State Bank of PakistanBy:By:

Faiza ismailFaiza ismailMatium HanifMatium HanifFatima BaberFatima Baber

• State Bank of Pakistan is the central bank of Pakistan.

• Its constitution, as originally laid down in the State Bank of Pakistan Order1948, remained basically unchanged until January 1, 1974

• The bank was nationalized then

• The State Bank of Pakistan Act 1956 with subsequent amendments,forms the basis of its operations today

Background• Reserve Bank of India

• Distribution of reserves between India and Pakistan

• On May, 1948 Muhammad Ali Jinnah took steps to establish the State Bank of Pakistan.

• These were implemented in June1948.

• The State Bank of Pakistan commenced operation under the “State Bank of Pakistan Order 1948”on July 1, 1948.

Establishment History• Before independence on 14 August 1947, during British

colonial regime the Reserve Bank of India was the central bank for both India and Pakistan.

• On 30 December 1948 the British Government's commission distributed the Reserve Bank of India's reserves between Pakistan and India -30 percent for Pakistan and 70 percent for India.

• In May, 1948 Muhammad Ali Jinnah (Founder of Pakistan) took steps to establish the State Bank of Pakistan immediately. These were implemented in June 1948, and the State Bank of Pakistan commenced operation on July 1, 1948

• Under the State Bank of Pakistan Order 1948, the state bank of Pakistan 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".

• When the State Bank of Pakistan Act 1956 was introduced. It required the state 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"

Facts & Figures• Headquarters: Karachi Islamabad• Offices: 16 all over Pakistan• Governor: Mr. Ashraf Mahmood Wathra

Acting Governor, State Bank of Pakistan Jan 31,2014• The Central Board consists of 9 members:• the Governor (who is Chairman)• Secretary Finance Division, Government of Pakistan• Seven Directors• At the time of its establishment the “State

Bank of Pakistan” was semi-government• Its 51% shares were held by the government and 49%

by the general public.• Paid up capital at the time of Nationalization in 1974

was Rs. 30 Million.

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CENTRAL BOARD OF DIRECTORSCentral Board consists:

1. One Governor2. One Secretary Finance Division, Government of Pakistan3. Seven Directors

Governor, Deputy Governor and seven directors arenominated by Federal Government.

Directors are appointed for terms of up to three years.

Central Board's Meetings:Atleast six times a year and atleast once every quarter

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Primary FunctionPrimary Function

1.1. Issuance of Notes:Issuance of Notes:- - Sole Authority to Issue NotesSole Authority to Issue Notes- Follows Minimum Reserve System to Issue Note- Follows Minimum Reserve System to Issue Note- Minimum amount of reserve for issue of notes - Minimum amount of reserve for issue of notes

is Rs.1200 millionis Rs.1200 million- Two departments:- Two departments:

The Issue departmantThe Issue departmant The Banking departmentThe Banking department

Their Accounts separately published inTheir Accounts separately published in The Weekly The Weekly Statement of AffairsStatement of Affairs

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Approved Forms of Foreign ExchangedApproved Forms of Foreign ExchangedApproved Foreign Exchange, held as an asset of The Issue

Department must be in one of following forms:

a) Balance standing to the credit of SBP with principal currency authority of a country whose currency is an approved foreign exchange

b) Bills of exchange having - Two or more good signatures, - A maturity not exceeding 180 days- Payable at any place in a country whose currency is

approved foreign exchangec) Securities of a government with unexpired currency of not

more than 5 yrs and payable in a currency which is approved foreign exchange

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2. Conduct of Monetary and Credit 2. Conduct of Monetary and Credit PoliciesPolicies

Conducted by SB to regulate and control the volume of Conducted by SB to regulate and control the volume of money and credit supply in the country in order to money and credit supply in the country in order to achieve sfollowing objectives:achieve sfollowing objectives:

• Full EmploymentFull Employment• Price StabilityPrice Stability• Increase in Production and InvestmentIncrease in Production and Investment• Economic DevelopmentEconomic Development• Exchange Rate StabilityExchange Rate Stability• Increase ExportsIncrease Exports• Enhance Standard of LivingEnhance Standard of Living

3. Prudential Regulations3. Prudential RegulationsState Bank has issued Prudential RegulationsState Bank has issued Prudential Regulations• To safeguard the interest of depositorsTo safeguard the interest of depositors• To ensure the safety and soundness of the banksTo ensure the safety and soundness of the banks

