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STATE BANK OF PAKISTAN

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Introduction:
Before the World War First, there were only a few countries, which had there own central banks. After the War, the number of central banks has increased and now there is not a single country in the world, which does not have its own central bank. There were many considerations underlying the establishment of a central bank. After the first war, there was complete confusion in currency and exchange markets. There were large withdrawals of money form banks. The bank reserves fell below the needed levels. There was no institution, which could supervise the working of banks and also serve as a fiscal agent. In addition to the above difficulties, there was a rigidity or lack of elasticity in the supply of the currency. There were also reoccurrences of failures of the commercial banks. In order to solve the monetary problems of the countries and set them on the healthy footings, a conference was held at Brussels in 1920. It was decided in that conference that to control the supply of money and credit in the economy and maintained stable business conditions, each country must establish its own central bank in order to solve the problems.

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Brief History of State Bank of Pakistan:
At the time of independence, the immediate and foremost work of the government of Pakistan was to establish a central bank so that it should have an independent currency and banking system. At that time Pakistan faced a lot of complex problems on account of partition of the Sub-continent. It was decided with India that the Reserve Bank of India would continue to act as a central bank and currency authority for Pakistan till the establishment of its own central bank. The transitional arrangement of having one central bank for two independent countries was promulgated by Governor General of undivided India on August 14, 1947 by an order called “Monetary System and Reserve Bank Order 1947”. Following are the main provisions of the said order. 1) The reserve bank of India would be the sole note issuing authority in Pakistan till September 1948. 2) The Indian note will remain legal tender in both Pakistan and India until 30th September 1948. The Govt of Pakistan will issue its own currency from October1, 1948. 3) The reserve bank of India would transfer the assets of value equal to Pakistani note to Pakistani government after 30th September 1948. 4) The Govt of Pakistan will issue notes and coins in the country after 30th September 1948. The coins issued by the Govt of India would remain the legal tender in Pakistan for at least one year from the date of issue of Pakistani coins.

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5) The reserve bank of India would perform the full functions of central bank in Pakistan up to September 30th, 1948.

Establishment of State Bank of Pakistan:
Immediately after partition, the newly born state was forced with a serious banking situation due to the wholesale migration of the banking staff to India. The reserve bank of India showed reluctance in solving the banking crises. It rather created further problems and difficulties by refusing to give Rs55 Crore, which Pakistan was entitled to share the cash balance of the undivided India. The Govt of Pakistan then realized that reserve bank of India cannot existence of Pakistan. It therefore decided to establish its own currency authority earlier then it was mutually agreed upon. The reserve bank of India was relieved of its factions in Pakistan from the first day of July 1948. The Governor General of Pakistan Quid-e-Azam Muhammad Ali Jinnah issued order for the establishment of State Bank of Pakistan on 1st July 1948. According to the State Bank order 1948, the bank is entrusted with the duty of regulating the issue of bank notes and keeping of reserve with a view to seeking monetary stability in Pakistan

What The Central Bank is?

“The guiding principle of a Central Bank is that it acts only in the public interest and for the welfare of the community as a whole and without regard to profits a primary consideration.”

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The objectives of establishing Central Bank: .
 Firstly, the objectives of establishing the central bank are different from that of commercial bank. The commercial banks are profit seeking companies where as the central bank does not compete with the commercial banks in the hunting of profits. Earning of profits is the prime objectives of today commercial banks, while for the central bank it has only a secondary consideration. The central bank is charged with the responsibility of managing the banking and credit system to achieve high and stable level of employment and production in the economy.  Secondly, the central bank is subordinates to the government or state. It controls the monetary as well as the banking system on the behalf of the government.  Thirdly, it deals with the member banks and supervises their work.

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Organizational Hierarchy
Governor

Deputy Governo r

Deputy Governo r

Executive Directors

Joint Director

Dy. Director

Assistant Director

Statutory Obligations (RMD)
STATUTORY CASH RESERVE In terms of Section36 (1) SBP Act, 1956, every scheduled bank is required to maintain with State Bank a balance the amount of which shall not at the close of business or any day be less than such percentage of Time & Demand Liabilities in Pakistan as may be determined by State Bank. Presently the requirement is 5% on weekly average basis subject to daily minimum of 4% of Time & Demand Liabilities. STATE BANK OF PAKISTAN 6

STATUTORY LIQUIDITY REQUIREMENT In terms of Section 29(1) of Banking Companies Ordinance, 1962 every banking company shall maintain in Pakistan in cash, gold or unencumbered approved securities valued at price not exceeding "the lower of cost or the current market price" an amount which shall not at the close of business in any day be less than such percentage of the total of its time & demand liabilities in Pakistan, as may be notified by State Bank from time to time. Presently the requirement is 15% (excluding 5% statutory cash reserve) of the total of its time and demand liabilities in Pakistan. MAINTENANCE OF LIQUIDITY AGANINST CERTAIN LIABILITIES In terms of Rule 6 of non banking financial institutions (NBFIs) Rules of Business, all NBFIs are required to invest 14% of their liabilities defined in the Rule, in Government Securities, NIT Units, shares of listed companies or listed debt securities in the prescribed manner. For the purpose of this rule, liabilities shall not include NBFIs equity, borrowings from financial institutions including accruals thereon, lease key money, deferred taxation not payable within 12 months, dividend payable within two months, advance lease rentals and deposits from financial institutions. In addition, they are also required to maintain cash balance with State Bank, which shall not be less than 1% of their liabilities as defined above. SUBMISSION OF ANNUAL AUDITED ACCOUNTS BY NBFIs Under Rule 17 of NBFIs Rule of Business, all NBFIs are required to submit their annual audited accounts within a period of 6 months after the close of their accounting year.

