Principles of Money &

Banking
Banking
in
Pakistan

By. Prof Riaz Ahmed Mian

Banking in Pakistan
 The Banking Sector
 In March 1947, there were 487 offices
of banks situated in the area which
now comprises Pakistan, but soon
after independence many banks
closed their branches and offices.

 On June 30, 1948 there were only 195

bank branches left in Pakistan.

 This situation posed a great threat to

the economic position of Pakistan.
(cont’d..)
1
Prof. Riaz Ahmed Mian, HCBF, University of the Punjab
 The Banking Sector– cont’d

 The Reserve Bank order of 1947 states,

that Indian notes will continue to be
legal tender both in Pakistan and India.
Bank of India would function as
Central Bank of Pakistan uptill April,
1948.

 However, Reserve Bank of India did not

work fairly for Pakistan it refuse
making advances to the
Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 2
(cont’d..)
 The History – cont’d

4. The Indian coins will be valid and they

will remain legal tender in Pakistan for
at least one year from the date of
issuance of Pakistani coins. The
Pakistan government will issue its own
coins from October 1, 1948.

5. The Reserve Bank of India will transfer

the Pakistan’s share of 75 crore to
government of Pakistan till September
30, 1948.
Prof. Riaz Ahmed Mian, HCBF, University of the Punjab
3
 Establishment of SBP
 On December 30, 1948 the British
Government’s commission distributed the
Bank of India’s reserves between Pakistan
and India as 30 percent for Pakistan and
70 percent for India.
 The share of Pakistan was 75 crore.
 Irrespective of the provisions of the
Monetary system and Reserve bank Order
1947. The reserve bank of India did not
perform its function with diligence and
good faith for Pakistan. (cont’d..)
4
 Establishment of SBP – cont’d

 Also this bank refused to tranfer Rs.

550 million which Pakistan was entitled to
receive as the proportionate share of
reserves of undivided India.

 Further the losses incurred in the

transition to independence which were
amounting to Rs. 23 crore were taken from
Pakistan’s share.
(cont’d..)

5
 Establishment of SBP – cont’d

 Keeping in view all this, the government

of Pakistan decided not to rely on the
Indian bank. So the Indian bank was
relieved of its functions earlier than it was
previously decided and the Governor
General of Pakistan Quaid-i-Azam
Muhammad Ali Jinnah issued the order of
the establishment of SBP on 12 May, 1948.
 This order is known as the “State Bank
of Pakistan Order 1948” and under this
order the SBP started its operations on July
1, 1948.
6
Prof. Riaz Ahmed Mian, HCBF, University of the Punjab
 Establishment of SBP
 On December 30, 1948 the British
Government’s commission distributed the
Bank of India’s reserves between Pakistan
and India as 30 percent for Pakistan and
70 percent for India.
 The share of Pakistan was 75 crore.
 Irrespective of the provisions of the
Monetary system and Reserve bank Order
1947. The reserve bank of India did not
perform its function with diligence and
good faith for Pakistan. (cont’d..)
7
 Establishment of SBP – cont’d

 Also this bank refused to transfer Rs.

550 million which Pakistan was entitled to
receive as the proportionate share of
reserves of undivided India. Further the
losses incurred in the transition to
independence which were amounting to Rs.
23 crore were taken from Pakistan’s share.
(cont’d..)

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 8

 Establishment of SBP – cont’d

 Keeping in view all this, the government

of Pakistan decided not to rely on the
Indian bank. So the Indian bank was
relieved of its functions earlier than it was
previously decided and the Governor
General of Pakistan Quaid-e-Azam
Muhammad Ali Jinnah issued the order of
the establishment of SBP on 12 May, 1948.

(cont’d..)

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 9

 Establishment of SBP – cont’d

 This order is known as the “State Bank

of Pakistan Order 1948” and under this
order the SBP started its operations on July
1, 1948.

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 10

 Establishment of SBP – cont’d

 Share Capital
The State Bank of Pakistan had the share
capital of Rs. 3 crore divided into 3 lac
fully paid up shares of Rs. 100 each. Of the
share capital, 51% was contributed by the
Central Government and the remaining 49%
was subscribed by the public.
(cont’d..)

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 11

 Establishment of SBP – cont’d

 Fundamental Changes
During year 1994, the State Bank was
given full autonomy. It was the milestone in
the history of SBP. Autonomy granted to the
SBP has strengthened its supervisory and
regulatory powers and SBP has become the
sole regulatory authority.
(cont’d..)

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 12

 Establishment of SBP – cont’d

 Management
The power to supervise and control the
functions of the bank is vested with a
Central Board of Directors. The central
board of directors consists of 10 persons
including:
A governor and one or more deputy
governors.

