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A Presentation on State Bank of Pakistan: Pakistan’s Central Bank By: Muhammad Iqrash Awan

Contents What you can expect from this presentation… Part 1: Introduction to Central Banking and SBP – – – – – – The Concept of a Central Bank State Bank of Pakistan (SBP) Historical Background of SBP Establishment of SBP Organization of SBP Independence of SBP Part 2: Core Functions of SBP – Primary Functions – Secondary Functions – Non-Traditional Functions

Introduction to Central Banking & State Bank of Pakistan

. It usually issues the currency. best it can in the national economi c interest. and cont rols the interest rates in a country.Central Bank Explaining the Concept of a Central Bank A central bank is a bank which constitutes the apex of the monetary and banking structure of its country and which performs. regulates the money supply.

. and State Bank of Pakistan. A central bank possesses a monopoly on printing the national curre ncy.Central Bank Explaining the Concept of a Central Bank Central banks often also oversee the commercial banking system of their respecti ve countries. which usually serves as the nation s legal tender. Examples include the Fed eral Reserve of the United States. the People s Bank of China.

forms the basis of it‟s operations. .State Bank of Pakistan (SBP) The Central Bank of Pakistan The State Bank of Pakistan (SBP) (Urdu: ) is the central bank of Pakista kistan Act 1956. with subsequent amendments.

Historical Background of SBP Reserve Bank of India . . the Reserve Bank of India was the central bank for both India and Pakistan. On 30 December 1948 the British Government s commission distributed the Reserve Bank of India s reserves between Pakistan (30 %) and India (70%).Before Separation Before independence on 14 August 1947.

These were implemented in June 1948. . The State Bank of Pakistan commenced o peration under the “State Bank of Pakistan Order 1948” on July 1. 1948. 1948 Muhammad Ali Jinnah took steps to establish the State Bank of Pakis tan.Historical Background of SBP Establishment of The State Bank of Pakistan On May.

Organogram of SBP Organizational Structure of SBP Board of Directors Governor Economic Advisor Executive Director Banking Deputy Governor Banking Director Islamic Banking Head Treasury Department Execut ive Director FRM Deputy Governor Management Director/Head HRD Director CMAD Director Audit Director Research Director Eco PD Director ISD Director ACD Director BPD Director Accounts Director Statistics Director BSD Director EPD Director BID Director PSD .

– Deputy Governors of the Bank may also attend the meeting of the Board. but they do not have the right to vote. if requir ed. .Organization of SBP Organizational Structure of SBP Board of Directors – The Central Board consists of nine members: • The Governor (who is Chairman) • The Secretary Finance Division. Government of Pak istan • & Seven Directors including one Director from each Province (nominated by the Federal Government) – The Directors are appointed for terms of up to three years.

– The Federal Government appoints Deputy Governors. – The Governor is the Chief Executive Officer and directs and controls the whole a ffairs of the Bank on behalf the Central Board.Organization of SBP Organizational Structure of SBP Management – The management of the Bank consists • • • • • Governor (one or more) Deputy Governors Executive Directors Economic Advisor Dir ectors of various departments. .

Independence of SBP The Right of SBP to Work Without Intervention The State Bank of Pakistan (amendment) Act. 1997 states. or quasi-govern mental body or agency shall issue directives directly or indirectly.” T his law ensures that State Bank can work independently with governmental interve ntion. . “No govt. to any bank ing company or any other any other financial institution regulated by the Bank.

Core Functions of State Bank of Pakistan .

Core Functions of SBP Responsibilities Which SPB is Entrusted With Core Functions of SBP Traditional Functions NonTraditional Functions Primary Functions Secondary Functions .

Core Functions of SBP Traditional Functions: Primary Functions Issue of Notes Conduct of Monetary and Credit Policy Regulation and Supervision of Financial System Banker s Bank Lender of Last Resort Banker to Government .

Core Functions of SBP Traditional Functions: Secondary Functions Public Debt Management Management of Foreign Exchange Advisor to Government Relations with International Financial Institutions .

