853,796 -15.69 15.19
bills of exchange
Balances due from
the Governments of
India and Bangladesh 4,677,500 5,033,592 5,416,132 7.61 15.79
(former East
Pakistan)
Property and
19,019,433 18,522,284 18,073,733 -2.61 -4.97
equipment
Intangible assets 163,769 120,923 116,393 -26.16 -28.93
Other assets 15,433,411 17,605,450 8,630,077 14.07 -44.08
Total assets 959,191,125 1,135,820,480 1,377,964,974 18.41 43.66

LIABILITIES
Bills payable 571,942 1,224,446 827,785 114.09 44.73
Current accounts of
142,197,558 70,823,348 66,621,868 -50.19 -53.15
the Governments
Current account with
SBP Banking
2,369,636 3,702,522
Services Corporation-
a subsidiary
Securities sold under 61,816,757 6,758,751 -89.07 -100.00
agreement to

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repurchase

Deposits of banks
and financial 305,168,576 424,549,382 273,739,781 39.12 -10.30
institutions
Other deposits and
104,135,996 145,601,026 167,779,189 39.82 61.12
accounts
Payable to the IMF 85,063,742 91,263,686 419,003,041 7.29 392.58
Other liabilities 72,229,063 60,279,837 43,016,815 -16.54 -40.44
771,183,634 800,500,476 974,691,001 3.80 26.39
Deferred liability -
staff retirement 11,484,789 12,183,991 4,204,684 6.09 -63.39
benefits
Capital grant rural
finance resource 59,431 59,430 0.00 -100.00
centre
Deferred liability -
staff retirement 3,939,778 4,204,684
benefits
Deferred income 340,845 206,244 193,549 -39.49 -43.21
Total liabilities 783,068,699 812,950,141 979,089,234 3.82 25.03
Net assets 176,122,426 322,870,339 398,875,740 83.32 126.48

REPRESENTED BY
Share capital 100,000 100,000 100,000 0.00 0.00
Allocation of special
drawing rights of the 1,525,958 1,525,958 1,525,958 0.00 0.00
IMF
Reserves 67,138,769 76,288,533 172,704,657 13.63 157.24
Unappropriated profit 9,139,871 96,440,491 49,025,682 955.16 436.39
77,904,598 174,354,982 223,356,297 123.81 186.70
Unrealized
appreciation on gold 79,440,921 129,768,343 156,772,429 63.35 97.34
reserves
Surplus on
revaluation of
18,747,014 18,747,014 18,747,014 0.00 0.00
property and
equipment
Minority interest 29,893 0 -100.00 -100.00

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 176,122,426 322,870,339 398,875,740 83.32 126.48

Table 9 Horizontal Analysis: Profit and Loss Account

Horizontal Analysis
Profit and Loss Account
in %age based on
State Bank of Pakistan
year 2007
Income
(Rupees in ‘000’)
Statement items
2007 2008 2009 2008 2009
Discount, interest /
mark-up and / or 92,513,195 104,882,577 183,029,210 13.37 97.84
return earned
Less: Interest /
5,289,092 3,748,759 8,085,169 -29.12 52.86
mark-up expense
87,224,103 101,133,818 174,944,041 15.95 100.57
Gross Margin 656,268 720,289 1,667,375 9.76 154.07
Commission
1,957,806 61,973,254 34,725,139 3065.44 1673.68
income
Exchange gain-
4,286,628 6,594,079 9,733,352 53.83 127.06
net
Dividend income 140,043 192,481
Other operating
30,181,241 9,631,073 1,114,285 -68.09 -96.31
income - net
Other income /
-442,148 52,020
(charges) - net
124,306,046 179,611,917 222,428,693 44.49 78.94
Less: Direct
operating
expenses
Bank notes printing
3,087,214 3,097,868 4,193,032 0.35 35.82
charges
Agency
2,576,382 2,710,017 3,614,261 5.19 40.28
commission
(Provision) /
reversal of

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provision for:

loans, advances
-73,964 -451,726 -100.00 510.74
and other assets
diminution in
value of -98,687
investments
- other doubtful
212,057 122,543 62,615 -42.21 -70.47
assets
138,093 122,543 -487,798 -11.26 -453.24
118,504,357 174,122,085 215,109,198 46.93 81.52
Less: General
administrative and 9,210,501 8,888,130 10,897,194 -3.50 18.31
other expenses
OPERATING
109,293,856 173,681,489 215,109,198 58.91 96.82
PROFIT
PROFIT FOR THE
108,732,613 164,793,359 204,212,004 51.56 87.81
YEAR

Horizontal Analysis Interpretation

In the above Horizon analysis of balance sheet and profit and loss
statement we have used 2007 year as our base year and different heads of
balance sheet and profit and loss account are compared to know the performance
of current year as compared to the base year. As in balance sheet the gold
reserves are increasing from 2007 to 2009 but the currency reserves are
continuously decreasing total assets are also increasing in the issuing
department. The total assets of banking dept increasing in fact because of better
performance. The overall performance of the bank is continuously becoming
better of restructuring of bank in 2002.
If we talk about the profit and loss account the interest income is increasing
but the interest expense is negative in 2008 but it reaches to almost 52% in the
2009 because of IMF loans and other foreign loans that are taken by the
government to its position, profit of the bank also showing the positive trend and
reaches to the level of 2.4 trillion rupees and that is almost 88% higher than 2007.

