State the Federal Government’s targets for growth and

 

State Bank of Pakistan: Evolution, Functions and Organization

(Summary)

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The State Bank of Pakistan is the central bank of the country.
Usually the starting point for a central bank is a banking system that is
already in place – the banking system necessitates the presence of a central
bank. But the State Bank of Pakistan (SBP) is unique in the sense that it
started its function in a newly born country, where it also had to shoulder
responsibilities of developing and rehabilitating a banking system and the
economy, in addition to the traditional central banking functions.

The primary functions of the State
Bank include issue of notes, regulation of the financial system, lender of the
last resort, and conduct of monetary policy. On the other hand the  secondary functions including
management of public debt, management of foreign exchange, advising the
Government on policy matters, anchoring payments system, and maintaining close
relationships with international financial institutions.

One of the primary responsibilities
of the State Bank is the regulation of currency in accordance with the
requirements of business and the general public. For this purpose the Bank has
been granted the sole right of issuing notes in the country under Section 24 of
the State Bank of Pakistan Act, 1956. The overall affairs with respect to the
issuing of notes are conducted through two notionally separate departments of
SBP, viz., Issue Department which deals with the issue of notes, and the
Banking Department which undertakes general banking business2. There are four
issue departments one each in four provincial capitals viz., Karachi, Lahore,
Peshawar and Quetta. Under section 30 of the State Bank Act, 1956 the assets of
the Issue Department should at no time fall short of its liabilities, i.e., total
notes issued.

The State Bank of Pakistan is responsible to
regulate the monetary and credit system of the country in such a manner that
ensures monetary stability in the economy4. Section 9A of SBP Act, 1956
entrusts the Central Board of the Bank to formulate and monitor monetary and
credit policy by taking into account the Federal Government’s targets for
growth and inflation, in accordance with the recommendation of the Monetary and
Fiscal Policies Co-ordination Board (MFPCB).

Another principal task of the Bank is to safeguard
the soundness of the financial system. To perform this crucial role effectively
and efficiently, State Bank of Pakistan has been given vast powers under the
State Bank of Pakistan Act, 1956, Banking Companies Ordinance, 1962, Banks
Nationalization (Amendment) Act, 1974 and Microfinance Institutions Ordinance
2001 to regulate and supervise the activities of Banks, Development Finance
Institutions and Microfinance Banks. These laws have been subject to amendments
over time to meet changing circumstances. 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 (See Section 5 on Autonomy of the
SBP).

The Bank also functions as the bankers’ bank. Banks
are classified as scheduled and non scheduled. The Bank maintains an updated
list of all scheduled banks at its various offices. These banks are entitled to
certain facilities from the State Bank and in return they have some obligations
to it. One of the important characteristics of a central bank is its being the
lender of the last resort. The State Bank provides loan and re-discount
facilities to scheduled banks in times of dire need when they find no other
source of funds. These facilities are ordinarily provided by the Bank against
government securities, trade bills, agriculture bill, etc.

            The Bank is responsible for the
management of government debt under subsection 13(e) of section 17, and section
21 of the SBP Act, 1956. The Public Debt Act 1944 also defines the
responsibilities of SBP for public debt management. Being responsible for
maintaining the external value of the currency, the State Bank of Pakistan
assumed the charge of management and administration of the exchange system of
the country in line with the Foreign Exchange Regulation Act, 1947 which was
originally enacted by the British Government and subsequently adopted by
Pakistan. As an agent to the Government, the Bank has been authorized to
purchase and sell gold, silver or foreign exchange and transactions of special
drawing rights with the International Monetary Fund under sub-sections 3(a) and
13(a,f) of section 17, and section 23 of the SBP Act, 1956.

            The State Bank of Pakistan, also
acts as an advisor to the Government on financial and economic matters
particularly with reference to their monetary aspects. The Bank counsels the
Government on loan operations and advises it with regard to the timings, terms
and conditions and rate of return on these loans. The advice is also tendered
on matters like agricultural credit, cooperative credit, industrial finance,
exchange regulations, banking and credit control, mobilization of savings,
financial aspects of planning and development and similar other economic
issues. State Bank of Pakistan also tenders advice to the Government on debt

management
issues. The advisory role of the Bank has been made mandatory in accordance
with the Section 9A(d,e) of the SBP Act 1956.

            Pakistan is the member of
International Monetary Fund. The State Bank of Pakistan deals with the IMF on
behalf of the Government of Pakistan (subsections 13(f) and 15 of Section 17 of
the act). As a member of the Fund, the Government accepted the obligations of
Article-VIII, Sections 2, 3 and 4 of the IMF Articles of Agreement w.e.f. July
1, 1994. As a result of which Pak-rupee was made convertible on current
international transactions. The Governor State Bank accompanies the Minister of
Finance in annual general meeting of the IMF and World Bank. The Bank officials
also participate in negotiations with IMF missions in Pakistan and at IMF Head
Office. The State Bank of Pakistan also deals with other international
financial

organizations
including Bank for International Settlement, the World Bank, Central Banks of
foreign countries, etc. Almost all the agreements of Provincial and Federal
Government with International Financial Institutions (IFIs) are executed
through the State Bank of Pakistan.

