STATE BANK OF PAKISTAN:

Introduction:

Before the World War First, there were only a few countries, which had
there own central banks. After the War, the number of central banks
has increased and now there is not a single country in the world, which
does not have its own central bank.

There were many considerations underlying the establishment of a

central bank. After the first war, there was complete confusion in
currency and exchange markets. There were large withdrawals of
money form banks. The bank reserves fell below the needed levels.
There was no institution, which could supervise the working of banks
and also serve as a fiscal agent. In addition to the above difficulties,
there was a rigidity or lack of elasticity in the supply of the currency.
There were also reoccurrences of failures of the commercial banks. In
order to solve the monetary problems of the countries and set them on
the healthy footings, a conference was held at Brussels in 1920. It was
decided in that conference that to control the supply of money and
credit in the economy and maintained stable business conditions, each
country must establish its own central bank in order to solve the
problems.

STATE BANK OF PAKISTAN 1

Brief History of State Bank of Pakistan:

At the time of independence, the immediate and foremost work of the

government of Pakistan was to establish a central bank so that it
should have an independent currency and banking system. At that
time Pakistan faced a lot of complex problems on account of partition
of the Sub-continent. It was decided with India that the Reserve Bank
of India would continue to act as a central bank and currency authority
for Pakistan till the establishment of its own central bank. The
transitional arrangement of having one central bank for two
independent countries was promulgated by Governor General of
undivided India on August 14, 1947 by an order called “Monetary
System and Reserve Bank Order 1947”. Following are the main
provisions of the said order.

1) The reserve bank of India would be the sole note issuing

authority in Pakistan till September 1948.
2) The Indian note will remain legal tender in both Pakistan and
India until 30th September 1948. The Govt of Pakistan will issue
its own currency from October1, 1948.
3) The reserve bank of India would transfer the assets of value
equal to Pakistani note to Pakistani government after 30th
September 1948.
4) The Govt of Pakistan will issue notes and coins in the country
after 30th September 1948. The coins issued by the Govt of India
would remain the legal tender in Pakistan for at least one year
from the date of issue of Pakistani coins.

STATE BANK OF PAKISTAN 2

 5) The reserve bank of India would perform the full functions of
central bank in Pakistan up to September 30th, 1948.

Establishment of State Bank of Pakistan:

Immediately after partition, the newly born state was forced with a
serious banking situation due to the wholesale migration of the
banking staff to India. The reserve bank of India showed reluctance in
solving the banking crises. It rather created further problems and
difficulties by refusing to give Rs55 Crore, which Pakistan was entitled
to share the cash balance of the undivided India. The Govt of Pakistan
then realized that reserve bank of India cannot existence of Pakistan.
It therefore decided to establish its own currency authority earlier then
it was mutually agreed upon. The reserve bank of India was relieved of
its factions in Pakistan from the first day of July 1948. The Governor
General of Pakistan Quid-e-Azam Muhammad Ali Jinnah issued order for
the establishment of State Bank of Pakistan on 1st July 1948. According
to the State Bank order 1948, the bank is entrusted with the duty of
regulating the issue of bank notes and keeping of reserve with a view
to seeking monetary stability in Pakistan

What The Central Bank is?

“The guiding principle of a Central Bank is that it

acts only in the public interest and for the
welfare of the community as a whole and
without regard to profits a primary
consideration.”

STATE BANK OF PAKISTAN 3

STATE BANK OF PAKISTAN 4
The objectives of establishing Central Bank: .

 Firstly, the objectives of establishing the central bank are

different from that of commercial bank. The commercial
banks are profit seeking companies where as the central bank
does not compete with the commercial banks in the hunting
of profits. Earning of profits is the prime objectives of today
commercial banks, while for the central bank it has only a
secondary consideration. The central bank is charged with the
responsibility of managing the banking and credit system to
achieve high and stable level of employment and production
in the economy.

 Secondly, the central bank is subordinates to the government

or state. It controls the monetary as well as the banking
system on the behalf of the government.

 Thirdly, it deals with the member banks and supervises their

work.

STATE BANK OF PAKISTAN 5

 Organizational Hierarchy

Governor

Deputy Deputy
Governo Governo
r r

Executive Directors

Joint Director

Dy. Director

Assistant Director

Statutory Obligations (RMD)

STATUTORY CASH RESERVE

In terms of Section36 (1) SBP Act, 1956, every scheduled bank is

required to maintain with State Bank a balance the amount of which
shall not at the close of business or any day be less than such
percentage of Time & Demand Liabilities in Pakistan as may be
determined by State Bank.

Presently the requirement is 5% on weekly average basis subject to

daily minimum of 4% of Time & Demand Liabilities.

STATE BANK OF PAKISTAN 6

STATUTORY LIQUIDITY REQUIREMENT

In terms of Section 29(1) of Banking Companies Ordinance, 1962 every

banking company shall maintain in Pakistan in cash, gold or un-
encumbered approved securities valued at price not exceeding "the
lower of cost or the current market price" an amount which shall not at
the close of business in any day be less than such percentage of the
total of its time & demand liabilities in Pakistan, as may be notified by
State Bank from time to time.

Presently the requirement is 15% (excluding 5% statutory cash

reserve) of the total of its time and demand liabilities in Pakistan.

MAINTENANCE OF LIQUIDITY AGANINST CERTAIN LIABILITIES

In terms of Rule 6 of non banking financial institutions (NBFIs) Rules of
Business, all NBFIs are required to invest 14% of their liabilities defined
in the Rule, in Government Securities, NIT Units, shares of listed
companies or listed debt securities in the prescribed manner. For the
purpose of this rule, liabilities shall not include NBFIs equity,
borrowings from financial institutions including accruals thereon, lease
key money, deferred taxation not payable within 12 months, dividend
payable within two months, advance lease rentals and deposits from
financial institutions. In addition, they are also required to maintain
cash balance with State Bank, which shall not be less than 1% of their
liabilities as defined above.

SUBMISSION OF ANNUAL AUDITED ACCOUNTS BY NBFIs

Under Rule 17 of NBFIs Rule of Business, all NBFIs are required to

submit their annual audited accounts within a period of 6 months after
the close of their accounting year.