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Customization of Regulations into following areas1. Corporate and Commercial Banking2. SME Financing3. Consumer Financing4. Micro Financing

Prudential Regulations for Prudential Regulations for Corporate and Commercial BankingCorporate and Commercial Banking

It focuses on • Credit Risk Management, • Corporate Governance, • Anti Money Laundering and Operations

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Prudential Regulations for Micro Finance Banks

• No Microfinance Bank/Institutions (MFBs/MFIs) shall commence business unless it has a minimum paid-up capital. It shall also maintain equity equivalent to at least 15% of its risk-weighted assets

• The MFB/MFI shall not extend loans exceeding

Rs.100,000/- to a single borrower

4. Bankers of Last resort– Provide loans and discount facility to bank– Prevent banks from liquidity– Mostly provide short term loans to meet

temporary requirements of funds

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Prudential Regulations for Consumer FinancingPrudential Regulations for Consumer Financing• Consumer Financing cover any financing allowed to individuals for Consumer Financing cover any financing allowed to individuals for

meeting their personal, family or household needsmeeting their personal, family or household needs• It includes credit cards, Auto Loans, Housing Finance and other It includes credit cards, Auto Loans, Housing Finance and other

consumer financingconsumer financing

Prudential Regulations for SME FinancingPrudential Regulations for SME Financing

The Prudential Regulations for SMEs facilitate & encourage the flow of The Prudential Regulations for SMEs facilitate & encourage the flow of bank credit to the SME sectorbank credit to the SME sector

Its features are; Its features are; • Shift from collateral based lending to cash flow based lendingShift from collateral based lending to cash flow based lending• Maximum limit of clean financing against personal guarantees Maximum limit of clean financing against personal guarantees

increased to Rs. 3 million for SMEs.increased to Rs. 3 million for SMEs.

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5. Bankers to Government:SBP provides following services to the government:BP provides following services to the government:

– Accept cash deposits, checks and drafts by the Accept cash deposits, checks and drafts by the governmentgovernment

– Federal & provisional governments keeps their Federal & provisional governments keeps their deposits with SBP free of interestdeposits with SBP free of interest

– Federal & provisional governments obtain advances Federal & provisional governments obtain advances from SBPfrom SBP

– SBP does not charge any commissionSBP does not charge any commission– SBP purchase gold, silver, securities etc on behalf of SBP purchase gold, silver, securities etc on behalf of

governmentgovernment

6. Bankers’ bank6. Bankers’ bankServices to the scheduled banksServices to the scheduled bankso Excess Reserves kept with SBPExcess Reserves kept with SBPo Remittances FacilitiesRemittances Facilitieso Interbank PaymentsInterbank Payments

Secondary functions• Public debt management– SBP is responsible for public debt (act 1956)– Responsible for payment of interest to public

debt

• Management of foreign exchange1. Exchange Rate Regime

– SBP is responsible for foreign exchange (act 1947)

2. Development of Forex Market- SBP prevent country currency from wide fluctuations

Secondary functions• Advisor to Government

– Advise on financial and economic matters particularly on monitory policy

– Advise on loan operations– Participate in economic policy making– Monitory and fiscal policy coordination board (MFPCB)– MFPCB coordinate fiscal, monitory, trade policy &

exchange rate policy

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Non- Traditional Functions1. Developmen t of the Banking System

Promotion of Micro Finance:To expand at grass root level and to reduce

poverty allevation , SBP facilitatedKhushali Bank - Set up in Public sectorFirst Micro Finance Bank (FMFB) - in Private

Sector

Promotion of Islamic BankingConferences, workshops, seminars and presentations are being conducted to create

public awareness

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2. Training Facilities to Bankers• Training Department - Scholarships for PhDs and

courses on banking• NIBAF - Provides special training to bankers on

Islamic Banking• SEANZA Courses• Training for Rural Finance• Library Services

3. Credit to Priority Sectors

• Credit For Agriculture• Export Finance Scheme

• To engage in trade or otherwise have a direct interest in any commercial, industrial, or other undertaking.

• To purchase its own shares or the shares of any other bank or company or grant advances or loans upon security of any such shares

• To advance money on the mortgages or on the security of immovable property or documents of titles relating thereto

Functions that the SBP can not undertake

• To become the owner of any immovable property except where ownership is necessary for the use of the bank

• To make unsecured advances or loans

• To draw or accept bills payable otherwise than on demand

• To allow interest on deposits in current account

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Minimum Paid up Capital

• The minimum Paid up Capital requirements for all locally incorporated banks

• Raised to Rs. 23 billion (net of losses) to be achieved in a phased manner as under:

Controller of credit

what is credit control?

