Organizational Transformation Challenges at The State Bank of Pakistan (A), (B), (C)

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Organizational Transformation Challenges at the State Bank of Pakistan (A),

(B), (C)
Article in Asian Journal of Management Cases · March 2013

DOI: 10.1177/0972820112471258
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Case
Editor’s Introduction 35
Organizational Transformation Asian Journal of Management Cases

10(1) 35–75
Challenges at the State Bank of © 2013 Lahore University of
Management Sciences
Pakistan (A), (B), (C) SAGE Publications
Los Angeles, London,
New Delhi, Singapore,
Washington DC
DOI: 10.1177/0972820112471258
http://ajc.sagepub.com
Javaid Ahmad
Zafar I. Qureshi
Abstract
The Organizational Transformation Challenges at the State Bank of Pakistan case series pertains to a
key institution that performs the role of the Central Bank in the country. On assuming the position of
the Governor, SBP, in December 1999, Dr Ishrat Husain felt the need to turnaround this institution
with a view to make it congruent with the requirements of a central bank in the twenty-first century.
To realize this goal, he developed a concept paper by engaging all the key stakeholders both within and
outside of the Bank. After following a rigorous process of discussions, deliberations and conferences,
his concept paper was approved both from his management as well as from the Board. And finally, he
presented the concept paper to the Cabinet headed by the President, who gave him the go-ahead for
the execution of his plan.
The cases in this series have three focal points: Identifying the challenges faced by the Bank and the
designing of a strategy for change (Case A), Dr Husain’s detailed implementation plan (Case B) and
finally the assessment of results of the turnaround plan at the end of his six-year tenure (Case C).
Keywords
Turnaround, transformation, process, concept paper, change strategy, union, HR audit, Competency
Model, Bell Curve Principle, reorganization, re-engineering, core functions, retail functions, core values,
participative decision-making
Organizational Transformation Challenges at the

State Bank of Pakistan (A)
On a mildly cold December evening in 1999, Dr Ishrat Husain was sitting in his office at the top floor of
the State Bank building, in Karachi, and musing over the many challenges that his new assignment had
These three cases were written by Javaid Ahmed, Senior Fellow and Department Head of Management at Institute
of Business Management, Karachi and Visiting Professor Zafar I. Qureshi (zafar@lums.edu.pk) at Lahore University
of Management Sciences, Pakistan to serve as a basis for class discussion rather than to illustrate either effective or
ineffective handling of an administrative situation. This material may not be quoted, photocopied or reproduced in
any form without the prior written consent of the Lahore University of Management Sciences.
Downloaded from ajc.sagepub.com at INSTITUTE OF BUSINESS MANAGEMENT--KARACHI on February 27, 2016

36 Javaid Ahmad and Zafar I. Qureshi
brought up. He had been appointed as the Governor of the State Bank of Pakistan (SBP) a few days ago
by the Government of Pakistan. His initial, informal assessment and conversation with different stake-
holders had made him realize that SBP needed drastic reforms (short, medium and long term) to be
turned into a modern and efficient central bank.
Major changes were needed in the existing human, technological and physical infrastructures for
which Dr Husain wanted to develop a prioritized list of interventions. This was essential to ensure effi-
cient transformation of the bank and prudent utilization of scarce resources.
What areas to focus upon, in which order and within what timeframe were some of the questions
occupying Dr Husain’s mind. He was also cognizant of the fact that the successful implementation of
his change strategy would, perhaps, be more difficult than crafting a coherent plan. He would need to
identify the forces that could possibly undermine his transformational efforts beforehand if he were to
have a realistic chance of success.
The New Governor

Dr Ishrat Husain, a self-made man, had risen from teaching Chemistry at a government college in
Hyderabad to becoming the Governor of the State Bank of Pakistan. He had been working as a Director
at the World Bank in Washington when he was appointed in December 1999 as Governor by the then
President of Pakistan, General Pervaiz Musharraf (see Appendix). Although a graduate of the elite civil
service of Pakistan, he was considered an ‘outsider’ in the cloistered atmosphere of the country’s Central
Bank.
He knew that in order to succeed at his new post, he needed to be accepted by the insiders, particularly
the old guards. For this, he needed to understand the history of the institution he had been asked to
lead into the new millennium. As the saying goes, he who shall know what shall be; must know what has
been.
Dr Husain had two advantages in leading change initiatives at the Bank:
(a) Political support from Islamabad, the seat of the Federal Government, and
(b) Resources needed to implement change from the World Bank.
A Brief History of Central Banking in Pakistan

The Government of Pakistan, shortly after the formation of Pakistan on 14 August 1947, established the
SBP to take over the central banking functions from the Reserve Bank of India. On 1 July 1948, the State
Bank of Pakistan Order 1948 was promulgated. In 1956, this order was replaced with the State Bank of
Pakistan Act that required the SBP to ‘regulate the monetary and credit system of Pakistan 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’.
This Act provided for a developmental role for the SBP. With the passage of the Banking Companies
Ordinance of 1962, the SBP also became responsible for regulating the country’s banking industry.
Asian Journal of Management Cases, 10, 1 (2013): 35–75

State Bank of Pakistan 37
Like a central bank in any developing country, the SBP was expected to perform both ‘traditional’ and
‘non-traditional’ functions. The ‘traditional’ functions, which were generally performed by central banks
all over the world, could be classified into two classes:
(a) Primary functions, including the issue of currency; the regulation and supervision of the financial
system; the conduct of monetary policy; and the provision of banking services to other banks and
the government.
(b) Secondary functions, including 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 SBP included the development
of a financial framework for the country; the institutionalization of public and private savings and
investment; the provision of training facilities to bankers; and the provision of credit to priority sectors.
The SBP had also been playing an active role in the process of Islamization of the national banking
system.
In 2000, Pakistan had eight state-owned banks, twelve private banks and nineteen foreign banks.
In addition, there were twelve Development Finance Institutions (DFIs), sixteen investment banks,
four housing finance companies, forty-five Modaraba companies, thirty-three leasing compa-
nies, forty-one mutual funds, three discount houses and two venture capital companies. The banks,
DFIs, investment banks and discount houses were under the regulatory and supervisory ambit of the
SBP whereas the Securities and Exchange Commission of Pakistan (SECP) was the regulatory and
supervisory body for Modaraba companies, leasing companies, mutual funds and venture capital
companies.1
The Banking Sector and the SBP Challenges in 1999–2000
Banking Sector Situation

When Dr Husain assumed the charge of Governor, SBP, in December 1999, public sector banks were
dominating the financial sector with more than 80 per cent of the market share. Almost all public banks
and financial institutions were on budgetary support and were not generating sufficient surpluses to off-
set their huge operating costs. The reformation of the banking sector posed a complex challenge.
Most banks were satisfied with focusing on lending to the government sector and a few large corpora-
tions, while engaging in trade financing and investing in government papers on the side. The govern-
ment’s fiscal deficit was so high that most of the deposits the banks received were loaned to the
government and government corporations. This was both risk-free and highly remunerative; therefore,
there was little incentive for banks to do anything else. There was limited or no lending to small and
medium enterprises, to the housing sector or to the agricultural sector, which created most of the growth
and employment in the country. Most importantly, the financial system (including the SBP) suffered
from political interference in lending decisions and also in the appointment of managers. The middle

class, which was the backbone of any economy, was not given due attention by the sector. Rationalization
of the credit system was another challenge faced by the new Governor.
Bureaucracy was pervasive. In government banks (including the SBP), the staff worked like typical
government employees, coming to office at 9 a.m., checking files, doing nothing of use and leaving at
5 p.m. The recovery rate was so low that almost 25 per cent of loans were stuck up, as a large number of
these loans to private-sector borrowers were not given on the merit of the proposal, but on political con-
siderations. These influential borrowers seldom repaid their debts. Changing work ethics and reduction
in credit risk was yet another challenge.
The banking industry faced a punitive tax rate of 58 per cent, whereas the rest of the corporate sector
was paying only 35 per cent. The weight of this high tax rate, along with the burden of stuck-up loans
and an unprofessional, inefficient and bureaucratic staff had to be borne by the bank customers in the
form of high lending rates of up to 21 per cent and low deposit rates.
Challenges Inside the SBP

Inside the SBP, Dr Husain’s predecessor, Dr Yaqoob, had been reasonably successful in weakening the
‘union culture’ within the organization. However, the bank still had sizeable staff redundancies and a
financially unviable branch office network. The institutional capacity and the right kind of professional
talent to ensure effective regulatory and supervisory oversight of banks and to manage the national mon-
etary policy effectively were also limited.
There had been limited or no emphasis on training and development and, as such, the knowledge base
and skill mix of the employees was outdated and incompatible with the requirements of core central
banking functions. The Bank was performing too many non-central banking functions that had diluted
the management’s focus on their core central banking responsibilities.
The organization was alien to the rapid developments taking place in information and communication
technology since there was no concept of electronic communication and almost all the information pro-
cessing and retail banking functions were based on manual and outdated systems. Therefore, the need for
technological upgradation was of paramount importance.
The physical infrastructure was dilapidated and the offices of various functional units were littered
with files and broken furniture. This physical environment did not present a glimpse of a modern institu-
tion. To top it all, the work processes were archaic and dated leading to inefficient operations. These
processes could not continue if the dream of a modern central bank was to be realized.
The Reforms Process—The Concept Paper

Dr Husain knew that his predecessor had initiated some projects to build the institutional capacity of the
SBP and had made some headway in areas like the revival of fresh inductions at lower and middle man-
agement level; minimizing union interference in the management of organizational affairs; and the
strengthening of the SBP’s banking supervision function.