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 Table 10 Vertical Analysis: Balance Sheet of Issuing
Department
Vertical Analysis in
State Bank of Pakistan:
%age based on Total
Issuing department
Assets
Balance Sheet Items (Rupees in ‘000’)
2008 2009 2008 2009
Assets
Gold reserves held by the
130,970,552 157,543,551 12.52 12.87
Bank
Foreign currency reserves 439,104,769 378,121,392 41.98 30.90
Special Drawing Rights of
11,632,215 6,318,150 1.11 0.52
the IMF
Notes and coins: Indian
notes representing assets
683,678 727,665 0.07 0.06
receivable from the
Reserve Bank of India
Coins 2,718,036 2,496,236 0.26 0.20
Total: notes and
3,401,714 3,223,901 0.33 0.26
coins
Investments 458,259,765 675,410,375 43.81 55.19
Commercial papers held
in Bangladesh (former 78,500 78,500 0.01 0.01
East Pakistan)
Assets held with the
2,591,897 3,021,743 0.25 0.25
Reserve Bank of India
Total Assets 1,046,039,41 1,223,717,61
100.00 100.00
2 2

LIABILITY
Bank notes issued 1,046,039,41 1,223,717,61
100.00 100.00
2 2

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 Net Assets

2009

2008

2007

0 100,000,000 200,000,000 300,000,000 400,000,000 500,000,000

Rupees

Figure 6 Net Assets

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 Table 11 Vertical Analysis: Balance Sheet of Banking
Department
Vertical Analysis in
State Bank of Pakistan:
%age based on
Banking department
Total Assets
Balance Sheet Items (Rupees in ‘000’)
2008 2009 2008 2009
Assets
Local currency 181,913 196,449 0.02 0.01
Foreign currency
197,206,165 430,086,636 17.36 31.21
reserves
Earmarked foreign
952,112 33,959,461 0.08 2.46
currency balances
Special Drawing Rights
3,137,123 6,117,522 0.28 0.44
of the IMF
201,477,313 470,360,068 17.74 34.13

Reserve tranche with the

IMF under quota 13,286 15,048 0.00 0.00
arrangements
Securities purchased
under agreement to 0.00
resale
Current account of the
40,915,860
Government of Punjab
Current account of the
Government of 13,908,793 7,127,734 1.22 0.52
Baluchistan
Current account of the
Government of Azad 518,564 0
Jammu and Kashmir
Investments 635,739,865 495,348,215 55.97 35.95
Loans, advances and
242,880,410 331,853,796 21.38 24.08
bills of exchange

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 Balances due from the
Governments of India
5,033,592 5,416,132 0.44 0.39
and Bangladesh (former
East Pakistan)
Property and equipment 18,522,284 18,073,733 1.63 1.31
Intangible assets 120,923 116,393 0.01 0.01
Other assets 17,605,450 8,630,077 1.55 0.63
Total assets 1,135,820,48 1,377,964,97
100.00 100.00
0 4

LIABILITIES
Bills payable 1,224,446 827,785 0.11 0.06
Current accounts of the
70,823,348 66,621,868 6.24 4.83
Governments
Current account with
SBP Banking Services 2,369,636 3,702,522
Corporation- a subsidiary
Securities sold under
6,758,751 0.60 0.00
agreement to repurchase
Deposits of banks and
424,549,382 273,739,781 37.38 19.87
financial institutions
Other deposits and
145,601,026 167,779,189 12.82 12.18
accounts
Payable to the IMF 91,263,686 419,003,041 8.04 30.41
Other liabilities 60,279,837 43,016,815 5.31 3.12
800,500,476 974,691,001 70.48 70.73
Deferred liability - staff
12,183,991 4,204,684 1.07 0.31
retirement benefits
Capital grant rural
59,430 0.01 0.00
finance resource centre
Deferred liability - staff
3,939,778 4,204,684 0.35
retirement benefits
Deferred income 206,244 193,549 0.02 0.01
Total liabilities 812,950,141 979,089,234 71.57 71.05
Net assets 322,870,339 398,875,740 28.43 28.95

REPRESENTED BY
Share capital 100,000 100,000 0.01 0.01
Allocation of special 0.11
1,525,958 1,525,958 0.13
drawing rights of the IMF

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 Reserves 76,288,533 172,704,657 6.72 12.53
Inappropriate profit 96,440,491 49,025,682 8.49 3.56
174,354,982 223,356,297 15.35 16.21
Unrealized appreciation
129,768,343 156,772,429 11.43 11.38
on gold reserves
Surplus on revaluation of
18,747,014 18,747,014 1.65 1.36
property and equipment
Minority interest 0 0.00 0.00
322,870,339 398,875,740 28.43 28.95

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 Total Assets

Assets held
with the
Reserve Bank
of India
Gold reserves

Foreign
Investments
currency
reserves

SDRs
Total: notes
and coins

Gold reserves
Foreign currency reserves
SDRs
Total: notes and coins
Investments
Commercial papers held in Bangladesh (former East Pakistan)
Assets held with the Reserve Bank of India

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 Table 12 Vertical Analysis: Profit and Loss Account