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ANNUAL ACCOUNTS: At the expiration of each calendar year every banking company incorporated in Pakistan, in respect of all business transacted by it, and every banking company incorporated outside Pakistan, in respect of all business transited through its branches in Pakistan, shall prepare with reference to that year a balance-sheet and profit and loss account as on the last working day of the year in the prescribed forms (Section 34 of Banking Companies Ordinance, 1962). SUBMISSION OF RETURNS: The accounts and balance-sheet referred to in section 34 together with the auditor’s report as passed in the annual General Meeting shall be published in the prescribed manner, and three copies thereof shall be furnished as returns to the State Bank within three months of the close of the period to which they relate (Section 36 of Banking Companies Ordinance, 1962). MINIMUM CAPITAL REQUIREMENTS: In terms of Section 13 of Banking Companies Ordinance, 1962 no banking company shall commence business unless it has a minimum paid up capital as may be determined by the State Bank or carry on business unless the aggregate of its capital and unencumbered general reserves is of such minimum value within such period as may be determined and notified by the State Bank from time to time for banking companies in general or for a banking company in particular. As present, all banks operating in Pakistan are required to maintain capital and unencumbered general reserve, the value of which is not less than 8% of their risk weighted assets. Additionally they are also required to maintain a minimum paid up capital of Rs.500 million.

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Core Functions of State Bank of Pakistan:
State Bank of Pakistan is the Central Bank of the country. While its constitution, as originally laid down in the State Bank of Pakistan Order 1948, remained basically unchanged until 1st January 1974 when the Bank was nationalized, the scope of its functions was considerably enlarged. The State Bank of Pakistan Act 1956, with subsequent amendments, forms the basis of its operations today. Under the State Bank of Pakistan Order 1948, the Bank was charged with the duty to "regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in Pakistan and generally to operate the currency and credit system of the country to its advantage". The scope of the Bank’s operations was considerably widened in the State Bank of Pakistan Act 1956, which required the Bank to "regulate the monetary and credit system of Pakistan and to foster its growth in the best national interest with a view to securing monetary stability and fuller utilization of the country’s productive resources". Under financial sector reforms, the State Bank of Pakistan was granted autonomy in February 1994. On 21st January, 1997, this autonomy was further strengthened by issuing three Amendment Ordinances (which were approved by the Parliament in May, 1997) namely, State Bank of Pakistan Act, 1956, Banking Companies Ordinance, 1962 and Banks Nationalization Act, 1974. The changes in the State Bank Act gave full and exclusive authority to the State Bank to regulate the banking sector, to conduct an independent monetary policy and to set limit on government borrowings from the State Bank of Pakistan. The amendments in Banks Nationalization Act abolished the Pakistan Banking Council (an institution established to look after the affairs of NCBs) and institutionalised the process of appointment of STATE BANK OF PAKISTAN 9

the Chief Executives and Boards of the nationalised commercial banks (NCBs) and development finance institutions (DFIs), with the Sate Bank having a role in their appointment and removal. The amendments also increased the autonomy and accountability of the Chief Executives and the Boards of Directors of banks and DFIs. Like a Central Bank in any developing country, State Bank of Pakistan performs both the traditional and developmental functions to achieve macro-economic goals. The traditional functions, which are generally performed by central banks almost all over the world, may be classified into two groups:

1) The primary functions including:
 Issue of notes,

 Regulation and supervision of the financial system,  Bankers’ bank,

 Lender of the last resort,   Banker to Government, Conduct of monetary policy.

2) The secondary functions including:  The agency functions like management of public debt,

 Management of foreign exchange, etc.

Sole right of Note Issue:
The central bank has the monopoly of note issue in world. In Pakistan state bank of Pakistan is central bank and has sole right to issue currency notes (coins are issued by the Ministry of Finance in Pakistan). The monopoly in issuance of currency notes has the following advantages. STATE BANK OF PAKISTAN

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Advantages:
o It brings uniformity in the circulation of currency. o The central bank is in a better position to exercise control over the money supply in the country. o The sole power to issue notes enables the central bank to control the lending operations of the commercial banks. o Law regulates the right of note issue. Therefore it enhanced and increased public confidence in the monetary system of the country.

Methods of Note Issue:
There are two methods of note issue named as Fixed Fiduciary System and Proportionate Reserve System. In Pakistan proportionate reserve system is prevailing at the moment. 1. Fixed Fiduciary System: Under this system a fixed amount is laid down, which need to be covered by government securities. Note issued in excess of this amount must be fully backed gold and silver etc. this methods assures maximum safety for the notes without any doubt but it lacks elasticity. The supply of notes is tied down to the supply of gold available in the country. This system also fails to take into consideration the commercial banks power to create credit. And this system is not in a position to meet the needs of growing trade industry and commerce and not a favorable system for less developed countries like the economy of Pakistan.

2. Proportionate Reserve System:
According to Proportionate Reserve System, the central bank is to keep a certain percentage of the total notes issued in gold, silver etc.

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And other functions like advising the government on policy matters and maintaining close relationships with international financial institutions. The non-traditional or promotional functions, performed by the State Bank include development of financial framework, institutionalization of savings and investment, provision of training facilities to bankers, and provision of credit to priority sectors. The State Bank also has been playing an active part in the process of islamization of the banking system. The main functions and responsibilities of the State Bank can be broadly categorized as under. REGULATION OF LIQUIDITY: Being the Central Bank of the country, State Bank of Pakistan has been entrusted with the responsibility to formulate and conduct monetary and credit policy in a manner consistent with the Government’s targets for growth and inflation and the recommendations of the Monetary and Fiscal Policies Co-ordination Board with respect to macro-economic policy objectives. The basic objective underlying its functions is twofold i.e. the maintenance of monetary stability, thereby leading towards the stability in the domestic prices, as well as the promotion of economic growth. To regulate the volume and the direction of flow of credit to different uses and sectors, the Bank makes use of both direct and indirect instruments of monetary management. Until recently, the monetary and credit scenario was characterised by acute segmentation of credit markets with all the attendant distortions.