These initiatives, however, were patchy and transactional in nature and were not part of an overall
reforms and transformation plan. Dr Husain, therefore, decided to initiate a comprehensive strategic
reforms programme which would envision the strategic direction of the central bank; identify the key
strategic objectives to be pursued and provide workable strategies and action plans to build and align the
institutional capacity with this new strategic direction.
As a starting point, he prepared a ‘concept paper’ for transforming the SBP into a modern and
well-equipped central bank through a broad consultative process, involving the management and staff
(see Box 1). For more than two months, Dr Husain heard each department, visited field offices, inter-
acted with the board of directors, received feedback from heads of commercial banks and DFIs and
exchanged views with past and present senior managers of the SBP.
On the basis of these discussions and his experience at other central banks, Dr Husain formulated his
vision; identified the core/strategic functions which the SBP should focus on as a central bank and articu-
lated a strategy that suggested the values and instruments through which this vision could be attained.
The concept paper identified the following as the core/strategic functions of the bank:
(a) Ensuring soundness and stability of the financial system;

(b) Ensuring price stability and growth through effective monetary management;
(c) Ensuring effective exchange rate and foreign exchange reserves management; and
(d) Ensuring smooth and efficient functioning of the payment system.
The rest of the functions that the SBP was carrying out at the time, like retail banking and agency
functions of the National Saving Schemes, were categorized as ancillary and it was proposed that they
be spun off from the central bank proper. He realized that this was not going to be an easy sailing given
the unionized employees and the interest of the senior management that wanted an expanded influence
by retaining the retail functions within the Bank.
Dr Husain presented this concept paper to the Central Board of SBP in February 2000. The board
approved it and gave the governor the go-ahead to initiate the reforms process.
Box 1. A Concept Paper
During the last eight weeks, I have listened to the presentations made by each department at the Central
Directorate, visited a few field offices, interacted with the Board of Directors, received some feedback from
the heads of the commercial banks and DFIs and exchanged views with past and present senior managers
of the State Bank. On the basis of this and the experience of other Central Banks, I wanted to share my
vision for the future direction of State Bank of Pakistan, articulate the strategy which I wish to pursue and
suggest the instruments and values through which this strategy will be accomplished. Needless to say that
this vision cannot be achieved without the commitment, dedication and hard work of each and every staff
member of the Bank.
This Concept Paper has been discussed extensively with the Senior Managers, Heads of Departments and
the Chief Managers. Their views have been incorporated during the revision of this paper while other sug-
gestions will be taken into account at the implementation stage if the Board endorses this Concept Paper.
Source: Company Documents.

The Change Management Conferences

Dr Husain knew that the approval of the concept paper was just the beginning of a long and arduous
journey towards the transformation of the SBP into a modern and efficient central bank. He was certain
that the change process could not succeed without a major shift in the values and attitudes of the work-
force. So, in order to sensitize the organizational leadership to this reality, to apprise them about the
importance and the need for change and strategic thinking and to get their feedback on the issue, he
decided to convene a series of Change Management Conferences (CMCs). He was aware of the fact that
without extensive communication at different levels, it would be rather difficult to mobilize the support
required to execute his change plan. He also realized that changing old guards, particularly at the senior
level, would require a lot of patience.
After extensive homework, the first CMC was organized in December 2000. All the senior
management (Senior Joint Directors and above) spent two full days in a congenial and friendly environ-
ment away from their offices to discuss the need for change, the change management strategy and the
values that were critical for achieving their goals. Reputed management experts and resource persons,
especially contracted/invited for the event, facilitated the participants in different activities/sessions of the
conference.
The conference—the first of its kind in SBP’s 50-year-old history—came as a pleasant surprise to
many participants, many of whom had never had the opportunity to exchange views and discuss the
future direction of the central bank with their superiors in an open and consultative environment.
This conference was followed by dissemination seminars at the cluster level to bring the lower and
middle management on board about the decisions of the first CMC; to build ownership of the change
management process throughout the organization and to promote strategic thinking down the line. The
CMCs, thus, kick-started the change/transformation process.
A large majority of the employees, however, still believed that all these conferences were non-
productive activities. The participants would have some leisure time, eat good food and pass some vague
and impractical resolutions and action plans which would never be implemented. Among the ranks of
these cynics, to the chagrin of Dr Husain, were some of the senior-most employees of the SBP.
However, troubled as he was, Dr Husain was not particularly surprised by this attitude. He knew that
change was a difficult process and required a great deal of patience and firmness. He also knew
that gradually this scepticism could be converted into optimism, provided the Senior Management Team
(SMT) bought, and showed ownership for, the change process and if positive results could be shown
with the implementation of some ‘Quick Win Projects’.
In spite of this optimism, at the back of his mind, however, were the history and the cultural context
of the Bank. He knew that there would be groupings for and against his change plan. He had a deep feel-
ing that the relatively younger staff would be more willing to buy his change plan compared to the older
staff. How should he approach the older staff was a question he was seeking an answer to.
In reply to a question by the case writers, he said that ‘more communication and patience’ were the
two levers he wanted to employ to overcome resistance from the opponents of his change plan. He
wanted to avoid unnecessary confrontation that would have strengthened the opponents right at the start
of his difficult journey towards change.

Looking Forward
As Dr Husain ruminated over the possible courses that his organizational transformation plan could take,
he allowed himself a small smile of contentment. In his first few months as the Governor of the SBP, he
had achieved a fair bit. Not only had he formulated what he thought was a workable strategic transforma-
tion plan for the Bank, he had also gotten it approved by the SBP Board; disseminated it to the rest of the
organization and gotten their feedback on his views through the CMCs; formulated a new and ambitious
vision for the Bank (see Box 2); identified a new set of core values and attitudes to be instilled in the
workforce (see Box 3) and, with the consultation of all important stakeholders, adopted an ambitious
five-pronged change strategy for the organization (see Figure 1). However, he still had many tough ques-
tions to answer and tricky decisions to make.
Had enough homework been done in identifying the key challenges facing the bank and in
designing the strategic plan? Had the correct roles and functions been designated as the core functions of
the new SBP? Would the new set of values being identified help in reshaping the existing culture of the
organization? What type of precautions would be needed in implementing this ambitious plan? What type
of actions needed to be taken on the ground, in the offices and with the people in the banks? How would
the reforms serve the interests of a common citizen as a consumer, a depositor and as a businessman?
Above all, he wondered whether his change plan would face severe setbacks from within or from
outside.
Box 2. The Vision Statement
To transform the State Bank of Pakistan into a highly professional, efficient and modern institution which is fully
equipped to play a meaningful role, on sustainable basis, in the economic and social development of Pakistan.
Box 3. Showing New Value Set
The conference concluded with the adoption of the vision and mission statements, the strategic objectives,
the set of values to be promoted and the action plan for initiating and completing different change initiatives.
The Values adopted by the conference included:
1. Personal and Professional Integrity

2. Trust
3. Sense of Responsibility
4. Teamwork
5. Collaboration and Open Communication
6. Honest and Candid Feedback
7. Serving Clients with Courtesy, Respect and Competence

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Figure 1. The Five-Pronged Strategy

Source: Company documents.
Appendix
Biographical Sketch of Dr Ishrat Husain
Former Governor, the SBP

Dr Ishrat Husain joined the elite Civil Services of Pakistan in 1964 and served in the field in Sindh and then East
Pakistan (now Bangladesh) and also held mid-level policy-making positions in the Finance, Planning and
Development departments before moving to Washington in 1979 to join the World Bank. He became the Bank’s
Resident Representative to Nigeria in 1983. On his return to the headquarters, he headed the Bank’s Debt and
International Finance Division. He was promoted as Chief Economist for Africa between 1991–94 and later as Chief
Economist for East Asia and Pacific Region. He became the Bank’s Director, Poverty and Social Department, and
in 1997, he was named the Country Director for Central Asian Republics.
Dr Ishrat Husain was appointed the Governor of Pakistan’s Central Bank in December 1999. During the next six
years, he implemented a major programme of restructuring of the Central Bank and steered the reforms of the bank-
ing sector. As a member of the economic management team of the Government, he played a key role in the impres-
sive economic turnaround of Pakistan. In recognition of his meritorious services, he was conferred the prestigious
award of “Hilal-e-Imtiaz” by the President of Pakistan in 2003. The Banker Magazine of London declared him as
the Central Bank Governor of the year for Asia in 2005. He received the Asian Banker Lifetime Achievement Award
in 2006.
He was appointed the Chairman, National Commission for Government Reforms, in May 2006 with the status of
Federal Minister and had held that position for two years, reporting directly to the President and the Prime Minister

of Pakistan. The Commission produced a two-volume report on governance reforms in Pakistan. In March 2008, he
took over the charge of the office of the Dean and Director, IBA, Karachi–the oldest graduate business school in
Asia. During 2005–06, he was appointed by the Board of the IMF as a member of a three-person panel to evaluate
the IEO and was also a member of the Mahathir Commission 2020 vision for the Islamic Development Bank (IDB).
He also advised the IDB for creating its poverty reduction fund. He is currently a member of the Middle East
Advisory Group of the IMF and the Regional Advisory Group of the UNDP.
Dr Husain has maintained an active scholarly interest in development issues. He has authored twelve books and
monographs and contributed more than two dozen articles in refereed journals and fifteen chapters in books. His
book, Pakistan: The Economy of the Elitist State, published by Oxford University Press in 1999 is widely read in
Pakistan and outside. He is regularly invited as a speaker to international conferences and seminars and has attended
more than 100 such events all over the world since his retirement as the Governor. He is the Distinguished National
Professor of Economics and Public Policy and serves on the Boards of several research institutes, philanthropic and
cultural organizations.


