15. unit 8 sbp (complete)

8/12/2019 15. Unit 8 SBP (Complete)

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From the desk of Zaheer Swati

Lecture8 StateBank of Pakistan

Vis ion S ta tement

Give loan to government and commercial banks for accomplishment of mega projects in the country


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Financial Institution

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Zaheer A. Swati

Unit 8

PRESENT

GOVERNOR

Present Governor of State Bank of Pakistan

Chairman: Mr. Ashraf Mahmood Wathra

Acting Governor

Present Deputy Governor of State Bank of Pakistan

Mr. Kazi Abdul Muktadir Mr. Saeed Ahmad

Deputy Governor Deputy Governor

Miss ion S ta tem ent

Our mission is to promote soundness and stability of the banking system through proactive supervision and prompt

enforcement act


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STATE BANK OF PAKISTAN (SBP)

Before independence, Reserve Bank of India was the central bank of sub-continent

It was not easy to setup a central bank from the day of independence, therefore, The British Government'scommission were distributed the Bank of India's reserves between Pakistan and India

30 percent for Pakistan and 70 percent for India Reserve Bank of India continued its duties as central bank for both the countries 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 the SBP immediately. These were implemented in June 1948, and

the State Bank of Pakistan commenced operation on July 1, 1948

Initially, under State Bank of Pakistan order 1948, SBP was charged with the duty related to issuance of currencynotes and keeping reserves with a view of securing monetary stability in the country

However, State Bank of Pakistan Act 1956 further strengthened the bank by giving it authority to regulate the creditand monetary policy of the country

In 1997, State Bank of Pakistan was given full autonomy through an amendment ordinance in the Act of 1956. Afterthese amendments SBP has full and exclusive authority to regulate the banking sector, conduct an independent

monetary policy and set limits on government borrowings from State Bank of Pakistan

In 2005, an ordinance has given the money exchange companies a legal status in the country and now all moneyexchange companies are also working under the umbrella of SBP. Hence, since 2005 central bank of Pakistan is

acting as a regulatory and controlling authority for money exchange companies just like commercial banks of the

country

The principal officer of the SBP is the Governor President of Pakistan appoint the Governor of State Bank of Pakistan The Central Board consists of ten members: the Governor (who is Chairman), Secretary( Finance Division-

Government of Pakistan), and eight Directors, including at least one from each province

The Directors are appointed for terms of up to three years

8.1 Functions of SBP

Following are important functions of SBP

8.1.1 Issuing Currency Notes

Sole authority to issue notes in Pakistan except coins (coins are issued by federal government of Pakistan) It issues 10-rupee, 50-rupee, 100-rupe, 1,000-rupee and 5,000 rupee notes. The bank follows the proportional reserve system. All notes Issued by it are backed by at least 20% in the form of

gold coins and foreign exchange


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8.1.1.1 Principles of Note Issue:

At time of bank CHARTERED ACT in ENGLAND in 1844 there was a huge disagreement over the matter as towhat is the most suitable principle of issuing notes

Some economists favour the currency principle and other suggested for banking principle. Both these principles arediscussed below

(a) Currency Principle: The currency principle is based on 100% gold backing. According to this principle central bank

must keep 100% reserves against each and every note issued. So there will be full convertibility under such system

(b) Banking Principle: Banking principle lies on the other end. This principle says that note issuance should be dealt

independently by central bank and it shall be allowed to issue notes according to the ongoing circumstances. Also there is

no need of full backing of gold under this principle. Only a percentage of issued notes are backed by gold. However all

the notes are issued with the guarantee of convertibility into gold

8.1.1.2 Methods of Note Issue:

Based on banking and currency principles of note issue, several systems and methods have been devised for theissuance of notes. These are as follows

(a) Fixed Limit Issue: Fixed limit issue (Fixed Fiduciary Issue) is widely recognized as an important method of note

issue. Under this system a limit of volume of currency has been fixed by central authority. Any note issue in this limit is

to be backed by Government Securities. However any note issued above this limit is to is 100% backed by gold. This

system remained in force in many countries of the world at different times

(b) Proportionate Reserve System: Under this system the central bank is required to keep 100% reserves for a

particularly percentage of notes issued. The rest of notes issued are backed by Government Securities and Government

bills. Usually 25% to 40% of notes issued are fully backed by gold and rest are backed by Government Securities. This

system remained in force in many countries of world such as in FRANCE and GERMANY with 30% and 40% backing

respectively

(c) Minimum Reserve System: Under minimum this method of note issue the central bank has to keep only a minimum

amount of reserves, against all the notes issued. This means that any volume of currency can be issued by central bank

depending on demands of economy. There is no fixed maximum limit under this system. The reserves are kept in the

form of gold and foreign exchange. Usually 20% to 30% of the notes issued are backed by reserves