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Pakistan embarked upon a program of financial sector reforms in the late 1980s. A number of fundamental changes have since been made in the conduct of monetary management, which essentially marked a departure from administrative controls and quantitative restrictions to market-based monetary management. A reserve money management programmed has been developed. In terms of the programmed, the intermediate target of M2 would be achieved by observing the desired path of reserve money - the operating target. While use in now being made of such indirect instruments of control as cash reserve ratio and liquidity ratio, the program’s reliance is mainly on open market operations.

ENSURING THE SOUNDNESS OF FINANCIAL SYSTEM: REGULATION AND SUPERVISION One of the fundamental responsibilities of the State Bank is regulation and supervision of the financial system to ensure its soundness and stability as well as to protect the interests of depositors. The rapid advancement in information technology, together with growing complexities of modern banking operations, has made the supervisory role more difficult and challenging. The institutional complexity is increasing, technical sophistication is improving and technical base of banking activities is expanding. Accordingly, the out dated inspection techniques have been replaced with the new ones to have better inspection and supervision of the financial institutions. The banking activities are now being monitored

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through a system of ‘off-site’ surveillance and ‘on-site’ inspection and supervision. Off-site surveillance is conducted by the State Bank through regular checking of various returns regularly received from the different banks. On other hand, the State Bank in the premises of the concerned banks when required undertakes on-site inspection. To deepen and broaden financial markets as also to diversify the sources of credit, a number of non-bank financial institutions (NBFIs) were allowed to increase substantially. The State Bank has also been charged with the responsibilities of regulating and supervising of such institutions. institutions, To a regulate new and supervise namely, the activities of these and Department NBFIs Regulation

Supervision Department was set up. Moreover, in order to safeguard the interest of ultimate users of the financial services, and to ensure the viability of institutions providing these services, the State Bank has issued a comprehensive set of Prudential Regulations (for commercial banks) and Rules of Business (for NBFIs). The "Prudential Regulations" for banks, besides providing for credit and risk exposure limits, prescribe guide lines relating to classification of short-term and long-term loan facilities, set criteria for management, prohibit criminal use of banking channels for the purpose of money laundering and other unlawful activities, lay down rules for the payment of dividends, direct banks to refrain from window dressing and prohibit them to extend fresh loan to defaulters of old loans. The existing format of balance sheet and profit-and-loss account has been changed to conform to international standards, ensuring adequate transparency of operations. Revised capital requirements, envisaging minimum paid up capital of Rs.500 million have been enforced. Effective December,1997, every bank was required to maintain capital

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and unencumbered general reserves equivalent to 8 per cent of its risk weighted assets. The "Rules of Business" for NBFIs became effective since the day NBFIs came under State Bank’s jurisdiction. As from January, 1997, Modaraba and leasing companies, which are also specialized type of NBFIs, are being regulated/supervised by the Securities and Exchange Commission (SECP), rather than the State Bank of Pakistan.

EXCHANGE RATE MANAGEMENT AND BALANCE OF PAYMENTS One of the major responsibilities of the State Bank is the maintenance of external value of the currency. In this regard, the Bank is required, among other measures taken by it, to regulate foreign exchange reserves of the country in line with the stipulations of the Foreign Exchange Act 1947. As an agent to the Government, the Bank has been authorized to purchase and sale gold, silver or approved foreign exchange and transactions of Special Drawing Rights with the International Monetary Fund under sub-sections 13(a) and 13(f) of Section 17 of the State Bank of Pakistan Act, 1956.

The Bank is responsible to keep the exchange rate of the rupee at an appropriate level and prevent it from wide fluctuations in order to maintain competitiveness of our exports and maintain stability in the foreign exchange market. To achieve the objective, various exchange policies have been adopted from time to time keeping in view the prevailing circumstances. Pak-rupee remained linked to Pound Sterling till September 1971 and subsequently to U.S. Dollar. However, it was decided to adopt the managed floating exchange rate system w.e.f. STATE BANK OF PAKISTAN 15

January 8, 1982 under which the value of the rupee was determined on daily basis, with reference to a basket of currencies of Pakistan’s major trading partners and competitors. Adjustments were made in its value as and when the circumstances so warranted. During the course of time, an important development took place when Pakistan accepted obligations of Article-VIII, Section 2, 3 and 4 of the IMF Articles of Agreement, thereby making the Pak-rupee convertible for current international transactions with effect from July 1, 1994. After nuclear detonation by Pakistan in 1998, a two-tier exchange rate system was introduced w.e.f. 22nd July 1998, with a view to reduce the pressure on official reserves and prevent the economy to some extent from adverse implications of sanctions imposed on Pakistan. However, effective 19th May 1999, the exchange rate has been unified, with the introduction of market-based floating exchange rate system, under which the exchange rate is determined by the demand and supply positions in the foreign exchange market. The surrender requirement of foreign exchange receipts on account of exports and services, previously required to make to State Bank through authorized dealers, has now been done away with and the commercial banks and other authorized dealers have been made free to hold and undertake transaction in foreign currencies. As the custodian of country’s external reserves, the State Bank is also responsible for the management of the foreign exchange reserves. The task is being performed by an Investment Committee which, after taking into consideration the overall level of reserves, maturities and payment obligations, takes decision to make investment of surplus funds in such a manner that ensures liquidity of funds as well as maximizes the earnings. These reserves are also being used for intervention in the foreign exchange market. For this purpose, a Foreign Exchange Dealing Room has been set up at the Central STATE BANK OF PAKISTAN 16

Directorate of State Bank of Pakistan and services of a ‘Forex Expert’ have been acquired