Vertical Analysis in
State Bank of Pakistan:
%age based on
Banking department
interest Income
Income Statement
(Rupees in ‘000’)
items
2008 2009 2008 2009
Discount, interest /
mark-up and / or return 104,882,577 183,029,210 100.00 100.00
earned
Less: Interest / mark-up 3,748,759 8,085,169 3.57 4.42
expense Figure 7 Total Assets
101,133,818 174,944,041 96.43 95.58
Gross Margin 720,289 1,667,375 0.69 0.91
Commission income 61,973,254 34,725,139 59.09 18.97
Exchange gain- net 6,594,079 9,733,352 6.29 5.32
Dividend income 140,043 192,481 0.13 0.11
Profit earned through
subsidiaries
Other operating income
9,631,073 1,114,285 9.18 0.61
- net
Other income /
-442,148 52,020 -0.42 0.03
(charges) - net
179,611,917 222,428,693 171.25 121.53
Less: Direct operating
expenses
Bank notes printing
3,097,868 4,193,032 2.95 2.29
charges
Agency commission 2,710,017 3,614,261 2.58 1.97
(Provision) / reversal of
provision for:
loans, advances and
-451,726 0.00 -0.25
other assets
diminution in value of
-98,687 0.00 -0.05
investments

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 - other doubtful assets 122,543 62,615 0.12 0.03
122,543 -487,798 0.12 100.00
174,122,085 215,109,198 166.02 117.53
Less: General
administrative and other 8,888,130 10,897,194 8.47 5.95
expenses
OPERATING PROFIT 173,681,489 215,109,198 165.60 117.53
PROFIT FOR THE
164,793,359 204,212,004 157.12 111.57
YEAR

Assets & Liabilities

1,600,000,000
1,400,000,000
1,200,000,000
1,000,000,000
Rupees

Liabilities
800,000,000
Assets
600,000,000
400,000,000
200,000,000
0
2007 2008 2009
years

Figure 8 Assets and Liabilities

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 Vertical Analysis Interpretation
In the vertical analysis we use the total assets as base to know the
performance of different heads of balance sheet we use only one base to know
the overall assets and liabilities performance. In the profit and loss account
interest income is used as base to measure the performance of different
expenses. All the expenses heads and other heads are compared to the interest
revenue. Assets and liabilities are also depicted in the bar chart that shows that
liabilities are less than the assets it means the assets are financed with debts are
less and bank is in the position of solvency. The main reason behind the greater
return is investments that the bank has in major currencies and deposits of foreign
countries the good profit also shows the excellent performance of the banks fund
managers even then they have no latitude to deviate from benchmark. I think if
they were allowed to deviate from benchmark they can perform better.

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 SWOT ANALYSIS

SWOT analysis is an acronym that stands for strengths, weakness,

opportunities, and threats SWOT analysis is careful evaluation of an
organization’s internal strengths and weakness as well as its environment
opportunities and threats.
“The overall evaluation of a company strengths, weaknesses, opportunities
and threats is called SWOT analysis.”
In SWOT analysis the best strategies accomplish an organization’s mission by:
1. Exploiting an organizations opportunities and strength.
2. Neutralizing it threats.
3. Avoiding or correcting its weakness.
SWOT analysis is one of the most important steps in formulating strategy
using the organization mission as a context, managers assess internal strengths
distinctive competencies and weakness and external opportunities and threats.
The goal is to then develop good strategies and exploit opportunities and
strengths neutralize threats and avoid weaknesses.

Strengths
Premier Institution
SBP in one of the premier bank of Pakistan that is responsible for
regulation of banking and monetary system of Pakistan since its inception. It
provides some guidelines time to time for proper working of financial and
monetary system in Pakistan.

Agent to Government
The SBP performs additional services for government by providing loans
and managing the government accounts as well as the other banks.

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 Reserve custodian
SBP is privileged to hold the reserves of the whole economy no other bank
is authorized to hold the reserves except they can deal in reserves but the
ultimate holder is SBP. It is also responsible to manage and control the exchange
rate in the country.

Employee Benefit
The employers at SBP are offered reasonable monetary benefit. Normally
bonuses are given. Employees also enjoy the interest free loans free medical care
of family and insurance of life. These serve as a benefit and competency for the
bank and a source of motivation for the employees.

Broad Network
The bank has another competency i.e. it has two subsidiaries one is the
NIBAF and second one is the BBP-Banking Services Corporation. SBP has 33
departments that are performing their own separate functions.

Strictly follows Rules & Regulations

The employees at SBP are strict followers of rule & regulation imposed by
bank. The disciplined environment at SBP bolsters its image and also enhances
the over all out put of the organization.

Professional Competence
The employees at SBP here have a good hold on their descriptions, as
they are highly skilled Professionals with better training programs in business
administration, banking, economics etc. These professional competencies enable
the employees to understand and perform the function and operation in better
way.

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 Healthy Environment
The working condition in the SBP Karachi is very good each and every
employee has its own cabin to work with devotion without any disturbance and its
office environment can be compared to any multinational organization. There is
canteen for employees that cover a large area.

LRC
SBP has its own training department known as Learning Resource
Center(LRC) all the training programs are held over their even the international
seminars and meetings conducted over their.

Online Network
The bank has the strength of being powered by the network of computers,
which have saved time, energy and would have lessened the mental stress, the
employees have. This would add to the strength that is powered by network of
computers.

Weakness
Lack of Marketing Efforts
The bank does not promote its corporate image, services, etc on a
competitive way. Hence lacks far behind in marketing effort .A need for aggressive
marketing in there in the era marketing in now becoming a part of every
organization.

Political Pressure
The strong political hold of some parties and government and their
dominance is affecting the bank in a negative way. They sometime have to

Abubakar Riaz (478)

 provide loan under the pressure, which leads to uneven and adjusted feeling in
the bank employees.

Favoritism and Nepotism

The promotions and bonuses etc in the bank are often powered by senior’s
favoritism or depends upon their wills and decision. This adds to the negative
factors, which denominate the employees thus resulting in affecting their
performance negatively.