STATE BANK OF PAKISTAN 7

ANNUAL ACCOUNTS:

At the expiration of each calendar year every banking company

incorporated in Pakistan, in respect of all business transacted by it, and
every banking company incorporated outside Pakistan, in respect of all
business transited through its branches in Pakistan, shall prepare with
reference to that year a balance-sheet and profit and loss account as
on the last working day of the year in the prescribed forms (Section 34
of Banking Companies Ordinance, 1962).

SUBMISSION OF RETURNS:

The accounts and balance-sheet referred to in section 34 together with

the auditor’s report as passed in the annual General Meeting shall be
published in the prescribed manner, and three copies thereof shall be
furnished as returns to the State Bank within three months of the close
of the period to which they relate (Section 36 of Banking Companies
Ordinance, 1962).

MINIMUM CAPITAL REQUIREMENTS:

In terms of Section 13 of Banking Companies Ordinance, 1962 no

banking company shall commence business unless it has a minimum
paid up capital as may be determined by the State Bank or carry on
business unless the aggregate of its capital and unencumbered
general reserves is of such minimum value within such period as may
be determined and notified by the State Bank from time to time for
banking companies in general or for a banking company in particular.
As present, all banks operating in Pakistan are required to maintain
capital and unencumbered general reserve, the value of which is not
less than 8% of their risk weighted assets. Additionally they are also
required to maintain a minimum paid up capital of Rs.500 million.

STATE BANK OF PAKISTAN 8

 Core Functions of State Bank of Pakistan:

State Bank of Pakistan is the Central Bank of the country. While its
constitution, as originally laid down in the State Bank of Pakistan Order
1948, remained basically unchanged until 1st January 1974 when the
Bank was nationalized, the scope of its functions was considerably
enlarged. The State Bank of Pakistan Act 1956, with subsequent
amendments, forms the basis of its operations today.

Under the State Bank of Pakistan Order 1948, the Bank was charged
with the duty 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". The scope of the Bank’s operations was considerably
widened in the State Bank of Pakistan Act 1956, which required the
Bank to "regulate the monetary and credit system of Pakistan and to
foster its growth in the best national interest with a view to securing
monetary stability and fuller utilization of the country’s productive
resources". Under financial sector reforms, the State Bank of Pakistan
was granted autonomy in February 1994. On 21st January, 1997, this
autonomy was further strengthened by issuing three Amendment
Ordinances (which were approved by the Parliament in May, 1997)
namely, State Bank of Pakistan Act, 1956, Banking Companies
Ordinance, 1962 and Banks Nationalization Act, 1974. The changes in
the State Bank Act 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. The amendments in Banks Nationalization Act abolished
the Pakistan Banking Council (an institution established to look after
the affairs of NCBs) and institutionalised the process of appointment of

STATE BANK OF PAKISTAN 9

the Chief Executives and Boards of the nationalised commercial banks
(NCBs) and development finance institutions (DFIs), with the Sate Bank
having a role in their appointment and removal. The amendments also
increased the autonomy and accountability of the Chief Executives and
the Boards of Directors of banks and DFIs.

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:
1) The primary functions including:

 Issue of notes,
 Regulation and supervision of the financial system,
 Bankers’ bank,
 Lender of the last resort,
 Banker to Government,
 Conduct of monetary policy.

2) The secondary functions including:

 The agency functions like management of public debt,
 Management of foreign exchange, etc.

Sole right of Note Issue:

The central bank has the monopoly of note issue in world. In Pakistan
state bank of Pakistan is central bank and has sole right to issue
currency notes (coins are issued by the Ministry of Finance in
Pakistan). The monopoly in issuance of currency notes has the
following advantages.

STATE BANK OF PAKISTAN 10

Advantages:
o It brings uniformity in the circulation of currency.
o The central bank is in a better position to exercise control over
the money supply in the country.
o The sole power to issue notes enables the central bank to
control the lending operations of the commercial banks.
o Law regulates the right of note issue. Therefore it enhanced and
increased public confidence in the monetary system of the
country.

Methods of Note Issue:

There are two methods of note issue named as Fixed Fiduciary
System and Proportionate Reserve System. In Pakistan
proportionate reserve system is prevailing at the moment.
1. Fixed Fiduciary System:
Under this system a fixed amount is laid down, which need to
be covered by government securities. Note issued in excess
of this amount must be fully backed gold and silver etc. this
methods assures maximum safety for the notes without any
doubt but it lacks elasticity. The supply of notes is tied down
to the supply of gold available in the country. This system
also fails to take into consideration the commercial banks
power to create credit. And this system is not in a position to
meet the needs of growing trade industry and commerce and
not a favorable system for less developed countries like the
economy of Pakistan.
2. Proportionate Reserve System:
According to Proportionate Reserve System, the central bank is to keep a certain
percentage of the total notes issued in gold, silver etc.

STATE BANK OF PAKISTAN 11

 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 main functions and
responsibilities of the State Bank can be broadly categorized as
under.

REGULATION OF LIQUIDITY:

Being the Central Bank of the country, State Bank of Pakistan has been
entrusted with the responsibility to formulate and conduct monetary
and credit policy in a manner consistent with the Government’s targets
for growth and inflation and the recommendations of the Monetary and
Fiscal Policies Co-ordination Board with respect to macro-economic
policy objectives. The basic objective underlying its functions is two-
fold i.e. the maintenance of monetary stability, thereby leading
towards the stability in the domestic prices, as well as the promotion of
economic growth.

To regulate the volume and the direction of flow of credit to different

uses and sectors, the Bank makes use of both direct and indirect
instruments of monetary management. Until recently, the monetary
and credit scenario was characterised by acute segmentation of credit
markets with all the attendant distortions.

STATE BANK OF PAKISTAN 12

Pakistan embarked upon a program of financial sector reforms in the
late 1980s. A number of fundamental changes have since been made
in the conduct of monetary management, which essentially marked a
departure from administrative controls and quantitative restrictions to
market-based monetary management. A reserve money management
programmed has been developed. In terms of the programmed, the
intermediate target of M2 would be achieved by observing the desired
path of reserve money - the operating target. While use in now being
made of such indirect instruments of control as cash reserve ratio and
liquidity ratio, the program’s reliance is mainly on open market
operations.