DEVELOPMENTAL ROLE OF STATE BANK

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

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Banking Sector Supervision in Pakistan: State Bank of Pakistan (SBP) which is the Central Bank of the country has been interalia entrusted with the responsibility for an ongoing effective supervision of the banking sector. The relevant provisions of law, which vest powers in State Bank of Pakistan (SBP) to carry out inspection of banks, are contained in the Banking Companies Ordinance, 1962. Besides, State Bank of Pakistan Act, 1956 and the Bank’s Nationalization Act, 1974, The Financial Institutions (Recovery of finances) Ordinance, 2001, Companies Ordinance, 1984 and Statutory Regulatory Orders (SROs) are the relevant legislations, which cover the activities concerning the banking sector. The financial sector in Pakistan comprises of Commercial Banks, Development Finance Institutions (DFIs), and Micro finance Banks (MFBs), Non-banking Finance Companies (NBFCs) (leasing companies, Investment Banks, Discount Houses, Housing Finance Companies, Venture Capital Companies, Mutual Funds), Modaraba, Stock Exchange and Insurance Companies. Under the prevalent legislative structure the supervisory responsibilities in case of Banks, Development Finance Institutions (DFIs), and Microfinance Banks (MFBs) falls within legal ambit of State Bank of Pakistan while the rest of the financial institutions are monitored by other authorities such as Securities and Exchange Commission and Controller of Insurance.

Under the WTO commitments the operational status of branch network of foreign banks operating in Pakistan as on 31-12-1997 has been protected and frozen. However, existing foreign banks having less than 3 branches can have branches to the extent of maximum number of 3 only. New foreign banks desirous of entering banking business in Pakistan will now be required to incorporate as domestic bank under

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the local laws. The branches of foreign banks operating in Pakistan can also be converted into a local commercial bank by incorporating under the local laws and subject to a minimum paid up capital of Rs.1 billion provided foreign share holding is restricted to a maximum of 49%.

At present there are 41 scheduled banks, 6 DFIs, and 2 MFBs operating in Pakistan whose activities are regulated and supervised by State Bank of Pakistan. The commercial banks comprise of 3 nationalized banks, 3 privatized banks, 15 private sector banks, 14 foreign banks, 2 provincial scheduled banks, and 4 specialized banks.

Under the Banking Companies Ordinance, 1962 the State Bank of Pakistan is fully authorized to regulate and supervise banks and development finance institutions. During the year 1997 some major amendments were made in the banking laws, which gave autonomy to the State Bank in the area of banking supervision. Under Section 40(A) of the said Ordinance it is the responsibility of State Bank to systematically monitor the performance of every banking company to ensure its compliance with the statutory criteria, and banking rules & regulations. In every case in which the management of a bank is failing to discharge its responsibility in accordance with the applicable statutory criteria or banking rules & regulations or is failing to protect the interests of the depositors or for advancing loans and finance without due regard for the best interests of the bank or for reasons other than merit, the State Bank is empowered to take necessary remedial steps. The State Bank of Pakistan can, interalia, exercise the following powers vested upon it under the Banking Companies Ordinance:-

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Prohibiting the bank from giving loans, advances & credits. Prohibiting the bank from accepting deposits. Cancel license of a bank. Give directions to the bank as it deem fit. Remove chairman, directors, chief executive or other managerial persons from the office and appoint a person as chairman, director or chief executive.

Supersede the Board of Directors. Direct prosecution of directors, chief executive or other officer. Caution or prohibit bank against entering into any particular transaction(s). Require bank to make changes in management. Appoint its officers to observe the manner in which affairs of bank/its branches/office are conducted. Winding up the bank through high court. Apply to Federal Government for an order of moratorium in respect of a bank and to prepare scheme of reconstruction or amalgamation. Impose penalties including civil money penalties.

The State Bank has framed Prudential Regulations for banks and Rules of Business for DFIs that present a prudent operating framework within which banks and DFIs are expected to conduct their business in a safe and sound manner taking into account the risks associated with their activities. These regulations incorporate the spirit and essence of BIS regulations and are constantly watched for possible improvement so that their enforcement yields the best results to promote the objectives of supervision.

The State Bank is empowered to determine Statutory Liquidity and Cash Reserve Requirements for banks/DFIs. Presently the Cash Reserve Requirement is 5% on weekly average basis subject to daily STATE BANK OF PAKISTAN 20

minimum of 4% of Time & Demand Liabilities. In addition to that banks are required to maintain Statutory Liquidity Requirement (SLR) @ 15% of their Time & Demand Liabilities. Similarly, DFIs are required to maintain SLR of 14% and Cash Reserve of 1% of their specified liabilities. Additionally, The Banking Companies Ordinance had been amended in 1997 which empowers the State Bank to prescribe capital requirements for banks. In exercise of these powers the State Bank has laid down Minimum Capital Requirements for banks based on Basle capital structure. The banks have to maintain a Capital Adequacy Ratio in a way that their capital and unencumbered general reserves are, at the minimum, 8% of their risk weighted assets, and effective from 1st January, 2003 banks are required to maintain a minimum paid up capital level of Rs.1 Billion.

While the off-site monitoring aspect is looked after by the State Bank of Pakistan’s Banking Supervision Department the responsibility for the on-site examination of the banking system in Pakistan lies on the shoulders of the Banking Inspection Department. This has been designed to ensure that institutions operate in a safe and sound manner. The focus of the supervisory efforts by the State Bank of Pakistan is on the health and stability of the banking system in Pakistan.