State Bank of Pakistan: Implementation Plan (B)
In June 2005, Dr Ishrat Husain had completed his work on the implementation of a strategic plan to
transform the SBP into a modern and efficient Central Bank. His implementation plan had focused on
five key components:
(a) Restructuring and consolidation of functions

(b) Human Resource Development
(c) Business Process Re-engineering
(d) Technical upgradation
(e) Physical infrastructure improvement
The following questions were going through his mind: had he pushed the implementation at the right
speed? Was the sequence of the steps that had been implemented correct and had they affected the buy-in
and speed of execution of the plan? Would it have been better, perhaps, if the changes had been rolled
out on a smaller scale to begin with?
There were also longer-term concerns occupying Dr Husain’s mind such as: had his plan implementa-
tion been successful in institutionalizing his change strategy? What impact his change programme would
have on transforming a traditional Central Bank into a modern bank? And lastly, whether the changes he
had made would survive after he had departed from the bank?
Restructuring and Consolidation of Functions

In Dr Husain’s opinion, the old organizational structure of the SBP was not congruent with the strategic
direction identified in his concept paper (see Figures 2 and 3). The core functions were not in sync with
the operational structure. For instance, there were about 6,000 associates out of which only about 1,000
were involved with the four core ‘value creating’ functions of the Central Bank (see Figure 4). The rest
were spread out in 16 field offices largely involved in transactional processes, but were consuming
80 per cent of the management’s time. The value-creating processes were, thus, only receiving about
20 per cent of the management’s time. The turnaround time for operational decisions from the Governor
was over 20 days.
The SBP Banking Services Corporation

After rigorous internal and external consultations, it was decided to separate the core and support func-
tions of the Central Bank and divide the existing SBP into two parts (see Figure 5):
1. The Central Bank to carry out the core/strategic functions of monetary policy, supervision and
regulation of financial institutions, exchange rate and reserve management and strengthening of
payment systems.

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2. An independent organization to look after the retail banking and other ancillary and support
functions.
The restructuring decision sent shock waves throughout the work force, particularly amongst the
lower cadre staff and the staff undertaking the retail banking functions in the field offices. A sense of
insecurity was felt regarding the continuity of their jobs in the SBP. Not surprisingly, thus, union leaders
approached both Dr Ishrat and the CMT to appraise them about the fears of the employees.
For his part, Dr Ishrat was mulling over two different courses of action that he could take in the
retail banking/ancillary functions context: (a) he could delegate these functions to the National Bank of
Pakistan or (b) he could create an independent subsidiary of the SBP to execute these functions.
To elicit the views of other stakeholders on these issues he constituted a committee under the chair-
manship of Deputy Governor (Management) Mukhtar Nabi Qureshi to recommend which of the two
options would be more effective. The committee finalized its report within months in 2001 and proposed
to form an independent subsidiary owned by the SBP and headed by a Managing Director.
However, this proposal did not satisfy the lower cadre employees and union representatives. They
were concerned that the SBP umbrella would not be available to them since their services from the SBP
were to be transferred permanently to the subsidiary, whereas most of them wanted to continue their
services as SBP employees.
A series of meetings were held with the union representatives to make them understand the need
for this change and also to allay their fears about their job security in the newly created subsidiary to
be known as the SBP Banking Services Corporation (SBP BSC). They were assured that no employee
would be forced to leave the bank and that the separation schemes would be voluntary in nature.
The draft ordinance for creation of the subsidiary was shared with the union representatives. This move
helped in allaying some of their worst fears and getting their buy-in for the proposed restructuring. In the
months and years to follow, Dr Husain often wondered what the fate of his plan would have been, had
he not been able to get this buy-in from his employees.
The staff, however, was not the only stakeholder that had to be convinced. The government also had
to be brought on board. Convincing them, however, proved to be less of a challenge and both the cabinet
and the President gave their consent to Dr Husain’s transformational plans readily. As a result, the SBP
BSC (Bank) Ordinance was promulgated on 29 December 2001 and the SBP BSC was created on
2 January 2002.
In addition to the creation of SBP BSC, a comprehensive restructuring of various SBP departments
was required to bring them in line with the strategic direction and to create focused units, divisions and
departments that were capable of supporting the enhanced role of the ‘new’ SBP as a professional, effi-
cient and modern organization.
Accordingly, Dr Ishrat undertook a number of restructuring and reorganizing initiatives in consulta-
tion with the CMT to affect these changes, including:
(1) Reorganization of the Exchange, Debt and Reserve Management Function,

(2) Reorganization of the Research Function,
(3) Reorganization of the Banking Supervision Function, and
(4) Creation of a Payment Systems Department.

Exchange, Debt and Reserve Management Function

The exchange, debt and reserve management function was scattered in different departments of the SBP,
particularly the Securities Department and the Dealing Room. With the objective of synchronizing the
monetary and exchange rate management functions and taking over the entire debt management and
treasury functions, the Exchange and Debt Management Department was created in February 2000 by
merging the Securities Department, which was taking care of Money Market activities, and the Dealing
Room, which was managing the Foreign Exchange Market activities. Staffed by high calibre senior,
mid-career and young professionals, the department proved a big success in achieving complete syn-
chronization of Foreign Exchange and Money Market activities; ensuring exchange rate stability; effec-
tive implementation of monetary policy; development of government debt and bond market and
long-term yield curve.
Up till this point, the SBP had almost no in-house capacity for reserve management. This capacity had
to be gradually built up by recruiting skilled manpower and managers; building the requisite IT capabil-
ity, including the installation of new hardware and software; the setting up of operating procedures and
oversight mechanisms and instituting several other organizational changes that would facilitate this
process.
A reasonably efficient Risk Management Unit had already been set up under the previous governor
and an experienced professional had been recruited from overseas as the Head of Risk Management.
This was now followed up by the recruitment of the Head of Investment Services Cell and the Back
Office. The organizational responsibilities and division of labour between the Front Office, Mid Office
and Back Office were also defined and operating procedures were laid down. Finally, the in-house
management of reserves, through inter-bank placements, was further strengthened by specifying the risk
parameters in which the maximum counter party limits could operate.
Research Function
Before the reforms, the research function of the SBP was quite weak and outdated with limited research
capacity. The SBP Annual Report on Economic Performance was the only major product of the three
functioning research departments when Dr Husain assumed the charge of the SBP as Governor. No
research papers or working papers had been produced for a very long time and there also was not any
concept of developing a pool of external referees to get research papers reviewed. The morale of officers
and researchers working in the research departments was also quite low due to limited promotion and
career development opportunities. A number of officers regularly opted for rotation and transfers to
other, presumably, mainstream departments and functions.
Dr Husain knew the importance of the research function for the Central Bank’s monetary policy
formulation capacity and, thus, wanted to completely overhaul and rebuild the research department. As
a result, in January 2002, he reorganized the three existing research departments into the Research and
Economic Policy Departments. He also gave the employees of these departments the choice of either
research or policy work and posted the officers preferring research work in the Research Department and
those who chose policy-related work were posted in the Economic Policy Department. By matching the
employee’s interests more closely with their work responsibilities this resulted in an increase in their

motivation and level of commitment. Both the research and policy departments benefited from this. The
nomenclature of positions was also changed to Director, Senior Research Economist, Research Economist
and Analyst.
The new departmental set-up was designed in such a manner that moving up the hierarchy depended
on recognized individual performance without linking it to any higher vacant position. A reputed econo-
mist was hired as the Head of Research to lead and steer the change initiatives in the Research Department.
Though initially unpopular, the decision was critical for strengthening the research and economic policy
and analysis functions of the Bank. It was also imperative for changing the outlook and approach of the
Bank towards an extremely important central banking function.
Another important aspect of the restructuring of the research function was the creation of an environ-
ment conducive for teamwork that significantly promoted research orientation through intellectual dis-
cussion and feedback. The concepts of inter and intra-departmental research teams, along with a culture
of recognition of both team and individual efforts, was introduced that proved extremely successful in
motivating researchers to produce quality research work.
Mere restructuring and hiring of a Research Head was, however, not sufficient to strengthen the
research function. There was a need for inducting economists and researchers both at the entry and
the middle-management level and reviving the focus on training. Two batches of research analysts com-
prising 44 analysts were hired in 2002 and 2003 and imparted extensive post-induction training under
specially-designed training programmes. The results were highly encouraging for Dr Ishrat. The SBP
started publishing a number of new and high quality reports and working papers. These publications, due
to their in-depth analysis, expanded coverage, high level of disclosure and candid review, began earning
credibility and became the most respected and widely referred documents on Pakistan’s economy. The
practice of having the papers reviewed by external referees was introduced and a panel of reputed refer-
ees was developed to review the papers. This substantially improved the quality of research papers and
their credibility for use as a reference in economic policy formulation as well as future research.
The Economic Policy Department also benefited by this restructuring exercise and its role
increased from mere data compilation to formulation of the SBP’s monetary and exchange rate policies.
The monetary policy formulation and implementation process became more objective, predictable and
transparent and the SBP, from January 2003, started issuing a biannual Monetary Policy Statement,
which conducted a thorough assessment of major economic developments and gave the SBP’s monetary
policy stance for the next six months.
Banking Supervision Function

