Financial sector

Contents: Bank: formal definition Central bank: definition Function of state bank of Pakistan Role of state bank of Pakistan in economic development Commercial banking in Pakistan Other financial institutions PICIC, IDPB, ADBP, ICP, SBFC, HPFC, NDFCEFP, BEL, NIT

FORMAL DEFINITION OF BANK:

Bank is an institution which revives money from one party and lends to another party. OR Bank is a financial institution which deals in other peoples money. OR A corporation empowered to deal with cash, domestic and foreign, and to receive the deposits of money and to loan those monies to third parties. We can also say that. An organization, usually a corporation, chartered by a state or federal government, which does most or all of the following: receives demand deposits and time deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and issues drafts and cashier's checks. In other words, An establishment authorized by a government to accept deposits, pay interest, clear checks, make loans, act as an intermediary in financial transactions, and provide other financial services to its customers. Bank Origin: There are different views about origin of the word Bank. According to some people the word Bank is derived from the word Bancus which means a Bench. They argue their point by this transacted their business of money exchange on

the benches. If the business of any businessman failed, his bench was destroyed by the people. Due to this practice the word Bankrupt was also used. On the other hand some people say that the world Bank is derived from German time. The word Bank was replaced by the word Bank which is called Banco in Italian language. Central bank: The head, the leader and the supervisor of the banking and monetary system of a country is known as the central bank OR A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. It is the most important of all banks. Its importance increased many folds during past century. It is the symbol of financial sovereignty and stability of the country. It does not work for profit motive. It acts in the national interest and earning of profit is only a secondary consideration. It does not compete with other banks rather it is their supervisor. It follows an active policy for safeguarding the countrys economy. For this purpose, it enjoys vast powers. It must be independent of political influence. Every country of the world has its own central bank. Our central bank is the State Bank of Pakistan. Reserve Bank of India, Bank of England and Federal Reserve System are the central banks of India, England and USA respectively. The primary function of a central bank is to provide the nation's money supply, but more active duties include controlling interest rates and acting as a lender of last resort to the Banking sector during times of financial crisis. It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently. It has the monopoly of note issue.

Functions of State Bank of Pakistan:

The state Bank of Pakistan performs the following functions.

1: Banker to the Government:

As banker to the government, SBP:

a. Receives deposits (taxes, fees, fines, etc.) on behalf of the federal government. b. Disburses payments (tax refunds, interest, etc.) on behalf of the federal government. c. Manages the national debt ---- buys, sells, and cashes government securities and pay interest/profit on them. d. Lends money to the federal government as needed.

2. Banker to the Banks:

As banker to the scheduled banks, SBP: a. Holds deposits made by them as a part of their required reserves5% at this time. b. Lends them funds as a lender of the last resort to meet their pressing needs by discounting their bills of exchange and other

3. Acts as a Clearing House:

Provides facilities, physical and/or electronic, to scheduled banks to clear cheques and other claims drawn against each otherdeposited by their customers for collection--by adding up what they owe or owed them and transfer funds from their accounts at SBP.

4. Supervisor of Banks and other Financial Institutions:

Besides the number of important functions of state bank, one of its function is to supervise the banks and other financial institutions.

5: Issue of Notes
State Bank of Pakistan is the sole authority to issue currency notes in the country except one rupee coin and subsidiary coins which are issued by the government.

6: Framing and operation of monetary policy

The state bank of Pakistan frames and operates the monetary policy. Monetary policy is conducted by the State Bank of Pakistan to regulate and control the volume of money and credit supply in the country in order to achieve specific economic objectives such as price stability, reducing unemployment etc. The main instruments of monetary policy are: Open market operations

Changing the reserve requirements changing the discount rate Regulations and supervision of banks

7: Foreign exchange management:

The state bank of Pakistan acts as a custodian of foreign exchange reserves,manages exchange control and external value of the rupee and acts as the agent of the government in respect of Pakistans membership of the IMF.

8: State Bank as a clearing house:

The state bank of Pakistan acts as a clearing house for thecommercial bank. A clearing house is a place where the representatives of commercial banks meet each day to exchange cheques drawn on each other and then settle the differences owed to each other.

9: Advisor to Government
The State Bank of Pakistan also acts as advisor to government in all financial matters. Since the State Bank of Pakistan is directly involved in the money and foreign exchange markets, it, therefore, tenders advice on all economic matters.