            Responsibilities of the State Bank
of Pakistan go well beyond the conventional functions that have been discussed
above. The scope of Bank’s operations has been widened considerably by
including the economic growth objective in its statute under the State Bank of
Pakistan Act, 1956. The most significant contribution made by the State Bank of
Pakistan towards facilitating and fostering economic development in Pakistan
was the rehabilitation of the banking system in Pakistan. At the time of independence
the commercial banking system in Pakistan had virtually collapsed with the
closure of large number of bank offices which were run and managed by
non-Muslims who migrated en-mass to India. Also there was no independent
monetary authority, and the Government of Pakistan had to resort to the Reserve
Bank of India for its currency and monetary affairs. Thus a tremendous task
before the State Bank was to strengthen its own institution as a central bank
besides overall development of banking industry in the country.

            Keeping in view an acute shortage of
trained bankers at the time of the independence, the State Bank introduced
“Bank Officers Training Scheme” within one month of its
establishment. On July 2 1948, the Central Board of Directors of the Bank
approved a comprehensive scheme for university graduates especially with mathematics,
economics and commerce backgrounds. For clerks, State Bankintroduced
departmental examinations system in 1950 to enhance the capabilities of the
existing staff in the banking industry.

The
State Bank has actively participated in setting up a number of specialized
credit institutions designed to meet the long and medium-term financing needs
of various sectors of the economy. These institutions include Pakistan
Industrial Credit and Investment Corporation of Pakistan (PICIC), Industrial
Development Bank of Pakistan (IDBP), National Development Finance Corporation
(NDFC), Agricultural Development Bank of Pakistan12 (ADBP), Federal Bank
for Cooperatives (FBC) and House Building Finance Corporation (HBFC). These
institutions were established to provide credit to industrial, agricultural and
other sectors. The Bank also subscribed to the share capital of the People’s
Finance Corporation – renamed subsequently as Small Business Finance
Corporation (merged in to the present Small and Medium Enterprise Bank), the
Equity Participation Fund and Banker’s Equity. These institutions were designed
to provide finance to small businesses and the major sectors of the economy.

            The Bank has also introduced various
credit schemes to channel resources towards priority sectors like export
finance scheme, mandatory credit for agriculture, small business and small
industries, etc. Before 1990s, mandatory and concessionary credit to priority
sectors remained about 50 per cent of the total private sector credit. However,
with the start of liberalization process in the financial sector, its share is
declining as a result of deliberate policy stance. The underlying objectives
are to increase efficiency in all the sectors of the economy and to let the
market forces decide the proper allocation of resources.

            The State Bank has also been
involved in the process of Islamisation of the economy in general and the
banking system in particular. The State Bank had been making efforts since its
inception to evolve and introduce a financial system based on the norms of the
Shariah. While inaugurating the State Bank of Pakistan, the Father of the
Nation, Quaid-e-Azam Muhammad Ali Jinnah, and later on the first Governor of
the Bank, late Zahid Hussain, gave a direction to make efforts to build the economic
and financial system of the country on the lines dictated by Islam. However,
the work could not be started forthwith as the experts in Islamic jurisprudence
and the modern economics both were not available.

            The Islamic Economic Division of the
Bank served as a secretariat to the Council

of
Islamic Ideology (C.I.I.) in late 1970s when the President of Pakistan asked
the Council to prepare a blueprint for the establishment of an interest-free
economic system compatible with the Shariah. Various reports of the C.I.I.
formed the genesis for changes in the banking system that were introduced in
later years. The Banking Control Department of the Bank, under guidance of the
Ministry of Finance and in collaboration with the Pakistan Banking Council,
issued directives to the banks for transformation of the conventional banking
system into the noninterest based system. The process started in 1979 and
reached its culmination in 1985. As of 1st April, 1985, all banking companies
were required to provide finance to all entities, including individuals, only
under the identified interest free modes. As of 1st July, 1985, no banking
company could accept any interest bearing deposits. The Islamization programme,
however, did not apply to foreign branches of Pakistani commercial banks as well
as foreign currency accounts/ foreign currency dominated loans kept in
Pakistan.

 

Independence of a central bank in conduct of its
policies for achieving stipulated targets has become a significant decree of present
economic wisdom. There is a world wide movement of granting independence to
central banks. Pakistan is not an exception. During the decade of 1990s, a
number of measures have been taken to enable the State Bank of Pakistan to
execute its functions independently. The legal documents governing financial
system of Pakistan, viz., SBP Act, 1956, Banking Companies Ordinance, 1962 and
Banks Nationalization Act, 1974 have been subject to a number of changes to
give exclusive authority to the State Bank for regulating the banking sector,
conducting an independent monetary policy and setting limit on Government
borrowings from the Bank. A bill, passed in February 1994, amended the State
Bank of Pakistan Act, 1956, in terms of which monetary policy was made the sole
responsibility of the State Bank of Pakistan. More specifically, the Central
Board of the Bank was given larger responsibility to regulate and supervise
monetary and credit system keeping in view the national policy objectives of
the Government.

In 1948 when the Bank started its operations, it had
only four departments in the Central Directorate and three small branch offices
located at Karachi, Lahore and Dacca. It had the benefit of the services of
only eight experienced officers who opted for service in SBP from the Reserve
Bank of India. The shortage of trained personnel was even more acute for
conducting the supervisory role of a central bank. However, with the passage of
time the State Bank of Pakistan not only expanded its branch network across the
country, it also strengthened its management by harvesting highly qualified and
trained personnel and introducing modern information technology.