ENSURING THE SOUNDNESS OF FINANCIAL SYSTEM:

REGULATION AND SUPERVISION

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 rapid
advancement in information technology, together with growing
complexities of modern banking operations, has made the supervisory
role more difficult and challenging. The institutional complexity is
increasing, technical sophistication is improving and technical base of
banking activities is expanding.

Accordingly, the out dated inspection techniques have been replaced

with the new ones to have better inspection and supervision of the
financial institutions. The banking activities are now being monitored

STATE BANK OF PAKISTAN 13

through a system of ‘off-site’ surveillance and ‘on-site’ inspection and
supervision. Off-site surveillance is conducted by the State Bank
through regular checking of various returns regularly received from the
different banks. On other hand, the State Bank in the premises of the
concerned banks when required undertakes on-site inspection.

To deepen and broaden financial markets as also to diversify the

sources of credit, a number of non-bank financial institutions (NBFIs)
were allowed to increase substantially. The State Bank has also been
charged with the responsibilities of regulating and supervising of such
institutions. To regulate and supervise the activities of these
institutions, a new Department namely, NBFIs Regulation and
Supervision Department was set up. Moreover, in order to safeguard
the interest of ultimate users of the financial services, and to ensure
the viability of institutions providing these services, the State Bank has
issued a comprehensive set of Prudential Regulations (for commercial
banks) and Rules of Business (for NBFIs).

The "Prudential Regulations" for banks, besides providing for credit and
risk exposure limits, prescribe guide lines relating to classification of
short-term and long-term loan facilities, set criteria for management,
prohibit criminal use of banking channels for the purpose of money
laundering and other unlawful activities, lay down rules for the
payment of dividends, direct banks to refrain from window dressing
and prohibit them to extend fresh loan to defaulters of old loans. The
existing format of balance sheet and profit-and-loss account has been
changed to conform to international standards, ensuring adequate
transparency of operations. Revised capital requirements, envisaging
minimum paid up capital of Rs.500 million have been enforced.
Effective December,1997, every bank was required to maintain capital

STATE BANK OF PAKISTAN 14

and unencumbered general reserves equivalent to 8 per cent of its risk
weighted assets.
The "Rules of Business" for NBFIs became effective since the day NBFIs
came under State Bank’s jurisdiction. As from January, 1997, Modaraba
and leasing companies, which are also specialized type of NBFIs, are
being regulated/supervised by the Securities and Exchange
Commission (SECP), rather than the State Bank of Pakistan.

EXCHANGE RATE MANAGEMENT AND BALANCE OF PAYMENTS

One of the major responsibilities of the State Bank is the maintenance

of external value of the currency. In this regard, the Bank is required,
among other measures taken by it, to regulate foreign exchange
reserves of the country in line with the stipulations of the Foreign
Exchange Act 1947. As an agent to the Government, the Bank has
been authorized to purchase and sale gold, silver or approved foreign
exchange and transactions of Special Drawing Rights with the
International Monetary Fund under sub-sections 13(a) and 13(f) of
Section 17 of the State Bank of Pakistan Act, 1956.

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. To achieve the objective, various exchange
policies have been adopted from time to time keeping in view the
prevailing circumstances. Pak-rupee remained linked to Pound Sterling
till September 1971 and subsequently to U.S. Dollar. However, it was
decided to adopt the managed floating exchange rate system w.e.f.

STATE BANK OF PAKISTAN 15

January 8, 1982 under which the value of the rupee was determined on
daily basis, with reference to a basket of currencies of Pakistan’s major
trading partners and competitors. Adjustments were made in its value
as and when the circumstances so warranted. During the course of
time, an important development took place when Pakistan accepted
obligations of Article-VIII, Section 2, 3 and 4 of the IMF Articles of
Agreement, thereby making the Pak-rupee convertible for current
international transactions with effect from July 1, 1994.

After nuclear detonation by Pakistan in 1998, a two-tier exchange rate

system was introduced w.e.f. 22nd July 1998, with a view to reduce the
pressure on official reserves and prevent the economy to some extent
from adverse implications of sanctions imposed on Pakistan. However,
effective 19th May 1999, the exchange rate has been unified, with the
introduction of market-based floating exchange rate system, under
which the exchange rate is determined by the demand and supply
positions in the foreign exchange market. The surrender requirement
of foreign exchange receipts on account of exports and services,
previously required to make to State Bank through authorized dealers,
has now been done away with and the commercial banks and other
authorized dealers have been made free to hold and undertake
transaction in foreign currencies.
As the custodian of country’s external reserves, the State Bank is also
responsible for the management of the foreign exchange reserves. The
task is being performed by an Investment Committee which, after
taking into consideration the overall level of reserves, maturities and
payment obligations, takes decision to make investment of surplus
funds in such a manner that ensures liquidity of funds as well as
maximizes the earnings. These reserves are also being used for
intervention in the foreign exchange market. For this purpose, a
Foreign Exchange Dealing Room has been set up at the Central

STATE BANK OF PAKISTAN 16

Directorate of State Bank of Pakistan and services of a ‘Forex Expert’
have been acquired

DEVELOPMENTAL ROLE OF STATE BANK

The responsibility of a Central Bank in a developing country goes well

beyond the regulatory duties of managing the monetary policy in order
to achieve the macro-economic goals. This role covers not only the
development of important components of monetary and capital
markets but also to assist the process of economic growth and
promote the fuller subsidized of a country’s resources.

Ever since its establishment, the State Bank of Pakistan, besides

discharging its traditional functions of regulating money and credit, has
played an active developmental role to promote the subsidized of
macro-economic goals. The explicit recognition of the promotional role
of the Central Bank evidently stems from a desire to re-orientate all
policies towards the goal of rapid economic growth. Accordingly, the
State Bank with a well-recognised developmental role has combined
the orthodox central banking functions.