Off-Site Monitoring at Banking Sector Development: The objectives of off-site surveillance over the banking system are to monitor the condition of individual banks, as well as condition within the banking system; to provide early identification of problems so that corrective action can be effected; and to target scarce on-site supervisory resources to areas or activities of greater risk. STATE BANK OF PAKISTAN 21

Off-site surveillance system revolves around receipt, review and analysis of periodic financial statements and returns submitted to the State Bank. The off-site analysis facilitate monitoring of each bank’s performance and its observance of supervisory requirements over time, so that problems may be identified as soon as these emerge. The process thus assists in making the most effective use of scarce on-site inspection resources. The system also works as an early warning to identify those areas, which reflect high probability of financial difficulties so that policies and corrective actions can be designed and implemented accordingly.

In consonance with the responsibilities envisaged under the Core Principles recommended by the Basle Committee, the On-Site examination capabilities at the State Bank of Pakistan have been substantially augmented to bring them at par with the expected international standards. While regulations have existed for some time aimed at convergence of the essential industry indicators to the globally accepted criteria, the bank in all its assessments has adopted a risk-based approach to evaluations. Periodic On-Site examinations of the financial condition of institutions, falling within SBP’s jurisdictions, remains the most effective supervisory tool, which support Banking Supervision Departments in maintaining a proactive approach in discharge of the statutory responsibilities.

The State Bank of Pakistan’s policy for frequency of inspection of banks and DFIs is designed to provide flexibility in scheduling inspections consistent with the need to maintain safety and soundness. The policy provides a framework within which supervisory ratings, surveillance

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and financial monitoring results, and other appropriate indicators of banks soundness, are to be considered in carrying out the State Bank of Pakistan’s fundamental policy of subjecting each bank and non-bank financial institution under its supervision to a periodic on-site inspection.

With a view to streamline the approach and the underlying procedures for effective and efficient banking supervision State Bank of Pakistan has embarked upon a major overhauling of its own capabilities so as to bring them at par with international practices. This entailed hiring of services of consultants of world repute (M/s. Arthur Andersen) under the FSID Project of the World Bank. These Consultants have compiled extensive on-site and off-site manuals. Besides qualified and professional trained human resource have been recruited and rigorous theoretical and hands-on training has been provided to them. With the shift bank in supervisory rating focus from in ‘compliance conformity oriented’ with to ‘Risk Assessment Approach’ State Bank of Pakistan has developed a uniform system international standards/benchmarks. Now each bank is appraised under the CAMELSS/CAELS Rating System.

In order to portray a legitimate and true financial condition of a bank the off-site surveillance system and the on-site inspection functions of banking supervision work extremely close together. As a result of these close coordination bank ratings reflects as accurately as possible, the true financial condition of a bank and the banking system as a whole.

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MINIMUM CAPITAL REQUIREMENTS: Banks are aware that Section 13 of the Banking Companies Ordinance, 1962 relating to requirement of minimum paid up capital and reserves has recently been modified through the Banking Companies (Second Amendment) Ordinance, 1997 (copy enclosed). The modified law interlay states that no banking company shall commence business unless it has a minimum paid up capital as may be determined by the State Bank or carry on business unless the aggregate of its capital and unencumbered general reserves so of such minimum value within such period as may be determined and notified by the State Bank from time to time. Accordingly, in exercise of the powers vested under the above provisions of law it has since been decided that effective from December 31, 1997 all banks shall maintain minimum capital as laid down in the enclosed Annexure.

INSTRUCTIONS ON CALCULATION OF MINIMUM CAPITAL Requirements Based On Risk Weighted Assets

1.

No banking company incorporated in Pakistan shall commence and carry on banking business unless it has a minimum paid up capital or Rs 500 million. Similarly, no banking company incorporated outside Pakistan shall commence and carry on banking business in Pakistan unless it has a minimum paid up capital of the value of Rs 500 million.

2. Provided that where a banking company already in existence is found short of the minimum required paid up capital on 31st December, 1997, it shall meet shortfall by 31st December, 1998. STATE BANK OF PAKISTAN 24

3. Effective from where the capital and unencumbered general reserves maintained by a banking company are found short of the minimum required capital and unencumbered general reserves (MCR) on December 31st, 1997, the State Bank shall, on request from the banking company concerned, consider grant of extension in time for meeting the required capital adequacy. 4. The capital and unencumbered general reserves for the purposes of the minimum requirement of 8% of risk weighted assets shall mean and include:A) Equity: i. ii. iii. iv. v. Fully paid up capital / capital deposited with SBP* Balance in share premium account Reserve for Bonus Shares General Reserves as disclosed on the balance-sheet Unappropriate/unremitted* profits (net of accumulated losses, if any) IN THE CASE OF FOREIGN BANKS OPERATING IN PAKINSTAN. A. Supplementary Capital: i. ii. iii. iv. General Provisions or Reserves for loan losses Revaluation Reserves Undisclosed Reserves Subordinate debt. computation of the amount of Equity and

1. The

Supplementary Capital shall be subject to the following limitations and restrictions:-

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i.

The

sum

total

of

the

different

components

of

the

Supplementary Capital will be limited to the sum total of the various components of the Equity. ii. While calculating the amount of equity the followings shall be deducted: Book value of intangible assets such as goodwill, etc. Shortfall in provisions required against classified assets

irrespective of any relaxation allowed by the State Bank.

NIBAF Files and Information’s

Location National Institute of Banking and Finance is also referred as State Bank Training Institute (SBTI) NIBAF Islamabad .It is situated at Sector H –8 Pittras Bukahri Road near Zero Point. Government offices at Islamabad are situated at a distance of 6/7 kilometers from the institute. The sector H is famous for educational and vocational institutions and offices. The institute provides the residential facilities equivalent to four-star hotel. The Public transport is easily available while other facilities like telephone, postal services; hospitals are located quite close to institute. Facilities Available All major training activities /courses and State Bank ’s Training Programmes are held at NIBAF. The institute has a modern complex constructed on a plot of land measuring 2.5 acres, having academic and hostel blocks.