Ensuring the soundness and stability of the financial system was a critically important statutory responsi-
bility of the SBP. Also, banking regulation and supervision was an area where restructuring and strength-
ening was already in progress under the Financial Sector Strengthening and Deepening Programme of the
World Bank when Dr Husain started his term as the Governor. At this time, the Banking Policy and
Regulation Department (BPRD) and three Inspection Departments were responsible for policy formula-
tion, regulation, supervision and inspection of banks and financial institutions. These departments were
absorbing most of the direct recruits, both at the entry and mid-management level. An onsite examination
manual had been developed and a CAMELS2 based onsite examination and rating mechanism had been
introduced. The overall human capacity of the departments, though relatively better than the others,

still needed substantial improvement. The Banking Policy formulation was unilateral with no or limited
consultation with other banks and financial institutions, which at times resulted in several revisions and
reversals of instructions and lacked necessary ownership by the banking community.
Dr Ishrat continued his predecessor’s policy of strengthening the SBP supervisory capacity with a
renewed vigour and made it an integral part of the overall banking sector reforms that had been initiated
in 1997. He was, however, not convinced of the need for three banking Inspection Departments (headed
by directors and supervised by an Executive Director (ED)) and so he came up with a proposal for merg-
ing the three into one consolidated Inspection Department.
The outright merger, however, would have made two directors redundant at the twilight of their
careers with the SBP. Therefore, a gradual merger of the departments was adopted as two of the three
directors were retiring during the next two years. The three Inspection Departments were gradually
merged and consolidated into one Banking Inspection Department by January 2001 with the exclusive
mandate to conduct onsite examination of banks and financial institutions and to assess risks faced by
them.
The merger of the Inspection Departments also necessitated the merger of the positions of the ED,
Banking Inspection and the ED, Banking Policy and Regulation, to enhance and encourage greater
coordination between the Policy and Inspection Departments. The implementation of this decision was
also carefully planned and linked with the departure of one ED to the African Central Bank on deputation
for two years (almost the same amount of time that was remaining in his retirement).
The reorganization and restructuring of the BPRD, responsible for banking policy formulation and
numerous compliance, operational and monitoring functions, was also necessary as the department was
too large to be managed effectively by one director. Also, it did not make sense for a single department
to at once formulate policy and then ascertain policy compliance. For these reasons, the department was
bifurcated into the Banking Policy Department and the Banking Supervision Department.
Both departments were equipped with quality human resources and necessary technology, coupled
with extensive focus on training and development. All this translated into substantial improvement in the
capacity of the banking departments to ensure financial system soundness. Furthermore, new depart-
ments, having expertise in the emerging areas of Islamic Banking, small and medium enterprises and
micro finance were created to focus exclusively on these important areas and encourage banks and finan-
cial institutions to venture into these highly attractive, but largely untapped, markets.
The hiring of the Deputy Governor (Banking and Foreign Exchange) was another critical decision
that Dr Husain handled tactfully. Traditionally, the post used to be filled by an internal promotion of
the senior-most ED. Dr Husain, however, realized that the induction of professionals at the entry and
middle-management level would yield better results if the functions were headed and overseen by a
seasoned professional banker. He, therefore, recommended the Government to hire Mr Tawfiq A. Husain,
then Country Manager American Express Bank, as Deputy Governor to lead and steer the banking sector
reforms and oversee the exchange and reserve management functions.
This non-traditional decision, though not very popular in the SBP at that time, proved extremely
useful in changing the approach and attitude of the SBP towards banking supervision and exchange
and reserve management. Mr Tawfiq encouraged participative decision-making for both banking
and exchange and management clusters and formed a Banking Team and Exchange Team comprising
senior members (Senior Joint Directors and above) of the two clusters and all policies and regulations
were required to be discussed and approved by the teams before their final submission to the Deputy
Governor/Governor for approval.

Closer Links with the Banking Sector

The practice of unilateral issuance of instructions with no or limited consultation with banks and finan-
cial institutions and an environment of distrust between the regulator and the regulated was another
disturbing issue for Dr Husain. He believed that policies formulated through a consultative process
would have ownership of all the stakeholders and, thus, would be easier to implement. This idea was
received reluctantly by his associates, who had been brought up in an authoritative and bureaucratic
environment. They believed that it would dilute the SBP’s supervisory authority. Dr Ishrat, however,
was very clear about the importance of such a consultative process in affecting an improvement in the
quality of policies and regulations formulated by the SBP and their compliance by other banks, so he
stood firm on this point even in the face of such dogged opposition.
He believed that the Central Bank should have the capacity, exposure and understanding of the issues
affecting the banking industry and should be able to discuss the rationale behind its policies with the
people who were affected by them. He, therefore, issued instructions that no policy for the banking
industry would be issued unless discussed with the Pakistan Banks Association (PBA). The policy for-
mulation process was, thus, made consultative and the practice of unilateral issuance of instructions and
directives by the SBP was done away with. To institutionalize this consultative mechanism, he intro-
duced the concept of quarterly meetings with the PBA to discuss current developments in the banking
sector as well as the issues and challenges faced by the banking industry and solutions thereof. This
started the development of trust between the SBP management and the banking community and enabled
the former to substantially improve the quality of its policies and regulations and their ownership by the
banking industry as well as the business community.
Deepening of Relations with the Securities and Exchange Commission of Pakistan (SECP)
Similarly, prior to Dr Husain’s taking charge of the SBP, there was no coordination and consul-
tation between the SBP and the SECP, the regulator of corporate sector and the Non Bank Finance
Companies (NBFCs). Here too, Dr Husain emphasized the need for coordination and greater interaction
between the two regulatory bodies and decided, in consultation with the then Chairman of the SECP,
Mr Khalid Mirza, to hold quarterly consultative meetings to discuss important issues affecting the
financial sector.
This initiative proved extremely useful in addressing the coordination issues between the two bodies
and in ensuring the effective supervision of the NBFCs. It also led to the transfer of the regulation and
supervision of investment banks, discount houses and housing finance companies from the SBP to the
SECP in December 2002, which removed several legal and regulatory hurdles to ensure the effective
supervisory oversight of the NBFCs3 by the SECP. This extended coordination also enabled the SBP to
help the SECP in building its supervisory capacity, particularly for the onsite examination of the NBFCs,
which was a totally new area for the SECP. A number of the SBP officers were sent to the SECP on depu-
tation for this purpose.
These initiatives produced positive results both in terms of a substantial improvement in the SBP’s
supervisory capacity and in terms of an improvement in the financial health of banks and DFIs. In
2004, a joint mission of the International Monetary Fund and the World Bank carried out an indepen-
dent assessment of the SBP’s compliance with the Core Principles4 under the Financial Sector
Assessment Programme (FSAP) of the country. This was the first such assessment and it provided an
independent evaluation of the level of robustness of the supervisory framework of the country. The
mission assessed the SBP supervisory system as fully/largely compliant with twenty-six of the thirty

Core Principles. Compliance with two more principles was achieved subsequent to the FSAP’s report
and efforts were continued to achieve compliance with the last two principles on consolidated supervi-
sion by June 2006.
As a result of these reforms, the banking system also became far more stable and healthy compared to the
pre-reform era. New institutions like Islamic banks and micro finance institutions started to gain a footing in
the local economy and the turnaround in the performance of a majority of financial institutions not only helped
in reducing the systemic risk but also provided a stimulus to overall economic growth.
Payment Systems Department

In order to institutionalize the Central Bank’s focus on ensuring the stability of the payments system, a
new Payment Systems Department was established in November 2002. The department took stock of
the existing payment system infrastructure, initiated a dialogue with commercial banks and Automated
Teller Machine (ATM) Switch Service Providers to promote e-banking in the country and encouraged
banks to substantially invest in technology to improve the e-banking infrastructure and network in the
country. As a first step, the Central Bank successfully managed to develop an agreement with MNet and
1-Link.
These initiatives led to a substantial improvement in the payments system infrastructure and in con-
sumers’ payment patterns, particularly in urban areas.
Disaster Recovery Centre and Business Continuation Planning

To ensure the continuity of critical functions, SBP established a technology Disaster Recovery Centre to
cope with any interruption due to a technology fault or a disaster. The objective of this Business
Continuation Planning was to prevent any major disruption in the financial system of the country in the
face of a catastrophe caused either by natural disaster, fire, civil strife, sabotage or an act of war.
A New Organizational Structure

After the successful implementation of the restructuring project, the SBP’s organizational structure was
redefined and clustered according to the organization’s strategic objectives (see Figure 3). The depart-
ments were clustered into four specialist areas:
• The Banking Cluster: Comprising the Banking Policy, Banking Supervision, Banking Inspection,
Islamic Banking, Agricultural Credit and Small and Medium Enterprises Departments.
• The Financial Resources Management Cluster: Comprising the Exchange and Debt Manage-
ment, Exchange Policy, Payment Systems, Accounts and Audit Departments, as well as the Risk
Management Division and Real Time Gross Settlement Project.
• Research Cluster: Comprising the Economic Policy, Research and Statistics Departments.
• Support Cluster: Comprising the Human Resources, Information Systems and Corporate
Services Departments, as well as the Legal Services Division and the Project Management Office.

