Central bank of pakistan & banking system
Central bank is a bank that regulates all the banks of the country and has sole authority to issue currency in the country. State Bank of Pakistan (SBP) is the central bank of Pakistan. It was established on 1st July 1948.
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.
Before independence on 14 August 1947, the Reserve Bank of India (central bank of India) was the central bank for what is now Pakistan. On 30 December 1948 the British Government's commission distributed the Bank of India's reserves between Pakistan and India - 30 percent (750 M gold) for Pakistan and 70 percent for India.
The losses incurred in the transition to independence were taken from Pakistan's share (a total of 230 million). In May, 1948 Muhammad Ali Jinnah (Founder of Pakistan) took steps to establish the State Bank of Pakistan immediately. These were implemented in June 1948, and the State Bank of Pakistan commenced operation on July 1, 1948.
Under the State Bank of Pakistan Order 1948, the state bank of Pakistan 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".
A large section of the state bank's duties were widened when the State Bank of Pakistan Act 1956 was introduced. It required the state 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". In February 1994, the State Bank was given full autonomy, during the financial sector reforms.
On January 21, 1997, this autonomy was further strengthened when the government issued three Amendment Ordinances (which were approved by the Parliament in May 1997). Those included were the State Bank of Pakistan Act, 1956, Banking Companies Ordinance, 1962 and Banks Nationalization Act, 1974. These changes 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 to the Banks Nationalization Act brought the end of the Pakistan Banking Council (an institution established to look after the affairs of NCBs) and allowed the jobs of the council to be appointed to the Chief Executives, Boards of the Nationalized Commercial Banks (NCBs) and Development Finance Institutions (DFIs). The State Bank has a role in their appointment and removal. The amendments also increased the autonomy and accountability of the chief executives, the Boards of Directors of banks and DFIs.
The State Bank of Pakistan also performs both the traditional and developmental functions to achieve macroeconomic goals. The traditional functions, 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, and conduct of monetary policy.
2. 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, 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 islamisation of the banking system.
· Regulation of Liquidity:
The State Bank of Pakistan has also been entrusted with the responsibility to carry out monetary and credit policy in accordance with Government targets for growth and inflation with the recommendations of the Monetary and Fiscal Policies Co-ordination Board without trying to effect the macroeconomic policy objectives.
The state bank also regulates the volume and the direction of flow of credit to different uses and sectors, the state bank makes use of both direct and indirect instruments of monetary management. During the 1980s, Pakistan embarked upon a program of financial sector reforms, which lead to a number of fundamental changes. Due to these changed the conduct of monetary management which brought about changes to the administrative controls and quantitative restrictions to market based monetary management. A reserve money management programme has been developed, for intermediate target of M2, that would be achieved by observing the desired path of reserve money - the operating target.
The principal officer of the SBP is the Governor. During December 2005, the President of Pakistan appointed Dr. Shamshad Aktar as the new Governor of the State Bank for a three year term, to replace Dr. Ishrat Hussain, who retired on December 1, 2005.
· Central Board of Directors:
1. Dr. Shamshad Akhtar Chairperson
2. The Secretary Finance Member
3. Mr. Khair Mohamed Junejo Member
4. Mr. Ehsen Rashid
5. Mr. M. Yaqoob Vardag Member
6. Mr. Mohsin Aziz Member
7. Dr. Wasim Azhar Member
8. Mr. Kamran Y. Mirza Member
9. Mr. Alman A. Aslam Member
10. Mr. Riaz Ahmed Secretary
1. State Bank’s Shariah Board Approves Essentials and Model Agreements for Islamic Modes of Financing
2. Procedure For Submitting Claims With SBP In Respect of Unclaimed Deposits Surrendered By Banks/Dfis.
3. Banking Sector Supervision in Pakistan
4. Micro Finance
5. Small Medium Enterprises (SMEs)
6. Minimum Capital Requirements for Banks
7. Remittance Facilities in Pakistan
8. Opening of Foreign Currency Accounts with Banks in Pakistan under new
9. Handbook of Corporate Governance
10. Guidelines on Risk Management
11. Guidelines on Commercial Paper
12. Guidelines on Securitization
13. SBP. Scheme for Agricultural Financing
· PRUDENTIAL REGULATIONS FOR CORPORATE / COMMERCIAL BANKING:
The existing Prudential Regulations for Corporate / Commercial Banking have been reviewed in the light of on-going process of changes in the financial sector. The third edition of the booklet on Prudential Regulations for Corporate / Commercial Banking containing therein all the amendments is being issued herewith for ease of reference.