Uneven Work Distribution

The workload in SBP is not evenly distributed and the workload tends to be
more on some employees while others abscond away from their responsibilities,
which server as a demotivation factor for employees performing above average
work.

Opportunities
Electronic Banking
The world today has become a global village because of advancement in
the technologies, especially in communication sector. More emphasis is now
given to avail the modern technologies to better the performances. SBP can utilize
the electronic banking opportunity to ensure on line banking 24 hours a day. This
would give a competitive edge over others.

Micro Financing
Because of the need for micro financing in the market, there are lot of
opportunities in this regard. Now the time has arrived when the SBP must realize
it and take on step to cater an ongoing demand and the Micro finance dept should
device policies to strengthen the micro finance network.

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 Threats
Political Pressure by Elected Government
The ongoing shift in power in political arena in the country effects the
performance of the bank has to forward loans to politically powerful persons which
create a sense of insecurity and demoralization in the customer as well as
employees.

Data theft
The bank is currently dealing from data theft and the present technology in
Pakistan is not that effective and others are very costly in providing a safe place
on internet away from domestic and international hacks which threaten the
environment of the bank

Customer Complaints
There exists no regular and specific system of the removal of customer
complaints. Now a day a need for total customer satisfaction is emerging and in
their demanding consequences customer's complaints are ignored.

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 SBP REPORT

Australia
Australia’s foreign currency reserves are managed by the Reserve Bank of
Australia (RBA). Its Head office1 is in Sydney the value of gross reserves
portfolios is USD36, 342 Million on May 2010 [7]
Table 13 Official Reserve Assets of Australia
In Million of US Dollars
May 2010
Official reserve 36,341.71
(1) Foreign currency reserves (in convertible foreign 27,237.72
currencies)
(a) Securities of which: issuer 21,349.60
headquartered in reporting country but
located abroad
(b) total currency and deposits with: 5,888.12
(i) other national central 580.18
banks, BIS and IMF of
which: located abroad
(ii) banks headquartered 5,307.93
outside the reporting
country of which: located in
the reporting country
(2) IMF reserve position 1,031.15
(3) SDRs 4,585.92
(4) gold (including gold deposits and, if appropriate, gold 3,112.53
swapped)
-volume in millions of fine troy 2.57
ounces
(5) other reserve assets (specify) 374.39
-financial derivatives -0.14
-other 374.54

1 Australia has three dealing centers; New York(US), London(UK), Sydney(AUS)

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 Framework

Objectives of reserves management

Australia’s Reserves are held for intervention purpose. The primary role of
the reserves portfolio is to fund foreign exchange market operations that arise as
part of the Bank’s broader monetary policy function.
Analysis:
The reserves are managed in such a manner that it gives priority
to low levels of credit risk, limited exposure to market risk, while
maintaining a high degree of liquidity. They are managed to achieve the
highest returns within defined risk parameters taking into account the
need to ensure funds at short notice when required for intervention.

Organizational and decision-making

structure
Institutional Framework
The RBA’s responsibility to manage Australia’s foreign exchange reserves
is given through broad legislative powers that allow the Bank to buy, sell, and
otherwise deal in foreign exchange to achieve monetary policy objectives.
Responsibilities are not shared with other government agencies, reflecting the role
of reserves as a source of intervention capital. The RBA acts independently in its
management decisions.

Organizational Structure
Responsibility for management of reserves is delegated by the Governor of
the Bank to the Financial Markets Group (FMG). Firstly international department
was responsible for both middle and front office function and back office was also

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 located in it. As the scale of operations increased RBA made flexibility in
investment operations. [160]

Figure 9 Organizational Structure of RBA

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 Decision Making
Early every transaction in reserves management had to be approved by
higher management. Later it was devised that day-to-day management of
reserves should be delegated to an Investment Committee within the Financial
Markets Group. The Committee, made up of senior managers from units involved
in reserves management, had discretion to take sizable positions in currency and
asset allocation subject to limits approved by the Governor. The Investment
Committee meets regularly and takes positions largely based on assessments of
the medium-term macroeconomic outlook of countries in which the reserves were
invested. [166]

Figure 10 Decision Making Structure

The Governor requires that reserves are accounted for in line with best practice and that
the level of transparency is consistent with that in other parts of the RBA’s monetary policy
operations. Senior managers overseeing front office operations are now responsible for day-to-

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 day management of currency and asset allocation, maintaining the portfolio close to benchmark.
They report directly to the Assistant Governor of the Financial Markets Group. [167]

Analysis:
Approval of transaction from higher management means it
maximized control over the management process, but it makes decision
making unwieldy and, therefore, poorly suited to a more active risk
management framework. It also constrained initiative at manager levels.
So in order to move to more active management above system was
devised and a small and qualified amount of trading discretion was
delegated to managers in trading centers.

Active Management
No – More passive management is observed. Close to benchmark.
Analysis:
Before 2000, Short term investment decision made a positive
return from market. Whereas investment position in medium term
macroeconomics development also made positive returns in some years
but negative returns in others leaving a small positive returns from this
activity overall. This significantly reduced the importance of discretionary
management. [158]

Transparency and
accountability
The RBA publishes statistical information on its reserves and foreign
currency transactions in its monthly Bulletin. Also, since 1992, the Bank has
provided an overview of reserves management operations and return relative to
benchmark in its Annual Report. It is SDDS subscriber; Special data
dissemination standards, as an IMF member country it observes the standards
and reserves data template approved by IMF’s executive board.