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 Bank’s participation 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), directing
the use of credit according to selected development priorities,
providing subsidized credit, and development of the capital market

STATE BANK OF PAKISTAN 17

Banking Sector Supervision in Pakistan:

State Bank of Pakistan (SBP) which is the Central Bank of the country
has been interalia entrusted with the responsibility for an ongoing
effective supervision of the banking sector. The relevant provisions of
law, which vest powers in State Bank of Pakistan (SBP) to carry out
inspection of banks, are contained in the Banking Companies
Ordinance, 1962. Besides, State Bank of Pakistan Act, 1956 and the
Bank’s Nationalization Act, 1974, The Financial Institutions (Recovery
of finances) Ordinance, 2001, Companies Ordinance, 1984 and
Statutory Regulatory Orders (SROs) are the relevant legislations, which
cover the activities concerning the banking sector. The financial sector
in Pakistan comprises of Commercial Banks, Development Finance
Institutions (DFIs), and Micro finance Banks (MFBs), Non-banking
Finance Companies (NBFCs) (leasing companies, Investment Banks,
Discount Houses, Housing Finance Companies, Venture Capital
Companies, Mutual Funds), Modaraba, Stock Exchange and Insurance
Companies. Under the prevalent legislative structure the supervisory
responsibilities in case of Banks, Development Finance Institutions
(DFIs), and Microfinance Banks (MFBs) falls within legal ambit of State
Bank of Pakistan while the rest of the financial institutions are
monitored by other authorities such as Securities and Exchange
Commission and Controller of Insurance.

Under the WTO commitments the operational status of branch network

of foreign banks operating in Pakistan as on 31-12-1997 has been
protected and frozen. However, existing foreign banks having less than
3 branches can have branches to the extent of maximum number of 3
only. New foreign banks desirous of entering banking business in
Pakistan will now be required to incorporate as domestic bank under

STATE BANK OF PAKISTAN 18

the local laws. The branches of foreign banks operating in Pakistan can
also be converted into a local commercial bank by incorporating under
the local laws and subject to a minimum paid up capital of Rs.1 billion
provided foreign share holding is restricted to a maximum of 49%.

At present there are 41 scheduled banks, 6 DFIs, and 2 MFBs operating

in Pakistan whose activities are regulated and supervised by State
Bank of Pakistan. The commercial banks comprise of 3 nationalized
banks, 3 privatized banks, 15 private sector banks, 14 foreign banks, 2
provincial scheduled banks, and 4 specialized banks.

Under the Banking Companies Ordinance, 1962 the State Bank of

Pakistan is fully authorized to regulate and supervise banks and
development finance institutions. 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. In every case in which the management of a bank is failing
to discharge its responsibility in accordance with the applicable
statutory criteria or banking rules & regulations or is failing to protect
the interests of the depositors or for advancing loans and finance
without due regard for the best interests of the bank or for reasons
other than merit, the State Bank is empowered to take necessary
remedial steps. The State Bank of Pakistan can, interalia, exercise the
following powers vested upon it under the Banking Companies
Ordinance:-

STATE BANK OF PAKISTAN 19

Prohibiting the bank from giving loans, advances & credits. Prohibiting
the bank from accepting deposits. Cancel license of a bank. Give
directions to the bank as it deem fit. Remove chairman, directors, chief
executive or other managerial persons from the office and appoint a
person as chairman, director or chief executive.

Supersede the Board of Directors. Direct prosecution of directors, chief

executive or other officer. Caution or prohibit bank against entering
into any particular transaction(s). Require bank to make changes in
management. Appoint its officers to observe the manner in which
affairs of bank/its branches/office are conducted. Winding up the bank
through high court. Apply to Federal Government for an order of
moratorium in respect of a bank and to prepare scheme of
reconstruction or amalgamation. Impose penalties including civil
money penalties.

The State Bank has framed Prudential Regulations for banks and Rules
of Business for DFIs that present a prudent operating framework within
which banks and DFIs are expected to conduct their business in a safe
and sound manner taking into account the risks associated with their
activities. These regulations incorporate the spirit and essence of BIS
regulations and are constantly watched for possible improvement so
that their enforcement yields the best results to promote the
objectives of supervision.

The State Bank is empowered to determine Statutory Liquidity and

Cash Reserve Requirements for banks/DFIs. Presently the Cash
Reserve Requirement is 5% on weekly average basis subject to daily

STATE BANK OF PAKISTAN 20

minimum of 4% of Time & Demand Liabilities. In addition to that banks
are required to maintain Statutory Liquidity Requirement (SLR) @ 15%
of their Time & Demand Liabilities. Similarly, DFIs are required to
maintain SLR of 14% and Cash Reserve of 1% of their specified
liabilities. Additionally, The Banking Companies Ordinance had been
amended in 1997 which empowers the State Bank to prescribe capital
requirements for banks. In exercise of these powers the State Bank has
laid down Minimum Capital Requirements for banks based on Basle
capital structure. The banks have to maintain a Capital Adequacy Ratio
in a way that their capital and unencumbered general reserves are, at
the minimum, 8% of their risk weighted assets, and effective from 1st
January, 2003 banks are required to maintain a minimum paid up
capital level of Rs.1 Billion.

While the off-site monitoring aspect is looked after by the State Bank
of Pakistan’s Banking Supervision Department the responsibility for the
on-site examination of the banking system in Pakistan lies on the
shoulders of the Banking Inspection Department. This has been
designed to ensure that institutions operate in a safe and sound
manner. The focus of the supervisory efforts by the State Bank of
Pakistan is on the health and stability of the banking system in
Pakistan.

Off-Site Monitoring at Banking Sector Development:

The objectives of off-site surveillance over the banking system are

to monitor the condition of individual banks, as well as condition within
the banking system; to provide early identification of problems so that
corrective action can be effected; and to target scarce on-site
supervisory resources to areas or activities of greater risk.

STATE BANK OF PAKISTAN 21

Off-site surveillance system revolves around receipt, review and
analysis of periodic financial statements and returns submitted to the
State Bank. The off-site analysis facilitate monitoring of each bank’s
performance and its observance of supervisory requirements over
time, so that problems may be identified as soon as these emerge. The
process thus assists in making the most effective use of scarce on-site
inspection resources. The system also works as an early warning to
identify those areas, which reflect high probability of financial
difficulties so that policies and corrective actions can be designed and
implemented accordingly.