10: Lender of Last resort:

The State Bank of Pakistan is the lender of last resort for the commercial banks. If at any time, the banks are short of cash reserves, the State Bank of Pakistan comes to their rescue. Plenty of more articles on banking are available on this website. Please click on the below mentioned bold, underlined words if you want to read them.

11: Custodian of monetary reserves:

All monetary reserves of a country are kept by central bank. The reserves are in the form of gold or foreign currencies.

12: Controller of foreign exchange:

The whole business of controlling foreign exchange control and financing of international trade is done by the central bank. It is the function of state bank to see that exchange rate does not change undesirably. It prepares the balance of payment of a country.

Role of State Bank of Pakistan in Economic Development

The State Bank of Pakistan (SBP) was established on July 1, 1948. Since its establishment, besides performing its traditional functions, it is undertaking a number of developmental and promotional functions in the best interest of the country. The main developmental and promotionalfunctions in brief are as under

1: Building up a sound banking system:

For rapid economic development of country, the building up a sound financial system is necessary. The immediately after its establishment in 1948, it took up this task. It starts with the establishment of National Bank of Pakistan in 1949.

2: Assistance to specialized financial institutions:

The State Bank of Pakistan is providing financial assistance to specialized financial institutions such as ADBP, IDBP, PICIC etc.

3: Promotion of export finance:

Under the State Bank of Pakistan Finance Scheme, the commercial banks are providing finance to the exporters at the concessional rates. The State Bank of Pakistan is helping the commercial banks in refinance at low rate of interest to the commercial banks.

4: Credit targets:
The State Bank of Pakistan gives targets to commercial banks for providing loans in the field of agricultural, industry, housing every year.

5: Exchange control:
The State Bank of Pakistan exercises full control on the visible and invisible payments coming to and going out of the country.

6: Trading facilities:
The State Bank of Pakistan provides a training scheme for imparting banking knowledge to the employees working in the banks and to those who are to join banks as their profession.

7: Proper interest rate structure & ensuring internal price stability:

In order to encourage investment and promote development activities, the State Bank of Pakistan fixes a suitable markup both for the savers and the investors. Along with other objectives of economic growth, the State Bank of Pakistan attempts to maintain internal price stability.

8: 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 Governments 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 two-fold i.e. the maintenance of monetary stability, thereby leading towards the stability in the domestic prices, as well as the promotion of economic growth.

9: Promotion of export finance.

Under the SBP Finance Scheme the commercial banks are providing finance to the exporters at the concessional rates. The SBP is helping the commercial banks in refinance at low rate of interest to the commercial banks. It also formulates various policies relating to export credit.

10: Development 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 utilization of a countrys 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 realization of macro-economic goals recognition of the promotional.

COMMERCIAL BANKING IN PAKISTAN These are the institutions, which perform general banking functions.
The main commercial banks of Pakistan are 1: National bank 2: Habib bank 3: United bank 4: Allied bank 5: Muslim commercial bank Recently opened commercial banks are 1: Punjab bank 2: First women bank 3: Khyber bank 4: khushali bank 5: Micro finance bank Etc etc Some of its functions are as follows 1: Receiving deposits 2: Advancing loans

3: Discounting of Bill of Exchange 4: Increasing money supply through Credit Creation 5: Transfer of money 6: Safe custody of valuables 7: Agency functions 8: Advisory functions

The growth of this sector can be divided into three stages, which are as follows: a) Pre-Nationalization Era b) Nationalization Era c) Post Nationalization Era

A) PRE NATIONALIZATION PERIOD:

There were only two Muslim banks in Indo Pak before partition, they were; Habib Bank Ltd. (estd. in 1941 at Bombay) & Australia Bank Ltd. (estd. In 1944 at Lahore). All other banks, at that time, were either owned by Hindus or Foreigners. At the time of partition there were 631 bank branches in area which came under Pakistani control. But due to blood shed and violence at large scale, mostly branches were closed and the disparity can be assessed from the fact that on July 1948 there were 195 branches with deposits of Rs.88 crore (880 million) only.Some of the steps taken by the government in this regard were as under: 1) Inauguration of State Bank of Pakistan (SBP) on 1st July, 1948. 2) Setting up of National Bank of Pakistan in November, 1949 to control the 'jute' export in East Pakistan and to act as agent of SBP. 3) Larger powers were given to SBP through SBP Act (1956) for controlling purposes. 4) Banking Companies Ordinance 1962 for protection and guidance to banks. 5) Establishment of specialized banks, such as ADBP (1952); a) HBFC (Nov, 1952); b) P1CIC (Oct, 1957) c) IDBP (Aug. 1961); d) NDFC (Jan, 1973). B) NATIONALIZATION PERIOD On January 01, 1974 all Pakistani banks were nationalized through Nationalization Act 1974. Under this law all Pakistani banks became a public property. All small Banks were merged in bigger banks to create 5 major Pakistani banks Pakistani Banks. These banks were to control by Pakistan Banking Council. There are still Controversies about this act of government as whether it contributed in success of Failure of banks. However the major changes after nationalization were as follows: Working of banks was extended to under developed areas. Market expansion for credit and deposits Decrease in service level of bank officers. Decrease in profitability as well. However the effect of expansion was enormous and it can also be depicted with the C) POST NATIONALIZATION ERA