Human Resource Development

Dr Husain knew that a suitably qualified, trained and skilled human resource base was critically
important for achieving a turnaround both in SBP and in the financial sector. Merit and perfor-
mance would need to be made the key success measures. As a result a new human resource vision, mis-
sion, objectives and strategy were developed; organizational HR processes were revamped and reformed;
and a number of new projects were initiated to support this new mandate in people management
practices.
Human Resource Audit

As an initial step towards HR development, a detailed HR audit was initiated to develop job descriptions,
specify the requirements for each position, make an inventory of the existing skill mix and the matching
of jobs with existing skills. An external consultant acted as a facilitator for this exercise. The human
resource audit culminated in the following outputs:
• Identification of benchmark positions

• Job analysis, evaluation and job description
• Matching incumbents with positions
• Gap analysis and identification of training needs
• Determination of recruitment requirements and redundancies
• A review on human resource policies
• A review and documentation of the reward system
• Leadership audit
Revival and Strengthening of the Management Trainee Scheme

The discontinuation of fresh inductions at officer grade 2 level (OG-2) under the State Bank
Officials Training Scheme (SBOTS) from 1971 to 1996 was one of the major contributors to the deterio-
ration of the human resource quality at the SBP. The scheme, though revived in 1996, still needed to
be strengthened to attract the best talent from the market and to polish their skills. An objective and
scientific selection process was developed that included competitive written tests, group discussions,
competency-based behavioural interviews and personality profiling after a careful short-listing process.
Post-induction training was also revamped and its duration increased from six months to twelve months
to include six months hands-on training in the SBP and commercial banks. The policy enabled the
SBP to attract quality young professionals from the market and suitably train them to undertake develop-
mental projects.
Dr Husain was well aware that without building human resource capacity and providing staff with the
required skills to cope with new realities, the degree of failure and subversion of the change plan could
go up many notches. He was a firm believer in the principle that ‘where people lacked the skills, there
would be no will to support the change’.

Induction of Professionals
The long discontinuation of fresh inductions at officer level, coupled with limited or no focus on training,
development and succession planning had resulted in an acute dearth of expertise and relevant skills in
the SBP. The process of recruitment of high calibre mid-career professionals that started in the mid-
1990s was now accelerated and extended to the senior-management level. A total of seventy Joint
Directors (JDs) and five Senior JDs/Directors were hired under this scheme within six years.
Separate Salary Structure for Specialized Professionals

Due to the launching of various development projects under the Capacity Building Program in SBP, services
of professionals with specialized skills in different fields were urgently required, since such skills were not
available internally in the SBP. To meet this demand, the SBP hired professionals in the field of Information
Technology, Treasury, Research, etc., on contract basis by offering market-based salaries. Later, it was felt
that the retention and continued commitment of these professionals with the SBP was compromised due to the
short nature of their contract appointments. In order to address this issue, the Central Board of Directors
approved a Separate Salary Structure for Specialized Professionals under which market-based salaries could
be offered to professionals in the regular cadre. Professionals hired under this scheme were, in this way, made
permanent employees of the SBP and were eligible for all regular benefits except pension facility.
This approach sent negative vibrations among the older staff of the Bank. Creating two parallel
employee streams had an adverse impact on the morale of many older employees.
Training Policy
To further strengthen the focus on training and development of the staff to meet the skill and competency
requirement in line with the changing needs of the SBP, a training policy was formulated that initially
focused on providing core central banking training, but was subsequently broadened to include manage-
ment and special skill development. The core central banking trainings were further segregated into
three levels, that is foundation, intermediate and advanced, representing broad career advancement of
employees in the organization. Minimum training requirements were also prescribed for eligibility for
promotion to the next grade (see Table 1).
Table 1. Minimum Training Requirement for Promotion
OG-2 to OG-3 OG-4 to OG-5

Central Banking/Foundation 10 Weeks Central Banking/Advanced 05 Weeks
Management Training 03 Weeks Management Training 04 Weeks
Function Specific 03 Weeks Function Specific 03 Weeks
OG-3 to OG-4 OG-5 to OG-6
Central Banking/Intermediate 05 Weeks Central Banking –
Management Training 04 Weeks Management 10 Weeks
Function Specific 03 Weeks Function Specific –

Training and Development

Training was considered ‘time off’ at the SBP as, indeed, it was in many public sector organizations. The
new SBP management, however, considered training and development critical for the sustenance of the
change that the management initiative launched under it, which is why it transformed the National
Institute of Banking and Finance (NIBAF) into an independent subsidiary of the bank with the mandate
to develop and arrange training programmes for the SBP officers on a regular basis. A separate Training
Division was also established in the Human Resources Department to oversee the overall training
activity in the SBP. Training Coordinators were appointed in all the SBP departments to assess the train-
ing needs of their respective department officers and coordinate with the Training Division and NIBAF
for arranging the requisite training programmes.
Training Scorecard
In order to further facilitate and manage the delivery of training as well as to identify any gap therein, the
concept of a Training Scorecard was introduced. This scorecard provided, on an on-going basis, updated
details of all trainings received by each employee and served as a useful decision-making tool to identify
gaps and recommend further training for each individual employee.
Management and Soft Skills Training

A comprehensive two and a half year project to enhance and enrich the managerial and soft skills of the
SBP employees, particularly at the middle and senior-management level, were also initiated under World
Bank’s Technical Assistance for Banking Sector (TABS) programme. In the six-year period following
Dr Husain’s ascension to the governor’s seat, a total of 596 officers attended foreign training pro-
grammes. These included programmes at the Federal Reserve Bank, the Bank of Australia, the Center for
Central Banking Studies—Bank of England, the Bank of International Settlement, the International
Monetary Fund, the World Bank, the Central Bank of South Africa, the Bank of Korea, the Bundesbank
and several others.
Foreign Training
In addition to in-house and domestic training programmes, the SBP officers were also sent to reputed
international training programmes and on exposure visits or attachments to reputed supervisory agencies
and central banks of the world to increase their awareness about the variety of systems, policies and
practices in vogue in different parts of the world in their respective area/function. In the six-year period
following Dr Husain’s ascension to the governor’s seat, a total of 596 officers attended foreign training
programmes. These included programmes at the Federal Reserve Bank; the Bank of Australia; the Center
for Central Banking Studies—Bank of England; the Bank of International Settlement; the International
Monetary Fund; the World Bank; the Central Bank of South Africa; the Bank of Korea; the Bundesbank
and several others. These programmes covered a wide range of areas related to central banking functions

Table 2. Training Programmes Funded by World Bank’s TABS Program
Period Total Participants

2000–01 67
2001–02 118
2002–03 128
2003–04 157
2004–05 126
Total 596
and were funded fully or partially by the host institutions. Programmes that were not funded this way
were alternatively sponsored by the World Bank’s TABS programme (see Table 2).
Further, international experts were invited in collaboration with the Asian Development Bank to
develop and update teaching modules in the areas of monetary policy, financial sector regulation, com-
mercial and investment banking and financial market operations.
Performance Management System

The performance management system in the pre-transformation period was traditional and based on non-
objective and largely immeasurable parameters. This system, not surprisingly, did not have the capacity
to differentiate good performers from average or low performers. A new PMS was introduced. The new
system, developed by a consultant in consultation with the management, introduced concepts/stages of
performance planning, management and appraisal to create a full cycle performance management
system. Under the new PMS, SMART5 goals/targets and requisite competencies were mutually agreed
upon at the beginning of the performance cycle through open one-to-one discussions and then closely
managed throughout the year. The PMS cycle would end on a mutually agreed assessment of these
SMART goals and competencies at the end of the year through another one-on-one performance appraisal
interview. The first complete cycle of the new PMS was completed in July 2003 amidst intensive
training workshops.
Competency Model
A competency model was also introduced as an essential part of the new PMS. The model catered
for the development of twenty-nine competencies envisioned as essential for enhancing the efficiency of
the SBP. These competencies were clearly defined in a Competency Dictionary vis-à-vis the role of
employees as Individual Contributors, Unit Heads, Divisional Heads or Heads of Departments, etc.
Three competencies, namely Achievement Orientation, Teamwork, and Communication, were made
Core Competencies. A maximum of three role-specific and four function-specific competencies were to
be mutually decided by the appraiser and the appraised from the Competency Dictionary during the plan-
ning stage of the PMS, taking into account the job requirements and the individual development needs
of the employee being appraised.

Introduction of Bell Curve Principles

The bell curve principle was adopted in the SBP to award the newly introduced Annual Merit Increase.
Under this principle, employees were ranked as A, B+, B and C level performers based on their compara-
tive scores under the new PMS. The bell curve principle was applied on departmental basis for lower
management and on bank wide basis for middle and senior management. The ranking so arrived was
only used for Annual Merit Increase purposes, while for promotions, trainings, etc., the actual PMS
marks were taken into account.
This bell curve principle created ripples amongst the lower performers’ categories since it became
the basis of merit, raises and a cause of cribbing about the system. An unending debate ensued
within the organization about the pluses and minuses of absolute versus relative performance grading
system.
Revision of Compensation and Benefits Structure

The new SBP management, cognizant of the extremely inadequate level of compensation offered to the
SBP employees, decided to revise the salary and benefits structure. They also decided that such revisions
should be made a regular practice and be undertaken every two years in order to avoid any employee
grievances on the compensation front. In the first four years of the new policy, the following salary
increases were affected:
• 12.5 per cent in September 2000

• 8 per cent in September 2002
• 10 per cent in September 2004
Despite these measures, a sizable difference in the salary scales for new professionals recruited from
the market created tensions between the old employees and the new recruits.
Promotion Policy
A merit-based and competency driven promotion policy was introduced in July 2003. Under the new
promotion policy, a merit list of employees was prepared, based on the evaluation of their performance
during the last three years; the improvement in qualifications; the marks obtained in different trainings
and their seniority. Employees short listed on the basis of this initial merit list were evaluated by a
Promotions Committee through competency-based interviews for their suitability to perform in higher
jobs (see Table 3).
To ensure a single route for induction and recruitment to OG-2 level that was transparent and uniform
across the board, all previously approved promotion and career growth policies for OG-1 employees,
including automatic promotion on acquisition of MBA degree, were discontinued. In addition to the
usual structured promotion process, the concept of promotions based on professional growth was also
introduced. Employees at OG-3, OG-4 and OG-5 grades, who excelled in their respective professional
fields but could not be promoted under the usual structured promotion process due to lack of vacancies
could now be promoted on professional growth basis.