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 Procedure Manual
A key element in the control of operational risk has been the development
of manuals detailing investment and risk management procedures. [170]
The manuals specify;
• The kinds of instruments in which investments can be made
• The risk parameters for each portfolio, and
• The responsibilities of various positions associated with reserves
management.
They also specify how risks and returns are calculated and how office
systems should be used in specific circumstances. Procedures manuals also exist
for middle and back office staff.

Staffing policy
Staffing policy is another key element. The RBA has found considerable
benefit in specialization of professional staff in operational areas. Frequently
rotating staff in and out of these areas in order to provide a breadth of experience
was felt to be a significant constraint on maintaining adequate levels of experience
and knowledge. Over the past ten years, efforts have been made to maintain a
core of experience at senior levels within the operational areas while, at the same
time, allowing rotation at junior levels in order to build a foundation of experience.
Compensation is reviewed regularly to ensure competitiveness with other
organizations and staff is encouraged to participate in a range of courses. [171]

Statements
The RBA’s annual financial statements are prepared in accordance with
Australian Accounting Standards and other mandatory reporting requirements
contained in the Commonwealth Authorities and Companies Act. The statements
are scrutinized by an external auditor, the Australian National Audit Office, to
ensure that they comply with relevant standards. [173]

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 Audit
Reserves management functions are audited internally each year in
accordance with recommended control frameworks published by the Bank for
International Settlements and requirements set out by the Australian Financial
Markets Association. The internal audit reports on compliance with controls and
seeks to strengthen management processes where it sees potential for loss
through inadequate control.

Capacity to Assess and Manage

Risk
Benchmark Portfolios
The benchmarks represent the risk-return trade-off acceptable to the RBA
over the long term. Statistical, practical, and judgmental factors relevant to the
RBA are important in deciding the appropriate composition and they are
periodically reviewed for optimal risk/return trade off. Mean-variance analysis in
addition to judgmental factors is used in deciding on the weights assigned to the
three currencies in the benchmark portfolio.
The choice of a duration benchmark of 30 months for each of the asset
portfolios was made on the basis of factors specific to the RBA in its responsibility
for managing reserves and analysis of risk and return for each asset. [176]

Table 14 Currency, Asset, and Duration Benchmarks

United States Europe Japan

Currency allocation (%) 45 45 10

Asset allocation (%) 45 45 10
Duration (Months) 30 30 30

Analysis:
With the aim of maximizing the Bank’s capacity to intervene,
that’s way it’s decided that a trade weighted basket of currencies would
be an appropriate currency. The decision was taken to spread the

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 composition across the three major reserve currencies—the U.S. dollar,
deutschemark (later the euro), and Japanese yen. This also provided a
diversified portfolio and meant, too, that the RBA’s assets would be
invested in capital markets that are liquid and highly rated.
30 month duration represents the maximum price risk that the
RBA will allow itself while keeping the probability of capital loss to an
acceptable level over the Bank’s investment horizon. An example of this
analysis is given in Figure 3.

Figure 11 Horizon Analysis

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 Horizon Analysis [178]
The RBA’s investment horizon is of twelve months. This is based
on the Bank’s investment objectives and the period in which it reports on
its operations to the Australian Parliament. Over a twelve-month period,
the RBA expects the return on the portfolio to fall within a 95 percent
confidence band around the mean return, and will accept a negative
return on only 2.5 percent of occasions. On this basis, return is
maximized at point A in Figure 3, where the lower boundary of the
confidence band crosses the horizontal axis.

Composition of Benchmarks
The RBA has established benchmarks for the composition of each of the
three asset portfolios. These benchmarks are set out in Table 3. Like the other
benchmarks, practical and judgmental factors, combined with the liquidity
characteristics in each market, are important in deciding the appropriate asset
structure of the portfolios.

Table 15. Composition of Individual Portfolio Benchmarks [179]

United States Europe Japan
Asset Class % of Asset Class % of Asset Class % of
Total Total Total
Deposits 22 Deposits 30 Deposits 22
Treasury bills 21 Treasury bills 15 Treasury bills 33
Treasury 57 Bonds 55 Bonds 45
Notes

Analysis:
The desire to maintain a liquid and secure portfolio led the RBA
to limit its benchmark investments to government securities and cash
instruments. Typically, some 75 to 80 percent of the RBA’s benchmark
foreign investment portfolios are held in government paper.
For the European portfolio, the RBA has decided on a
combination of French and German government securities as the best

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 structure to satisfy requirements for credit risk and liquidity. In order to
limit exposure to price risk, the maximum maturity of securities holdings
is restricted to 10 ½years in each portfolio.

Cash Repo
Cash invested under repurchase agreements (repo) and deposits with
highly rated banks make up the balance of the asset benchmarks.

Analysis:
The RBA has found the short duration offered by deposits to be
attractive in markets where access to short-term government debt was
limited. They have also been a good, immediate source of liquid funds
during episodes of currency intervention. That said, the proportion of
foreign exchange reserves invested in deposits has declined in recent
years, reflecting tighter credit constraints and changes in cash
management practices. The RBA now makes greater use of cash repo,
which has the security advantage of being collateralized with
government securities. [181]

Instruments
In addition to the assets held in the benchmark portfolios, the RBA’s
dealing centers have discretion to hold a small range of other highly rated
instruments.
These include the [183]
• U.K. Gilts,
• Dutch and Swiss government paper,
• Deposits and medium-term notes issued by the Bank for
International Settlements.
Analysis:
With the exception of BIS deposits, these investments have
accounted for a negligible share of total holdings. Discretion to hold

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 U.K., Dutch, and Swiss paper is a remnant of a period in the 1980s
when the composition of Australia’s official foreign currency liabilities
influenced the composition of the reserves portfolio. Discretion also
exists to hold U.S. Federal Agency debt in the U.S. portfolio as a source
of return enhancement. Total holdings are restricted to a maximum of
US$500 million. [183]

Futures Contracts
In 1994, the Bank began trading interest rate futures contracts. Futures
trading have been concentrated in the European and Japanese portfolios. The
RBA does not use any over-the-counter or exchange-traded options in its
reserves management activities.

