Fi sbp presentation

State Bank Of Pakistan

Submitted by:Hamza Arif

Usman Pervez Sohail Mumtaz Khan

Introduction

• About SBP • Origin

IntroductionORIGIN• At the time of Partition, the new state was without a central bank and a proper

banking system was almost non-existent. Most of the banks had their head offices in India. Out of 3,496 branches of the scheduled banks, only 631 were situated in Pakistan. To complete the picture of misery, the entire banking structure was dominated by Hindus. With the announcement of the Partition Plan of June 3, 1947, the Hindu started to withdraw their deposits from the banks located in Pakistan. As a result, many banks had to close down their operations.

• Since Pakistan had no central bank of its own, it was decided to assign the monetary operations of the new state to the Reserve Bank of India for a period of one year (till September 30, 1948). However, it was soon realized that if this situation continued for too long, the country’s interests would be hurt. Accordingly, the State Bank of Pakistan Order was issued on May 12, 1948 and Pakistan (Monetary System and Reserve Bank) Order, 1947 was amended according to which the Reserve Bank of India was to stop functioning in Pakistan on June 30, 1948, with the new central bank taking over on the next day.

GOVERNORS (1948-Onwards)

GOVERNORS (CONT.)

Mr. Ashraf Mahmood Wathra

(29-4-2014 TO 2017)

Function of State Bank of PakistanTraditional Functions

Primary functions

issue of notes

regulation and supervision of the financial system

bankers’ bank

lender of the last resort

banker to Government

conduct of monetary policy

Secondary functions

management of public debt

management of foreign exchange

advising the government

Non-traditional or promotional functions

• The non-traditional or promotional functions, 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.

Main Responsibilities of The State Bank of Pakistan

• The main functions and responsibilities of the State Bank can be broadly categorized as under.1. Regulation of Liquidity2. Ensuring the soundness of financial system3. Exchange rate management and balance of

payments

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 Government’s targets for growth and inflation and the recommendations of the Monetary and Fiscal Policies Co-ordination Board with respect to macro-economic policy objectives.

REGULATION OF LIQUIDITY(cont.)

• 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.

REGULATION OF LIQUIDITY(cont.)

• A reserve money management program has been developed. In terms of the program, the intermediate target would be achieved by observing the desired path of reserve money - the operating target.

• While use in now being made of such indirect instruments of control as cash reserve ratio and liquidity ratio, the program’s reliance is mainly on open market operations.

ENSURING THE SOUNDNESS OF FINANCIAL SYSTEM

State Bank performs its role of ensuring the soundness of financial system by exercising the following: 1. Regulation and supervision2. Exchange rate management and balance of

payments3. Developmental role of state bank

ENSURING THE SOUNDNESS OF FINANCIAL SYSTEM(cont.)

• One of the fundamental responsibilities of the State Bank is regulation and supervision of the financial system to ensure its soundness and stability as well as to protect the interests of depositors.

EXCHANGE RATE MANAGEMENT AND BALANCE OF PAYMENTS

• One of the major responsibilities of the State Bank is the maintenance of external value of the currency. In this regard, the Bank is required, among other measures taken by it, to regulate foreign exchange reserves of the country in line with the stipulations of the Foreign Exchange Act 1947.

EXCHANGE RATE MANAGEMENT AND BALANCE OF PAYMENTS(cont.)

• As an agent to the Government, the Bank has been authorized to purchase and sale gold, silver or approved foreign exchange and transactions of Special Drawing Rights with the International Monetary Fund under sub-sections 13(a) and 13(f) of Section 17 of the State Bank of Pakistan Act, 1956.

EXCHANGE RATE MANAGEMENT AND BALANCE OF PAYMENTS(cont.)

• As an agent to the Government, the Bank has been authorized to purchase and sale gold, silver or approved foreign exchange and transactions of Special Drawing Rights with the International Monetary Fund under sub-sections 13(a) and 13(f) of Section 17 of the State Bank of Pakistan Act, 1956.

Functions that State bank does not entertain

• It is not a peoples bank– Receiving the deposits – Loan accommodations– Safe keeping of valuables

• It does not act as a trustee or referee or agent or adviser for the general public

• It does not collect utility bills • It does not purchase or sell securities for the corporate

customers• It does not engage in collection or payment on behalf of

general public or companies. • It does not monitors the actions of borrowers

Development Role of State bank Pakistan

• The scope of Bank’s operations has been widened by including the economic growth objective under the State Bank of Pakistan Act 1956.

• Under this role, SBP assist the process of economic growth and promote the full utilization of resources for the betterment of country.

