Functions of the State Bank of Pakistan 1. Banker to the Government: As banker to the government, SBP: a.

Receives deposits (taxes, fees, fines, etc.) on behalf of the federal government. b. Disburses payments (tax refunds, interest, etc.) on behalf of the federal government. c. Manages the national debtbuys, sells, and cashes government securities and pay interest/profit on them. d. Lends money to the federal government as needed. 2. Banker to Banks: As banker to the scheduled banks, SBP: a. Holds deposits made by them as a part of their required reserves5% at this time. b. Lends them funds as a lender of the last resort to meet their pressing needs by discounting their bills of exchange and other 3. Acts as a Clearing House: Provides facilities, physical and/or electronic, to scheduled banks to clear cheques and other claims drawn against each otherdeposited by their customers for collection-by adding up what they owe or owed them and transfer funds from their accounts at SBP.

4.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. 5. 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. 6. 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 countrys external reserves, it is responsible for management of the foreign exchange reserves. 7. Developmental Role of SBP: The Banks 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. 8. 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. 9. 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.

Affecting a change in nominal interest rates: The contraction of the monetary supply can be achieved indirectly by increasing or decreasing the nominal interest rates. By changing the Discount Rate and by conducting Open Market Operations a change in money supply would affect the nominal interest rates. A tight money supply tends to increase nominal interest rates while an increase in money supply can help bring down the interest rates. A change in the nominal interest rates influences the overall economic activity, rate of inflation, GDP, and economic growth. 3

Banking secrecy is the official term used to refer to what is normally known to us as banking confidentiality. By banking secrecy, we refer to the professional discretion that banking institutions, bank employees, surveillance authorities, legal and accounting professionals and representatives linked to the bank must uphold with respect to the information and knowledge obtained about the banks customers or other persons or companies which may be involved in various bank transactions (third parties).

Through banking secrecy the objective is to provide safe and secure conditions for individuals and corporations to do banking business. As a matter of choice, a banks customer may ask that his information be revealed and thereby release the bank from its obligation to provide confidentiality at all times. A banker however, cannot take the decision to release the details of a customer on its own as this would be a breach of confidentiality or secrecy laws.

In civil law jurisdictions bank secrecy is governed by a contractual obligation signed by a banker in which a vow is taken to protect and maintain the details of a customers situation.

Secrecy, however, is not a feature which is peculiar to banking and can be found in many professional areas including the medical and legal professions, clergy, management, accounting and secretarial or administrative assistant duties. Banking secrecy is often treated as different from the discretion given to customers of the mentioned professional fields, but in reality functions on the very same basis of not disclosing any information about a customers personal situation. In the USA trading on the stock market is also entitled to confidentiality under

Article 43 Federal Act on Stock Exchanges and Securities Trading; SR 954 1.

Banking secrecy was first introduced in Switzerland under the Swiss Banking Act 1934 and gave rise to what is commonly known today as Swiss banking which is heavily identified for its secrecy provisions.

Following the tragic incidents of September 11, legislations establishing due diligence measures to be made effective for the prevention and elimination of bank transactions linked with terrorist financing were passed by the Bush (Jr.) administration.

The Know Your Client or KYC rules passed called for a reduction and in some cases termination of certain banking secrecy practices. For example, anonymous banking whereby offshore accounts were opened without identifying the beneficial owner of an account and a number or code was assigned for performing transactions was brought to a halt. Currently, banks offering anonymous banking are very few and provide the service on a

limited level whereby the customers details are kept with a specific officer or at the management level of the bank and is not given to the tellers and other employees who work with codes or numbers when working with anonymous customers. These types of accounts are referred to as number accounts as the clients name is replaced by a number and disclosed only with a particular person group of people within the bank. Hence, although banking secrecy is available in many countries including Belgium, Germany, USA, France and the UK, it exists in varying forms and extents according to the laws of the country. Due diligence also ought to be performed and a bank must at all times be able to identify its customers.

Banking secrecy is also carried out within limitations set by internationally accepted exceptions provided for under administrative law, bankruptcy law and criminal law, particularly where mutual assistance is required in legal matters. If a banks customer has been suspected of unacceptable dealings, banking secrecy can be lifted by the courts order. In these circumstances, banking secrecy is not total and becomes non functional where prosecution by the court is concerned.