In consonance with the responsibilities envisaged under the Core

Principles recommended by the Basle Committee, the On-Site
examination capabilities at the State Bank of Pakistan have been
substantially augmented to bring them at par with the expected
international standards. While regulations have existed for some time
aimed at convergence of the essential industry indicators to the
globally accepted criteria, the bank in all its assessments has adopted
a risk-based approach to evaluations. Periodic On-Site examinations of
the financial condition of institutions, falling within SBP’s jurisdictions,
remains the most effective supervisory tool, which support Banking
Supervision Departments in maintaining a proactive approach in
discharge of the statutory responsibilities.

The State Bank of Pakistan’s policy for frequency of inspection of banks

and DFIs is designed to provide flexibility in scheduling inspections
consistent with the need to maintain safety and soundness. The policy
provides a framework within which supervisory ratings, surveillance

STATE BANK OF PAKISTAN 22

and financial monitoring results, and other appropriate indicators of
banks soundness, are to be considered in carrying out the State Bank
of Pakistan’s fundamental policy of subjecting each bank and non-bank
financial institution under its supervision to a periodic on-site
inspection.

With a view to streamline the approach and the underlying procedures

for effective and efficient banking supervision State Bank of Pakistan
has embarked upon a major overhauling of its own capabilities so as to
bring them at par with international practices. This entailed hiring of
services of consultants of world repute (M/s. Arthur Andersen) under
the FSID Project of the World Bank. These Consultants have compiled
extensive on-site and off-site manuals. Besides qualified and
professional trained human resource have been recruited and rigorous
theoretical and hands-on training has been provided to them. With the
shift in supervisory focus from ‘compliance oriented’ to ‘Risk
Assessment Approach’ State Bank of Pakistan has developed a uniform
bank rating system in conformity with international
standards/benchmarks. Now each bank is appraised under the
CAMELSS/CAELS Rating System.

In order to portray a legitimate and true financial condition of a bank

the off-site surveillance system and the on-site inspection functions of
banking supervision work extremely close together. As a result of
these close coordination bank ratings reflects as accurately as
possible, the true financial condition of a bank and the banking system
as a whole.

STATE BANK OF PAKISTAN 23

MINIMUM CAPITAL REQUIREMENTS:

Banks are aware that Section 13 of the Banking Companies Ordinance,

1962 relating to requirement of minimum paid up capital and reserves
has recently been modified through the Banking Companies (Second
Amendment) Ordinance, 1997 (copy enclosed). The modified law
interlay states that no banking company shall commence business
unless it has a minimum paid up capital as may be determined by the
State Bank or carry on business unless the aggregate of its capital and
unencumbered general reserves so of such minimum value within such
period as may be determined and notified by the State Bank from time
to time. Accordingly, in exercise of the powers vested under the above
provisions of law it has since been decided that effective from
December 31, 1997 all banks shall maintain minimum capital as laid
down in the enclosed Annexure.

INSTRUCTIONS ON CALCULATION OF MINIMUM CAPITAL

Requirements Based On Risk Weighted Assets

1. No banking company incorporated in Pakistan shall commence

and carry on banking business unless it has a minimum paid up
capital or Rs 500 million. Similarly, no banking company
incorporated outside Pakistan shall commence and carry on
banking business in Pakistan unless it has a minimum paid up
capital of the value of Rs 500 million.
2. Provided that where a banking company already in existence is
found short of the minimum required paid up capital on 31st
December, 1997, it shall meet shortfall by 31st December, 1998.

STATE BANK OF PAKISTAN 24

 3. Effective from where the capital and unencumbered general
reserves maintained by a banking company are found short of
the minimum required capital and unencumbered general
reserves (MCR) on December 31st, 1997, the State Bank shall, on
request from the banking company concerned, consider grant of
extension in time for meeting the required capital adequacy.
4. The capital and unencumbered general reserves for the purposes
of the minimum requirement of 8% of risk weighted assets shall
mean and include:-

A) Equity:

i. Fully paid up capital / capital deposited with SBP*

ii. Balance in share premium account
iii. Reserve for Bonus Shares
iv. General Reserves as disclosed on the balance-sheet
v. Unappropriate/unremitted* profits (net of accumulated
losses, if any)

IN THE CASE OF FOREIGN BANKS OPERATING IN PAKINSTAN.

A. Supplementary Capital:

i. General Provisions or Reserves for loan losses

ii. Revaluation Reserves
iii. Undisclosed Reserves
iv. Subordinate debt.

1. The computation of the amount of Equity and

Supplementary Capital shall be subject to the following
limitations and restrictions:-

STATE BANK OF PAKISTAN 25

 i. The sum total of the different components of the
Supplementary Capital will be limited to the sum total of
the various components of the Equity.
ii. While calculating the amount of equity the followings shall
be deducted:-

 Book value of intangible assets such as goodwill, etc.

Shortfall in provisions required against classified assets

irrespective of any relaxation allowed by the State Bank.

NIBAF Files and Information’s

Location

National Institute of Banking and Finance is also referred as State Bank

Training Institute (SBTI) NIBAF Islamabad .It is situated at Sector H –8
Pittras Bukahri Road near Zero Point. Government offices at Islamabad
are situated at a distance of 6/7 kilometers from the institute. The
sector H is famous for educational and vocational institutions and
offices. The institute provides the residential facilities equivalent to
four-star hotel. The Public transport is easily available while other
facilities like telephone, postal services; hospitals are located quite
close to institute.
Facilities Available

All major training activities /courses and State Bank ’s Training

Programmes are held at NIBAF. The institute has a modern complex
constructed on a plot of land measuring 2.5 acres, having academic
and hostel blocks.

STATE BANK OF PAKISTAN 26

The Academic block of the institute is well equipped with all latest
state of all audio visual aids & a computer laboratory. The spacious
training rooms, Auditorium, and Syndicate rooms are suitable for any
type of training program /courses. The library of the institute contains
a rich collection of books, banking journals and periodicals besides
providing a client and congenial atmosphere for all the participants to
get benefit of learning.