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The Academic block of the institute is well equipped with all latest state of all audio visual aids & a computer laboratory. The spacious training rooms, Auditorium, and Syndicate rooms are suitable for any type of training program /courses. The library of the institute contains a rich collection of books, banking journals and periodicals besides providing a client and congenial atmosphere for all the participants to get benefit of learning. The Publication Wing housed in the Academic Block provides all sort of published material which includes course books, reading material, photocopies, arranging of training material, hand books of training and other publications of NIBAF to the trainees, participants, trainers, training managers and other senior officials from SBP and other institutions as well. It is also equipped with modern, electronic equipment for scanning, typing, word processing of documents, Internet exploring etc. The hostel block of NIBAF consists of 120 single occupancy rooms and 4 executives suits that are fully furnished having all facilities of fourstar hotel providing homely environment. There is also a wellmaintained cafeteria supported by a modern commercial kitchen, providing catering services to trainers & participants. Indoor games and other recreational facilities like TV, VCR is available in the lounge of the block. To promote healthy competition tournaments are held for each course participants. Sight seeing trips are also arranged to visit hill stations like Murree, Nathiagalli, Taxilla, Bhourbon, Kaghan, Naran, etc on weekends /holidays. Such activities are part of the recreational program arranged for participants to enjoy their leisure hours and to keep them healthy and fit after long training. NIBAF is now regarded as an institution of excellence in the area of training of Banking & Finance in Pakistan. The top international

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institutions like IMF; Bank Negra Malaysia has appreciated NIBAF for its arrangements. Functional and Organizational Set Up: The functional and organizational set up of NIBAF has undergone a quantum change in order to utilize the existing facilities of NIBAF at optimum level. Director General NIBAF is the overall in charge of the Academic Side of the Institute .He is assisted by two Directors one is looking after Academic and the other Logistics side. The institute now has it own in house capacity to organize the design, development and review of relevant training programmed for both domestic and foreign institutions in the field of banking and finance. The institute has conducted a number of training programmes, which are

State Bank Officers Training (SBOT) (For new inductees at OG II level) Joint Directors Training Program Research Officers Training Program International Courses on Central and Commercial banking

• • •

Institutional Arrangements:
The Bank has made contractual arrangements with other partners’ institutions like Institute of Bankers Pakistan (IBP) and Pakistan Institute of Development Economics (PIDE) for conduct training courses at NIBAF and Training Department Karachi. The arrangements are meant for external trainers to be engaged through these institutions as well as for training design and delivery of different modules on

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28

Pakistan economy, Foreign Exchange, Macro Finance, Commercial Banking etc.

Account Department:
A Brief Of The Working Of The accounts Department Functions of the Department:
• • •

Issuance of notes and coins in Pakistan Bankers of the Federal and Provincial Governments. Bankers of the commercial banks and custodian of Custodian of Pakistan’s reserves of approved foreign Sale purchase of foreign currencies. Preparation of Balance Sheet and P/L account of the Preparation of annual budget of the bank. Issuance of weekly statement of affairs of Banking Management of Provident/General Provident Fund Management of Prize bonds and saving schemes of Functional control of the offices of the bank.

their cash reserves.

exchange.
• •

bank.
• •

and Issue departments.

balances.

the government.

The Accounts Department is responsible to perform and manage the functions detailed on pre-page. It controls the working of the Offices under the provisions of Issue and Banking Department Manuals. Issue Department deals with

STATE BANK OF PAKISTAN

29

management

of

currency

operations,

which

includes

designing, printing of currency notes and its circulation. Banking Department relates to the operation of offices of the Bank, maintenance of Federal and Provincial Government Accounts, booking of financial transactions in the books of accounts of Central Directorate and issue of weekly Statement of Affairs as required under the provisions of SBP Act, 1956, preparation of Profit and Loss Account and Balance Sheet on yearly basis, formulation of budget estimates of revenue and capital expenditure. Management of General Provident Fund and Provident Fund balances of all employees of the Bank. Operational control of working of offices by framing policies and procedures under the provisions of Banking/Issue Department Manuals, Sale/ purchase of foreign currencies, maintenance of foreign reserves of the country. Accounts Department is also responsible for management of Prize Bonds and Savings Schemes of the Government of Pakistan. To achieve the above objectives, the Department has been divided into six divisions as detailed below:• • • • •

Currency Division International Division Accounts Division Audit Division Support Services Division

Prize Bonds & Savings Scheme Division: Brief Functions Of The Divisions STATE BANK OF PAKISTAN 30

1. CURRENCY DIVISION

Arrange currency operation in the country which relates to designing of currency notes, its printing through Pakistan Security Printing Corporation and its issue through our offices of issue i.e. Karachi, Lahore, Peshawar and Quetta.

Regulate the withdrawal of old notes from circulation and maintenance of its account etc. Issuance of weekly statement of Affairs and preparation of Balance Sheet of Issue Department. Arrange purchase of confiscated Gold from Government

Departments. Make arrangements for opening of new offices of State Bank of Pakistan. INTERNATIONAL DIVISON:This Division is responsible for investment of Bank’s funds in foreign as well as local currencies. Sale/Purchase of approved foreign currency through the authorised dealers. Realisation of interest income on our investments in foreign and domestic securities and maintenance of their respective record. Placement of Bank’s Foreign Reserve as per decision of Investment Committee in term deposits with of Payments to Commercial banks of International repute. Dealing with IMF transactions in respect of acquisition/allocatio tranches/Purchase/Repurchases, SDR’s/receiptof IMF. Making

payments to parties/executing agencies under various etc., by the International Donor Agencies viz. IBRD,ADB etc. Issue of payment guarantees in respect of foreign currency loans

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31

negotiated by the Federal Government/Provincial Government, autonomous bodies and approved organization on the strength of counter guarantee from the Ministry of Finance, Government of Pakistan, and Allocations/distributions of Government’s Letters of Credit of Pakistani Commercial Banks as per ratio prescribed by Ministry of Finance. Receipt/payments under ACU arrangements and settlement thereof with ACU Secretariat, Iran. ACCOUNTS DIVISION (Accounts (Main) Section):
• • •

Maintenance of Accounts of Central Directorate. Consolidation of accounts received from offices. Preparation of weekly statement of Affairs for issuance in the Government Gazette as provided in the State Bank of Pakistan Act,1956.