Core Functions of SBP Non-Traditional Functions Development of Financial Institutions Training Facilities to Bankers Credit to Priority Sectors Islamization of Banking System

Primary Functions of State Bank of Pakistan

Primary Functions of SBP Issue of Notes Regulation of currency in accordance with the requirements of business and the g eneral public. Granted the sole right of issuing notes in the country under Sect ion 24 of the State Bank of Pakistan Act, 1956. Two separate dept. deal with the affairs of issuing of notes – Issue Department: Deals with the issue of notes – Banking Department: Undertakes g eneral banking business

The Bank merely looks after the management of their issue on behalf of the Government. .Primary Functions of SBP Issue of Notes The issue of one rupee and subsidiary coins is the prerogative of the Federal Go vernment. The State Bank also issues "Commemorative (Yadgari)" notes and coins of different denominations at occasions of national importance.

and a number of currency chest all over the country. amount of Rs. SBP has been required to keep a min.1.Primary Functions of SBP Issue of Notes Since 1965. Peshawar. gold bullion. . Currently there are three offices of issue at Karachi.2 billion in the shape of gold coins. Lahore. and silver bullion or approved foreign excha nge as the backing for note issue.

  s targets for growth and inflation. . 1956 entrusts the Central Board of the Bank to formulate and monitor monetary and credit policy by taking into account the Federal Govt. State Bank must take into account Recommenda tion of the Monetary and Fiscal Policies Co-ordination Board.Primary Functions of SBP Conduct of Monetary and Credit Policy Section 9A of SBP Act.

Primary Functions of SBP Conduct of Monetary and Credit Policy Main Instruments used by SBP: – – – – SBP 3-day Repo Rate T-Bill Auctions Open Market Operation Statutory Liquidity Ra tio .

Primary Functions of SBP Conduct of Monetary and Credit Policy SBP 3-day Repo Rate – SBP provides a lending facility to the scheduled banks for up to 3 days through Reverse Repo transactions. – The interest rate charged on this facility serves as the main tool to give interest rate signals to the money market. . – Increase in thi s rate gives a signal of monetary tightening.

. keeping in view monetary targets. current economic and financial conditions and expected market response. – SBP 3-day repo rate influences the yield of T-bi lls sold through auctions. – The Six month T-bill is considered the most impor tant benchmark by the money market. – The cut off yield is determined by the Auction Commit tee.Primary Functions of SBP Conduct of Monetary and Credit Policy T-Bill Auctions – T-Bill stand for treasury bill.

. – In October. 1997. – Till October 1997. it started bi-directional intervention. SBP used to mop up liquidity from the marke t in case of excess but it refrained to inject funds in case of liquidity crunch .Primary Functions of SBP Conduct of Monetary and Credit Policy Open Market Operation – SBP is conducting regular Open Market Operations (OMOs) si nce January 1995. now Repo transaction s are used to mop up liquidity and Reverse Repo to inject it.

– Curr ently this ratio (excluding Cash Reserve Requirement) is 15% of time and demand liabilities. Treasury Bills (T-Bills) or other approved se curities. – This fraction is called Statutory Liquidity Ratio.Primary Functions of SBP Conduct of Monetary and Credit Policy Statutory Liquidity Ratio – Commercial banks are required to keep some fraction of their assets in the form of cash. . – Its main objective is to ensure that banks have sufficient funds in the form of liquid assets.

It is the responsibility of State Bank to systematically monitor the p erformance of every banking company to ensure its compliance with the statutory criteria. SBP h as been given has been given vast powers under Pakistani Law to monitor financia l system. and banking rules & regulations .Primary Functions of SBP Regulation & Supervision of Financial System It is a principal task of SBP to make sure that financial system is sound.

. On-site inspection is undert aken on the premises of the concerned banks. Off-site surveillance is conducted by SBP through vario us periodical returns received from banks and DFIs.Primary Functions of SBP Regulation & Supervision of Financial System SBP monitors the banking activities through a combination of off-site monitoring and on-site inspection.

– The regula tions incorporate the spirit and essence of Bank of International Settlement (BI S) regulations – These are constantly watched for possible improvement to get bett er result from their implementation. the SBP has issued Prudential Regulations. .Primary Functions of SBP Regulation & Supervision of Financial System Prudential Regulations – In order to safeguard the interest of depositors and to ensure the safety and so undness of the banks/DFIs.

.Primary Functions of SBP Regulation & Supervision of Financial System There are separate prudential regulation for: – – – – – Agriculture Financing Corporate / Commercial Banking SMEs Financing Consumer Fin ancing Micro Finance Banks This way each set of regulations serves the relevant area in the best possible w ay. A brief introduction to these is given in upcoming slides.

