Topics to be Covered

Central bank defined Central Banking tools and Instruments Cash Reserve ratio or Requirement History of Central Bank Core Functions of State Bank of Pakistan Various Departments of Central Bank of Pakistan

Central bank defined

Central Bank is also known as the Reserve Bank is a Financial Institution granted with the exclusive privilege of creating the currency of that Nation which is loaned to the Government in the form of legal tender Controls the money supply Controls inflation

Central Banking: Tools & Instruments

There are four tools that are used:-

1. Open Market Operations and Short term Interest Rates (OMOs) 2. Cash Reserve Ratio or Requirement (CRR) & (SLR) 3. REPOS Contracts
1. Bank Rate

Open Market Operations and Short term Interest Rates (OMOs)

Buying and selling of securities takes place This controls the supply of bank reserves and circulation of money in the economy Expansionary OMO creates downward pressure on short term Interest rates

Contractionary OMO create upward pressure on short term interest rates

Cash Reserve Ratio or Requirement (CRR) & (SLR)

In this commercial banks are obligated to maintain reserves in the form of cash CRR is the rate at which Banks are required to maintain their reserves with the Central Bank Increased Reserve ratio decreases the lending power of the commercial banks

Cash Reserve Ratio or Requirement (CRR) & (SLR)

In Pakistan all Banks are required to keep a weekly average balance of 5% of their total time and demand liabilities with SBP subject to daily minimum balance of 4%. SLR currently is 15% of time and demand liabilities

REPOS Contracts
These are contracts of the sale and future repurchase of a financial asset The seller repurchases the asset at rate which he sold it and pays interest for the use of fund he had taken The interest rate paid on loan is called repo rate

Repos is used to manage the aggregate banking system

REPOS Contracts
Repos is used to manage the aggregate banking system Lending facility is for 3 days for scheduled banks by State bank

This is done through Reserve Rep transaction

Bank Rates

Bank rate is the rate at which Central Banks lend money to other Banks by discounting the Bill brought to it

HISTORY OF CENTRAL BANKS

Oldest Central bank in the world is in Sweden, opened in 1668
2nd was Bank of England created in 1694

Peoples Bank of China evolved as a Central Bank in 1979

History in Pakistan
Before independence Bank Of India acted as central bank 30th December Bank of India reserves were distributed among India and Pakistan on 70% and 30% respectively July 7 1948 State Bank Of Pakistan came into existence SBP had very important task to carry

History in Pakistan
On Jan 1, 1974 SBO was nationalized Before nationalization SBP had a mixed ownership, Central govt. held 51 percent of the share capital of Rs 30 million divided into 300,000 fully paid up shares of the normal value of Rs 100 each while the balance was held by the public

After nationalization total control was taken by the Govt.

History in Pakistan
After nationalization it has focused more on its developmental roles like: Established Banking Council Exercise stronger control over the Banking Systems.

History in Pakistan
1997 amendments were made to SBP 1956 act. SBP was given authority to :-

Regulate the Banking System according to World Supervisory Parameters. Set limit to a Government borrowings
To formulate independent Monetary Policy

History in Pakistan
Consequences: High NPLs

SBP lost control of money supply

Long term investments collapsed Interest rate fluctuated

Core Functions of State Bank

The main functions of SBP include Regulation of liquidity Ensuring the soundness of the financial systems Regulation & Supervision

Exchange Rate Management & Balance of Payments

Developmental role of State Bank

Regulation of liquidity
SBP formulates and conducts the monetary and credit policy Promotes the economic growth in the country Regulates the volume and flow of money towards different sectors Use indirect instruments like cash reserve, OMO etc

Ensuring the soundness of financial system Regulation and Supervision

Protection to depositors On site and off site surveillance has started Prudential regulations and other rules for business have been introduced This is to manage credit risk ,money laundering & other unlawful activities

Exchange Rate Management & Balance of payments

Maintaining the external value of currency
Regulate the foreign exchange reserves Maintain the Balance of Payments Value of rupee is managed with reference to the basket of currencies of Pakistan

Developmental Role of SBP

Target to achieve macroeconomic goals State bank has worked well for the rehabilitation of the banking sector Developed new Financial institutions and DFIs Providing subsidized credit to preferred sector

Other Functions of SBP

There are two types of functions: Traditional functions that are preformed by almost all the central banks its has further two types: Primary Secondary

Non-traditional functions that are apart from other functions

Primary Functions
Issue of notes Central Banks have the sole authority to issue currency notes and provide liquidity to Commercial banks Bankers Bank Commercial Banks are required under law to keep a certain proportion of their cash deposits in reserve with Central Bank