The Prudential Regulations for Corporate / Commercial Banking cover four categories viz. Risk Management (R), Corporate Governance (G), KYC and Anti Money Laundering (M) and Operations (O). Whereas, the Regulations for SMEs Financing and Consumer Financing cover only the Risk Management (R) category. Thus, for the remaining three categories [i.e. Corporate Governance (G), Anti Money Laundering (M) and Operations (O)], the relevant sections contained in the accompanying Prudential Regulations for Corporate / Commercial Banking shall be applicable.
The Prudential Regulations for Corporate / Commercial Banking do not super cede other directives issued by State Bank of Pakistan in respect of areas not covered here. Any violation or circumvention of these regulations shall render the bank / DFI / officer(s) concerned liable for penalties under the Banking Companies Ordinance, 1962.
1. LIMIT ON EXPOSURE TO A SINGLE PERSON:
The total outstanding exposure by a bank/ DFI to any single person shall not at any point in time exceed 30% of the bank’s / DFI’s equity.
2. LIMIT ON EXPOSURE AGAINST CONTINGENT LIABILITIES:
Contingent liabilities of a bank / DFI shall not exceed at any point in time 10 times of its equity. For the purpose of this regulation, weight age of 50% shall be given to bid / mobilization advance / performance bonds and 10% forward to foreign exchange contracts.
3. MINIMUM CONDITIONS FOR TAKING EXPOSURE:
While considering proposals for any exposure exceeding such limit as may be prescribed by State Bank of Pakistan from time to time (presently at Rs 500,000),banks / DFIs should give due weight age to the credit report relating to the borrower and his group obtained from Credit Information Bureau (CIB) of State Bank of Pakistan. Banks / DFIs shall, as a matter of rule, obtain a copy of financial statements duly audited by a practicing Chartered Accountant, relating to the business of every borrower who is a limited company or where the exposure of a bank / DFI exceeds Rs 10 million, for analysis and record. Banks / DFIs shall not approve and / or provide any exposure until and unless the Loan Application Form (LAF) prescribed by the banks / DFIs is accompanied by a ‘Borrower’s Basic Fact Sheet’ under the seal and signature of the borrower as per approved format of the State Bank of Pakistan.
4. LIMIT ON EXPOSURE AGAINST UNSECURED FINANCING FACILITIES:
Banks / DFIs shall not provide unsecured / clean financing facility in any form of a sum exceeding Rs 500,000/- (Rupees five hundred thousand only) to any one person. Financing facilities granted without securities including those granted against personal guarantees shall be deemed as ‘clean’ for the purpose of this regulation.
5. LINKAGE BETWEEN FINANCIAL INDICATORS OF THE BORROWER AND TOTAL EXPOSURE FROM FINANCIAL INSTITUTIONS:
While taking any exposure, banks / DFIs shall ensure that the total exposure availed by any borrower from financial institutions does not exceed 10 times of borrower’s equity as disclosed in its financial statements subject to the condition that the fund based exposure does not exceed 4 times of its equity as disclosed in its financial statements.
6. EXPOSURE AGAINST SHARES / TFCs AND ACQUISITION OF SHARES:
Banks / DFIs shall not take exposure against the security of shares / TFCs issued by them. Banks / DFIs shall not take exposure against the non-listed TFCs or the shares of companies not listed on the Stock Exchange(s). However, banks / DFIs may make
Direct investment in non-listed TFCs. Banks / DFIs shall not take exposure on any person against the shares / TFCs issued by that person or its subsidiary companies.
Banks / DFIs shall not own shares of any company / scrips in excess of 5% of their own equity. The banks/DFIs may also take exposure in future contracts to the extent of 10% of their equity on aggregate basis. Banks/DFIs will obtain prior approval from the State Bank while purchasing shares of a company in excess of 5% of their paid-up capital or 10% of the capital of Investee Company, whichever is lower.
All guarantees issued by the banks / DFIs shall be fully secured, it may be waived up to 50% by the banks / DFIs at their own discretion, provided that banks / DFIs hold at least 20% of the guaranteed amount in the form of liquid assets as security. The guarantees shall be for a specific amount and expiry date and shall contain claim lodgment date. However, banks / DFIs are allowed to issue open-ended guarantees without clearance from State Bank of Pakistan provided banks / DFIs have secured their interest by adequate collateral or other arrangements acceptable to the bank / DFI for issuance of such guarantees in favor of Government departments, corporations / autonomous bodies owned/controlled by the Government and guarantees required by the courts.
