Principles of Money &

Banking

By. Prof Riaz Ahmed Mian

State Bank of
Pakistan

By. Prof Riaz Ahmed Mian

 Establishment,
Management & Functions
of the State Bank of
Pakistan

1
 Establishment, Management & Functions
of the State Bank of Pakistan

1.The History:
 The Reserve Bank of India was
directed to perform all functions of the
Central Bank of Pakistan until Sep. 1948.

 The Reserve Bank of India to be the

sole currency note issuing authority for
Pakistan until Sep. 1948.
(cont’d)
Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 2
 The History – cont’d

 The Indian currency notes will be

valid and they will remain legal tender
in Pakistan until Sep. 30, 1948. The
Pakistan government will issue its own
currency from Oct. 1, 1948.

 The Indian coins will be valid and

they will remain legal tender in Pakistan
for at least one year from the date of
issuances of Pakistani coins. The
Pakistan government will issue its own
coins from Oct. 1, 1948.
Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 3
(cont’d)
 The History – cont’d

 The Reserve Bank of India will

transfer the Pakistan’s share of 75 crore
to Govt. of Pakistan till Sep. 30, 1948.

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 4

 Establishment of the State Bank of
Pakistan
 On Dec. 30, 1948 the British
Government's commission distributed
the Bank of India's reserves between
Pakistan and India as 30 percent for
Pakistan and 70 percent for India. The
share of Pakistan was Rs. 75 crore.
Irrespective of the provisions of the
Monetary system and Reserve Bank
Order 1947.
(cont’d)
Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 5
 Establishment of the State Bank of Pakistan – cont’d

 The Reserve Bank of India did not

perform its function with diligence and
good faith for Pakistan. Also this Bank
refused to transfer Rs.550 million which
Pakistan was entitled to receive as the
proportionate share of assets of
undivided India. Further the losses
incurred in the transition to
independence which were amounting to
Rs. 23 crore were taken from Pakistan's
share. 6
Prof. Riaz Ahmed Mian, HCBF, University of the Punjab
(cont’d)
 Establishment of the State Bank of Pakistan – cont’d

 Governor General of Pakistan Quaid-

e-Azam Muhammad Ali Jinnah issued
the order of the establishment of SBP
on 12May, 1948.

 This order is known as the “State

Bank of Pakistan Order, 1948” and
under this order the SBP started its
operations on July 1, 1948.

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 7

 Objectives (Under 1948 Order)

 “Regulating the issue of bank

currency notes and keeping the reserves
with the view to securing monetary
stability in Pakistan and generally to
operate the currency and credit system
of the country to its advantage.”
(cont’d)

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 8

 Objectives (Under 1948 Order) – cont’d

 “Regulate the monetary and credit

system of Pakistan and to foster its
growth in the best national interest with
the view to securing monetary stability
and the fuller utilisation of the countries
productive resources.”

 So the SBP has twofold objectives i.e.,

issuance of the currency notes and the
advanced objective of leading the
country towards development and
prosperity.
Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 9
 The Laws Governing SBP

 The powers, functions, operations

and administration of the SBP are
governed and directed by the SBP Act,
1956 and the Banking Companies
Ordinance 1962.

(cont’d)

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 10

 The Laws Governing SBP – cont’d

Functions / Role of the SBP

1.Issue of Currency Notes

Currency Note Issue Offices:
The SBP has 3 offices of currency
notes issue situated at Karachi, Lahore
and Peshawar. Apart from this currency
chests are situated all over the country.
The currency chests remain in the
custody of the National Bank of
Pakistan or the Treasury Officers.
Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 11
 Functions / Role of the SBP – cont’d

2. Banker to the Government

3. Banker’s Bank

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 12

 Functions / Role of the SBP – cont’d

4.SBP as Clearing House

 By acting as a clearing house the
SBP / NIFT introduces flexibility in
the banking operations and also
remains informed about the liquidity
position of various banks.

 SBP / NIFT helps commercial banks

to settle inter-bank transactions with
the minimum use of cash.
(cont’d)
Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 13
 SBP as Clearing House – cont’d

 By acting as a clearing house, SBP

/ NIFT also keeps a check on
unwanted and harmful competition
among commercial banks.

 The clearing house function of the

SBP also helps the commercial banks,
in times of need and crisis. They can
help one another by deferring early
payments.
Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 14
 Functions / Role of the SBP – cont’d

5. Advisor to Government
6.Lender of Last Resort
7.SBP as Controller of Credit
1. Open Market Operations
2. Bank Rate Policy
3. Changes in Reserves Ratio
4. Changes in Margin Requirements
5. Change in Liquidity Ratio
6. Moral Persuasion
7. Publicity
Also in 1972, a National Credit Consultative
Council (NCCC) was setup for the purpose
of monitoring and controlling credit.
15
 Methods of Note Issue
Both the principles of note issue have merits
and demerits. Based on these principles
several systems and methods have been
devised for the issuance of notes. These are
as follows:

(cont’d..)

16
 Methods of Note Issue – cont’d

1.Fixed Fiduciary Issue:

This is widely recognized as an important
method of note issue. Under this system a
limit of volume of currency has been fixed
by central authority. This limit is called
fiduciary limit. Any note issue in this
fiduciary limit is to be backed by
Government securities. However any note
issued above this limit are to be 100%
backed by gold. This system remained in
force in many countries of the world at
different times. 17
 Fixed Fiduciary Issue – cont’d

Merits:
(a) Controlled Supply
(b) No Danger of Over Issue

18
 Fixed Fiduciary Issue – cont’d

Demerits:
(a) Inelastic
(b) Fiduciary limit is always open to
change

19
 Methods of Note Issue – cont’d

1.Proportionate Reserve System:

Under this system the central bank is
required to keep 100% reserves for a
particular percentage of notes issued. The
rest of the notes issued are backed by
Government securities and Government bills.
Usually 25% to 40% of notes issued are fully
backed by gold and rest are backed by
Government securities.

20
 Proportionate Reserve System – cont’d

Merits:
(a) A Widely Prevailed System
(b) Elastic
(c) High Degree of Safety
(d) Responsive

21
 Proportionate Reserve System – cont’d

Demerits:
(a) Rigid
(b) Contraction in Money Supply

22
 Methods of Note Issue – cont’d

3.Minimum Reserves System

The reserves are kept in the form of gold
and foreign exchange. Usually 20% to 30% of
the notes issued are backed by the reserves.

23
 Minimum Reserves System – cont’d

Merits
(a) Elasticity
(b) Responsive
(c) Safety
(d) Suitable for Modern World

24
 Minimum Reserves System – cont’d

Demerits
(a) Inconvertibility
(b) No Intrinsic

25
 Issuance of Money in Pakistan
 In the beginning, the SBP issued notes on
the basis of SBP act 1956. According to this
act the notes were issued on a proportional
reserve system.
 This method remained in effect till
November 1965.
 However, afterward in Nov. 1965 the 30%
reserve requirement was changed by an
ordinance.

(cont’d..)
26
 Issuance of Money in Pakistan – cont’d

 the amount of currency that is to be

backed by gold and approved foreign
exchange.

 Afterwards in Dec. 1965, through a

further notification, the level of currency
backing was made fixed at Rs.1200 million.

(cont’d..)
27
 Issuance of Money in Pakistan – cont’d

 Concluding it can be said that besides

taking advantages of flexibility of minimum
reserve system, SBP should take steps to
strengthen the rupee and to restore
confidence of people in it.

28
thank U

Best of Luck