Primary Functions
Lender of Last resort Whenever CBs are short of money they revert toward SBP for provision of money. The Central banks gives the loan by rediscounting the bill of exchange Banker to government Through this function SBP helps Government in lending funds in times of need and crisis by discounting bills and this helps out to stabilize the economy

Primary Functions
Conduct of Monetary and Credit policy SBP controls the money supply in the country. It controls credit money through the monetary policy using the tools of OMOs, Bank Rate policy etc. Regulation and supervision of financial system Through the regulation and supervision SBP ensures a sound financial system in the country. For this prudential regulations have been introduced

Secondary Functions
These include: Debt management Acting as Advisor to the Government Management of Foreign Exchange Maintaining relationships with other International Financial Institutions

Departments of SBP
1. Agriculture Credit Development This department is responsible to meet the Agriculture Credit Needs of Pakistans economy. It formulates policies and programs for agriculture. 2. Banking Inspection (Onsite Department) This department supervises. the financial Institution through regular on-site inspections of all scheduled Banks, Foreign Banks and Development Financial Institution. 3. Banking Surveillance Department BSD has been set up to ensure Regulatory and Supervisory oversight of Banks and DFIs. Monitors the risk profile of the banks and ensures there compliance with rules.

Departments of SBP
4. Banking Policy and Regulation Department Reviews and formulates proactive policy framework for Banks/NBFIs, prepares proposals for mergers/acquisitions and other privatization matters 5.Business Support Service Department It provide services to stake holders. It has five divisions to assist its performance, these include Employees Benefit Division, Services Division, Procurement Division, Property management Division, Leasing Resource Centre and Internal Monitoring Division.

Departments of SBP
6.Domestic Market and Monitoring Management Department Main object is Management of Government Debts, providing funds to Financial Investments as lender of last resort , Reserve Management Monitory operations

Departments of SBP
7. Economic Analysis Department
Monitors macro economic issues Provides input for economic policy regulations Quarterly and yearly annual reports on the state of economy

Departments of SBP

8. Exchange Policy Department This is the core department of SBP with 3 divisions Policy Division, Investment Division and Exchange Companies Division. It formulates the policies relating to the foreign exchange matters

Departments of SBP
9. Finance department It maintains book of account in accord to international standard and has seven divisions Financial Accounts Divisions (FAD), Forex, Securities and Investment Division (FSID) Systems and Procedure Divisions Payment Controller Division (PCD) Asset Management Division (AMD) Currency Management Division (CMD) and Support Services Division.

Departments of SBP
10.Financial Markets Shortage and Conduct Department (FSCD) This department is responsible for : Formulating policies and Regulating Conduct of Domestic Money Exchange Securities and derivatives markets It also has 3 divisions

Departments of SBP
11. Human Resource Department This department acquires, develop and retain the right talent for continuous improvement in SBP HR policies

Divisions working under are:

Regulation and Compliance Division, Reward Management HRIS Division talent management division

Departments of SBP
12.Information Department System and Technology

It manages the technological operations Development and implementation including all corporate systems like LAN, WAN, Database etc.

Departments of SBP
13.Internal Audit and Compliance Department Improve operational efficiency Risk management Internal control systems It examine and evaluate SBPs frame work of Risk management Control Governance processes

Departments of SBP
14. Islamic Banking Department It was formulated on 15th September 2003 to promote and develop Islamic Banking Industry in line with Shariah Compliance. 15. Off site Supervision and Enforcement Department Keeps offsite supervision of financial institutes including banks, DFIs etc

Departments of SBP
16. Payment System Department It formulates the policies for the payment systems Develops strategies for modern payment system RTGS is being used

Departments of SBP
17.Research Department Provide in depth economic analysis Publishes research bulletin Serve as SAARC finance country cell for Pakistan Organizes seminars and annual conferrnces

Departments of SBP
19.Real Time gross Settlement Systems Enable banks to make large value payments Using online telecommunication facilities and computer systems RTGS system has been implemented The RTGS in Pakistan has been renamed Pakistan Real Time Inter bank settlement mechanism (PRISM). 40 commercial Banks and DFIs are members of PRISM.

Departments of SBP
20. SME Finance Department

Promotes the finance to SME on fast track basis

This Department provides regulatory framework for SMEs keeping in view their credit needs. 21. Statistics and Data Warehouse Department

This Department is responsible for collection compilation, dissemination and publication of Statistics on Economic, financial and monetary aspects pertinent to the Central Banking.

Departments of SBP
22.Strategic & Corporate Planning Department This Department coordinates SBPs strategic plans and Business Plans and reports to BOD on Quarterly basis. It also coordinates with International finance Institutions such as WB, IMF, ADB and UNDP