The state bank is the guardian of money market. It is responsible to regulate the monetary and credit

system of the country in such a manner that ensures monetary stability in the economy of the country. The government has given it vast powers to regulate the

volume and direction of bank loans.

Monetary policy

• An important function of the state bank of Pakistan as a controller of credit is to implement the government’s monetary policy.

• monetary policy aims to control the cost of credit i.e. the rate of interest to be paid.

The objectives of Credit Control

• Regulation of Money supply• To stabilize interest rates• To increase investment• To increase employment

opportunities• Price control

Methods of Credit Control

Quantitative controls• Bank rate policy• Open market operation(OMO)• Variation in Reserve Requirement • Credit rationing

Qualitative controls• Change in margin requirement • Regulation of consumers credit• Moral persuasion• Publicity• Direct action

Quantitative Controls-Bank rate policy

• Rate at which Bank rediscounts bills of exchange

• The rate of interest at which central bank advances loans to commercial banks.

• It directly affects the rate of interest charged by commercial banks, which in turn affects the volume of loans.

• To increase money supply the interest rate is lowered.

• Similarly rate is lowered when it required to reduce the money supply.

Bank rate is effective if:

• When the financial market is well-organized.

• The economic structure of the country is flexible to the extent that the procedure should benefit wages, rents, commerce and production.

Qaulitative controls-Open market operations

• Sale and purchase of government securities in the money market by the central bank is called open market operations.

• When it sales securities, the amount of cash with the people and the banks is reduced. Then with less amount of cash , the commercial banks have less lending power. In this way the money in circulation is reduced.

• If the central bank purchases securities, it meant it is paying out cash. The result is that money supply increases. Banks sell securities to the central bank and their cash reserves increase. They are in position to expand credit.

• Thus open market operations OMO is a tool in the hands of central bank to regulate the currency circulation and credit policies of other banks.

Qaulitative Controls- Variation in Reserve Requirement

• The central bank by changing the reserve requirement can also control credit money.

• Every member company keeps a percentage of its deposits with the central bank.

• Whenever, the central bank desires to decrease the money supply, it raises the reserve ratio. In this way, the other banks are left with lesser amount to lend.

• If the central bank feels that money supply should be expanded, it lowers the reserve requirement.

Qualitative Controls- Rationing Credit rationing• Sometimes the central banks fixes the limit

up to which it can give loans to its member banks

Change in Margin Requirement:• Whenever a bank extends loan against a

security, it keeps a margin i.e. it gives less amount that the value of security.

• When the central bank wants to reduce the money supply, it asks the member banks to increase margin requirement. In this way amount of loans decreases.

Qualitative controls- Moral Persuasion

• Moral Persuasion• Whenever a bank extends loan against a security, it

keeps a margin i.e. it gives less amount that value of security.

• When the central bank wants to reduce the money supply, it asks the member banks to increase margin requirement. In this way, amount of loans decreases.

Qualitative controls-publicity

• Central bank undertakes publicity about its policies. This also helps to make other banks realize the monetary needs of the country. State bank of Pakistan issues weekly statement on money and banking position.

Qualitative controls-direct action

As a last resort, if some bank refuses to act in accordance with the policy of central bank, it takes direct action against the bank.

It can impose fine and penalty and don’t accommodate such a bank.

CASE A: For example if SBP says to maintain 10% reserve ratio

ASSETS LIABILITITES

Reserves 10 Deposits 100

Loans 90 Equity 10

Security 10

Total Assets 110 Total Equity and Liability 110

SBP thinks that there should be more credit in the market meaning more liquid then it will reduce the reserve requirement from 10% to 8% so that more loans are given out as earning assets

ASSETS LIABILITITES

Reserves 8 Deposits 100

Loans 92 Equity 10

Security 10

Total Assets 110 Total Equity and Liability 110

• CASE B: Example if SBP thinks that there is excess cash available in the economy then it will sell T bills, banks will purchase them and money will be transferred to SBP. In this way monetary tightening takes place. On the other hand if SBP wants to increase money supply, it will purchase those T bills from banks.

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CONCLUSION

• State Bank of Pakistan is not a Profit Hunting Institution. Profit is its secondary objective. Its Primary function is to stimulate economicgrowth of the Country

• It reveals complete Transparency, &Prudence in Nations Economy

• So it clearly Justifies the Need &Importance of The State Bank of Pakistan .