In the US, the Bank Secrecy Act of 1970 calls on financial institutions to facilitate government agencies with identifying and stopping money laundering. One of the requirements of the Act is that banks file reports whenever transfers over USD10,000 are made on a daily basis, report suspicious activities and maintain records of cash purchases of negotiable instruments. Terrorist finance tracking programs are also established to provide the employees and professionals of financial institutions with tools and guidelines to identify suspicious and irregular transactions.

The Banking Secrecy Act identifies five main types of reports to be made to the government. The reports include the FinCEN (Financial Crimes Enforcement Network) Form 104 Currency Transaction Report, which is required to be filed for every currency exchange, payment, deposit, withdrawal or transfer exceeding $10,000. If several transactions were done by or in the name of one particular person or transactions are above $10,000, they must be dealt with as one transaction; Department of the Treasury Form 9022, which must be filed for a US citizen, national or bank with interest in, is a signatory to or the owner

of securities, bank (s) or accounts abroad that are more than $5,000; Designation of Exempt Person FinCEN Form 110 which must be filed by banks to list its exempt customers; FinCEN Form 105 Report of International Transportation of Currency or Monetary Instruments, which must be files by every person and bank that physically transports, ships, receives or mails any form of instrument amounting to over $10,000; Suspicious Activity Report, which must be filed by banks if any transaction is in violation of law or considered to suspicious activity.

Businesses and individuals face the possibility of being charged if they do not adhere to these filing and reporting laws established by the Banking Secrecy Act.

Limitations placed on banking secrecy tend to defeat the whole idea of going offshore in the first place. But, certain rules and sanctions have been established to prevent and eliminate the incidence of terrorist financing and illegal money trafficking which affect us all as these activities are very closely linked to organized crime, drugs and terrorism. While we do not doubt and question the importance of banking secrecy in light of the

multiple uses of offshore vehicles, certain practices need to be put in place to ensure that the financial system is a clean one, especially where offshore banking is concerned that it remains a legitimate, safe and blameless way of doing business, protecting assets and reducing tax burdens.

BANKS OBLIGATION TO MAINTAIN SECRECY OF ACCOUNTS When a person opens an account in a bank he/she is entitled to a reasonable assurance that information regarding the account remains a matter of knowledge only between the banker and the account holder. This is because, it is one of the principal duties of the banker to maintain complete secrecy of the status of the customers account. This obligation of the Bank to maintain secrecy continues even after the customers account is closed. If the banker makes an unwarranted disclosure of the status of account of the banks customer, the banker becomes liable to compensate the customer. However, the banks obligation of keeping the secrecy of the status of the customers account is qualified and not absolute. There are certain circumstances in which the banker is entitled or required to make disclosures about a customers account. Let us understand the conditions under which a banker is justified in making disclosure.Disclosures permitted by

Law (i) Under iaw: A Bank is justified to disclose any information about the customersaccount when it is statutorily required to do so under (a) Income Tax Act, 1961(Section 131 & Section 133(6) (b) Companies Act, 1956 (Section 235 andSection 237) (c) Bankers Book Evidence Act, 1891 (Section 4) (d) ReserveBank of India Act, 1 937 (Section 26) (e)(1) Foreign Exchange Management Act1973 (Section 11) (f) Gift lax Act, 1958 (Section 36) (ii) Under express or implied consent of the customer: When an account is opened with the bank, there is an implied contract between the customer and the Bank that the latter will not disclose information relating to his account without the customers consent. If however, a customer permits, this information can be disclosed. For example, the customer may permit giving information about his! her account to a prospective guarantor, or, customer. It is necessary to obtain the customers consent before disclosing the information. The consent can be expressed or implied. (iii) Common courtesy among bankers: As per the practices/usages in the banking system (business) it is customary to share information about customers among the bankers, that whenever a bank makes inquiries with another bank, on matters such as proposed sureties or acceptors etc. An implied consent of the customer is

presumed to exist therefor. However, such information is kept confidential at both the ends and adequate precautions should be taken while furnishing such information. (iv) Disclosure in the banks interest: A bank can disclose information when it is essential to protect its own interest, legally. For instance, if there is any dispute between the customer and a banker, regarding balance standing in the account of the customer or if there is a loan default, then the bank will be justified in revealing the information to the guarantor or to a solicitor for initiating legal proceedings in the court of law.The sharing of information between a bank and its agent for collection purposes will fall under this head. It is necessary that the information shared with the agent is exclusive and not to put to other uses. Therefore the banks should take adequate care and due diligence in selecting the agents.. (v) Disclosure in Public/National interest: Banker may be required to make disclosure in the interest of the nation and public at large. Public interest may be reckoned only according to the prevailing circumstances.