Saturday, August 22, 2009

Role and Functions of State Bank of Pakistan

Immediately after partition the newly born stat was faced with a serious banking situation due to the who sale immigration of banking staff to India. The Reserve Bank of India showed reluctance in solving the banking crisis in Pakistan. It rather created further difficulties by refusing to give Rs. 55 Crore which Pakistan was entitled to share the cash balance of the undivided India. The Govt. of Pakistan then realised that the Reserve Bank of India cannot be relied upon and further dependence on it would endanger the very existence of Pakistan. It therefore decided to establish its own currency authority. The Governor General of Pakistan Quaid-e-Azam Muhammed Ali Jinnah issued order of establishment State Bank of Pakistan on 1st July 1948. According to State Bank order of 1948, the bank is entrusted with the duty of regulating the issue of bank notes and keeping of reserve with a view to seeking monetary stability in Pakistan and generally to cooperate currency and credit system of the country to its advantage. The order of 1948 has been substituted by State Bank of Pakistan Act 1956 which requires the bank “to regulate monetary and credit system of Pakistan and to foster its growth in the best national interest with a view to secure stability and full utilization of the country’s productive resources”.
The functions of State Bank of Pakistan are governed by the State Bank of Pakistan Act 1956 State Bank of Pakistan will continue performing its four basic functions. (i) Framing and operation of monetary policy (ii) Regulations and supervision of banks and financial institutions (iii) Foreign exchange management (iv) Settlements of payment and accounts. The basic functions performed by State Bank of Pakistan are now discussed in brief as under.
The State Bank of Pakistan has the role right to issue notes except subsidiary coins which are issued by the Government. The Bank adopted the Proportional Reserve System for the issue of notes upto December 1965. The level of currency banking by gold bullion, foreign securities is now fixed 1200 million through an ordinance in December 1965. This system of note issue is known as minimum Reserve System. The size of notes issue reflects the public demand for money. The amount of notes in circulation can be increased to meet the public demand and are adjusted according to the general level of prices and economic activity in the country. The assets of the Issue Department are always equal to liabilities.
The State Bank of Pakistan frames and operators the monetary policy. Monetary policy is conducted by the State Bank of Pakistan to regulate and control the volume of money and credit supply in the country in order to achieve specific economic objectives such as price stability, reducing unemployment, etc. The main instruments of monetary policy are (i) Open market operations (ii) Changing the reserve requirement and (iii) Changing the discount rate.
(i) Open market Operations: Open market operations technique is used for expanding or contracting the money supply in the country. By buying the Govt. securities in the open market, the State Bank of Pakistan expands the money supply and by selling securities it contracts the money supply in the country.
(ii) Changing the reserve requirements: The state bank of Pakistan also controls the money supply in the country by changing cash reserve requirements of the commercial banks. An increase in the cash reserve ratio reduces the excess reserves of the bank and curtails the powers of the banks to advance loans. The decrease in the cash reserve ratio increases the cash reserves of the commercial banks which increase the capacity of the banks to advance more loans. The State Bank of Pakistan now requires the scheduled banks to maintain at least 35% of demand and time liabilities with it.
(iii) Changing Discount rate: The bank rate is the rate of interest at which the State Bank of Pakistan discounts the first class bills of exchange. The rise in the bank rate pushes up the cost of borrowing of commercial banks and reduces money supply in the country. A decrease in the bank rate works in the opposite direction.
The State Bank of Pakistan has full powers to supervise and control the banking system in the country. The regulatory powers relate to the licensing of banks, and their branch, expansion, liquidity of assets of banks, management and methods of working of the banks amalgamation and reconstruction and liquidation of banks, inspection of banks etc.
The State Bank of Pakistan acts as custodian of foreign exchange reserves manages exchange control and external value of the rupee and acts as the agent of the government in respect of Pakistan’s membership of IMF. An important aspect of foreign exchange management is that all foreign exchange transactions are made at the official rate of exchange. It also maintains the exchange value of the rupee in terms of other major currencies of the world.
The State Bank of Pakistan acts as Clearing House for the commercial banks. A clearing house is a place where representatives of commercial banks meet each day to exchange cheques drawn on each other and then settle the differences owed to each other. State Bank thus helps the commercial banks in making millions of payments by a minimum of transactions.
The State Bank of Pakistan also acts as advisor to government in all financial matters. Since State Bank of Pakistan is directly involved in the money and foreign exchange markets, it, therefore, tenders advice on all economic matters. It also provides advice to commercial banks and other financial institutions and to commerce and industry in general.
The State Bank of Pakistan is the lender of last resort for the commercial banks. It at any time the banks are short of cash reserves, the State Bank of Pakistan comes to their rescue. It provides cash to commercial banks by rediscounting bills of exchange and treasury bills. The State Bank of Pakistan thus helps and maintain liquidity ad solvency of the commercial banks.
The State Bank of Pakistan is playing a significant role in facilitating and fostering economic development and growth of banking system and other financial institutions in the country. The main development promotional activities of the Bank are as follows.
(a) The development of the capital market in the country owes a great deal to the efforts made by the State Bank of Pakistan.
(b) Under the State Bank’s Export Finance Scheme, the commercial banks provide finance to the exporters at the concessional rate.
(c) The State Bank of Pakistan has helped in the establishment of specialized credit institutions for meeting the medium and long term credit needs of the various sectors of the economy. These institutions include IDBP, NIT, EPF (Equity Participation Fund), HBFC, ICP (Investment Corporation of Pakistan) Banker’s Equity Limited, Pakistan Industrial Credit and Investment Corporation, Small Business, Finance Corporation etc.
The following functions which the State Bank of Pakistan hade been performing and which involved public dealings have been transferred to the State Bank of Pakistan Banking Services corporation. The new corporation has started functioning from January 2, 2002 as a subsidiary organization of State Bank of Pakistan.


1 Responses to “Role and Functions of State Bank of Pakistan”

Nipuna Perera said...
January 30, 2016 at 3:51 AM

Thank you for sharing this article.As an under graduate it helped me to gather some knowledge.

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