Contents

CENTRAL BANK:.......................................................................................................................... 2
PRIMARY FUNCTIONS OF CENTRAL BANK: ................................................................................ 2
1. MONOPOLY TO ISSUE CURRENCY: .................................................................................. 2
2. BANKER TO THE STATE: .................................................................................................. 2
3. BANKER’S BANK: ............................................................................................................. 2
4. LENDER OF THE LAST RESORT: ........................................................................................ 3
5. ACT AS A GUARDIAN: ...................................................................................................... 3
6. ACT AS A CLEARING HOUSE: ........................................................................................... 3
7. Changing the monetary base: ......................................................................................... 3
SECONDARY FUNCTIONS OF CENTRAL BANK: ........................................................................... 3
1. DEVELOPMENT OF SPECIALIZED FINANCIAL INSTITUTIONS: .......................................... 4
2. COLLECTION OF STATISTICAL DATA: ............................................................................... 4
3. PROVIDING TECHNICAL FACILITIES TO BANKERS: .......................................................... 4
4. MANAGEMENT OF FOREIGN EXCHANGE: ...................................................................... 4
CENTRAL BANK OF PAKISTAN: ................................................................................................... 4
FUNCTIONS OF CENTRAL BANK

CENTRAL BANK:
The bank of a country that provides its government and the network
of commercial banks with the services of banking and plays its role in implementing the
monetary policy and regulates the money supply in the country. Central bank plays its role in
maintaining the financial sovereignty and economic stability in the country. The central bank
is responsible for various economic functions. Some of them are described below:

PRIMARY FUNCTIONS OF CENTRAL BANK:

Some of the most important functions of a central bank are
following:

1. MONOPOLY TO ISSUE CURRENCY:

The central bank of country has the sole authority to issue the
currency. The currency which is issued by the central bank has the unlimited legal tender all
over the country. This authority has been given to central bank for various reasons like better
control, uniformity and to avoid over-issue by the other banks. This keeps the supply of the
currency in control with the demand.

2. BANKER TO THE STATE:

The central bank of the country receives and makes payments on
behalf of the government. It receives cash deposits and checks of the government. It also
collects other incomes like taxes, fees and other deposits by the people to the government.
It also caters to the requirements of cash like salaries, and other expenditures.

3. BANKER’S BANK:
Central bank also acts as a banker to the local banks of the country.
The central bank is responsible for holding the reserve ratios of all the commercial banks
which is also specified by the central bank. Central bank also has the authority to change the
reserve ratio when it feels necessary. This reserve ratio also helps central bank to regulate the
credit control in the country.

4. LENDER OF THE LAST RESORT:

The central bank also performs its function as the lender of the
last resort which means when a commercial finds itself in financial crisis it seeks help from a
central bank. The central bank fulfills the financial requirements of the commercial banks. The
central banks aid the commercial banks by providing them with loans or by discounting the
bills of exchange. This is also one of the important functions of central bank.

5. ACT AS A GUARDIAN:
The central bank of the country has the custody of all the
resources of the country. It regulates and controls the money market of the country. The
central bank has the authority to control the foreign policy in the country. Controlling of credit
money and regulation of monetary policy is the most important function of the central bank.
Credit is used to control the supply of money.

6. ACT AS A CLEARING HOUSE:

Provides facilities to scheduled banks to clear checks and
other claims against each other deposited by their customers.

7. Changing the monetary base:

This directly changes the total amount of money circulating in the economy. The Central Bank
can use open market operations to change the monetary base. The bank would buy/sell bonds
in exchange for hard currency. When the central bank sells government bonds it receives hard
currency in payment, thus reducing the money supply. It buys government bonds and pays
hard cash to the sellers, thus, increasing the money supply.

SECONDARY FUNCTIONS OF CENTRAL BANK:

The central bank of a country also performs other functions
for the development of economic and banking system. These are the secondary functions of
the central bank.
 1. DEVELOPMENT OF SPECIALIZED FINANCIAL INSTITUTIONS:
The central bank establishes institutions that serve credit
requirements of the agriculture sector and other rural businesses.

Some of these financial institutions include ZARAI TARAQIATI BANK OF PAKISTAN and SMALL
AND MEDIUM ENTERPRISE BANK. These are called specialized institutions as they serve the
specific sectors of the economy.

2. COLLECTION OF STATISTICAL DATA:

The state bank gathers and analyzes data related to banking,
currency, and foreign exchange position of a country. The data is quite helpful for researchers,
policymakers, and economists. For example, State Bank of Pakistan publishes a magazin
whose data is useful for formulating different policies and making macro-level decisions.

3. PROVIDING TECHNICAL FACILITIES TO BANKERS:

Besides all the developmental functions that a central bank
performs, it also performs non traditional roles like providing technical training to the bankers
of the commercial banks.

4. MANAGEMENT OF FOREIGN EXCHANGE:

The central bank is responsible to keep the exchange rate of the
local currency at an appropriate level and prevent it from wide fluctuations in order to
maintain competitiveness of the 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.

CENTRAL BANK OF PAKISTAN:

The State Bank of Pakistan is the central bank of Pakistan. Like a
Central Bank in any developing country, State Bank of Pakistan performs both the traditional
and developmental functions to achieve macro-economic goals. The traditional functions,
which are generally performed by central banks almost all over the world, may be classified
into two groups:
(a) the primary functions including issue of notes, regulation and supervision of the financial
system, bankers’ bank, lender of the last resort, banker to Government, and conduct of
monetary policy

(b) the secondary functions including the agency functions like management of public debt,
management of foreign exchange, etc., and other functions like advising the government on
policy matters and maintaining close relationships with international financial institutions.
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. The State Bank also
has been playing an active part in the process of islamization of the banking system.

The role of State bank of Pakistan in the development process has been in the form of
rehabilitation of banking system in Pakistan, development of new financial institutions and
debt instruments in order to promote financial intermediation, establishment of
Development Financial Institutions (DFIs), managing the use of credit according to selected
development priorities, providing subsidized credit, and development of the capital market.