State Bank of Pakistan

Origin of Central Bank

A conference was held in Nuremberg, Germany in 1548 in order to cover loop holes in banking system. It was decided that a bank should be setup by STATE which should streamline banking organization and rules regarding banks. First central bank was formed in Geneva 1578. Before WW-I (1914-18) there were few countries having Central Bank.

Origin of Central Bank

After WW-I, huge confusion in currency and exchange markets round the world resulted in large withdrawals from banks which brought failure to banks. So to control supply of money and credit in economy and maintain stable conditions a conference was held in 1920 in BrusselsBelgium, which made it mandatory for every country to have a Central Bank.

Definition of Central Bank

Central Bank is an institution that manages a nations currency, money supply and interest rates. Central Banks also oversee commercial banking system of their respective countries. Central Bank is also known as Reserve Bank or Monetary Authority in different countries.

History Before independence on 14 August 1947, the Reserve Bank of India (central bank of India) was the central bank for what is now Pakistan.

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

 The losses incurred in the transition to independence were taken from Pakistan's share (a total of 230 million). In May, 1948, Mr. Jinnah took steps to establish SBP immediately. These were implemented in June 1948, and the State Bank of Pakistan commenced operation on July 1, 1948.

Board of Directors
Board of Directors- 12 Members Governor- Yaseen Anwar 2 Deputy Governors (Banking & Operations) 7 Executive Directors 2 Chief Economists (Monetary Policy & Other Policy Development)

Appointment
President of Pakistan appoints the Governor of State Bank of Pakistan. Because SBP is an autonomous body; Monetary Policy Decision has to be taken independently.

Functions
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".

 A large section of the state bank's duties were widened 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 countrys productive resources".

 In February 1994, the State Bank was given full autonomy, during the financial sector reforms.

On January 21, 1997, this autonomy was further strengthened when the government issued three Amendment Ordinances (which were approved by the Parliament in May 1997). Those included were the SBP Act, 1956, Banking Companies Ordinance, 1962 and Banks Nationalization Act, 1974.

 These changes gave full and exclusive authority to the SBP to regulate the banking sector, to conduct an independent monetary policy and to set limit on government borrowings from the SBP.

 The amendments to the Banks Nationalization Act brought the end of the Pakistan Banking Council (an institution established to look after the affairs of NCBs) and allowed the jobs of the council to be appointed to the Chief Executives, Boards of the Nationalized Commercial Banks (NCBs) and Development Finance Institutions (DFIs).

 The State Bank having a role in their appointment and removal. The amendments also increased the autonomy and accountability of the chief executives, the Boards of Directors of banks and DFIs.

Phases of Banking Sector

Nationalization: 1974, Government took charge of all financial institutions. Duty is to monitor these organization, however Govt. is not liable for monitoring that results in De-Nationalization, That is Major Financial Institution came under the control of Pvt. organization.

Functions of State Bank of Pakistan

Primary functions Secondary functions

Primary functions Including issue of notes, regulation and supervision of the financial system, bankers bank, lender of the last resort, banker to Government, and conduct of monetary policy.

The Secondary Functions: including the agency functions like management of public debt, management of foreign exchange, etc., and other functions like advising the government on policy matters and maintaining close relationships with international financial institutions.

The Non-traditional or Promotional Function: 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.

Regulation of Liquidity
The SBP has also been entrusted with the responsibility to carry out monetary & credit policy in accordance with Govt targets for growth & inflation with the recommendations of the Monetary & Fiscal Policies Co-ordination Board without trying to effect the macroeconomic policy objectives.

Primary Functions
Issuing Currency:
Sole authority to issue paper notes in Pakistan except coins. Responsibility to control supply to ensure stability in price i.e. its purchasing power. Its notes, however are not convertible into gold or silver.

Framing and Operation of Monetary Policy:

SBP frames and operates monetary policy. Monetary policy is conducted to regulate and control the volume of money and credit supply in the country in order to achieve specific economic objectives like Full Employment, Price Stability, Increase in Production, Exchange Rate Stability etc.

Tools of Monetary Policy

Following tools are used to expand or contract money supply in the country:

Open Market Operations:

In OMO, SBP buys or sells government securities in open market. By buying government securities, SBP expands money supply while by selling securities, SBP contracts money supply. Changes in Reserve Requirement: Mandatory reserve requirement maintained by banks. By increasing ratio SBP reduces excess reserve/cash with banks thereby reducing level of advances.

Tools of Monetary Policy

Changing the discount rate: Banks borrow from SBP by cashing or discounting credit instruments, such as Bills of Exchange/government securities. By raising the discount rate SBP discourages banks to borrow money. If and when the goal is to increase the money supply, the bank lowers its discount rate to encourage borrowing by the banks, thus, helps increasing money supply. Recent cut in discount rate by 50 bps.

Regulations and Supervision of Banks

SBP has full power to supervise and control the banking system in Pakistan. Spectrum of activities include: Monitoring of Performance of banks Licensing of banks Branch Expansion Merger/Amalgamation of banks Clearance of senior management of banks Banking activities are monitored through a system of Off-Site surveillance and On-Site inspection and supervision.

Foreign Exchange Management

SBP acts as custodian of foreign exchange reserve. Manages Exchange Control Fixing value of Rupee with Foreign Currencies SBP 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. Payment of external debt Agent of GoP with respect to Pakistans membership with IMF and World Bank Correct adverse Balance of Payment

Clearing House
SBP acts as a clearing house for Commercial Banks. Clearing House is a place where representative of different banks meet each day to exchange cheques drawn on each other and then settle the differences owed to each other. Provides facilities, physical and/or electronic, to scheduled banks to clear cheques and other claims drawn against each other- deposited by their customers for collection- by adding-up what they owe or owed by them and transfer funds from their accounts at SBP. SBP helps in huge flow of money in less transactions and handles problems in this regard.

Adviser to Government
SBP acts as an advisor to government in all fiscal matters. Since SBP is involved directly in money, foreign exchange markets, inflation etc therefore gives advice to government. Also gives advice to commercial banks and other financial institutions, commerce and trade industry.

Banker and Agent to Government

SBP acts as an agent & banker to government. It receives deposits, cheques and drafts on behalf of government and deposited in government account. It pays on behalf of government. SBP gives short term advances to government also, when needed. Manages national debt- buys, sells and cashes government securities and pays interest/profit on them. It provides foreign exchange to government; to purchase goods and repay external debts.

Lender of Last Resort

SBP is the lender of last resort for commercial banks. If at any time, bankers are short of cash, SBP comes to their rescue. It also provides cash to banks by re-discounting bills of exchange thus helping in maintaining liquidity/solvency of commercial banks.