Preparation of Profit and Loss Account and Balance Sheet (Banking Department) as on 30th June each year. Preparation of Annual Budget of the Bank for Revenue and Capital expenditure under different heads of Charges/Dead stock Accounts.

Reconciliation of State Bank of Pakistan General Account relating to Inter-Office transactions.

Monitoring of contraction and expansion of Currency operations. Government Accounts Section

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32

Maintenance of Federal & Provincial Government Account on the basis of receipt and payments effected at our offices and National Bank of Pakistan.

Preparation of daily balance position and communication thereof to the Federal Finance Division and Provincial Finance Departments.

Central and Provincial Zakat Funds Account are also maintained on the basis of financial and lunar year.

Monitoring of debtor balances of Provincial Governments

AUDIT DIVISION:

Responsible for internal audit control on the expenditure of the Bank incurred in Central Directorate as also the expenditure incurred in various offices of the Bank on monthly basis.

Monitor the expenditure budgetary limit under various heads of charges Account by the offices of the Bank and Departments of Central Directorate.

Implementation on the audit inspection reports submitted by Audit Department after annual audit of Offices and Departments of Central Directorate.

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33

SUPPORT SERVICES DIVISION

Policy Regulation Section

&

Framing rules and regulations relating to the working of Offices, interpretation of provisions of Banking Department and Issue Department Manuals.

• •

Amendment in Banking Department Manual. Fraud Forgery cases, Matters relating to Government Audit Report on working of Office and meetings of Public Accounts Committee.

Specimen signature of Officers, printing and circulation to the Offices.

Administration Section:

Internal administrative control of the Department, maintenance of Petty Cash/ Imprest Account, deals with the cases of Payment Unit, Receipt and supply of Stationery articles.

Maintenance of leave record of Officers/Staff of the Department.

Funds Section:

Management of PF/GPF balances and retirement benefits of the retired employees of the Bank. Maintenance of BF Account and payment thereof. STATE BANK OF PAKISTAN 34

Payment of GTA premia to State Life Insurance Corporation, death claim in respect of GTA, Private insurance policies financed from PF/GPF.

Stationery Management Section:

Procurement of Stationery articles, Forms, Registers and papers etc. on the basis of annual indent received from Offices and Departments of Central Directorate, its costing, billing and dealing with other affiliated work.

Arrange its supply to outstation Offices in annual basis and Offices in Karachi and Departments of Central Directorate on monthly basis.

Special Cell (Menual):

Looking after the work of updating of Banking Department Manual etc. i. (Central Accounts {Remittance/ Audit & Record} Sections)

Deal with the adjustment of Remittance transactions under the Remittance facilities scheme under section17 (7) of SBP Act1956.

Drawing and encashment received from Treasury Agencies, SBP Offices and National Bank of Pakistan-Scrutiny of advises, sorting of paid instruments and application Forms etc. and deal with other affiliated work.

Payment of freight/ commission to Railway authorities in connection with the dispatch of treasure etc.

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35

Payment

of

expenditure

incurred

in

connection

with

the

dispatch/receipt of remittance of treasury by the N.B.P and payment of commission to them on Intra-Provincial Government drafts/drawings and encashment. Maintenance of Record of Intra Provincial NBP / SBP drafts. PRIZE BONDS AND SAVINGS SCHEMES DIVISION:

Printing of Prize Bonds through Pakistan Security Printing Corporation. Its distribution to our offices through respective Public Debt Offices. Management and control under the provisions of Prize Bonds Rules/Procedure of sale/ encashment of Prize Bonds. Dealing with the cases of frauds and forgeries in the Prize Bonds Scheme. Preparation of consolidated position of sales/ encashment of Prize Bonds on fortnightly basis or such intervals as required by the Central Directorate of National Savings, Government of Pakistan.

Making arrangements for prize bonds draws as per schedule proposed by the Central Directorate of National Savings.

Management and control of Saving Schemes of the Government effected at our offices and branches of Commercial Banks.

Economic Department:
Economic Policy Department is primarily engaged in eight

fundamental activities. These include:

STATE BANK OF PAKISTAN

36

• • • • • • • •

Preparation of Monetary Policy Statement; Preparation of Monetary Surveys; Preparation of Annual Credit Plan; Consultations with the IMF; Computation of REER index; Computation of domestic public debt, Analysis of financial markets; and Empirical research papers.

The Department also deals with external sector issues and references on money, credit and exchange rates management. For operational purposes, the Department has been divided into the following four groups: Monetary Survey & IMF Consultations Group: This group is responsible for preparation of Monetary Survey, details of Government budgetary borrowings, commodity operations, bank credit to private sector, public sector enterprises including (major autonomous bodies) and other items separately for SBP and Scheduled banks. In addition to this, the group is also assigned the task of preparation of material for IMF Consultations, World Bank and Ministry of Finance, monitoring of Performance Criteria and disposal of queries and references. Money, Credit & Prices Group The group is responsible for preparing credit plans, working papers for NCCC meetings and performs Secretariat work for NCCC. Other assignments include credit targeting, credit monitoring, banking issues and reforms, Inflation watch, analysis of lending rates, large scale