In 1990 the government decided to denationalize all the nationalized institutes. Some was also suggested in banking sector. For this purpose, amendments were made to Nationalization Act 1974 and two nationalized banks were privatized. Along with this a permission to open banks in private sector was also granted. The rules regarding establishment of new banks and for incoming foreign banks were also Relaxed. The-three privatized banks are; a) MCB taken up by a private group in April, 1991 b) ABL taken up by its own employees in September, 1991. c) UBL taken up by UAE party in 2002.

OTHER FINANCIAL INSTITUTIONS

PICIC:
Pakistan Industrial Credit and Investment Corporation (PICIC) is a financial institution in Pakistan established with the WORLD BANK Group assistance in 1957. PICIC Commercial Bank Limited was incorporated in 1993 asSchon Bank Limited and commenced its business on 4 April 1994, with a paid-up capital of PKR 500 Million. In February 2001, the Bank had only 15 branches. Now it is the 6th largest bank in Pakistan.On December 31, 2007, the operations of PICIC Commercial Bank were merged with and into NIB Bank Ltd.

Functions
Services

Commercial Financing Home Financing Car Financing Home Financing Telebanking

Mobile banking

Motorcycle Financing Islamic Banking Deposit & Saving Product

Branches
PICIC has over one hundred and twenty branches in over forty four cities including the main cities and towns of Pakistan.

IDBP:
Industrial Development Bank of Pakistan is located in Karachi, Sindh, Pakistan. It is among the oldest financing institutions in Pakistancreated with the primary objective of extending term finance for investment in the manufacturing sector of the economy. Over the years, however, the Bank has emerged as an institution fostering the growth and development of SME sector stimulating industrial progress in the rural/less developed regions of the country besides offering lucrative opportunities to the house-holds and institutions for the investment in its deposit schemes. IDBP has also become an important component of the financial sector of Pakistan and is playing an active role in money and capital market of the country. For attaining its objectives, the Bank provides medium and long term finance in local and foreign currencies for the creation of fixed assets to new industrial projects as well as for expansion, balancing, modernisation or replacement of existing projects. It extends technical, financial and managerial advice to its clients in planning and execution of the industrial projects. It also facilitates transfer of technologies from developed countries to industrial enterprises in Pakistan. IDBP is wholly owned by Government of Pakistan with 57% of its shares held by Federal Government, 36% by State Bank of Pakistan and 7% by Provincial Governments and other Public sector corporations. Its Board of Directors consisting of the representatives of private sector is appointed by Ministry of Finance, Government of Pakistan.

DEPOSIT SCHEMES

IDBP SPECIAL DEPOSIT CERTIFICATES IDBP MAHANA AMADNI SCHEME Term Deposit Receipt Business Deposit Account Profit & Loss Saving Bank Account Current Account

ADBP:

The Zarai Taraqiati Bank Limited (ZTBL) (formerly known as Agricultural Development Bank of Pakistan) is the largest public sector financial development institution with a wide network of 31 Zonal Offices, 9 Audit Zones and 355 branches in Pakistan. The bank serves around half a million clients annually and has over one million accumulated account holders

Zarai Taraqiati Bank (ZTBL) has been registered under the Companies Ordinance 1984 and by virtue of Finance Order, all assets, liabilities proceedings undertaking of ADBP stands transferred to and vested in ZariTaraqiati Bank with effect from December 14, 2002. Products and services

Supervised Agricultural Credit Scheme Deposits (Fixed, Saving, Current Accounts &ZaraiBachaat Scheme) Micro Credit Scheme Credit to Women Program One Window Operation Revolving Finance Scheme Crop Maximization Project