. Corporate Governance.Primary Functions of SBP Regulation & Supervision of Financial System Prudential Regulations for Corporate & Commercial Banking – The regulations focus on Credit Risk Management. – The regulations on Credit Risk cover: • Per party exposure limits of the bank/DFIs • Limit for clean advances • Investment i n shares/Term Finance Certificates (TFCs) • Provisioning requirements for stuck-up assets • Exposure to NBFC and Margin requirements etc. Anti Mone y Laundering and Operations.

– It ensure that nsumer Financing in a prudent manner.Primary Functions of SBP Regulation & Supervision of Financial System Prudential Regulations for Consumer Financing – These regulations have been devised to encourage the banks to an portfolio through creation of new products. – The Regulations require isk-management processes of the banks/DFIs through establishing edit risk management systems. diversify their lo banks undertake Co strengthening of r comprehensive cr .

Primary Functions of SBP Regulation & Supervision of Financial System Prudential Regulations for SME Financing – These regulations facilitate and encourage the flow of bank credit to the SME se ctor. and loan extending of a micro finance Bank. keeping in view their important role in the economic development. Prudential Regulations for Micro Finance Banks – These regulations discuss about the minimum paid up capital. cash reserves. .

– Scheduled Banks – Non-Scheduled Banks Banks are classified as: Scheduled Banks are entitled to certain facilities from the State Bank and in re turn they have some obligations to it.Primary Functions of SBP Banker’s Bank State Bank also functions as the bankers‟ bank. .

Primary Functions of SBP Banker’s Bank State Bank provides the following three important services to the scheduled bank s: – – – – – Excess Reserves kept with SBP Remittances Facilities Clearing through NIFT Inter bank Payments Statutory Reserves .

Primary Functions of SBP Lender of the Last Resort A lender of last resort is an institution willing to extend credit when no one e lse will. etc. agriculture bill. . These loans are essentially short-term in nature and are advanced to enable the banks to meet their temporary requirements of funds. These facilit ies are ordinarily provided by the Bank against government securities. The State Bank provides loan and rediscount facilities to scheduled ba nks in times of dire need when they find no other source of funds. trade bil ls.

Primary Functions of SBP Banker to Government SBP conducts the banking business of Federal and Provincial Government and some government agencies. . – Federal a nd Provincial governments keep their deposits with the Bank free of interest. cheques and drafts by the Government. SBP provides the following services to the governments: – It accepts the deposits of cash.

silver. approved foreign exchange. . securities or sha res in any company. – The Federal and Provincial governments can obtain advances from SBP. – On behalf of Federal. collection of return on these shares/securities.Primary Functions of SBP Banker to Government – SBP does not charge any commission to the governments for the banking services r endered to them. Provincial or Local governments the Bank also undert akes sale/purchase of gold.

Secondary Functions of State Bank of Pakistan .

The Ba nk is responsible for the management of government debt under subsection 13(e) o f section 17. .Secondary Functions of SBP Public Debt Management Public debt refers to all the money that the government is liable to pay. 1956. and section 21 of the SBP Act. The Public Debt Act 1944 also defines the responsibilities of SBP for public debt management.

Securities Department was setup in 1990. a department namely.Secondary Functions of SBP Public Debt Management In order to efficiently manage the public debt. SBP is responsible for payments of interest to hol ders of public debt instruments. .

SBP took of the country in authorized to purch of special drawin . currency. SBP is ase and sell gold. silver or foreign exchange and transactions g rights with the International Monetary Fund.Secondary Functions of SBP Management of Foreign Exchange SBP is responsible for maintaining the external value of the charge of management and administration of the exchange system line with the Foreign Exchange Regulation Act. 1947.

Secondary Functions of SBP Management of Foreign Exchange The Bank is responsible to keep the exchange rate of the rupee at an appropriate level and prevent it from wide fluctuations. As the custodian of country‟s extern al reserves. State Bank is also responsible for the management of the foreign ex change reserves. .

. terms and condi role of the Bank has been SBP Act 1956. The nt on loan operations and advises it with regard to the tions and rate of return on these loans.Secondary Functions of SBP Advisor to Government SBP acts as an advisor to the Government on financial cularly with reference to their monetary aspects. The advisory made mandatory in accordance with the Section 9A of the and economic matters parti Bank counsels the Governme timings.

monetary.Secondary Functions of SBP Advisor to Government Monetary and Fiscal Policies Coordination Board (MFPCB) – The State Bank also participates in economic policy making as a member of variou s government agencies and committees. . – In order to coordinate fiscal. f oreign trade and exchange rate policies. a “Monetary and Fiscal Coordination Board” has been set up.

money su pply.Secondary Functions of SBP Advisor to Government Reports on the State of the Economy – The Bank submits its review of the economy to the Parliament through its annual and quarterly reports. – A special reference is given to economic growth. . balance of payments and price developments. credit.