The Publication Wing housed in the Academic Block provides all sort of
published material which includes course books, reading material,
photocopies, arranging of training material, hand books of training and
other publications of NIBAF to the trainees, participants, trainers,
training managers and other senior officials from SBP and other
institutions as well. It is also equipped with modern, electronic
equipment for scanning, typing, word processing of documents,
Internet exploring etc.

The hostel block of NIBAF consists of 120 single occupancy rooms and
4 executives suits that are fully furnished having all facilities of four-
star hotel providing homely environment. There is also a well-
maintained cafeteria supported by a modern commercial kitchen,
providing catering services to trainers & participants. Indoor games
and other recreational facilities like TV, VCR is available in the lounge
of the block. To promote healthy competition tournaments are held for
each course participants. Sight seeing trips are also arranged to visit
hill stations like Murree, Nathiagalli, Taxilla, Bhourbon, Kaghan, Naran,
etc on weekends /holidays. Such activities are part of the recreational
program arranged for participants to enjoy their leisure hours and to
keep them healthy and fit after long training.
NIBAF is now regarded as an institution of excellence in the area of
training of Banking & Finance in Pakistan. The top international

STATE BANK OF PAKISTAN 27

institutions like IMF; Bank Negra Malaysia has appreciated NIBAF for its
arrangements.

Functional and Organizational Set Up:

The functional and organizational set up of NIBAF has undergone a

quantum change in order to utilize the existing facilities of NIBAF at
optimum level. Director General NIBAF is the overall in charge of the
Academic Side of the Institute .He is assisted by two Directors one is
looking after Academic and the other Logistics side.
The institute now has it own in house capacity to organize the design,
development and review of relevant training programmed for both
domestic and foreign institutions in the field of banking and finance.
The institute has conducted a number of training programmes, which
are

• State Bank Officers Training (SBOT) (For new inductees at OG II

level)
• Joint Directors Training Program
• Research Officers Training Program
• International Courses on Central and Commercial banking

Institutional Arrangements:

The Bank has made contractual arrangements with other partners’

institutions like Institute of Bankers Pakistan (IBP) and Pakistan
Institute of Development Economics (PIDE) for conduct training courses
at NIBAF and Training Department Karachi. The arrangements are
meant for external trainers to be engaged through these institutions as
well as for training design and delivery of different modules on

STATE BANK OF PAKISTAN 28

Pakistan economy, Foreign Exchange, Macro Finance, Commercial
Banking etc.

Account Department:

A Brief Of The Working Of The accounts Department

Functions of the Department:

• Issuance of notes and coins in Pakistan

• Bankers of the Federal and Provincial Governments.
• Bankers of the commercial banks and custodian of
their cash reserves.
• Custodian of Pakistan’s reserves of approved foreign
exchange.
• Sale purchase of foreign currencies.
• Preparation of Balance Sheet and P/L account of the
bank.
• Preparation of annual budget of the bank.
• Issuance of weekly statement of affairs of Banking
and Issue departments.
• Management of Provident/General Provident Fund
balances.
• Management of Prize bonds and saving schemes of
the government.
• Functional control of the offices of the bank.

The Accounts Department is responsible to perform and

manage the functions detailed on pre-page. It controls the
working of the Offices under the provisions of Issue and
Banking Department Manuals. Issue Department deals with

STATE BANK OF PAKISTAN 29

 management of currency operations, which includes
designing, printing of currency notes and its circulation.
Banking Department relates to the operation of offices of
the Bank, maintenance of Federal and Provincial
Government Accounts, booking of financial transactions in
the books of accounts of Central Directorate and issue of
weekly Statement of Affairs as required under the
provisions of SBP Act, 1956, preparation of Profit and Loss
Account and Balance Sheet on yearly basis, formulation of
budget estimates of revenue and capital expenditure.
Management of General Provident Fund and Provident
Fund balances of all employees of the Bank. Operational
control of working of offices by framing policies and
procedures under the provisions of Banking/Issue
Department Manuals, Sale/ purchase of foreign currencies,
maintenance of foreign reserves of the country. Accounts
Department is also responsible for management of Prize
Bonds and Savings Schemes of the Government of
Pakistan.

To achieve the above objectives, the Department has been

divided into six divisions as detailed below:-

• Currency Division
• International Division
• Accounts Division
• Audit Division
• Support Services Division

Prize Bonds & Savings Scheme Division:

Brief Functions Of The Divisions

STATE BANK OF PAKISTAN 30

 1. CURRENCY DIVISION
• Arrange currency operation in the country which relates to
designing of currency notes, its printing through Pakistan
Security Printing Corporation and its issue through our offices of
issue i.e. Karachi, Lahore, Peshawar and Quetta.
• Regulate the withdrawal of old notes from circulation and
maintenance of its account etc.
• Issuance of weekly statement of Affairs and preparation of
Balance Sheet of Issue Department.
• Arrange purchase of confiscated Gold from Government
Departments.

Make arrangements for opening of new offices of State

Bank of Pakistan.

INTERNATIONAL DIVISON:-

This Division is responsible for investment of Bank’s funds in

foreign as well as local currencies. Sale/Purchase of approved
foreign currency through the authorised dealers. Realisation of
interest income on our investments in foreign and domestic
securities and maintenance of their respective record. Placement
of Bank’s Foreign Reserve as per decision of Investment
Committee in term deposits with Commercial banks of
International repute. Dealing with IMF transactions in respect of
acquisition/allocatio of SDR’s/receiptof
tranches/Purchase/Repurchases, Payments to IMF. Making
payments to parties/executing agencies under various etc., by
the International Donor Agencies viz. IBRD,ADB etc. Issue of
payment guarantees in respect of foreign currency loans

STATE BANK OF PAKISTAN 31

 negotiated by the Federal Government/Provincial Government,
autonomous bodies and approved organization on the strength
of counter guarantee from the Ministry of Finance, Government
of Pakistan, and Allocations/distributions of Government’s Letters
of Credit of Pakistani Commercial Banks as per ratio prescribed
by Ministry of Finance. Receipt/payments under ACU
arrangements and settlement thereof with ACU Secretariat, Iran.