Table 3. New Promotion Policy Criteria
Weightage in Total Score

Promotion Criteria OG-3 OG-4 and OG-5
Performance Appraisal 40% 30%
Qualifications Acquired 5% 5%
Training 10% 10%
Seniority 5% 5%
Interview 40% 50%
Total Marks 100%
Employee Recognition Policy

After some years of intensive capacity building activities, the SBP started facing the challenge of
retaining its newly trained and skilled professionals, who had started leaving to join other institutions. To
create additional incentives for extraordinary performers, a formal employee recognition policy was
introduced for the first time in 2003. This policy provided the required tools to reward and recognize
employees who demonstrated positive behaviour through their performance towards achieving goals or
enhancing the image of the SBP.
Separation Policy
To offer employees graceful exit opportunities with additional monetary benefits, three Early Retirement
Incentive Schemes were introduced under which a total of 895 employees in different cadres opted for
retirement. Later, a regular and on-going Separation Policy was introduced as part of Staff Regulation.
Employees could now apply for early retirement at any time during their service.
Core Values
Strategic change is not possible without cultural change. A set of five Core Values was identified in
the concept paper for capacity building of the SBP in the year 2000. The definitions of and the kind of
behaviour required to meet these identified Core Values were decided through a participative and
consultative process. The aim of developing these Core Values through a consultative process was to
create ownership of the new value system from top to bottom of the hierarchy, which would lead to a
more professional culture in the work place. These values were:
• Trust
• Openness
• Courage
• Team work

• Commitment to Excellence
• Problem Solving Approach
Efforts were made to institutionalize the adoption of these Core Values by every staff member.
Human Resource Heads Forum

Dr Husain wanted the financial services industry to produce bankers of international calibre who could
participate in the export of financial services to the rest of the world. In this regard, he proposed
the formation of a network of Human Resource heads of all the financial institutions operating in the
country, with the ultimate objective of developing workable HR guidelines for the financial sector. The
following HR areas were identified as being critically important:
• Recruitment
• Compensation and Benefits
• Performance Management
• Career Progression, including training and development
• Severance and end of service
Five sub-committees, one for each of the above policy areas, were set up, headed by a Human
Resource professional and manned by leading names in the HR industry. They were tasked with formu-
lating HR policy guidelines for their assigned area and submitting their report to the HR Heads Forum.
Business Process Re-engineering (BPR)/Delegation of Powers

BPR was another area identified as being critical to the task of modernizing SBP. The objectives of BPR
were:
1. To review the existing procedures and systems and to eliminate and discard duplication and
redundancies in the light of new business needs.
2. The automation of business processes.
3. Streamlining and improving the decision-making process by decentralizing, de-layering and del-
egating administrative and financial powers to the appropriate levels in the organizational chain.
4. To strengthen the internal control system, financial reporting, the audit system and the bank’s
legal structure.
5. To enhance accountability and transparency by introducing adequate checks and balances.
Operations Manuals
To document and bring operational efficiency in the working of different departments, several operations
manuals were prepared. The objective of these manuals was to enhance efficiency without compromising

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Figure 6. Business Planning and Budgeting Activity

internal controls. These manuals incorporated new job descriptions along with revised procedures and
processes to undertake and complete various functions. Performance benchmarks for each position within a
department were also included.
Business Planning and Budgeting

On the strategic direction of Dr Husain, a business planning process was initiated at the SBP
(see Figure 6). Initially, the business planning and budgeting activity was carried out at the corporate
level. In 2002, a Business Planning and Budgeting Division was established in the Accounts Department
to facilitate the delegation of this activity to all departments of the SBP. Workshops were conducted for
every department to elaborate the business planning and budgeting process. The departments then came
up with their respective Business Plans and Budgets while incorporating developmental projects and
their estimated costs. These departmental budgets were then consolidated by the Accounts Department
and submitted to the top management for approval. The business planning and budgeting framework
totally transformed the working culture in the SBP. It enabled each and every officer of the Central Bank
to know the parameters on the basis of which his/her performance would be evaluated and provided a
reliable tool to the management for performance measurement, accountability and monitoring the
progress of work in different areas. Furthermore, Dr Husain also conducted quarterly meetings with
every department to review the progress on the attainment of these plans.
Participative Decision-Making
To institutionalize participative decision-making, teams at Corporate, Cluster and Department levels
were formed to discuss and decide the critical operational issues of their respective levels.
1. The Corporate Management Team (CMT), headed by the Governor and consisting of the Deputy
Governors, Advisers and Executive Directors, was made responsible for decision-making at the
corporate level and was made the principal forum for debate and decision-making on critical
operational issues affecting the quality of work at the institutional level.

2. The Group Management Teams (GMT), headed by Executive Directors (ED) and consisting
of all directors reporting to the EDs were made responsible for decision-making in respect
of administrative, financial, monitoring and organizational functions relating to the cluster of
departments.
3. The Department Management Teams (DMT), headed by the Directors and consisting of all
Division Heads reporting to them, were made responsible for discussing and resolving depart-
ment specific issues.
In order to increase the accountability and transparency in decision-making at all three levels of man-
agement, the practice of dissemination of minutes of all meetings of the CMT, GMT and DMT to all the
stakeholders was introduced, with minutes of the CMT disseminated throughout the bank, the GMT
within the cluster and the DMT amongst the members of the relevant department. This process provided
for and encouraged a two-way flow of information and a clear focus on a bottom-up approach,
with policy proposals flowing from the departmental levels to the GMT and CMT. Likewise, the direc-
tions and guidelines framed by the CMT trickled down to the other decision-making forums described
above and reached the relevant Division and the individual workers entrusted with the job of ensuring
compliance. The same channel was used for monitoring progress and identification of bottlenecks in
implementation, if any. In addition to well-defined business processes and the delegation of decision-
making authority, financial authority was also delegated through the Expenditure Regulations 2004.
Implementation of International Accounting Standards

Financial statements provided information about the financial position, performance and changes in the
financial position of an enterprise that was useful to a wide range of users in making economic decisions.
In 2001, the SBP adopted the International Accounting Standards6 (IAS), as applicable in Pakistan, to
enhance disclosure and transparency in its financial reporting. The SBP became one of the few central
banks in the region that was fully compliant with IAS and whose quality of financial statements and
disclosures were comparable with any modern and progressive central bank of the world.
Internal Audit
The new SBP management also took several initiatives to strengthen internal control systems and audit-
ing mechanisms. Services of an external consultant were hired to improve and strengthen the internal
control system in accordance with international auditing standards. Professionals in Audit and Accounts
were hired directly from the market to improve the skill level of the SBP in this important area. As a
result, the approach in the Audit Department was changed from conventional to a risk-based audit
approach, that is an approach based on the concept of materiality in which different risk levels were
defined based on the importance and sensitivity of a particular assignment or function, the availability of
resources and the pre-defined timelines for assigned tasks.

Technology Up-gradation
Information Technology (IT) had an extremely limited presence in the SBP prior to Dr Husain’s taking
charge and almost all the information/data processing was carried out manually. The SBP as a whole was
alien to the developments taking place in electronic communications and the enormous amounts of data
and information available through the Internet. Not a single Internet connection was available in the SBP.
The Computer Services Department, though operating for quite some time, had limited capacity to auto-
mate the manual systems and upgrade the technology infrastructure. In 1997–98, a Strategy paper to
upgrade the Information Technology environment at the SBP was developed by M/s Arthur Anderson
under the aegis of the World Bank Financial Sector Intermediation and Deepening Programme (FSDIP).
The implementation of the strategy, however, could not commence.
When Dr Husain joined the SBP, he was amazed to see high stacks of files collected on the desks of
his officers. Usually, the occupant would be hidden behind these stacks, immersed in manual work of
typing data on sheets of papers, correcting, reorganizing, adjusting and updating it. And after its finaliza-
tion, the same cycle would be repeated at every quarter-end and then at the year-end, creating never-
ending stacks of cross-referenced files. Dr Husain was worried about the lack of fulfilling developmental
work that these officers had to do day after day. With huge amounts of complex data that the SBP had
to compile on the economy and disseminate internally as well as externally to the decision-makers, the
manual work was constraining the SBP’s capacity as well as those that depended on it. This situation,
however, was not limited just to the SBP. Other public sector organizations, responsible for supplying
economic agents with up-to-date data and information on economy to facilitate their business decisions,
found themselves looking at external sources for up-to-date data on Pakistan.
Dr Husain knew that to transform the SBP into a true knowledge-based organization, he had to imple-
ment complete automation and electronic integration of data/information flow. The complete automation
of the SBP would not only require his and the senior management’s unwavering commitment but huge
financial resources as well. To achieve all this, a comprehensive automation and IT upgradation project
was initiated with the financial assistance of the World Bank, first under FSDIP and then under TABS.
The project was aimed at developing a state-of-the-art communication and information technology infra-
structure; equipping each workstation with a personal computer linked to the Internet and Intranet; auto-
mating all information processing and retail banking functions and building an enterprise wide data
warehouse. As the Computer Services Department did not have the necessary capacity to lead and steer
this huge project, large-scale inductions of IT professionals at lower, middle and senior level were made
on contractual basis for handling the initial work of networking, customization of software and installa-
tion of personal computers.
Dr Husain realized that this task would only be truly successful if the existing Computer Services
Department had permanent expertise and the technical know-how to facilitate the functional depart-
ments. Thus, on parallel basis, in November 2002, the Computer Services Department was restructured
as Information Systems Department and a professional with US-based IT experience was recruited to
lead its intensive and fast-paced development. In the span of just a few years, the department had around
100 IT professionals facilitating smooth transition of the SBP to an automated IT environment. The new
Information Systems Department had to patiently sensitize the 6,000 computer novice users to the latest
IT tools. Each user was facilitated and assisted in the day-to-day use of his/her personal computer. These
IT professionals had to help officers in learning the basics of using newly acquired IT facilities like