8.1.1.2 Issuance of Money in Pakistan:

In the beginning, the SBP issued notes on the basis of SBP act 1956. According to this act the notes were issued on aProportionate Reserve System. This method remained in effect till November 1956

Under this method the notes issued had to be backed by an equivalent amount of assets. At least 30% of such assetsmust be gold coins or gold bullion, silver bullion or approved foreign exchange. The remaining assets might be in

form of securities bill of exchange, promissory notes


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However, afterward in Nov. 1956 the 30% reserve requirement was changed by an ordinance. The ordinancegave the right and authority to federal government that she after consulting with bank would specify the Amount

of currency that is- to be backed by gold and approved foreign exchange

Afterward in Dec, 1965, through a further notification, the level of currency backing was made fixed at Rs.1,200 million. The state bank then could issue notes according to the requirements of the economy

The system is more or less a form of minimum reserve system

Present currency notes

Note of 10 Rs. Note of 20 Rs.

Note of 50 Rs. Note of 100 Rs.

Note of 500 Rs Note of 5,000 Rs.


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8.1.2 Banker to the Government

SBP acts as an agent & banker of Government Receives deposits (taxes, fees, fines, etc.) on behalf of the government (federal and provincial) and deposited in

government account and bank does pay any interest on them

Disburses payments (tax refunds, interest, etc.) on behalf of the federal government Manages the national debt (buys, sells, government securities and pay interest/profit on them) SBP gives short term advances to government, it also provides foreign exchange to govt. in order to purchase goods

& repay external debts

8.1.3 Banker to Banks

o As banker to the scheduled banks, SBP:Holds deposits made by them as a part of their required reserves (5% at this time) SBP is the lender of last resort for the commercial banks. Anytime, bankers are short of cash reserves, State

Bank comes to rescue them. It also provides cash to banks by rediscounting bills of exchange and treasury

bills, thus helps & maintains liquidity solvency of commercial banks

o All the banks send a weekly statement of its assets & liabilities to state banko It provides guidance and direction to other banks to formulate their policies about deposits, credit, Investment and

interest rate

8.1.4 Clearing House

SBP acts as a clearing house for commercial banks A place where representatives of different banks meet each day to exchange cheques drawn on each other & then

settle the differences owed to each other

SBP also performs the functions of a clearing house. Since State Bank holds cash reserves of others bank, it caneasily settle their mutual payments

8.1.5 Regulations & Supervion of Banks

SBP has full powers to supervise and control the banking system in Pakistan Powers relate to Credit ratings of banks, Performance of banks, Licensing of banks, Their branch expansion,

Liquidity of assets of banks, Management and methods of working of banks, Inspection of banks Amalgamation,

Reconstruction & liquidation of banks

8.1.6 Foreign Exchange Management

SBP acts as a custodian of foreign exchange reserve Manages fixing value of Rupee with foreign currencies Check flight in & out of reserves of the country It also acts as agent of Government in respect of Pakistans membership with IMF, World Bank etc


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8.1.7 Adviser to Government and Institutions

o SBP acts as an advisor to Government in all financial matterso As SBP is involved directly in money, foreign exchange markets, inflation etc so gives advices to Govt.o It also provides advices to Commercial banks, Other financial institutions and Commerce & trade Industry

8.1.8 Framing and Operation of Monitory or Credit Policy

SBP frames & operates Monitory Policy in Pakistan Monitory Policy is conducted by SBP 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

Increase in Investment, Economic Development, Stability of Capital Market, Proper Distribution of Wealth,

Exchange Rate Stability, Increase Exports, Improve Standard of Living etc,

8.2 Banking Sector Supervision in Pakistan State Bank of Pakistan (SBP) which is the Central Bank of the country has been responsible for an ongoing effective

supervision of the banking sector

The relevant provisions of law which give powers to State Bank of Pakistan (SBP) are contained in the BankingCompanies Ordinance, 1962; State Bank of Pakistan Act, 1956 and the Banks Nationalization Act, 1974