Analysis:
The decision for futures trading was driven by a desire to improve
management of market risk and, in particular, to provide a liquid hedging
instrument to minimize the risk of capital losses when interest rates were
rising. An additional attraction of using futures was the greater liquidity
and flexibility that they provide in some markets when implementing
investment strategies. Some futures markets are more liquid than their
underlying physical bond markets in that the bid-offer spread is usually
much narrower. [184]

Stock Lending
Stock lending is also an activity undertaken by the dealing centers.

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 Analysis:
As stock lending, particularly from the U.S. portfolio has risen to
be a major component of return enhancement. Though the back office
workload associated with this activity can be large. The RBA sees this
activity as relatively low risk.

Risk and performance

measurement
Market risk and return enhancement are measured relative to the
benchmark portfolios. For currency and asset allocation, Currency and asset
positions are managed separately within the discretionary band through the use of
foreign currency swaps. The cost/benefit of these swaps is taken into account
when measuring the performance of the asset and currency positions relative to
benchmark. Foreign exchange dealers in each of the three dealing centers have a
small amount of discretion set in terms of a maximum open position that falls
within the ±1 percent discretionary limit on currency allocation. Breaches of the
limit are reported to Assistant Governor on the day they occur. The dealing
centers are also required to report daily losses that exceed US$1 million to senior
management in the Financial Markets Group.

Analysis:
Risk measurement and trading discretion around the duration
benchmark for each asset portfolio are based on the concept of “dollars-
at risk.” This is the change in portfolio value arising from a one basis
point change in yield. Within each of the portfolios, the dealing centers
are required to maintain dollars-at-risk to within US$70,000 per basis
point at all times. This limit applies to the aggregate position of the
portfolio and to the position undertaken in each maturity bucket of the
portfolio in order to control the amount of curve risk. [187]

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 Value at Risk (VaR)
The VaR number represents the portfolio loss the RBA could incur once
every 20 business days in normal market conditions. Two VaR measures are
calculated each day—one based on the correlation method and the other based
on historical simulation methodology. The assumptions underlying these VaR
methodologies are reviewed periodically and their performance is tested regularly.
In accordance with best practice, the RBA also stress tests the portfolio. This
involves simulating and evaluating the impact of extreme market movements on
the value of the portfolio. [189]

Analysis:
The “dollars-at-risk” measure also forms the basis of the Value-at-
Risk (VaR) methodology, which the RBA has used since 1995 to
estimate the consolidated exposure of the Bank’s foreign currency
reserves to market risk. Though the overall limits to control market risk—
i.e., the discretionary trading bands around the benchmark—are not
defined in terms of VaR, the RBA has found that it nonetheless provides
a useful tool for conveying information about the overall portfolio
exposure to senior management and staff involved in reserves
management.[189]

Information System
All international transactions entered into by the RBA are processed
through a main-frame electronic Global Trading and Settlement System (GTS).
This system has been developed by an external software provider to their
specifications. [190]

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 CONCLUSION

State Bank of Pakistan is a unique financial institution in Pakistan as it is

central bank of our country as well as a regulatory authority.
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. The rapid advancement in information
technology, together with growing complexities of modern banking operations, has
made the supervisory role more difficult and challenging. The institutional
complexity is increasing, technical sophistication is improving and technical base
of banking activities is expanding. All this requires the State Bank for endeavoring
hard to keep pace with the fast-changing financial landscape of the country.
Accordingly, the out dated inspection techniques have been replaced with the new
ones to have better inspection and supervision of the financial institutions. The
banking activities are now being monitored through a system of ‘off-site’
surveillance and ‘on-site’ inspection and supervision. Off-site surveillance is
conducted by the State Bank through regular checking of various returns regularly
received from the different banks. On other hand, on-site inspection is undertaken
by the State Bank in the premises of the concerned banks when required.
To deepen and broaden financial markets as also to diversify the sources
of credit, a number of non-bank financial institutions (NBFIs) were allowed to
increase substantially. The State Bank has also been charged with the
responsibilities of regulating and supervising of such institutions. Moreover, in
order to safeguard the interest of ultimate users of the financial services, and to
ensure the viability of institutions providing these services, the State Bank has
issued a comprehensive set of Prudential Regulations (for commercial banks) and
Rules of Business (for NBFIs).
The "Prudential Regulations" for banks, besides providing for credit and
risk exposure limits, prescribe guide lines relating to classification of short-term
and long-term loan facilities, set criteria for management, prohibit criminal use of

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 banking channels for the purpose of money laundering and other unlawful
activities, lay down rules for the payment of dividends, direct banks to refrain from
window dressing and prohibit them to extend fresh loan to defaulters of old loans.
The existing format of balance sheet and profit-and-loss account has been
changed to conform to international standards, ensuring adequate transparency of
operations. Revised capital requirements, envisaging minimum paid up capital of
Rs.500 million have been enforced. Effective December, 1997, every bank was
required to maintain capital and unencumbered general reserves equivalent to 8
per cent of its risk weighted assets.
The "Rules of Business" for NBFIs became effective since the day NBFIs
came under State Bank’s jurisdiction. As from January, 1997, modarbas and
leasing companies, which are also specialized type of NBFIs, are being
regulated/supervised by the Securities and Exchange Commission (SECP), rather
than the State Bank of Pakistan

