STATE BANK OF PAKISTAN

Sole Authority to Note Issue

 Primary responsibilities in accordance with the requirements of business and the general public.
 The notes issued by the Bank constitute by far the largest portion of the currency in circulation
in the country.

Conduct of Monetary and Credit Policies

 Regulate the monetary and credit system ensuring monetary stability in the economy
 No. of instruments to regulate the volume of credit and to ensure its flow to the priority sectors.
 direct instruments of credit control
 indirect (market oriented)
Regulation and supervision of the financial system

 To safeguard the soundness of the financial system

Off-site & On-site monitoring
 to check the assets and liabilities as they appear on the books,
 to evaluate the quality of the assets,
 to judge the soundness of operations and the prudence of lending and investment policies,
 to appraise the quality of the management
 to attempt an estimate of the overall position of the bank.

Bankers' Bank
It performs three main functions:
1.keeps the deposits of commercial banks, which primarily constitute the statutory reserves of
scheduled banks.
2. provides extensive remittances facilities to banks at a concessional rates.
3. to streamline payments through the financial system, the Bank also manages the operations of
clearing houses.

SECONDARY TRADITIONAL FUNCTIONS

Public Debt Management

The Bank is responsible for the management of government debt.

 Subscribing Federal and Provincial governments’ securities at the time of
their issue
 Sale/purchase of such securities in the Money Market (through auction, OMO or discount
window)
 Payments of interest to holders of public debt instruments

Management of foreign exchange

 keep the exchange rate of the rupee at an appropriate level and prevent it from wide
fluctuations
 As the custodian of country’s external reserves, State Bank is also responsible for the
management of the foreign exchange reserves.
 The task relating to the management of foreign exchange reserves is being performed by an
investment committee.

Advisor to Government
 Counsels the Government on loan operations and advises it with regard to the timings, terms
and conditions and rate of return on these loans.
 State Bank of Pakistan also tenders advice to the Government on debt management issues.
 also participates in economic policy making as a member of various government agencies and
committees.
 Submit a quarterly report to the Parliament on the state of the economy with special reference
to economic growth, money supply, credit, balance of payments and price developments.

Relationships with International Financial Institutions

  Pakistan is the member of International Monetary Fund.
 The State Bank of Pakistan deals with the IMF on behalf of the Government of Pakistan.
 Almost all the agreements of Provincial and Federal Government with International Financial
Institutions (IFIs) are executed through the State Bank of Pakistan.

NON-TRADITIONAL FUNCTIONS

Development of Specialized Financial Institutions

 Participated in setting up a no. of specialized credit institutions designed to meet the long and
medium-term financing needs of various sectors of the economy.
 include
 Pakistan Industrial Credit and Investment Corporation of Pakistan (PICIC),
 Industrial Development Bank of Pakistan (IDBP),
 Agricultural Development Bank of Pakistan (ADBP),
 Federal Bank for Cooperatives (FBC) and
 House Building Finance Corporation (HBFC).
 established to provide credit to industrial, agricultural and other sectors.

Training Facilities to Bankers

Institute of Bankers Pakistan

 established for conducting examinations in prescribed banking courses for augmenting the
strength of qualified banking staff in the country.
 Training Department/Division
State Bank also strengthened its training area. Training courses on central and commercial banking for
both domestic and international participants were designed.

Credit to Priority Sectors

 introduced various credit schemes to channel resources towards priority sectors like export
finance scheme, mandatory credit for agriculture, small business and small industries, etc.
1. Credit scheme for Agriculture
2. Export Finance Scheme (EFS)

Islamisation of the Banking System

 Issued detailed criteria in December 2001 for establishment of full-fledged Islamic commercial
banks in the private sector.
 Al Meezan Investment Bank received the first Islamic commercial banking license from SBP
in January 2002
 SBP issued BPD Circular No. 1 dated 1st January, 2003 outlining its policies for
promotion of Islamic banking, which includes criteria for:
 Establishment of Islamic commercial banks in private sector
 Setting up of Islamic banking subsidiaries by existing commercial Banks
 Opening of stand-alone branches for Islamic banking by existing commercial banks
 ROLE AS A CREDIT CONTROLLER
DIRECT INSTRUMENTS

 Credit Ceilings:
Fixation of upper limit beyond which banks can’t extend credit .
 Credit/Deposit Ratio:
the prescription of credit ceilings, as an instrument of credit control, was abolished in August, 1992
and was replaced by a system which required the commercial banks to extend credit to the private
sector within limits worked out on quarterly basis in relation to a Credit/Deposit Ratio.
 Credit/Deposit Ratio (CDR) was liberalized gradually. It was abolished completely w.e.f. October,
1995.
 Margin Requirements:
While securing a loan the marginal requirement is the difference between the market value of the
security and its maximum value.

INDIRECT INSTRUMENTS

Open Market Operations

 Is the purchase or sale of government securities in the open market by the central bank as a
credit tool.
 When Central Bank purchases securities
Banks monetary reserves increase, money supply increases leading to fall in interest rates in the
market.
 When Central bank sells securities Bank monetary reserves decrease, money supply decreases
leading to a rise in the interest rates.

Discount Rate

 Banks borrow money from the State Bank by cashing or discounting credit instruments, such as
bills of exchange.
   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 and, thus, helps increasing the money supply. 
 Discount Rate is a tool, which central bank  uses for short-term purposes.

Cash Reserve Ratio

 Commercial Banks are required by SBP to hold a certain proportion of their deposits in the form
of  cash. 

 Thus, When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 9%, the banks
will have to hold additional Rs 9 with  SBP and Bank will be able to use only Rs 91 for
investments and lending / credit purpose.
  Therefore,  higher the  ratio (i.e. CRR), the lower is the amount that banks will be able to  use
for lending and investment. 

Statutory Liquidity Reserve

 Commercial banks are required to keep some fraction of their assets in the form of cash,
Treasury Bills (T-Bills)or other approved securities. This fraction is called Statutory Liquidity
Ratio.
 Its main objective is to ensure that banks have sufficient funds in the form of liquid assets

Foreign Exchange Management

 The state bank of Pakistan acts as a custodian of foreign exchange reserves, manages exchange
control and external value of the rupee and acts as the agent of the government in respect of
Pakistan’s membership of the IMF.
 The Bank 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.  As the custodian of country’s external
reserves, it is responsible for management of the foreign exchange reserves.

FUNCTIONS THAT SBP CANNOT ENTERTAIN

 To engage in trade or otherwise have a direct interest in any commercial, industrial or

other undertaking except such interest as it may in any way acquire in the course of the
satisfaction of any of its claims but also such interest shall be disposed of at the earliest
possible moment;
 To purchase its own shares or the shares of any other bank or company or grant
advances or loans upon the security of any such shares;
 To advance money on the mortgage or on the security of immovable property or
documents of titles relating thereto;
 To become the owner of any immovable property except where ownership is necessary
for the use of the Bank;
 To make unsecured advances or loans;
 To draw or accept bills payable otherwise than on demand.