STATE BANK OF PAKISTAN

Presented by

Nadia Nazir

Farah Shahid

Allah Rakhio

Fawad Shahid

INTRODUCTION:

The State Bank of Pakistan is the central bank of the country. Usually the starting point for a central bank is a banking system that is already in place - the banking system necessitates the presence of a central bank. But the State Bank of Pakistan (SBP) is unique in the sense that it started its function in a newly born country, where it also had to shoulder responsibilities of developing and rehabilitating a banking system and the economy

Facts and figures:

Central Bank of:  PakistanEstablished: 1947Headquarters: Karachi & IslamabadGovernor: Mr. Shahid Hafiz KardarOfficial website: www.sbp.org.pk

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 & India ,30 percent (750 M gold) for Pakistan and 70 percent for India.

Cont’d

• The losses incurred in the transition to independence were taken from Pakistan's share (a total of 230 million).

• 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.

Issue of Notes

Primary

1(a) PRIMARY FUNCTIONS:

• Sole Authority to Issue Notes• Conduct of Monetary and Credit Policy• Regulation and Supervision of Financial System• Banker's Bank• Lender of Last Resort• Banker to Government

1(b) SECONDARY FUNCTIONS:

• Public Debt Management• Management of• Foreign Exchange• Advisor to Government• Relations with IFIs

2. Non-Tradit ional Functions:

• Development of Financial Institutions• Training Facilities to Bankers • Credit to Priority Sectors• Islamization of Banking System

IMPORTANCE:

• State bank can play a very important role in the economic development of Pakistan because it is responsible for conducting monetary policy in Pakistan. 

•  Monetary policy controls money supply and also determines price level. This inflation control can impact employment in Pakistan and hence it impacts the economic growth in the country.

• Economic development of Pakistan is also possible because state bank also maintains the stability of the national currency and improves trade balance by impacting positively on exports.

• Safeguard the soundness of the financial system– Central bank has got the authority over all the banks working

in the economy.– Banking Companies Ordinance– Supervise the activities of Banks

• 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

Regulation and Supervision of the Financial System:

Conduct of Monetary and Credit Policy

• Monetary Policy ,Control of Credit and Controlling Money Supply are the same things.

• Conduct these policies in a manner that ensures monetary stability.

• Federal Government's targets for growth and inflation

• Monetary and Fiscal Policies Co-ordination Board (MFPCB).

• availability of credit facilities to its citizens

Objectives

• Full Employment• Price Stability• Increase in Production• Increase in Investment• Economic Development• Stability of Capital Market• Proper Distribution Of Wealth• Exchange Rate Stability• Increase Exports• Improve Standard of Living

Credit Policy-Instruments Used

• Credit Rationing• Open Market Operation• Statutory Liquidity Ratio(SLR)• Cash Reserve Requirement (CRR)• Change in Bank Rate Policy

Credit Control

Quantitative Methods Qualitative Methods

Credit Rationing

• Credit limit for every commercial bank• Decrease money supply? Decrease the

limit• Vice Versa

Open Market Operation

• Selling Govt securities in the open market like Stock Exchange.

• Reduce money supply? Sell securities• If State bank wants to increase the

money supply 5000 millions it purchases the Govt. securities 5000 millions.

Statutory Liquidity Ratio

• Cash, Treasury Bills (T-Bills) or other approved securities.

• SLR isExpressed in the form of % of total time and demand deposits.

• It’s 15 % currently.• Increased SLR will decrease the ability of bank to give

more credit.• Objective

– Control credit by banks– Help banks avoid insolvency– Augment investment in Govt Securities

Cash Reserve Requirement (CRR)

• Percentage of deposits kept with the central bank.

• Presently, banks are required to meet Cash Reserve Requirement (CRR) of 5% on weekly average basis (subject to daily minimum of 4%).

• Objectives– Depsitors can be paid back– Insovency– Money Supply

Change in Bank Rate Policy

• Rate at which central bank gives loans to commercial banks.

• In case of inflation SB increases the rate which results in an increase in interest rate on loans given by banks.

• If the central bank wants to decrease money supply by 5% then it would increase the rate by 5%.

Qualitative Methods

• Moral Suasion– Loans should not be given to unproductive

fields• Consumer Credit Control

– Increase Money Supply? Waive restrictions• Direct Action• Publicity

RECENT NEWS:

• Paid up capital– 10 BILLION instead of 2 billion (400% increase)– 6 billion for any foreign bank wishing to commence business with more

than 5 branches• Monetary Policy

• The State Bank of Pakistan (SBP) announced the monetary policy for the next two months and according to expectations, decided to maintain the interest rate of 14 per cent.

• T-Bill– The central bank plans to sell Rs60 billion worth of Pakistan Investment

Bonds (PIB) and Rs1,150 billion worth of treasury bills (T-bills to offset fiscal deficit.

LIMITATIONS:

T-Bills

• Treasury Bills, or more commonly known as T-Bills, are short term government debt instruments, issued at a discount to par and mature within 1 year.  The largest purchase volumes come from primary dealers and other large banking or financial institutions.

• State Bank facilitates T-Bill sale and puchase.

T-Bill Yield Example

• A T-bill is sold to bank X at Rs.98 with a term to maturity of 90 days having par value of 100. What is the yield on the T-Bill.

• Yield=(100-98/100)*(360/90)*100• =8%