INTRODUCTION:

It was very difficult for Pakistan to develop their own banking system right after getting
independence because Pakistan lacked in qualified and trained staff and had scarce resources.
Because Pakistan lacked a central bank, it was decided that the Reserve Bank of India would
serve as the country’s central bank until September 30, 1948. Because Pakistan did not have a
central bank India used to print currency notes for Pakistan.

The Reserve Bank of India began to pursue policies that were harmful to Pakistan’s interests.
The situation had deteriorated to the point where, following consultation with two governments,
the Reserve Bank of India was ordered to conclude the agreement by the 30 th of June, rather than
the 30th of September, 1948. Because the Reserve Bank of India was not fulfilling its tasks
equitably for the Pakistani banking industry, it was decided that the country’s banking sector
needed to be established.

EVENTS THAT LED TO EARLY STOPPING OF RBI FUNCTIONS:

The Reserve Bank of India not only have to decide the division of profit, assets and liabilities but
RBI would eventually be acting as central bank for both Pakistan and India. Reserve Bank of
India did not make this decision on its own. Partition council was charged with this duty and also
ten expert committees were also involved. The expert committee’s task had to be finished in a
month’s time, therefore its major report was submitted on July 28, 1947. The Pakistan order of
1947 was largely based on the committee’s work.

Pakistan order that was issued on 14th August 1947 in this order it was stated that reserve bank of
India will be providing currency and will act as bank for Pakistan until 30 th September 1948. The
Reserve bank of India started taking the control of Pakistan monetary system under Pakistan
order.

The last thing to be decided was about cash balance division between Pakistan and India. At the
time of partition, the cash balance that Indian government have was almost near to Rs.400 crore.
Out of this 400 crore Pakistan share in it was set at Rs.75 crore. Out of this Rs.75 crore the
amount that was given to Pakistan on August 15, 1947 as operating balance was Rs. Crore. The
relation between Pakistan and Reserve Bank of India was damaged because of the problematic
and difficult matter of the remaining Rs.55 crore that was payable to Pakistan. The relation was
damaged because India was reluctant not to give the remaining balance to Pakistan

Kashmir became a center for controversy soon after the partition. In second memorandum it was
demanded by the finance secretary of Pakistan that Reserve bank of India should transfer the
remaining cash balance of Rs.55 crore to be transferred in Pakistan’s government account and if
RBI does not transfer the amount then Indian government’s Reserve bank of India will not be
allowed to operate in Pakistan as central bank anymore.

CONCLUSION:

Deshmukh’s (The governor of the RBI) relationship with the Pakistani government deteriorated
as a result of these occurrences. The governor of the Reserve Bank of India turned down an offer
to visit Karachi from Pakistan’s finance minister in February 1948. Things started to reach a
resolution a little later. Deshmukh and Zahid Hussain (members of the fifth expert committee)
met in Delhi for discussions and negotiations. On April 1, 1948, the Pakistan government chose
to take over responsibility for currency and banking systems sooner than originally anticipated.
The Reserve Bank of India was supposed to last until September 1948, according to the initial
agreement.

Pakistan’s currency and banking arrangements were handed over to the SBP, and Indian
currency notes in chests held in Pakistan would be transferred to the RBI sooner than the date
originally agreed upon. It was soon realized that if Reserve Bank of India was allowed to
continue its operation in Pakistan this could harm the interest of Pakistan.

The Reserve Bank of India has shown difficulty in resolving Pakistan's financial issue. It
worsened the situation by refusing to provide Pakistan the Rs. 55 crore it was owed from the
undivided India's financial position. The Pakistani government realized that the Reserve Bank of
India could not be trusted, and that continuing to rely on it would jeopardize Pakistan's very
survival. As a result, it chose to create its own currency authority.
 FUCTIONS OF STATE BANK OF PAKISTAN

The functions performed by state bank of Pakistan is similar to functions that are performed by
any other central bank of a country. But central bank functions are quite different from
commercial bank functions. National interest is look after by the central bank and profit-making
is not its main goal. Central bank does not accept deposits from public and also central bank does
not advances loan to general public these are not the functions of central bank but these functions
are performed by commercial bank. State bank of Pakistan perform both traditional and non-
traditional functions.

TRADITIONAL FUCTION

The traditional function of SBP is further classified in two parts primary function and secondary
functions.

1. PRIMARY FUNCTIONS
a) Sole Right of Issuance of Notes:

In Pakistan the in all the banks only State Bank of Pakistan has the sole right to issue currency
notes. Only the notes issued by State Bank of Pakistan are legal tender money that is circulated
throughout our country. State bank of Pakistan has monopoly in issuance of notes. The reason
for giving sole authority to issue notes to central bank is because they regulate the currency
according to its demand.

b) Banker to Government:

The SBP acts as a banker to the government, both federal and state. It is in charge of all of the
government's banking operations. The State bank of Pakistan keeps the cash or deposits of
government in its current account. Also, another function that State Bank of Pakistan perform as
banker to the government is that it makes payment of government and gather the receipts.

In addition, on behalf of the government the central bank or SBP conducts exchange, remittance
and any other banking activity that government requires. The central bank makes short-term
loans and advances to governments as needed, and it also administers the country's public debt.
As a government adviser, it advises the government on all monetary and economic issues.
 c) Banker’s Bank and Supervisor:

A country often has hundreds of banks. There should be some sort of organization in charge of
regulating and supervising their appropriate operation. Hence State bank of Pakistan is
responsible for supervising commercial banks and fulfilling this obligation.