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 13

 Functions / Role of the SBP
1. Issue of Notes

2. Banker to the Government

3. Banker’s Bank

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 14

 Functions / Role of the SBP
4. SBP as Clearing House:
 By acting as a clearing house the SBP
/ NIFT introduces flexibility in the
banking operations and also remains
informed about the liquidity position
of various banks.

 SBP / NIFT helps commercial banks to

settle inter-bank transactions with the
minimum use of cash. (cont’d..)

Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 15

 Functions / Role of the SBP
SBP as Clearing House – cont’d

 By acting as a clearing house, SBP /

NIFT also keeps a check on unwanted
and harmful competition among
commercial banks.

 The clearing house function of the SBP

also helps the commercial banks. In
times of need and crises, they can
help one another by deferring early
payments.
Prof. Riaz Ahmed Mian, HCBF, University of the Punjab 16
 Functions / Role of the SBP
5. Advisor to Government
6. Lender of Last Resort
7. SBP as Controller of Credit
1. Open Market Operations
2. Bank Rate Policy
3. Changes in Reserves Ratio
4. Changes in Margin Requirements
5. Change in Liquidity Ratio
6. Moral Persuasion
7. Publicity
17
 Functions / Role of the SBP
8. SBP and Economic Growth
9. SBP was primarily set up for
fastening economic growth and
prosperity.
9. Establishment of Specialized Credit
Institutions:
HBFC House Building Finance Corporation
ICP Investment Corporation of Pakistan
EPF Equity Participation Fund
(Cont’d..)
18
 Functions / Role of the SBP – cont’d

Establishment of Specialized Credit Institutions- cont’d

NIT National Investment Trust

IDBP Industrial Development Bank of
Pakistan
ZTBL Zarai Taraqiati Bank Limited
(formerly Agricultural Development bank of
Pakistan)
NDFC National Development Finance
Corporations

19
 Functions / Role of the SBP – cont’d

10. SBP and Banking Infrastructure

SBP gave considerable attention towards
the advancement of banking culture
and towards growth of the banking
world.
11. SBP and External Value of Rupee
To maintain external value of rupee is the
responsibility of SBP. Also state bank
has to administer and control
exchange rate in the country.
20
 Functions / Role of the SBP – cont’d

SBP and External Value of Rupee – cont’d

Till September 1971, Pakistan rupee remained
linked to UK Pound. However, in
September 1971, it was unlinked from
pound and linked to US Dollar. This
remained so until January 1982. From
January 1982, we adopted manage
floating exchange rate system. Under this,
the rate was determined on daily basis
vis-à-vis basket of currency of major
trading parterres. Presently we are on a
market based floating exchange rate
system. Under this the rate is determined
21
by the demand and supply in foreign
 Functions / Role of the SBP – cont’d

12. SBP and Special Funds

 State Bank of Pakistan earns huge profits
from its operations. These profits are
allocated towards establishment of several
funds for economic progress. These funds
aim at promoting widespread growth in
different regions and fields.
 The rural credit fund was established in
1961 with the objective of providing financial
assistance to co-operative banks and rural
credit agencies.
(cont’d..)
22
 Functions / Role of the SBP – cont’d

SBP and Special Funds – cont’d

 In 1972 the export credit fund was

established with the view to finance exports.
 A Housing Credit Fund has also been
established to finance the housing industry.

23
 Functions / Role of the SBP – cont’d

13. Public Debt Management

 Pakistan has been facing debt burden since
long. The debts are both internal and external.
The SBP holds a key position in the debt
management framework of Pakistan.

24
 Functions / Role of the SBP – cont’d

14. Custodian of Foreign Exchange

 SBP is also the custodian of all gold, silver
and foreign exchange reserves. It regulates
foreign exchange reserve in accordance with
foreign exchange Act 1974.

15. Exchange Centre

 The SBP is responsible for enforcing
exchange control. It administers the inter
banks interest and exchange rates.

25
 Functions / Role of the SBP – cont’d

16. Relations with International Agencies

 SBP maintains relations with different
international financial institutions such as IMF,
WB, etc. as the agent of the government of
Pakistan. It negotiates different contracts with
these institutions on the behalf of Govt.

26
 Functions / Role of the SBP – cont’d

17. Economic Information

 SBP collects economic and fiscal data from
all over the country throughout the year. It also
annually publishes its report which is an
extremely important document.

27
 Prohibitions
Apart from extensive powers and an extremely
important and significant role. SBP has been
prohibited from the following:
 To engage in trade, as to have any direct
interest in any commercial matter.
 To make unsecured advances or loans.
 To purchase its own shares or shares of
any other bank or company.
(cont’d..)

28
 Prohibitions – cont’d

 To become the owner of any immovable

property except when the ownership is
essential.
 To draw or accept bills payable otherwise
on demand.

29
thank U

Best of Luck