8. CLASSIFICATION AND PROVISIONING FOR ASSETS: The rescheduling / restructuring of non-performing loans shall not change the status of classification of a loan / advance etc. unless the terms and conditions of rescheduling / restructuring are fully met for a period of at least one year (excluding grace period, if any) from the date of such rescheduling / restructuring and at least 10% of the outstanding amount is recovered in cash. The unrealized mark-up on loans (declassified after rescheduling / restructuring) shall not be taken to income account unless at least 50% of the amount is realized in cash.
9. ASSUMING OBLIGATIONS ON BEHALF OF NBFCs:
Banks / DFIs shall not issue any guarantee or letter of comfort nor assume any obligation whatsoever in respect of deposits, sale of investment certificates, issue of commercial papers, or borrowings of any non-banking finance company.
10. FACILITIES TO PRIVATE LIMITED COMPANY:
Banks / DFIs shall formulate a policy, duly approved by their Board of Directors, about obtaining personal guarantees of directors of private limited companies.
11. PAYMENT OF DIVIDEND:
Banks / DFIs shall not pay any dividend on their shares unless and until they meet the minimum capital requirements as laid down by the State Bank of Pakistan from time to time.
While extending fund based facilities to borrowers against hypothecation of stock or receivables, banks / DFIs shall obtain monthly statements from borrowers that contain a bank-wise break-up of outstanding amounts with the total value of stocks and receivables there-against.
13. MARGIN REQUIREMENTS:
Banks / DFIs are free to determine the margin requirements on facilities provided by them to their clients taking into account the risk profile of the borrower(s) in order to secure their interests. However, this relaxation shall not apply in case of items, import of which is banned by the Government. Banks / DFIs are advised not to open import letter of credit for these items in any case till such time the lifting of ban on any such item is notified by the State Bank of Pakistan.
14. MAINTENANCE OF ASSETS IN PAKISTAN:
Every bank / DFI shall maintain in Pakistan not less than 80% of the assets
created by it against such time and demand liabilities. Accordingly, assets held abroad by any bank / DFI shall not, at any point in time, exceed 20% of its time and demand liabilities.
Exchange and Debt Management
Real Time Gross Settlement System (RTGS System)
Small and Medium Enterprises
December 31, 2005
ASSETS (Rupees in thousand)
Lending to financial institutions -
Other assets 70,706
Total assets 9,769,089
Bills Payable 6,235,990
Borrowings from financial institutions -
Liabilities against assets subject to finance lease -
Other liabilities 2,533,099
Total liabilities 8,769,089
Share capital NA
Unappropriated Profit NA
Surplus on revaluation of assets NA
Total Net Assets 1,000,000
CHANGES IN EQUITY Share Exchange Issue of Statutory General
Capital Equalization bonus shares Reserves
Balance as at December 2005 1,000,000 - - - -
TOTAL DEPOSITS OF SCHEDULED BANKS (STOCKS) Million Rupees
Years 2005 2006
January 2,174,060 2,588,582
February 2,227,063 2,630,445
March 2,268,001 2,650,429
April 2,309,546 2,695,939
May 2,338,583 2,733,969
June 2,377,458 2,786,731
July 2,424,130 2,813,325
August 2,425,752 2,806,645
September 2,408,424 2,816,450
October 2,418,434 2,823,123
November 2,483,395 2,891,250
December 2,661,697 2,999,895
TOTAL ADVANCES OF SCHEDULED BANKS (STOCK) Million Rupees
Years 2005 2006
January 1,637,502 2,009,207
February 1,656,893 2,042,092
March 1,688,464 2,063,548
April 1,720,812 2,077,076
May 1,752,074 2,115,049
June 1,759,566 2,127,388
July 1,786,732 2,177,898
August 1,786,200 2,189,368
September 1,803,293 2,231,665
October 1,879,695 2,252,749
November 1,941,819 2,297,416
December 2,043,982 2,409,478
TOTAL INVESTMENT OF SCHEDULED BANKS (STOCK) Million Rupees
Years 2005 2006
January 602,519 602,519
February 646,996 759,919
March 652,473 793,157
April 670,990 827,850
May 658,202 821,399
June 716,119 794,584
July 772,187 830,799
August 748,250 799,285
September 766,550 790,057
October 730,330 790,558
November 697,669 824,966
December 730,067 775,546
State Bank is the last resort for commercial banks. The state bank of Pakistan 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 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. 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 state bank also regulates the volume and the direction of flow of credit to different uses and sectors, the state bank makes use of both direct and indirect instruments of monetary management.
The financial analysis shows that the deposits & advances of scheduled banks increases in 2006 but investment of scheduled banks decreases because of bad political conditions. From the above discussion we conclude that Central Bank plays very important role in country’s economy.