The State Bank of Pakistan also deals with other international financial organizations including Bank for International Settlement. Central Banks of foreign countries. The Governor Sta te Bank accompanies the Minister of Finance in annual general meeting of the IMF and World Bank. the World B ank.Secondary Functions of SBP Relationships with IFIs SBP deals with the IMF on behalf of the Government of Pakistan. . etc.

NonTraditional Functions of State Bank of Pakistan .

The initiated to set-up NBP and allow foreign banks to d o their business in Pakistan are two major steps towards development of Banking System.Non-Traditional Functions of SBP Development of the Banking System SPB‟s major contribution is the facilitating and fostering of the banking system i n Pakistan. . At time of independence it was a challenge for SBP to develop a Bank ing System in Pakistan.

– Conferences. – A set of prudential regulations has also been issu ed to keep the activities of these banks. seminars and presentations are being c onducted to create public awareness and develop better coordination among variou s stakeholders of Islamic banking. .Non-Traditional Functions of SBP Development of the Banking System Micro Finance – Khushali Bank and the First Micro Finance Bank have been setup by SBP to promote microfinance in the country. workshops. Promotion of Islamic Banking – State bank of Pakistan is playing a leading role in the promotion of Islamic Ban king in Pakistan.

. National Institute of Banking and Finance (NIBAF). Islamabad provides special training to bankers also puts special emphasis on Islamic Banking. Training Department/Division provides c ourses on central and commercial banking for both domestic and international par ticipants.Non-Traditional Functions of SBP Training Facilities to Bankers Institute of Bankers Pakistan is an institution working under SBP that aims to p rovide the country with trained bankers.

finance. students and general p ublic. Government documents. technical reports. banking. periodicals and magazines mainly r elating to the subjects of economics. . researchers. In order t o cater to information needs of the bankers.Non-Traditional Functions of SBP Development of the Banking System SBP has also started scholarships for PhD in economics and finance in order to m eet its needs for professionally qualified personnel in these fields. et c. The library has a rich collection of bo oks. management. commerce. a main library was setup in 1949.

Non-Traditional Functions of SBP Credit to Priority Sectors SBP has also introduced various credit schemes to channel resources towards prio rity sectors like: – – – – Export finance scheme Mandatory credit for agriculture Small business Small indu stries .

Considerable amount of rese arch work is undertaken in Islamic Economics Division which includes the nature and connotation of „Riba‟. various alternatives to interest and the fiscal system of Islam. . the Shari‟a position of present day interest based financia l system.Non-Traditional Functions of SBP Islamization of the Banking System The State Bank has also been involved in the process of Islamization of the econ omy in general and the banking system in particular.

I. formed the genesis for changes in the banking system that were introduced in later yea rs.I.I.I. declared un-Islamic by the Federal Shariat Court (FSC) in November 1991. within specified time frame. .) in late 1970s – Various reports of the C. – It al so directed the Government to set up. – The financing procedure based on „mark-up‟ adopted by banks in 1985 was. however .Non-Traditional Functions of SBP Islamization of the Banking System Secretariat of Council of Islamic Ideology – The Islamic Economic Division of the Bank served as a secretariat to the Council of Islamic Ideology (C. a commission for transformation of the financial system.

. – A Task Force was set up in the Ministry of Finan ce to suggest the ways to eliminate interest from Government financial transacti ons.Non-Traditional Functions of SBP Islamization of the Banking System Commission for Transformation of Financial System – The Commission for Transformation of Financial System (CTFS) was constituted by the Government in January 2000.

an amendment in section 23 of Banking Companies Ordinance. – In order to allow exis ting banks to open subsidiaries for Islamic banking.Non-Traditional Functions of SBP Islamization of the Banking System Measures for Transformation of Financial System – The State Bank issued detailed criteria in December 2001 for establishment of fu llfledged Islamic commercial banks in the private sector. 1962 was made on 6th November. 2002. .

Non-Traditional Functions of SBP Islamization of the Banking System Major steps taken towards Islmization of Banking System in Pakistan: – – – – Establishment of Shariah Board Special Cash Reserve for Islamic Banks Islamic Ex port Refinance Scheme Accounting & Auditing Organization for Islamic Financial I nstitutions – Full membership of Islamic Financial Services Board – Shariah Complian ce Audit of Islamic Banks .