ACCOUNTS
DIVISION

(Accounts (Main) Section):

• Maintenance of Accounts of Central Directorate.

• Consolidation of accounts received from offices.
• Preparation of weekly statement of Affairs for issuance in the
Government Gazette as provided in the State Bank of Pakistan
Act,1956.
• Preparation of Profit and Loss Account and Balance Sheet
(Banking Department) as on 30th June each year.
• Preparation of Annual Budget of the Bank for Revenue and
Capital expenditure under different heads of Charges/Dead stock
Accounts.
• Reconciliation of State Bank of Pakistan General Account relating
to Inter-Office transactions.

Monitoring of contraction and expansion of Currency operations.

Government Accounts Section

STATE BANK OF PAKISTAN 32

 • Maintenance of Federal & Provincial Government Account on the
basis of receipt and payments effected at our offices and
National Bank of Pakistan.
• Preparation of daily balance position and communication thereof
to the Federal Finance Division and Provincial Finance
Departments.
• Central and Provincial Zakat Funds Account are also maintained
on the basis of financial and lunar year.

Monitoring of debtor balances of Provincial Governments

AUDIT DIVISION:

• Responsible for internal audit control on the expenditure of the

Bank incurred in Central Directorate as also the expenditure
incurred in various offices of the Bank on monthly basis.
• Monitor the expenditure budgetary limit under various heads of
charges Account by the offices of the Bank and Departments of
Central Directorate.

Implementation on the audit inspection reports submitted by Audit

Department after annual audit of Offices and Departments of Central
Directorate.

STATE BANK OF PAKISTAN 33

 SUPPORT
SERVICES
DIVISION
Policy &
Regulation
Section

• Framing rules and regulations relating to the working of Offices,

interpretation of provisions of Banking Department and Issue
Department Manuals.
• Amendment in Banking Department Manual.
• Fraud Forgery cases, Matters relating to Government Audit
Report on working of Office and meetings of Public Accounts
Committee.
• Specimen signature of Officers, printing and circulation to the
Offices.

Administration Section:

• Internal administrative control of the Department, maintenance

of Petty Cash/ Imprest Account, deals with the cases of Payment
Unit, Receipt and supply of Stationery articles.
• Maintenance of leave record of Officers/Staff of the Department.

Funds Section:

• Management of PF/GPF balances and retirement benefits of the

retired employees of the Bank.
• Maintenance of BF Account and payment thereof.

STATE BANK OF PAKISTAN 34

 • Payment of GTA premia to State Life Insurance Corporation,
death claim in respect of GTA, Private insurance policies financed
from PF/GPF.

Stationery Management Section:

• Procurement of Stationery articles, Forms, Registers and papers

etc. on the basis of annual indent received from Offices and
Departments of Central Directorate, its costing, billing and
dealing with other affiliated work.
• Arrange its supply to outstation Offices in annual basis and
Offices in Karachi and Departments of Central Directorate on
monthly basis.

Special Cell (Menual):

• Looking after the work of updating of Banking Department

Manual etc.

i. (Central Accounts {Remittance/ Audit & Record}

Sections)

• Deal with the adjustment of Remittance transactions under the

Remittance facilities scheme under section17 (7) of SBP Act-
1956.
• Drawing and encashment received from Treasury Agencies, SBP
Offices and National Bank of Pakistan-Scrutiny of advises, sorting
of paid instruments and application Forms etc. and deal with
other affiliated work.
• Payment of freight/ commission to Railway authorities in
connection with the dispatch of treasure etc.

STATE BANK OF PAKISTAN 35

 • Payment of expenditure incurred in connection with the
dispatch/receipt of remittance of treasury by the N.B.P and
payment of commission to them on Intra-Provincial Government
drafts/drawings and encashment.

Maintenance of Record of Intra Provincial NBP / SBP

drafts.

PRIZE BONDS AND SAVINGS SCHEMES DIVISION:

• Printing of Prize Bonds through Pakistan Security Printing

Corporation.
• Its distribution to our offices through respective Public Debt
Offices.
• Management and control under the provisions of Prize Bonds
Rules/Procedure of sale/ encashment of Prize Bonds.
• Dealing with the cases of frauds and forgeries in the Prize Bonds
Scheme.
• Preparation of consolidated position of sales/ encashment of
Prize Bonds on fortnightly basis or such intervals as required by
the Central Directorate of National Savings, Government of
Pakistan.
• Making arrangements for prize bonds draws as per schedule
proposed by the Central Directorate of National Savings.

Management and control of Saving Schemes of the Government

effected at our offices and branches of Commercial Banks.

Economic Department:

Economic Policy Department is primarily engaged in eight

fundamental activities. These include:

STATE BANK OF PAKISTAN 36

 • Preparation of Monetary Policy Statement;
• Preparation of Monetary Surveys;
• Preparation of Annual Credit Plan;
• Consultations with the IMF;
• Computation of REER index;
• Computation of domestic public debt,
• Analysis of financial markets; and
• Empirical research papers.

The Department also deals with external sector issues and references
on money, credit and exchange rates management. For operational
purposes, the Department has been divided into the following four
groups:

Monetary Survey & IMF Consultations Group:

This group is responsible for preparation of Monetary Survey, details of

Government budgetary borrowings, commodity operations, bank credit
to private sector, public sector enterprises including (major
autonomous bodies) and other items separately for SBP and Scheduled
banks. In addition to this, the group is also assigned the task of
preparation of material for IMF Consultations, World Bank and Ministry
of Finance, monitoring of Performance Criteria and disposal of queries
and references.

Money, Credit & Prices Group

The group is responsible for preparing credit plans, working papers for
NCCC meetings and performs Secretariat work for NCCC. Other
assignments include credit targeting, credit monitoring, banking issues
and reforms, Inflation watch, analysis of lending rates, large scale

STATE BANK OF PAKISTAN 37

manufacturing developments & disposal of references on credit
allocation. The group also prepares periodic reports/reviews on Credit
assessment of Private sector, credit assessment of govt. sector,
analysis of tax revenue, NSS rates, domestic debt and impact analysis
of various policy initiatives. The group also intends to initiate work on
micro credit and SMEs.