Commercial banks of Pakistan are required to keep certain amount of deposits with State Bank
of Pakistan in this way SBP the ultimate custodian of commercial banks' cash reserves. When
commercial banks run out of cash, they can borrow from the central bank or SBP and have their
trade bills reduced. And if any commercial bank wants to open new branch of bank then they
first need the permission from central bank of Pakistan. Central bank continuously regulates its
policies regarding advances of loans to commercial bank, State bank of Pakistan fixes the rate of
interest to be charged.

d) Lender of Last Resort:

State Bank of Pakistan is lender of last resort for commercial banks because SBP gives cash or
short-term loan to commercial banks when they are in crisis and helps in to boost the cash
reserves position of commercial banks. This prevents banks from failing and the banking system
from collapsing. The central bank, on the other hand, preserves the country's financial system
from collapse by providing temporary financial accommodation.

e) Controller of Credit:

It means that the central bank has the authority to regulate private banks' credit production.
Credit generation is determined by the number of deposits, cash reserves, and interest rates
offered by commercial banks. The central bank has direct or indirect influence over all of these.

f) Representative of Foreign Trade:

State bank of Pakistan also acts as the representative of government in foreign trade by providing
foreign exchange to importers and exporters of the country.
 2. SECONDARY FUNCTIONS
a. Public Debt Management:

SBP manages domestic public debt on behalf of the Government of Pakistan. The SBP is in
charge of auctioning off marketable government securities.

b. Management of Foreign Currency:

The state bank of Pakistan also performs the function of maintaining minimum reserve of foreign
currency. The reason for maintaining this reserve is to meet any emergency needs of foreign
currency that can arise anytime. State Bank of Pakistan is also responsible for the maintenances
of value of home currency. All foreign money received by citizens must be deposited with the
central bank, and citizens must apply to the central bank if they wish to make payments in
foreign currency.

c. Advisor to Government:

The State bank of Pakistan is also the banker to the government. SPB as banker to the
government carries out various banking activities of the government. The government deposit
the money with SBP, also SBP give loans to provincial and central government, and supervises
the central government's debt operations.

Similarly, as government banker SPB on behalf of government collect receipts and make
payments. As banker to government SBP oversees government accounts across the country. As
the government's agent, it buys and sells securities on its behalf. It acts as an advisor to the
government and assists it in developing rules to control the money market.

d. Relationship with International Financial Institution:

Central bank acts as the representative of government for international institutions like
International monetary funds (IMF) and Pakistan is also the member IMF. State bank of Pakistan
also represent government in some other international financial institutions like World Bank, and
Central bank of foreign countries etc. State bank of Pakistan is responsible to execute all the
agreement of provincial and federal government with International financial institutions.
 NON-TRADITIONAL FUCTIONS

1. Staff Training:

The central bank or State bank of Pakistan also provide staff modern training of banking. And
State bank of Pakistan has also established various institute where they can provide training to
staff like Institute of bankers, Training department, Training on Islamic banking, national
institute of banking and finance, and training for rural finance etc.

One thing to be noted is that at the time of independence Pakistan severely lacked in qualified
and trained staff to solve this problem state bank of Pakistan introduced “Bank Officers Training
Scheme” and this was introduced one month after the establishment of State bank of Pakistan.
Also, Board of State bank of Pakistan on 2nd July 1948 approved for university graduates a
scheme this was done to improve the competencies and capabilities of banking workers.

2. Credit to Priority Sectors:

The central bank also extends or gives loan to sectors that need the capital for the development
and growth of that particular sector. Central bank extends different kind of loan to industrial and
agricultural sectors with the aim of the development and growth of these sectors of the country.
The ultimate goals are to improve efficiency in all sectors of the economy while allowing market
forces to determine the best resource allocation.

3. Development of The Banking Sector

The recovery of Pakistan's banking system was the State Bank of Pakistan's most significant
contribution to the country's economic development. Out of 3496 branches of scheduled bank
631 were in Pakistan when the announcement of independence was made then Hindus started
withdrawing their deposits from branches of Pakistan.

Ultimately many banks branches in Pakistan had to shut down their operation this means that
Pakistan’s commercial banking sector collapsed before partition. There was also no autonomous
monetary body, therefore Pakistan's currency and monetary matters had to be handled by the
Reserve Bank of India. As a result, the State Bank had a huge work ahead of it in terms of
strengthening its own institution as a central bank, as well as the entire development of the
banking system in the country.

4. Development of Specialized Financial Institutions

Many specialized financial institutions are also established by state bank of Pakistan. State bank
of Pakistan has established these institutions so that they meet and fulfill the financial needs and
requirements of different sectors of the economy. These institute provide finance to industrial,
agricultural and some other sectors.

Some of the institute that SBP has established are:

 Pakistan Industrial Credit and Investment Corporation of Pakistan (PICIC)

 Industrial Development Bank of Pakistan (IDBP)
 National Development Finance Corporation (NDFC),
 Agricultural Development Bank of Pakistan (ADBP)
 Federal Bank for Cooperatives (FBC)
 House Building Finance Corporation (HBFC).

5. Islamization of the banking system in Pakistan

Another important function performed by State bank of Pakistan is there effort to bring Islamic
laws and principles in banking system of Pakistan. Since the formation of State bank of Pakistan
has worked to build and introduce a financial system based on Shariah principles. When State
bank came into being Quaid e Azam and the first governor of state bank Zahid Hussain provided
orders to make efforts make the financial system of Pakistan in accordance with Islamic lines.
But the effort could not begin right away because of lack of Islamic jurisprudence.