ICP:
The International Comparison Program (ICP) is a worldwide statistical partnership to collect comparative price data and compile detailed expenditure values of countries gross domestic products (GDP), and to estimate purchasing power parities (PPPs) of the worlds economies. Using PPPs instead of market exchange rates to convert currencies makes it possible to compare the output of economies and the welfare of their inhabitants in real terms (that is, controlling for differences in price levels). The International Comparison Program (ICP) is being implemented as a true global initiative for the second time, with the reference year 2011. It will build on well programmed activities of a wide network of national and bi- and multi-lateral institutions that will engage in methodological research and review, survey activities and data processing and analysis in the areas of price statistics and national accounts and related fields with a view to estimating purchasing power parities (PPPs) of the worlds principal economies

SBFC:

Southeastern Bank Financial Corporation is a bank holding company. The Companys services include the origination of residential and commercial real estate loans, construction and development loans, and commercial and consumer loans. The Company also offers a variety of deposit programs, including noninterest-bearing demand, interest checking, money management, savings, and time deposits. Additional services include wealth management, trust, retail investment, and mortgage. As of December 31, 2010, the Company had total consolidated assets of $1,607,105 and total deposits of $1,410,737. The Company has two wholly owned subsidiaries that primarily do business in theAugusta-Richmond County, GA-SC metropolitan area-Georgia Bank & Trust Company of Augusta (GB&T) and Southern Bank & Trust (SB&T), a South Carolina State Bank (Banks).

The Company makes loans for commercial purposes to various types of businesses. At December 31, 2010, the Company held $189,128 of these loans, representing 21.64% of the total loan portfolio, excluding for these purposes commercial loans secured by real estate. The Company makes a variety of loans to individuals for personal and household purposes, including secured and unsecured installment and term loans, and revolving lines of credit such as overdraft protection. At December 31, 2010, the Company held $17,412 of consumer loans, representing 1.99% of total loans.

NIT:
The National Investment Trust Limited (NITL) is the first Asset Managment Company of Pakistan, formed in 1962, had Funds under managment of Rs. 80 billion, with approximately 58,350 unit holders as on December 31,2010. NIT's distribution network comprises of 21 branches, various Authorized bank branches all over Pakistan and Arab Emirates Investment Bank (AEIB) in Dubai (UAE).The National Investment (Unit) Trust is Pakistans largest and oldest Mutual Fund. NIUT had funds under managementof around Rs. 37 billion invested in over 440 listed companies and had approximately 55,600 unit holders.

BANKERS EQUITY LIMITED:

Bankers equity limited started its operation in January, 1980. Bankers equity limited is a leading resource bank for development in Pakistan. It has a strong capital base of Rs. 334 million paid up capital. BEL is organized as a

public limited company, it is sponsored by the SBP, PBC and nationalized commercial banks. BEL provides unified package of financing the working and fixed need of industry. It offers the entire range of services excluding from (1)direct equity investment (2) underwriting of public issues of shares (3)financing in both local and foreign currencies (5)provision of funds trough PTCs Modarba certificates,leasing .BEL fulfils all the requirements of the project at one window.

HOUSE BUILDING FINANCE CORPORATION

INTRODUCTION OF HBFC: Corporatized on July 25, 2007, the House Building Finance Company Limited is now an unlisted public company. The Government of Pakistan (GOP) and the State Bank of Pakistan (SBP) jointly holds the capital of HBFCL with 62.50 % and 37.50 %, shares respectively. As of February 18th, 2011 and pursuant to the provisions of section 39 of the SECP Companies Ordinance, 1984, the name of House Building Finance Company was changed to House Building Finance Company Limited and is currently in process of completing legal formalities. OBJECTIVE OF HBFC: HBFCL is a government designated financial institution and provides financing facilities for construction, reconstruction, renovation and purchase of houses through its deep rooted and national foot print of twelve Zonal offices, fifty eight Branches, fifteen Representative offices, four Camp offices, three Regional offices, and the Head Office based in Karachi. House building Finance Corporation is the largest source of loans for house building. HBFC has always been having a primary focus on low and middle income groups.

EQUITY PARTICIPATION FUND:

INTRODUCTION OF EPF: it was established in1970. It

established its head office at Karachi and started operation in1973 .its authorized capital share is 200 million . the paid up capital is Rs.50 million which has been contributed by federal government .

OBJECTIVE OF EPF:

The main purpose of setting up this fund was to foster and accelerate the growth of small and medium size industry in the private sector.

REFFERENCE:
www.google.com www. answer .com economics of Pakistan by PROF M.SAEED NASIR