Central Banking

Central Banking-- Background

Importance of Central Bank: -
Difficulties confusion chaos faced in
currency and exchange market by the
economies of the world in the period of
post-world War 1 and great depression of
1930 led to importance of a centralized
monetary institution which could
coordinate, control and manage the
complicated economic and financial
issues.

Central Banking
Thus central banks came into existence.
Every country has established a central
bank. Central bank of Pakistan is called
State Bank of Pakistan, which was
established on 1
st
July 1948.

Central Banking
General Principles of Central Banking
1) Central bank is a symbol of financial
sovereignty and stability of the country.

2) Central bank is not basically a profit-
making institution, its main objective
remains to safeguard financial and
economic stability of the country.


General Principles of Central Banking
3) Central bank is responsible for
formulation of credit policy of the
country.

4) To manage the money supply in the
economy at desired level.

General Principles of Central Banking
5) Steady growth in national output (Low
and stable inflation)
6) Low unemployment
7) To promote orderly financial markets.
8) Management and regulation of
exchange rates and measures for
boosting up exchange resources.
Central Banking
Functions of a Central Bank

1) Bank of issue:
Central bank is the sole authority for
issuing currency notes in a country. It
guarantees uniformity in currency
circulation and also ensures to keep
money supply within desirable limits.

Functions of a Central Bank
2. Bankers to the Government:
a. Central bank accepts deposits from
government in the form of cash or
cheques, drafts drawn on other banks.
b. Disbursement of salaries to government
departments/employees.
Functions of a Central Bank
c. Make payments to beneficiaries to the
debit of respective account of the
government. Central Banks do not pay
any interest/profit to government, however
advance short-term money to the
government without any collateral.

Functions of a Central Bank
3. Adviser to the Government:
It gives advice to the government on all:
Monetary and financial matters
Agricultural credit, industrial credit
Exchange control
Mobilization of savings etc.
Functions of a Central Bank

4, Agency Services to the Government:

It collects taxes and other revenue on
behalf of the government.
Issue and discounting of government
securities.
Receives subscription for government
loans






Functions of a Central Bank
5. Bankers Bank
Lender of last resort.
All scheduled banks have to keep a
certain percentage of their Demand
Deposits as Cash Reserves with Central
Bank Through Cash Reserves central
Bank's general financial position is
strengthened and Central Bank can also
control the volume of credit in the
economy through variation in Reserve
Ratio.
Functions of a Central Bank
In return Scheduled Banks are entitled to
Rediscounting facilities from central bank.
Functions of a Central Bank
6. Controller of Credit and Bank Rate
Central bank formulates and executes policy of
credit in the economy .It also keeps an eye on
volume of credit which should remain within
desirable limits. Bank rate is an important
instrument of quantitative control of credit.
Bank rate is the standard rate at which central
bank is prepared to buy or rediscount the bills
of exchange or other commercial papers
eligible for purchase.

Functions of a Central Bank
In addition to bank rate central banks can
also control credit through open market
operation and Credit Rationing.
Functions of a Central Bank
7. Regulation of Margin Requirements
8. Lowering or raising of minimum cash reserves
9. Direct action in the form of administrative action
(penalties) against offending banks.
10. It undertakes to maintain external value of
domestic currency.
[Exchange Control --- Measures to boost
exports, Remittance through Banking
Channels]