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Topic: Functions of Central Bank

Submitted to: Sir Saqib Khan

Submitted by: __________________________ Roll #: __________ Exam #: _____________ (BBA Hons) 6th Term

Gomal University Dera Ismail Khan.

Central Bank: Central bank is the most important bank of the country. Every country has its own central bank. All banking structure revolves around the central bank. It is the symbol of financial stability of the country. It has the monopoly of note issue. It is the head of the banking and monetary system. A central bank is the financial advisor of the government. Every civilized country has its own bank. In Pakistan it is known as State Bank Of Pakistan, which came into being on 1st July 1948. It is not a profit making concern. It does not compete with other banks. It follows an active policy for safeguarding the economy of the country. It does not need any advertisement.

FUNCTIONS OF CENTRAL BANK: There are a vast number of functions performed by central bank of the country. As in Pakistan the role of central bank is played by the SBP so its particular functions are elucidated below.

1. Sole right of note issue: According to sec 24 of SBP act 1956, the state bank has the sole right to issue notes except subsidiary coins which are issued by government. There are two principles of note issue: i. Currency principle. ii. Proportional reserve system.

2. Banker to government: As a governments bank it performs various functions for government which are thrashed down below:

A) Account holder: It keeps government accounts. It reserves deposits and makes payments on behalf of the government.

B) Lender to government: It grants loans to the government. It also makes investment in governments bills and securities.

C) Public debt management: Central bank manages debt and also handles financial business.

D) Financial advisor: The central bank acts as an advisor to the government in the monetary and financial problems.

3. Bankers bank: Central bank acts as a banker to the commercial banks in the following ways;

a) Custodian of cash reserves: It acts as the custodian of cash reserves according to the constitution of the country.

b) Lender of the last resort: At the time of banking crises the commercial banks can get loan and rediscount of their bills of exchange from the central bank.

c) Remittance facility: It also provides remittance facility to the commercial banks.

4. As a clearing house: Central bank acts as a clearing house for the commercial bank. A clearing house is a place where representatives meet each day to exchange cheque drawn on each other.

5. Foreign exchange policy: In the field of foreign exchange three important functions are performed by the central bank, these are;


Custodian of exchange reserves: The central bank is also a custodian of foreign exchange and gold reserves.


Exchange control: It manages foreign exchange transactions and enforces the exchange control regulations and allocation of foreign exchange expenditure made by the government through the central bank.


Exchange rate stability: The central bank is also responsible for maintaining stable forex rates.

6. Controller of credit: According to sec 17 SBP act 1956 it is the responsibility of the state bank to regulate volume of credit and its direction according to the economic conditions of the country.

7. Price stabilization: It is also the basic function of the central bank that it should frame the monetary policy in such a manner that prices inside the country should be stable.

8. Case of falling prices: In case of falling prices, SBP adopts the inflationary policy & increases the supply of money credit.

9. Case of rising prices: In case of rising prices, SBP adopts the deflationary policy and decreases the total quantity of money and credit. So inflation can be checked.

10. SBP as source of economic growth: SBP is playing vital role in the development and growth of banking system and other financial institutions in the country.

11. Control of other banks: State bank controls all the other banks and without SBP, the banking system in the country is like the human body without head.

12. Assistance to specialized financial institutions: The central bank is extending finance to the specialized financial institutions like ADBP, IDBP, PICIC, NDBP.

13. Export finance scheme: The commercial banks are providing finance to the exporters at the concessional rates this scheme has encouraged the exports.

14. Islamization of financial system: The SBP has prepared the program to introduce the Islamic economic system from 1985. Now PLS has been introduced by the bank in this regard.

15. Development of capital market: It is the major function of state bank. It develops the capital market in the country.

16.Training facility: The SBP provides training facilities to the staff working in various banking institutions.

17.Other functions: Some of the other functions performed by the central bank are listed below: 1. Maintains relationship with international agencies like IMF, World Bank etc. 2. Provides training facility to the staff working in various banking institutions. 3. It conducts seminars, surveys, and publishes annual reports giving real economic picture of the country.