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 RECOMMENDATIONS

State Bank of Pakistan is performing well as all of its operations are well
planned, organized and foolproof. However the micro finance activities are not still
satisfactory and need improvements. Followings are suggestion to enhance the
performance of State Bank of Pakistan.
• At the very highest level, the decision-making AUTHORITY for the
investment of reserves should be clearly defined. This hierarchy would
normally be established by the Governor or Board of Directors and would
include the overall objectives of reserves management.
• Senior management needs to specify a strategic long-term portfolio that
represents the best available trade-off between the different risks that the
reserve management entity is facing.
• There should be latitude for fund managers to deviate from benchmark in
foreign placements as provided by the RBA and BCRP (Peru).
• If SBP don’t want to do so then it can transfer the authority to the treasurer
to assign extra limit to their fund managers if they can provide the solid
reason to invest so they can invest in the best interest.
• The benchmarks should not short-term market expectations, but their
appropriateness should be reviewed regularly.
• Investment benchmarks are an important tool for assessing performance
and accountability. Where managers should be permitted to deviate from
the benchmark portfolio, performance and accountability will occur through
the comparison of performance of the actual portfolio and benchmark.
• Reserve management authorities should also subdivide their reserves
portfolio into "tranches" according to liquidity and investment objectives and
policy requirements.
• The risk management framework should apply the same principles and
measures to externally managed funds as it does to those managed
internally.

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 • Sound risk management of externally managed funds begins with the
careful selection of reputable external managers, which is the task of
middle office.
• It is necessary to establish a separate unit, or assign a position within the
middle office, to enable the reserve management entity to fully monitor the
activities of the external manager.
• Risk exposures should be monitored continuously to determine whether
exposures have been extended beyond acceptable limits. Monitoring is
essential in identifying and limiting any cumulative losses associated with
either deviation from the benchmark.
• Reserve managers should be aware of potential financial losses and other
consequences of the risk exposures they should be prepare to accept.
• Risk mitigation could involve the use of standardized documentation and
the performance of periodic reviews of documentation.
• The eligibility criteria for the selection of trading counterparties should be
clearly defined
• There should be a framework for determining the maximum credit
exposures permitted with each counterparty.
• Active risk management is good approach to mitigate the risk than passive
risk management practices.
• Use of e-CIB and its extension to cover data about micro finance borrowers
of all MFIs should be allowed.
• Allocation of funds for credit lines in commercial banks for MFIs
• The most effective way of delivering institutional support is to focus on
selected sectors with growth potential and make it time-limited.
• SME policy must set up an effective mechanism to address the distinct
requirements of micro (informal), small and medium firms in addition to
meeting the general needs of the sector.

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 GLOSSARY

Back office. The area of reserve equivalent to a cash transaction

management operations responsible combined with a forward contract. [4]
for confirmation, settlement and in
many cases, reconciliation of reserve Credit risk. Probability of loss from a
management transactions. debtor's default. In banking, credit
risk is a major factor in determination
Benchmark. The mix of currencies, of interest rate on a loan: longer the
investment instruments, and duration term of loan, usually higher the
that reflect the reserve manager’s interest rate. Also called credit
[3]
tolerance for exposure to liquidity, exposure.
credit, and market risks.
Foreign exchange reserves. Those
Benchmark portfolio. A preset list of external assets that are readily
securities to be used to compare the available to and controlled by
performance of an actual portfolio. [3] monetary authorities for direct
financing of payments imbalances,
Cash repo. A Repurchase for indirectly regulating the
agreement (also known as a repo or magnitudes of such imbalances
Sale and Repurchase Agreement) through intervention in exchange
allows a borrower to use a financial markets to affect the currency
security as collateral for a cash loan exchange rate, and/or for other
at a fixed rate of interest. In a repo, purposes.
the borrower agrees to sell
immediately a security to a lender Front office. The area responsible
and also agrees to buy the same for initiating investment transactions
security from the lender at a fixed in accordance with approved
price at some later date. A repo is delegations, limits, and benchmarks
and the prompt and accurate entry of

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 transactions into the investment
management system. Stock lending. The act of loaning a
stock, derivative, or other security to
Futures contracts. A contractual an investor or firm. Securities lending
agreement, generally made on the requires the borrower to put up
trading floor of a futures exchange, to collateral, whether cash, security, or
buy or sell a particular commodity or a letter of credit. The completion of
financial instrument at a pre- this transaction requires a security
determined price in the future. lending agreement, which states,
Futures contracts detail the quality among other things, how long the
and quantity of the underlying asset; loan lasts, what fee the lender
they are standardized to facilitate receives, and the amount and type of
trading on a futures exchange. Some collateral. [5]
futures contracts may call for physical
delivery of the asset, while others are SDDS. The Special Data
settled in cash. [2] Dissemination Standard (SDDS) was
established by the International
Middle office. Located between the Monetary Fund (IMF/Fund) to guide
front and back offices, the middle members that have, or that might
office’s role is to monitor that all seek, access to international capital
transactions have been performed markets in the provision of their
properly, that risks are being economic and financial data to the
monitored and limits observed, and public. Both the General Data
that relevant information is available Dissemination System (GDDS) and
for management. the SDDS are expected to enhance
the availability of timely and
Reserve management. The process comprehensive statistics and
by which public sector assets are therefore contribute to the pursuit of
managed in a manner that provides sound macroeconomic policies; the
for the ready availability of funds, the SDDS is also expected to contribute
prudent management of risks, and to the improved functioning of
the generation of a reasonable return financial markets. [6]
on the funds invested.

