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The State Bank of Pakistan by aqeelyousaf143

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The State Bank of Pakistan

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									STRUCTURE AND FUNCTION OF STATE BANK OF PAKISTAN

The State Bank of Pakistan (SBP) is the central bank of Pakistan. While its constitution, as
originally lay down in the State Bank of Pakistan Order 1948, remained basically unchanged
until January 1, 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. The headquarters are located in the financial capital of
Pakistan, Karachi with its second headquarters in the capital, Islamabad.

Organizational Structure


Governor is the head of the State Bank of Pakistan (SBP) and has two Deputy Governors, one
each for Banking and Corporate Services. There is one Chief Economist in charge of Banking
Regulations. Board of Directors: Consists of 9 directors. One of them acts as the Corporate
Secretary. The Governor of the State Bank presides as its Chairman.


According to the Ordinance, general superintendence, direction and management of the affairs
and business of the Bank and overall policy making in respect of its operations is vested in the
Board of Directors which may exercise all such powers and do all such acts, deeds and things
that may be exercised or done by the Bank. In discharging its functions, the Board ensures
compliance with the orders and directions that may be issued by the SBP from time to time.
The Board of Directors of SBP-BSC comprises of
   a. Members of the Central Board of State Bank of Pakistan; and
   b. Managing Director, SBP-BSC.


The members of Central Board of State Bank of Pakistan comprises of the Governor SBP,
Secretary Finance Division, Government of Pakistan, and seven non-executive Directors
nominated by the Federal Government. The Governor SBP acts as the Chairman of the Board.
The Directors, at least one from each province, bring a wide range of experience from
agriculture, banking, and industrial sectors to the deliberations of the Board. However, the
Managing Director is appointed by SBP as mandated by SBP-BSC Ordinance 2001.
The Board of SBP-BSC met five times during the year and the decisions taken include approval
of Financial Statements of SBP-BSC, Annual Budget, Corporate Governance, Currency
Management matters, and HR management policies. A list of major decisions taken in the
Board meetings during the period is attached at Annexure A.


Functions of the State Bank of Pakistan


1.        Banker to the Government: As banker to the government, SBP:


        Receives deposits (taxes, fees, fines, etc.) on behalf of the federal government.
        Disburses payments (tax refunds, interest, etc.) on behalf of the federal government.
        c. Manages the national debt—buys, sells, and cashes government securities and pay
         interest/profit on them.
        Lends money to the federal government as needed.

2. Banker to Banks: As banker to the scheduled banks, SBP:


        Holds deposits made by them as a part of their required reserves—5% at this time.
        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 other—deposited 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 country’s external
reserves, it is responsible for management of the foreign exchange reserves.


7. Developmental Role of SBP:


   The Bank’s 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 loan able 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.


Developmental Role of SBP:


   The Bank’s 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.

								
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