“Financial Institution And Operation”

Submitted by:
Sonia
Mi18MBA014
4th Semester
MBA (IRM)

Submitted to:
Sir Waqas

Hailey College of Banking & Finance

UNIVERSITY OF THE PUNJAB
(2020)

Functions of State Bank of Pakistan

State Bank of Pakistan
State bank of Pakistan is the central bank of Pakistan. It was established in 1948. Initially state bank
of Pakistan was entrusted with the task to "regulate the issue of bank notes and keeping of reserves
with a view to securing monetary stability in Pakistan and generally to operate the currency and
credit system of the country to its advantage".

In financial sector reforms of 1994 State Bank of Pakistan got full autonomy. "On January 21, 1997
this autonomy was further strengthened when the government issued three Amendment Ordinances.
These changes gave full and exclusive authority to the State Bank to regulate the banking sector, to
conduct an independent monetary policy and to set limit on government borrowings from the State
Bank of Pakistan".

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.

At the time of its formation, the State Bank of Pakistan neither had any building for housing its
offices nor was there sufficient time for purchase and construction of new premises.

Therefore, Victoria Museum Building at the Ingle Road was rented from the Karachi Municipal
Corporation and swiftly refurbished. The Bank was inaugurated on July 1, 1948 by Quaid-e-Azam
Muhammad Ali Jinnah, who thus observed on the guiding principles of the newly-created central
bank:

Functions of State Bank of Pakistan

The State Bank of Pakistan also performs both the traditional and developmental functions to achieve
macroeconomic goals. The traditional functions may be classified into two groups:

 The primary functions

 The secondary functions

 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.

 Agency functions like management of public debt

 Management of foreign exchange etc.,

 And other functions like advising the government on policy matters

 Maintaining close relationships with international financial institutions.

 Banker to the Government: 

The State Bank conducts the banking business of Federal and Provincial Government and some
government agencies. These functions performed by the Bank are akin to those ordinarily performed
by commercial banks for their customers. The Bank provides the following services to the
governments:

As banker to the government, SBP:

 Receives deposits (taxes, fees, fines, etc.) on behalf of the federal government.

 Disburses payments (tax refunds, interest, etc.) on behalf of the federal government.
  Manages the national debt—buys, sells, and cashes    government securities and pay

interest/profit on them.

 Lends money to the federal government as needed.

 Banker to Banks: 

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. State
Bank provides the following three important services to the scheduled banks; As banker to the
scheduled banks, SBP:

 Holds deposits made by them as a part of their required reserves—5% at this time.   

 Lends them funds as a “lender of the last resort” to meet their pressing needs by discounting
their bills of exchange and other

 Advisor to Government

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

 Acts as a Clearing House:

Provides facilities, physical and/or electronic, to scheduled banks to clear cheques and other claims
drawn against each other—deposited by their customers for collection--by adding up what they owe
or owed them and transfer funds from their accounts at SBP.

 Supervisor of Banks and other Financial Institutions:

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.
The banking activities are now being monitored through a system of ‘off-site’ surveillance and ‘on-
site’ inspection and supervision. Off-site surveillance is conducted through regular checking of
various returns regularly received from the different banks.

On other hand, on-site inspection is undertaken by the State Bank in the premises of the concerned
banks when required.

To broaden financial markets as also to diversify the sources of credit, a number of non-bank
financial institutions were allowed to increase substantially. The State Bank has also been charged
with the responsibilities of regulating and supervising of such institutions.

 Issuer of Paper Currency:

State Bank has the sole authority to issue paper notes.  It has the prime responsibility to control its
supply in order to ensure a stable price of money, i.e., its value or purchasing power.  Its notes,
however, are not convertible into gold or silver.

 Exchange Rate Management and Balance of Payment:

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.

 Developmental Role of SBP:

     The Bank’s participation in the development process has been widened in the form of
rehabilitation of banking system, development of new financial institutions and debt instruments in
order to promote financial intermediation, establishment of Development Financial Institutions,
directing the use of credit according to selected development priorities, providing subsidized credit,
and development of the capital market.

 Non-traditional Role: 

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.

 To Formulate and Implement the Monetary Policy: 

The Bank is also in charge of conducting monetary policy which means changing the supply of
money in the economy. 

The tools of the monetary policy are:

 a. Changing the monetary base:

 This directly changes the total amount of money circulating in the economy. The State 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.

b. Changing the reserve requirements: 

 Monetary policy can be implemented by changing the proportion of total assets that banks
must hold in reserve with SBP. Banks only maintain a small portion of their assets as cash
available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and
loans. By changing the proportion of total assets to be held as liquid cash, the SBP changes
the availability of loanable funds. This acts as a change in the money supply.

c. Changing the 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. 

Also by calling in existing loans or extending new loans, the monetary authority can   directly change
the size of the money supply.

 Role for Capital Market: -

SBP has played very effective role in improving the capital market. Due to his efforts rate of
investment has increased. Foreign investments has also shown the positive indication in the capital
market.

 Growth and Control of Banks:

-
It is the duty of the SBP to promote the growth of banking system on sound footing. The SBP
controls the commercial banks to follow the government policies.

 Assistance to Specialized Institutions: -

The SBP is also extending the finance to the various specialized financial institutions like ADBP,
PICIC, ICP, HBFC and IDBP, NDFC had been merged in National Bank of Pakistan in 2001 and
SBP has provided assistance to NBP.
  Export Promotion: -
The commercial banks are providing finance to the exporters at the concessional rates under the
export finance scheme provided by the state bank of Pakistan. The SBP also formulates the various
policies to increase the exports.

 Price Stability: -

It is also the duty of the SBP to provide stability in the price level inside the country. To achieve this
objective SBP adopts various types of credit measures to remove the inflationary and deflationary
pressure.