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 Stress Testing. A simulation widely used methods of stress
technique used on asset and liability testing. [2]
portfolios to determine their reactions
to different financial situations. Stress Value at Risk – VaR. A technique
tests are also used to gauge how used to estimate the probability of
certain stressors will affect a portfolio losses based on the
company or industry. They are statistical analysis of historical price
usually computer-generated trends and volatilities. VaR is
simulation models that test commonly used by banks, security
hypothetical scenarios. Stress testing firms and companies that are
is a useful method for determining involved in trading energy and other
how a portfolio will fare during a commodities. VaR is able to measure
period of financial crisis. The Monte risk while it happens and is an
Carlo simulation is one of the most important consideration when firms
make trading or hedging decisions. [2]

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 APPENDIX

Training certificate

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 Letter of authorization

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 Latest annual financial statements

Table 16 Balance Sheet Issuing department

Balance Sheet Items
2009
Assets
Gold reserves held by the Bank 157,543,551
Foreign currency reserves 378,121,392
Special Drawing Rights of the IMF 6,318,150
Notes and coins: Indian notes representing
assets receivable from the Reserve Bank of 727,665
India
Coins 2,496,236
Total: notes and coins 3,223,901
Investments 675,410,375
Commercial papers held in Bangladesh (former
78,500
East Pakistan)
Assets held with the Reserve Bank of India 3,021,743
Total Assets 1,223,717,612

Liability
Bank notes issued 1,223,717,612

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 Table 17 Balance Sheet Banking department
Balance Sheet Items
2009
Assets
Local currency 196,449
Foreign currency reserves 430,086,636
Earmarked foreign currency balances 33,959,461
Special Drawing Rights of the IMF 6,117,522
470,360,068

Reserve tranche with the IMF under quota

15,048
arrangements
Securities purchased under agreement to resale
Current account of the Government of Punjab 40,915,860
Current account of the Government of Baluchistan 7,127,734
Current account of the Government of Azad Jammu
0
and Kashmir
Investments 495,348,215
Loans, advances and bills of exchange 331,853,796
Balances due from the Governments of India and
5,416,132
Bangladesh (former East Pakistan)
Property and equipment 18,073,733
Intangible assets 116,393
Other assets 8,630,077
Total assets 1,377,964,974

LIABILITIES
Bills payable 827,785
Current accounts of the Governments 66,621,868
Current account with SBP Banking Services
3,702,522
Corporation- a subsidiary
Securities sold under agreement to repurchase
Deposits of banks and financial institutions 273,739,781
Other deposits and accounts 167,779,189
Payable to the IMF 419,003,041
Other liabilities 43,016,815
974,691,001
Deferred liability - staff retirement benefits 4,204,684
Capital grant rural finance resource centre
Deferred liability - staff retirement benefits 4,204,684

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 Deferred income 193,549
Total liabilities 979,089,234
Net assets 398,875,740

REPRESENTED BY
Share capital 100,000
Allocation of special drawing rights of the IMF 1,525,958
Reserves 172,704,657
Unappropriated profit 49,025,682
223,356,297
Unrealized appreciation on gold reserves 156,772,429
Surplus on revaluation of property and equipment 18,747,014
Minority interest
398,875,740

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 Table 18 Profit and Loss Statement
Income Statement items
2009
Discount, interest / mark-up and / or return
183,029,210
earned
Less: Interest / mark-up expense 8,085,169
174,944,041
Gross Margin 1,667,375
Commission income 34,725,139
Exchange gain- net 9,733,352
Dividend income 192,481
Profit earned through subsidiaries
Other operating income - net 1,114,285
Other income / (charges) – net 52,020
222,428,693
Less: Direct operating expenses
Bank notes printing charges 4,193,032
Agency commission 3,614,261
(Provision) / reversal of provision for:
loans, advances and other assets -451,726
diminution in value of investments -98,687
- other doubtful assets 62,615
-487,798
215,109,198
Less: General administrative and other
10,897,194
expenses
OPERATING PROFIT 215,109,198
PROFIT FOR THE YEAR 204,212,004

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 BIBLIOGRAPHY

• [156 -190] refers to the paragraph numbers from the “Guidelines for
foreign exchange reserves management: Accompanying document”.
• [1] International Reserves and Foreign Currency Liquidity IMF
http://www.imf.org/external/np/sta/ir/IRProcessWeb/data/aus/eng/curaus.ht
m#I
• [2] http://www.investopedia.com/
• [3] http://www.businessdictionary.com/
• [4] http://en.wikipedia.org/wiki/Main_Page
• [5] http://financial-dictionary.thefreedictionary.com/
• [6] Special Data Dissemination Standard IMF
http://dsbb.imf.org/Pages/SDDS/Overview.aspx
• [7] Wikipedia http://en.wikipedia.org/wiki/List_of countries by foreign
exchange reserves
• [8] State Bank of Pakistan Website link: www.sbp.org.pk
• Guidelines for foreign exchange reserves management.
http://www.bcentral.cl/eng/financial-operations/pdf/Guidelines%20for
%20Foreign%20Exchange%20Management%20FMI%202004.pdf
• Guidelines for foreign exchange reserves management:
Accompanying document.
http://www.bcentral.cl/eng/financial-operations/
• Issues in reserves Adequacy and Management.
Link: http://www.imf.org/external/np/pdr/resad/2001/101501.pdf

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