MS Office, printers, e-mail, intranet, Internet and any other information technology dependant tasks.
Gradually, the Information Systems Department broadened its work and developed a multi-directional
strategy to develop IT solutions for business processes not covered by the IT Project and enhance avail-
ability of data/information to users in a secure environment.
In September 2005, the project was completed successfully achieving almost all of its objectives and
an extremely fragile IT infrastructure was transformed into a modern, state-of-the-art communications
and IT base comparable with any central bank both in developed and developing countries. The major
milestones achieved during the six years on the IT upgradation front were:
• 2,748 personal computers were provided to all OG-2 and above at the SBP, SBP BSC offices and
NIBAF, interconnected via local area, metropolitan wide and wide area networks.
• Globus banking solutions system was adopted to automate the retail banking and treasury func-
tions of the SBP and SBP BSC. The core banking functionalities already on offer in Globus were
customized to the needs of the SBP and SBP BSC and new modules were developed for retail
functions specific to SBP BSC. Historic data was converted to the new system. All sixteen local
offices of SBP BSC along with the SBP were brought online and integrated at real time to churn
out timely and reliable information on the banking sector.
• An enterprise wide resource planning tool, the Oracle E-Business Suite was implemented to automate
and integrate the accounting, inventory control and human resource management functions of SBP and
capture data churned out by the Globus system. A total of seven modules, two from the Oracle Human
Resource Management System track and five from the Oracle financial track were implemented.
• An enterprise wide data warehouse was established to enhance the SBP’s capacity to timely
acquire, organize, store and retrieve large quantities of complex interrelated data on critical indi-
cators of the economy and the banking sector. The data warehouse was also connected online with
other operational systems like Globus and Oracle. The data warehouse added considerable value
to the research and banking supervision capacity of SBP. The data acquisition gateway facilitated
commercial bankers in feeding data directly to the data warehouse from their desktops.
Improvement of Physical Infrastructure

When Dr Husain took office, the physical infrastructure of the SBP was in very bad shape with decades
old furniture, chairs with broken arm rests and poor air-conditioning facilities. The renovation and
refurbishing of the physical environment was, therefore, necessary to match it with the changing organi-
zational culture.
The main objective here was to provide a congenial working environment to the employees and
reconfigure office layout and infrastructure to make it compatible with the new IT requirements. The
Central Board of Directors authorized the redesigning of six floors of the SBP at an estimated cost of
PKR 10 million each.
Having executed his change plan, however, towards the end of his second term, Dr Husain was
reflecting back on his plan to transform the SBP into a modern Central Bank compatible with the require-
ments of the twenty-first century. What impact would this implementation of changes have as well as
whether enough had been done to institutionalize these changes were some of his main concerns.


State Bank of Pakistan: Assessment of Results (C)
At the end of his two-term tenure, which spanned over six years and ended at the beginning of 2006,
Dr Ishrat Husain was looking at the pile of files on his main office table. In this pile was also a file con-
taining the results of his turnaround programme. While personally feeling quite satisfied, he was keen to
find out what the results might reveal. Also, at the back of his mind were a few niggling concerns. Were
the wide-ranging changes he had instituted in the SBP sustainable? Would the change in leadership at
the top of the organization roll back some of his initiatives or would these be continued with comparable
vigour? With these thoughts at the back of his mind, Dr Husain started to scan through the file containing
the findings of the outcomes of his turnaround programme.
Progress in Strategic Objectives
Financial System Soundness

Many observers believed that the improved health of the domestic financial system could at least par-
tially be attributed to the policies which Dr Husain had initiated at the SBP. Few would doubt that the
financial sector was in better shape at the end of his tenure (in 2006) than at the start (in 1999). During
these years,many public sector banks had been restructured, re-capitalized and/or privatized, transform-
ing them into competitive and profitable institutions with substantially improved quality of service.
Lending rates had been brought down to as low as 3–4 per cent from 16–17 per cent, boosting demand
for private credit. Initiatives to reduce Non-Performing Loans had led to the settlement of long outstand-
ing loans and a reduction of Non-Performing Loans to 11 per cent from 26 per cent of total loans in 1999.
The Financial Sector Assessment Programme (FSAP) introduced by the World Bank and the IMF fol-
lowing the financial crisis of the late 1990s had also expressed satisfaction with the domestic financial
sector(see Table 4, Figure 7 and Figure 8 regarding List of Banks in Pakistan, Banking System Soundness
Indicators and National savings rates).
Broadening Access to Financial Services

Dr Husain’s six-year tenure had coincided with an impressive broadening in the utilization of financial
services by local consumers. Under his direction, a market-based approach had been adopted to broaden
and deepen the country’s financial markets with a focus on the mainstreaming of agriculture, micro,
small and medium enterprise, consumer and Islamic finance services. The regulatory framework for
these sectors had been strengthened; the impediments to their functioning and growth removed and
extensive awareness and capacity building campaigns undertaken to significantly improve the demand
and use for these services. These efforts had led to a doubling in the number of domestic borrowers to
4.1 million by June 2005.

Table 4. List of Banks in Pakistan
As on 30 June 2000 As on 30 June 2005

1 First Women Bank Ltd 1 First Women Bank Ltd
2 Habib Bank Ltd 2 National Bank of Pakistan
3 National Bank of Pakistan 3 The Bank of Khyber
4 United Bank Ltd 4 The Bank of Punjab
5 The Bank of Khyber
6 The Bank of Punjab Domestic private banks
1 Habib Bank Ltd
Domestic private banks 2 MCB Bank Ltd
1 Muslim Commercial Bank Ltd 3 Allied Bank Ltd
2 Allied Bank of Pakistan Ltd 4 United Bank Ltd
3 Askari Commercial Bank Ltd 5 Askari Commercial Bank Ltd
4 Bank Al-Falah Ltd 6 Bank Al-Falah Ltd
5 Bank Al-Habib Ltd 7 Bank Al-Habib Ltd
6 Bolan Bank Ltd 8 Faysal Bank Ltd
7 Faysal Bank Ltd 9 Metropolitan Bank Ltd
8 Gulf Commercial Bank Ltd 10 KASB Bank Ltd
9 Metropolitan Bank Ltd 11 Prime Commercial Bank Ltd
10 Platinum Commercial Bank Ltd 12 Saudi Pak Commercial Bank Ltd
11 Prime Commercial Bank Ltd 13 Soneri Bank Ltd
12 Prudential Commercial Bank Ltd 14 Union Bank Ltd
13 Soneri Bank Ltd 15 Meezan Bank Ltd
14 Union Bank Ltd 16 Dawood Bank Ltd
17 PICIC Commercial Bank Ltd
Foreign Banks 18 NIB Bank Ltd
1 ABN AMRO Bank N.V. 19 Mybank Ltd
2 Al-Baraka Islamic Bank B.S.C. (EC) 20 Crescent Commercial Bank Ltd
3 American Express Bank Ltd
4 Bank of Ceylon Foreign Banks
5 Citibank N.A. 1 ABN AMRO Bank N.V.
6 Credit Agricole Indosuez 2 Al-Baraka Islamic Bank B.S.C. (EC)
7 Deutsche Bank AG 3 American Express Bank Ltd
8 Doha Bank 4 Citibank N.A.
9 Emirates Bank International PJSC 5 Deutsche Bank AG
10 Habib Bank AG Zurich 6 Habib Bank AG Zurich
11 International Finance Investment and Commerce 7 Oman International Bank S.A.O.G.
12 Mashreq Bank psc 8 Rupali Bank Ltd
13 Oman International Bank S.A.O.G. 9 Standard Chartered Bank
14 Rupali Bank Ltd 10 The Bank of Tokyo-Mitsubishi Ltd
(Table 4 continued)