In addition, The Financial Institutions (Recovery of finances) Ordinance, 2001; Companies Ordinance, 1984 andStatutory Regulatory Orders (SROs) are the relevant legislations, which cover the activities concerning the banking

sector

The financial sector in Pakistan comprises of Commercial Banks, Development Finance Institutions (DFIs),Microfinance Banks (MFBs), Non-banking Finance Companies (NBFCs) (leasing companies, Investment Banks,

Discount Houses, Housing Finance Companies, Venture Capital Companies, Mutual Funds), Modarabas, Stock

Exchange and Insurance Companies

Under the prevalent legislative structure the supervisory responsibilities in case of Banks, Development FinanceInstitutions (DFIs), and Microfinance Banks (MFBs) falls within legal domain of State Bank of Pakistan while the

rest of the financial institutions are monitored by other authorities such as Securities and Exchange Commission and

Controller of Insurance

At present there are 41 scheduled banks, 6 DFIs, and 2 MFBs operating in Pakistan whose activities are regulatedand supervised by State Bank of Pakistan. The commercial banks comprise of 3 nationalized banks, 3 privatized

banks, 15 private sector banks, 14 foreign banks, 2 provincial scheduled banks, and 4 specialized banks

Under the Banking Companies Ordinance, 1962 the State Bank of Pakistan is fully authorized to regulate andsupervise banks and development finance institutions. During the year 1997 some major amendments were made in

the banking laws, which gave autonomy to the State Bank in the area of banking supervision. 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


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The State Bank has framed Prudential Regulations for banks and Rules of Business for DFIs that present a prudentoperating framework within which banks and DFIs are expected to conduct their business in a safe and sound

manner taking into account the risks associated with their activities. These regulations incorporate the spirit and

essence of BIS regulations and are constantly watched for possible improvement so that their enforcement yields the

best results to promote the objectives of supervision

The State Bank is empowered to determine Cash Reserve Requirements (CRR) and Statutory LiquidityRequirements (SLR) for banks/DFIs. Presently the Cash Reserve Requirement is 5% on weekly average basis

subject to daily minimum of 4% of Time & Demand Liabilities. In addition to that banks are required to maintain

Statutory Liquidity Requirement @ 15% of their Time & Demand Liabilities

Similarly, DFIs are required to maintain SLR of 14% and CRR of 1% of their specified liabilities Additionally, The Banking Companies Ordinance had been amended in 1997 which empowers the State Bank to

prescribe capital requirements for banks

8.2 Important PointsFollowing are some important point

8.2.1 Cash Reserve Requirements (CRR)

In terms of Section36(1) SBP Act, 1956, every scheduled bank is required to maintain with State Bank a balance theamount of which shall not at the close of business or any day be less than such percentage of Time & Demand

Liabilities in Pakistan as may be determined by State Bank

Presently the requirement is 5% on weekly average basis subject to daily minimum of 4% of Time & DemandLiabilities (reference BPRD Circular No.27 dated 2nd July, 1999)

8.2.2 Statutory Liquidity Requirement

In terms of Section 29(1) of Banking Companies Ordinance, 1962 every banking company shall maintain in Pakistanin cash, gold or approved securities valued at price not exceeding "the lower of cost or the current market price" an

amount which shall not at the close of business in any day be less than such percentage of the total of its time &

demand liabilities in Pakistan, as may be notified by State Bank from time to time

Presently the requirement is 15% (excluding 5% statutory cash reserve) of the total of its time and demand liabilitiesin Pakistan (BPRD Circular No.26 dated 2

ndJuly, 1999)

8.2.3 Annual Accounts:

At the expiration of each calendar year every banking company incorporated in Pakistan, in respect of all businesstransacted by it, and every banking company incorporated outside Pakistan, in respect of all business through its

branches in Pakistan, shall prepare with reference to that year a balance-sheet and profit and loss account as on the

last working day of the year in the prescribed forms (Section 34 of Banking Companies Ordinance, 1962)


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Annexes A

Quaid-i-Azam's Speech

On the occasion of the Opening Ceremony of

The State Bank of Pakistan on 1st July, 1948.

"Mr. Governor, Directors of State Bank, Ladies and Gentlemen.