STATE BANK OF PAKISTAN

37

manufacturing developments & disposal of references on credit allocation. The group also prepares periodic reports/reviews on Credit assessment of Private sector, credit assessment of govt. sector, analysis of tax revenue, NSS rates, domestic debt and impact analysis of various policy initiatives. The group also intends to initiate work on micro credit and SMEs. Financial Market & Exchange Rates Group This group is responsible to keep constant watch and analyze developments in the financial markets. It prepares and supplies variety of background information for circulation in MERPC meetings. The group prepares analytical reports, and working papers relevant to financial markets on issues as identified by the MERPC. Further, it is also assigned the task of dealing with the matters relating to exchange rate and foreign exchange reserves. The other assignments include supplying of information/data relating to Exchange Rate/Forex Reserves/FCAs to World Bank. It also prepares NEER and REER Indices for submission to Governor. Besides, it deals with references/queries relating to financial markets and exchange rate issues. External Sector Group: The group deals with the matters relating to Pakistan’s relationship with IFIs like IMF, IBRD, ADB along with the issues of WTO and SAARCFINANCE. Their policies and likely impact on Pakistan is also evaluated. In addition, it prepares briefs on international trade, payments & economic issues, meant for Pakistan’s delegations attending the IMF/World Bank meetings and other International fora e.g. of World various Economic Forum, Commonwealth received Finance from Ministers’ meetings. It also prepares comments on Fund Documents, and replies references/queries international

STATE BANK OF PAKISTAN

38

organizations/agencies etc. Further, the group is also assigned the task of dealing with the matters relating to foreign trade, balance of payments, workers remittances, and foreign investment, etc. and impact of policy changes. Foreign Exchange Policy: Foreign Exchange Department (FED), one of the core departments of the State Bank, is working to manage/monitor the foreign exchange activities in the country. Foreign exchange business in Pakistan is regulated under Foreign Exchange Regulations Act, 1947(FER Act, 1947). There exist a Foreign Exchange Manual for guidance of Authorised Dealers (ADs), authorised by FED to carry out foreign exchange business, and general public including local/foreign investors. The change in instructions/policies/procedures is brought through F.E. Circulars/Circular letters. Mostly, there are general instructions. There are, however, certain areas for which FED's approval is necessary, 2. The nature of the work of the Department is of policy as well as operational for which the head office in Karachi is supported by 16 offices set up in major cities of Pakistan. The Department is divided into four divisions namely, Policy, Investment, General and Operations. 3. Policy Division is responsible for issuance of F.E.Circulars/Circular Letters and revision of FER Act, 1947/Foreign Exchange Manual. Broadly, it deals with the following matters:• • •

Foreign Currency Accounts Scheme Rates of forward cover fee-FCAs. Exchange Risk Cover Fee on Medium & Long Term Institutional SWAP Deposits under FE.45 of 1985. STATE BANK OF PAKISTAN 39

Loans.

• • •

Foreign Exchange Reserve Position. Home Remittances. Policy Follow matters up of regarding inspection commercial reports of and non-

commercial remittances.

Banking

Supervision Departments in foreign exchange matters of the banks.

Courts cases concerning any of above matter. Division liases with the other Government

5. Investment

Department concerned with the investment in Pakistan and corresponds to local as well as foreign investors. In short, the

Opening of foreign currency accounts with banks in Pakistan under new scheme:
Under the existing instructions, the Authorised Dealers (Bank

authorised to deal in foreign exchange) without the prior approval of the state Bank, open foreign currency accounts in Pakistan of Pakistan nationals resident in or outside Pakistan including those having dual nationality. These accounts can also be opened in the joint names of residents and non-residents. Residents firms and resident companies including investment banks and the companies incorporated in Pakistan with foreign share holding are also eligible to open and maintain foreign currency accounts. Charitable Trust, Foundations etc. which are exempt from payment of income tax can also open foreign currency accounts in Pakistan. This facility is also available to all foreign nationals residing abroad, all foreign firms/corporation s other than banks incorporated and operating abroad provided these are owned by persons who are otherwise eligible to open foreign currency accounts. Foreign nationals residing in Pakistan and foreign

STATE BANK OF PAKISTAN

40

firms and companies registered abroad and operating in Pakistan can also open and maintain foreign currency accounts with the Authorized Dealers provided the foreign exchange credited to such accounts does not represent their earnings abroad in respect of business conducted in Pakistan or services rendered by such foreign nationals and firms/companies while in Pakistan. These accounts can be fed by remittances received from abroad as well as cash deposits locally. The Authorized Dealers are free to decide the rate of return on these accounts payable to the depositors. They are also free to recover reasonable bank charges on handling cash transactions in foreign currencies received into or paid out of such accounts. The non-residents are exempted from payment of withholding tax and compulsory deduction of Zakat. Withdrawals from these accounts in the shape of cash currency notes is allowed and account holder is at liberty to make remittances from his account to the extent of his balance in his account. Accounts of diplomatic missions and international organizations etc. The Diplomatic Missions' staff in Pakistan, their Diplomatic Officers and home based members of the Missions' staff in Pakistan, as also all international organizations in Pakistan and their expatriate employees are allowed to open special foreign currency accounts outside the scope of Foreign Currency Accounts Scheme for the purpose of receiving funds from abroad. The diplomatic officers and home based members of the mission's staff in Pakistan and the expatriate employees of International Organizations can withdraw in the shape of foreign currency notes from their foreign currency accounts without any restrictions, However, withdrawal in the shape of cash is not allowed from the

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41

official

accounts

of

diplomatic

missions

and

International

Organizations.

Islamic Baking:
General Information on Islamic Banking Department Islamic Banking Department (IBD) has been created in the State Bank of Pakistan by merging Islamic Economics Division of the Research Department and Islamic Banking Division of the Banking Policy Department. Mr. Pervez Said has joined the Bank as Director (IBD) and Advisor to the Governor on Islamic Banking. IBD will be fully responsible of all matters related to Islamic Banking and Finance. The Director will also be Member/Secretary of the Shariah Board that is being established in the State Bank.

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