(Table 4 continued)
As on 30 June 2000 As on 30 June 2005
15 SocieteGenerale, The French and 11 The Hong Kong and Shanghai Banking
International Bank Corporation Ltd
16 Standard Chartered Bank
17 Standard Chartered Grindlays Bank Ltd Specialized Banks
18 The Bank of Tokyo-Mitsubishi Ltd 1 Zari Taraqiati Bank Ltd (old ADBP)
19 The Hong Kong and Shanghai Banking Corporation Ltd. 2 Punjab Provincial Cooperative Bank
3 Industrial Development Bank of Pakistan
Specialized Banks 4 SME Bank Ltd
1 Agricultural Development Bank of Pakistan
2 Punjab Provincial Cooperative Bank Micro Finance Banks
3 Federal Bank for Cooperatives 1 Khushhali Bank
4 Industrial Development 2 The First Micro Finance
Bank of Pakistan Bank Ltd
3 Network Micro Finance Bank Ltd
4 Rozgar Micro Finance Bank
Source: Company’s documents.
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Figure 7. Banking System Soundness Indicators

Exchange and Reserves Management

Pakistan’s national reserves had multiplied twelve times during Dr Husain’s tenure as the SBP Governor.
External debt had been reduced from $38 billion to $35 billion and many expensive loans had been
replaced by much softer alternatives. The currency exchange rate had also remained stable and, in fact,
the rupee had gained a little ground on the dollar and was trading at PKR 59.70 to a dollar in 2006 com-
pared to PKR 64 to a dollar in 1999. As encouraging as all these developments were, opinions were
divided on how much of them were a cause of Dr Husain’s policies at the SBP and how much of them
were a result of broader forces beyond the Central Bank’s control (see Figures 9, 10 and 11) on nominal
exchange rates, effective exchange rate indices and foreign exchange reserves).
Monetary Management
Many experts believed that the monetary policy stance during Dr Husain’s six-year tenure as the SBP
Governor had played a positive role in returning the Pakistani economy to real positive growth. The


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Figure 8. National Savings Rate

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Figure 11. Foreign Exchange Reserve
monetary policy formulation and implementation process at the Central Bank had been made objective,
predictable and transparent with the practice of publishing several Monetary Policy Statements through-
out the year. These reports/publications, made available on the SBP website, had became the main source
of objective, non-partisan assessment of the economy and of updated information on the movement of
economic indicators (see Figures 12 and 13) on inflation indicators and monetary statistics).
Payment System
Considerable progress had also been achieved with respect to the development of an efficient payment
system in the country. The SBP had encouraged banks to invest in technology and the development of
payment system infrastructure, which had resulted in a prodigious increase in the number of ATMs,
online branches and electronic and card-based payments. Almost 50 per cent of the banking system had
been electronically linked and an ambitious round of automation and IT infrastructure upgradation had
been successfully completed by most parts of the banking industry. The whole banking system was
poised to be electronically linked by 2006–2007.


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Figure 12. Inflation Indicators
Internal and External Stakeholders Survey
Employee Motivation Surveys

Over the years, a number of formal and informal surveys were conducted in the SBP in its endeavours
to adopt best practices. The first formal in-house Employee Survey was conducted in 2002. In 2003,
services of an external consultant were acquired to provide confidence to the employees to give their
feedback frankly and in a totally anonymous manner. The consultant was asked to independently admin-
ister the annual Employee Motivational Surveys at the SBP and report the findings to the SBP. The first
externally managed Employees Motivational Survey was conducted in November 2003 and the second


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Figure 13. Monetary Statistics
in December 2004 (see Figure 14). In 2003, 477 employees participated in the survey out of a total of
645, registering a response rate of 74 per cent and an overall satisfaction score of 3.99. In 2004, 518
employees responded in the survey out of a total of 725, registering a feedback rate of 71 per cent with
an overall satisfaction score of 4.10.
The overall results suggested that the primary areas of concern for the employees were Performance
Appraisal and Career Development; Training and Development; Compensation, Benefits and
Rewards and Performance Management System in which they displayed comparatively lower levels of

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Figure 14. External Stakeholders Survey 2004.

satisfaction ranging from 3.48 to 3.73. Assignment of Job Responsibilities; Survey Administration and
Training Facilities received high satisfaction ratings between 4.43 and 4.48.
Customer Satisfaction Surveys were another universally used tool to gauge the satisfaction of cus-
tomers or external stakeholders from the performance of an organization in its key areas of business. The
feedback received in these surveys provided a good yardstick to see an organization’s successes and was
critical in further improving the performance of any organization. The SBP started following this Best
Practice in 2002 and started hiring the services of an external consultant to independently carry out an
External Stakeholder Survey every year. The most comprehensive external stakeholder survey was car-
ried out in 2004, which produced a 100 per cent response rate from around 100 participating stakehold-
ers. The survey results noted a significant improvement in the overall image of SBP.
These stakeholders included banks, micro finance institutions, DFIs, exchange companies, members
of financial markets, chambers of commerce, business associations, media and academia. The satisfac-
tion level of the stakeholders for most of the core functions was high, with the exception of foreign
exchange management, credit to priority sectors and Islamic banking, which earned relatively lower
satisfaction levels. The efforts made by the SBP in improving the working environment, quality of work
and quality of human resource were recognized and appreciated by both direct and indirect stakeholders
(see Figure 15).

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Figure 15. External Stakeholders Survey 2004
Strategic Planning and the Reform Process

Most of the reform initiatives undertaken in the Capacity Building Programme were completed before
the end of 2005. The most immediate task now (i.e., in 2006) was to formulate a ‘successor’ pro-
gramme and ensure that the strategic planning process became embedded in the regular planning cycle
at the SBP. To facilitate this, a Strategic Planning Unit (SPU) had been set up in November 2003. The
purpose of the SPU was to develop a strategic planning framework for the SBP and formulate five-year
plans in coordination with various departments of the SBP. In December 2004, the SPU organized the
first Strategic Management Conference of the SBP and facilitated the development of the ‘Strategic
Plan 2005–10’.
The planning process employed was consultative, participative and result oriented. The involvement
of stakeholders, both internal and external, was given particular attention as it was felt that the success
of the plan was directly correlated with the level of ownership and commitment of those charged with
implementing the plan. The Strategic Plan 2005–10 was to serve as a blueprint of the SBP’s agenda for
the next five years. With the gradual unfolding of the Strategic Plan, all the specialized clusters (Banking,
Financial Resources Management, Research and Support) were expected to continue restructuring, cre-
ating units, divisions or departments capable of supporting the enhanced role of the SBP as a profes-
sional, efficient and modern organization.
However, with Dr Husain’s departure in December 2005, there was a fear of backtracking, felt by
several protagonists of the reform process as well as by the outgoing Governor. Some observers felt that
this fear was misplaced as power in the organization had been decentralized and the reform process built

into the SBP machinery. Yet, others thought that the leadership style of Dr Husain’s successor might have
a significant bearing on SBP’s fortunes in the years ahead.
Dr Husain was aware that divisions remained even within his senior management team. While a good
working relationship had been forged between the ‘career central bankers’ and the new recruits, different
approaches and resentments had been subdued by the sheer force of the Governor’s personality. These
differences could easily emerge in the absence of a common uniting force. While a lot depended on the
personality of his successor, Dr Husain hoped that the institution he had helped to step into the new cen-
tury would be able to sustain its own reform momentum and will not have to be dependent on the efforts
of a single individual.
Notes
1. Before 1997 Modarabas, the leasing and venture capital companies, used to be under the regulatory and super-
visory ambit of the SBP.
2. Onsite inspection framework, which gauges the capital adequacy, asset quality, management soundness, earnings
and profitability, liquidity and sensitivity to market risk.
3. SBP had been regulating and supervising these NBFCs without necessary powers as powers to issue and cancel
their licences were with SECP.
4. The World Bank and International Monetary Fund’s Joint Committee on Financial Sector Assessment use these
standards as benchmarks in evaluating countries’ development of financial markets. The Core Principles have
become the most important global standard for prudential regulations and supervision.
5. SMART goals are Stretched, Measurable, Achievable, Realistic and Time-bound.
6. International Accounting Standards provide harmonized regulations, accounting standards and procedures relat-
ing to the preparation and presentation of financial statements.

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Organizational Transformation Challenges at the State Bank of Pakistan (A),

Article in Asian Journal of Management Cases · March 2013

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Organizational Transformation Asian Journal of Management Cases

Organizational Transformation Challenges at the

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The New Governor

A Brief History of Central Banking in Pakistan

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The Banking Sector and the SBP Challenges in 1999–2000

Banking Sector Situation

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Challenges Inside the SBP

The Reforms Process—The Concept Paper

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(a) Ensuring soundness and stability of the financial system;

Box 1. A Concept Paper

Source: Company Documents.

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The Change Management Conferences

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Box 2. The Vision Statement

Box 3. Showing New Value Set

1. Personal and Professional Integrity

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Figure 1. The Five-Pronged Strategy

Biographical Sketch of Dr Ishrat Husain

Former Governor, the SBP

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Organizational Transformation Challenges at the

(a) Restructuring and consolidation of functions

Restructuring and Consolidation of Functions

The SBP Banking Services Corporation

Asian Journal of Management Cases, 10, 1 (2013): 35–75

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Figure 2. Old Organization Structure, December 1999

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Figure 3. New Organizational Chart, June 2005.

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Figure 4. SBP Value Chain

Figure 5. Core Departments

Asian Journal of Management Cases, 10, 1 (2013): 35–75

Downloaded from ajc.sagepub.com at INSTITUTE OF BUSINESS MANAGEMENT--KARACHI on February 27, 2016

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