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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 nationalised, 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 utilisation 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 Nationalisation
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 Nationalisation Act abolished the Pakistan Banking
Council (an institution established to look after the affairs
of NCBs) and institutionalised the process of appointment of
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: (a) the primary functions
including issue of notes, regulation and supervision of the
financial system, bankers’ bank, lender of the last resort,
banker to Government, and conduct of monetary policy, and (b)
the secondary functions including the agency functions like
management of public debt, management of foreign exchange, etc.,
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, institutionalisation 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 categorised as under.
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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. 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
programme has been developed. In terms of the programme, 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.
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ENSURING
THE SOUNDNESS OF FINANCIAL SYSTEM: |
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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.
All this requires the State Bank for endeavoring hard to keep
pace with the fast-changing financial landscape of the country.
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 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, on-site inspection is undertaken by the
State Bank in the premises of the concerned banks when required.
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 laon 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 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, modarbas 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.
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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 authorised 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. 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 be made to State Bank through authorized dealers, has now
been done away with and the commercial banks and other authorised
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 maximises 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 Directorate of State Bank
of Pakistan and services of a ‘Forex Expert’ have
been acquired.
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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 utilisation 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
realisation 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 orthodox central
banking functions have been combined by the State Bank with
a well-recognised developmental role.
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 subsidised credit, and development of
the capital market.
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