• The central bank design its policies to meet the goal of rapid economic growth

Differences between commercial and central bank

features Central bank Commercial bank

• ownership Owned by state Owned by private companies

• Authority Supreme bank of country Agent of central bank

• Note issuance Has the power to issue notes Can’t issue notes

• Governing Act Governed by SBP act 1965 Governed by co. ordinance 1984

• Motives Non-profit seeking institution Driven by profit motives

• Relationship Direct relation with state Direct relation with public

• Powers Has the powers to influence economic change

Have no such powers

• Credit Control Has the power to control credit Obey Central bank advice on credit control

• Lender of the last resort

Last resort for commercial banks Hold reserves with the Central bank

• Foreign exchange Responsible for maintaining foreign reserves

Only deal with foreign exchange according to the central bank

Similarities between commercial bank and central bank

• Loans – Commercial banks make consumer and business loans

while central bank make loans to their member banks.

• Deposits– Both types of banks offer deposits to their respective

customers or members.

• Services– Commercial and central bank offer their clients a wide of

services

Accountability Tools• Parliament Reports– The reports on the state of the Pakistan’s economy

provided by the State Bank to the Parliament are an important contribution in an assessment of the performance of the central bank.

– The reports aim to provide a candid and objective review of economic policies.

• Economic Coordination Committee od the Cabinet (ECC)– The ECC is the highest economic policy making body formed by

the Cabinet to take decisions pertaining to various economic issues transactions involving government interests and reviews key economic indicators.

Accountability tools (cont.)• Monetary and Fiscal Policies Coordination Board (MFPCB)

– The instruments of Monetary and Fiscal policies have an important bearing on the overall economic management of a country particularly on saving and investment decisions of the general public.

– The policies supplement each other in achieving national economic goals.

• External Audit– In terms of SBP Act 1956, the accounts of State Bank of Pakistan are

required to be audited every year by practicing Chartered Accountancy firms.

– Two firms of Chartered Accountants audit the financial record and statements of State Bank.

Accountability Tools (cont.)

• Auditor general of Pakistan – The Director General Commercial Audit carries out

audit of operations of State Bank of Pakistan every year.

– The auditors carry out a comprehensive audit of the business transactions and submit their report to the Auditor General of Pakistan.

Accountability Tools (cont.)• International Financial Institutions (IFIs)

– The governor of SBP along with finance minister enters into agreement with IMF. As a part of this agreement Pakistan has to meet a number of performance criteria and benchmarks.

– The IMF sends a review mission regularly to monitor the progress– The main performance criteria being observed are as follows

Credit control by State bank Pakistan

• Main objective: To save economy from inflation and deflation and to

stabilize the economy and prices. • Methods of Credit control

Quantitative Methods Qualitative Methods

Bank rate policy Moral suasion

Open market operations Method of publicity

Variable reserves ratios Direct action

Liquidity ratio

Credit rationing

Quantitative methods

• Bank Rate (or Discount Rate) Policy:– Bank rate is the rate at which central bank rediscounts bill

of exchange or provides credit to commercial banks. – For controlling credit central bank may increase or

decrease bank rate.

• Open Market Operation– Buying and selling of government securities by the central

bank with a view to influencing money supply is called open market operations.

Quantitative Methods

• Variable reserve ratios – The amount of money which the banks are legally required to

keep with the central bank is termed legal cash reserve ratio or requirement.

– This will cause fall in the rate of money expansion. A decrease in ratio has an opposite effect.

• Liquidity ratio – In Pakistan, liquidity ratio refers to the amount of assets which

banks are legally required to hold in the forms of (i) cash in hand, (ii) balances with SBP/NBP and (iii) approved securities.

– The increase in it causes a fall and decrease in it a rise in the rate of credit expansion.

Quantitative Methods (cont.)

• Credit Rationing – The central bank may recommend ceilings (an

upper limit) on the overall credit extended by each commercial bank.

Qualitative Methods

• Moral Suasion– By virtue of its special position, the central bank can persuade

commercial banks to follow a specific credit policy. • Publicity

– The central bank through its different publications may give publicity to desirable credit policy in the form of a few broad principles.

• Direct Action– if commercial banks do not follow the credit guidelines of

central bank then central bank can impose a penalty or refuse to discount bill of exchanges of commercial banks.

Difficulties in Controlling Credit• Absence of developed money markets.

– In underdeveloped countries, central bank control over bank credit is rendered very difficult by the absence of well-developed money markets.

• Existence of non-monetized sector. – In less developed countries there exists a large non-monetized and rural

subsistence sector. Thus a big section of the community is quite unaffected by monetary policy.

• Large-scale deficit financing. – A large-scale deficit financing by the government may make the central bank powerless in

controlling the amount of credit and inflationary pressures. Thus, unless it is prevented, the credit control measures will have little value.

• Cooperation of banks. – It is very difficult for a central bank to control credit if commercial banks do not extend

their full cooperation.

• Conflicting objectives. – The greatest difficulty in the way of the central bank in controlling credit is the

simultaneous achievement of conflicting objectives. For example controlling inflation and increasing employment opportunities are conflicting objects.

Thank You