The opening of the State Bank of Pakistan symbolises the sovereignty of our State in the financial sphere and I am very

glad to be here today to perform the opening ceremony. It was not considered feasible to start a Bank of our own

simultaneously with the coming into being of Pakistan in August last year. A good deal of preparatory work must

precede the inauguration of an institution responsible for such technical and delicate work as note issue and banking.

To allow for this preparation, it was provided, under the Pakistan Monetary System and Reserve Bank Order, 1947, that

the Reserve Bank of India should continue to be the currency and banking authority of Pakistan till the 30th September,

1948. Later on it was felt that it would be in the best interests of our State if the Reserve Bank of India were relieved of

its functions in Pakistan, as early as possible. The State of transfer of these functions to a Pakistan agency was

consequently advanced by three months in agreement with the Government of India and the Reserve Bank. It was at the

same time decided to establish a Central Bank of Pakistan in preference to any other agency for managing our currency

and banking. This decision left very little time for the small band of trained personnel in this field in Pakistan to complete

the preliminaries and they have by their untiring effort and hard work completed their task by the due date which is very

creditable to them, and I wish to record a note of our appreciation of their labours.

As you have observed, Mr. Governor in undivided India banking was kept a close preserve of non-Muslims and their

migration from Western Pakistan has caused a good deal of dislocation in the economic life of our young State. In order

that the wheels of commerce and industry should run smoothly, it is imperative that the vacuum caused by the exodus of

non-Muslims should be filled without delay. I am glad to note that schemes for training Pakistan nationals in banking are

in hand. I will watch their progress with interest and I am confident that the State Bank will receive the co-operation of

all concerned including the banks and Universities in pushing them forward. Banking will provide a new and wide field

in which the genius of our young men can find full play. I am sure that they will come forward in large numbers to take

advantage of the training facilities which are proposed to be provided. While doing so, they will not only be benefiting

themselves but also contributing to the well-being of our State.


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I need hardly dilate on the important role that the State Bank will have to play in regulating the economic life of our

country. The monetary policy of the bank will have a direct bearing on our trade and commerce, both inside Pakistan as

well as with the outside world and it is only to be desired that your policy should encourage maximum production and a

free flow of trade. The monetary policy pursued during the war years contributed, in no small measure, to our present day

economic problems. The abnormal rise in the cost of living has hit the poorer sections of society including those with

fixed incomes very hard indeed and is responsible to a great extent for the prevailing unrest in the country. The policy of

the Pakistan Government is to stabilise prices at a level that would be fair to the producer, as well as the consumer. I

hope your efforts will be directed in the same direction in order to tackle this crucial problem with success.

I shall watch with keenness the work of your Research Organization in evolving banking practices compatible with

Islamic ideas of social and economic life. The economic system of the West has created almost insoluble problems for

humanity and to many of us it appears that only a miracle can save it from disaster that is not facing the world. It has

failed to do justice between man and man and to eradicate friction from the international field. On the contrary, it was

largely responsible for the two world wars in the last half century. The Western world, in spite of its advantages, of

mechanization and industrial efficiency is today in a worse mess than ever before in history. The adoption of Western

economic theory and practice will not help us in achieving our goal of creating a happy and contended people. We must

work our destiny in our own way and present to the world an economic system based on true Islamic concept of equality

of manhood and social justice. We will thereby be fulfilling our mission as Muslims and giving to humanity the message

of peace which alone can save it and secure the welfare, happiness and prosperity of mankind.

May the Sate Bank of Pakistan prosper and fulfil the high ideals which have been set as its goal.

In the end I thank you, Mr. Governor, for the warm welcome given to me by you and your colleagues, and the

distinguished guests who have graced this occasion as a mark of their good wishes and the honour your have done me in

inviting me to perform this historic opening ceremony of the State Bank which I feel will develop into one of our greatest

national institutions and play its part fully throughout the world."