Financial Market & Exchange Rates Group

This group is responsible to keep constant watch and analyze

developments in the financial markets. It prepares and supplies variety
of background information for circulation in MERPC meetings. The
group prepares analytical reports, and working papers relevant to
financial markets on issues as identified by the MERPC. Further, it is
also assigned the task of dealing with the matters relating to exchange
rate and foreign exchange reserves. The other assignments include
supplying of information/data relating to Exchange Rate/Forex
Reserves/FCAs to World Bank. It also prepares NEER and REER Indices
for submission to Governor. Besides, it deals with references/queries
relating to financial markets and exchange rate issues.

External Sector Group:

The group deals with the matters relating to Pakistan’s relationship

with IFIs like IMF, IBRD, ADB along with the issues of WTO and
SAARCFINANCE. Their policies and likely impact on Pakistan is also
evaluated. In addition, it prepares briefs on international trade,
payments & economic issues, meant for Pakistan’s delegations
attending the IMF/World Bank meetings and other International fora
e.g. World Economic Forum, Commonwealth Finance Ministers’
meetings. It also prepares comments on Fund Documents, and replies
of various references/queries received from international

STATE BANK OF PAKISTAN 38

organizations/agencies etc. Further, the group is also assigned the task
of dealing with the matters relating to foreign trade, balance of
payments, workers remittances, and foreign investment, etc. and
impact of policy changes.
Foreign Exchange Policy:

Foreign Exchange Department (FED), one of the core departments of

the State Bank, is working to manage/monitor the foreign exchange
activities in the country. Foreign exchange business in Pakistan is
regulated under Foreign Exchange Regulations Act, 1947(FER Act,
1947). There exist a Foreign Exchange Manual for guidance of
Authorised Dealers (ADs), authorised by FED to carry out foreign
exchange business, and general public including local/foreign
investors. The change in instructions/policies/procedures is brought
through F.E. Circulars/Circular letters. Mostly, there are general
instructions. There are, however, certain areas for which FED's
approval is necessary,

2. The nature of the work of the Department is of policy as well as

operational for which the head office in Karachi is supported by 16
offices set up in major cities of Pakistan. The Department is divided
into four divisions namely, Policy, Investment, General and Operations.

3. Policy Division is responsible for issuance of F.E.Circulars/Circular

Letters and revision of FER Act, 1947/Foreign Exchange Manual.
Broadly, it deals with the following matters:-

• Foreign Currency Accounts Scheme

• Rates of forward cover fee-FCAs.
• Exchange Risk Cover Fee on Medium & Long Term
Loans.
• Institutional SWAP Deposits under FE.45 of 1985.

STATE BANK OF PAKISTAN 39

 • Foreign Exchange Reserve Position.
• Home Remittances.
• Policy matters regarding commercial and non-
commercial remittances.
• Follow up of inspection reports of Banking
Supervision Departments in foreign exchange matters of
the banks.
• Courts cases concerning any of above matter.
5. Investment Division liases with the other Government
Department concerned with the investment in Pakistan and
corresponds to local as well as foreign investors. In short, the

Opening of foreign currency accounts with banks in

Pakistan under new scheme:

Under the existing instructions, the Authorised Dealers (Bank

authorised to deal in foreign exchange) without the prior approval of
the state Bank, open foreign currency accounts in Pakistan of Pakistan
nationals resident in or outside Pakistan including those having dual
nationality. These accounts can also be opened in the joint names of
residents and non-residents. Residents firms and resident companies
including investment banks and the companies incorporated in
Pakistan with foreign share holding are also eligible to open and
maintain foreign currency accounts. Charitable Trust, Foundations etc.
which are exempt from payment of income tax can also open foreign
currency accounts in Pakistan. This facility is also available to all
foreign nationals residing abroad, all foreign firms/corporation

s other than banks incorporated and operating abroad provided these

are owned by persons who are otherwise eligible to open foreign
currency accounts. Foreign nationals residing in Pakistan and foreign

STATE BANK OF PAKISTAN 40

firms and companies registered abroad and operating in Pakistan can
also open and maintain foreign currency accounts with the Authorized
Dealers provided the foreign exchange credited to such accounts does
not represent their earnings abroad in respect of business conducted in
Pakistan or services rendered by such foreign nationals and
firms/companies while in Pakistan. These accounts can be fed by
remittances received from abroad as well as cash deposits locally.

The Authorized Dealers are free to decide the rate of return on these
accounts payable to the depositors. They are also free to recover
reasonable bank charges on handling cash transactions in foreign
currencies received into or paid out of such accounts.

The non-residents are exempted from payment of withholding tax and

compulsory deduction of Zakat. Withdrawals from these accounts in
the shape of cash currency notes is allowed and account holder is at
liberty to make remittances from his account to the extent of his
balance in his account.
Accounts of diplomatic missions and international organizations etc.

The Diplomatic Missions' staff in Pakistan, their Diplomatic Officers and

home based members of the Missions' staff in Pakistan, as also all
international organizations in Pakistan and their expatriate employees
are allowed to open special foreign currency accounts outside the
scope of Foreign Currency Accounts Scheme for the purpose of
receiving funds from abroad.
The diplomatic officers and home based members of the mission's
staff in Pakistan and the expatriate employees of International
Organizations can withdraw in the shape of foreign currency notes
from their foreign currency accounts without any restrictions,
However, withdrawal in the shape of cash is not allowed from the

STATE BANK OF PAKISTAN 41

 official accounts of diplomatic missions and International
Organizations.

Islamic Baking:

General Information on Islamic Banking Department

Islamic Banking Department (IBD) has been created in the State
Bank of Pakistan by merging Islamic Economics Division of the
Research Department and Islamic Banking
Division of the Banking Policy Department. Mr. Pervez Said has
joined the Bank as Director (IBD) and Advisor to the Governor on
Islamic Banking. IBD will be fully responsible of all matters related
to Islamic Banking and Finance. The Director will also be
Member/Secretary of the Shariah Board that is being established in
the State Bank.

STATE BANK OF PAKISTAN 42