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Annexes B

Past Governors of State Bank of Pakistan

(Late) MR. ZAHID HUSSAIN (Late) MR. ABDUL QADIR (Late) MR. S.A. HASNIE

(10-06-1948 TO 19-07-1953) 20-07-1953 TO 19-07-1960) (20-07-1960 TO 19-07-1967)

(Late) MR. MAHBUBUR RASCHID MR. S.U. DURRANI MR. GHULAM ISHAQ KHAN(20-07-1967 TO 01-07-1971) (01-07-1971 TO 22-12-1971) (22-12-1971 TO 30-11-1975)

(Late) MR. S. OSMAN ALI MR. A.G.N. KAZI MR. V.A. JAFAREY

(01-12-1975 TO 01-07-1978) (15-07-1978 TO 09-07-1986) (10-07-1986 TO 16-08-1988)

MR. I.A. HANFI MR. KASSIM PAREKH DR. MUHAMMAD YAQUB

(17-08-1988 TO 02-09-1989) (05-09-1989 TO 30-08-1990) (25-07-1993 TO 25-11-1999)

Dr. Ishrat Hussain DR. SHAMSHAD AKHTAR SYED SALIM RAZA

(02-12-1999 TO 01-12-2005) (02-01-2006 TO 01-01-2009) (02-01-2009 TO 02-06-2010)

MR. SHAHID HAFIZ KARDAR MR. YASEEN ANWAR

(09-09-2010 TO 18-07-2011) (20-10-2011 TO 31-01-2014)


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Annexes c

Balance Sheet of SBP


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Annexes D

Profit and Loss Account of SBP


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Governor Corporate Management Team(CMT)

Deputy Governor

(Operations)

PaymentSystems

InternationalMarkets &

Investments

Statistics &DWH

FinanceMonetaryPolicy

DomesticMarkets & Monetary

Management

Executive Director(FM&RM)

Banking Policy& Regulations

*Internal Audit &Compliance

RiskManagement &

Compliance

Research

Economic

Policy Review

ExchangePolicy

Agricultural Credit& Microfinance

Infrastructure,Housing and SME

Finance

Chief EconomicAdviser (MP)

Museum & ArtGallery

InformationSystems & Tech

Executive Director(Operations)

BankingInspection

(Onsite)

Executive Director(FRM)

Deputy Governor

(Banking)

ConsumerProtection

Office of theCorporateSecretary

Governors Office

Organogram- State Bank of Pakistan

Islamic Banking Legal Services

Executive Director(BPRG)

Executive Director(BSG)

Chief EconomicAdviser (PD)

Executive Director(DFG)

Strategic Planning

TreasuryOperationsLibrary

External Relations

Executive DirectorHuman Resources

Human Resources

Legend

ClusterHead

GroupHead

DepartmentHead

Off-site Sup. &Enforcement

* IACD reports directly to AuditCommittee

Deputy Governor

(Financial Markets,

Islamic Banking & Special

Initiatives)


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BANKNOTES AND COINS UNDER CIRCULATION

BANKNOTEDENOMIN SPECIMEN GENERAL CHARACTERISTICS

ATION OBVERSE REVERSE

Size 73 x 141 mm

Issue

Date12-07-1976

Color Green

Rs. 10/-Portrait of Quaid-e-Azam

Muhammad Ali Jinnah Vignette of a view ofMohenjodaro

Water

Mark

Portrait of Quaid-e-Azam

Muhammad Ali Jinnah

Size 73 x 154 mm

Issue

Date29-12-1977

Color PurpleRs. 50/-


Muhammad Ali Jinnah

Vignette of an

illustration of Lahore

Fort.

Water

Mark


Muhammad Ali Jinnah

Size 73 x 165 mm

Issue

Date 12-07-1976Color RedRs. 100/-


Muhammad Ali JinnahVignette of a view of

Islamia College Peshawar

Water

Mark


Muhammad Ali Jinnah

Size 73 x 175 mm

Issue

Date1-04-1986

Color Blue/GreenRs. 500/-


Muhammad Ali JinnahVignette of State Bank

Building at IslamabadWater

Mark


Muhammad Ali Jinnah

Size 73 x 175 mm

IssueDate

18-07-1987

Color Royal BlueRs. 1000/-


Muhammad Ali JinnahVignette of a picture of

Jahangirs Tomb, Lahore

Water

Mark


Muhammad Ali Jinnah

COINSPECIMENDENOMIN

ATION OBVERSE REVERSEGENERAL CHARACTERISTICS

Size 20 mm diameter

Weight 4 grams

Issue

Date 08-09-1998

Re. 1/-

Color Brownish

Size 22.5 mm diameter

Weight 5 grams

Issue

Date08-09-1998

Rs. 2/-

Color Yellowish

Size 24 mm diameter

Weight 6.5 grams

Issue

Date 26-12-2002

Rs.5/-

Color White

15. unit 8 sbp (complete)

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