BUSINESS FUNCTIONS OF SBP

In order to achieve the goals set before it, the State Bank of Pakistan performed all
the traditional and non-traditional functions. The traditional functions, which are
generally performed by central banks all over the world, are classified into two
groups;

• The primary functions including issue of notes, regulation of the financial

system, lender of the last resort, and conduct of monetary policy,

• The secondary functions including management of public debt, management

of foreign exchange, advising the Government on policy matters, anchoring
payments system, and maintaining close relationships with international
financial institutions.

PRIMARY FUNCTIONS
1. Sole Authority to Issue Notes
One of the primary responsibilities of the State Bank is the regulation of
currency in accordance with the requirements of business and the general
public. For this purpose the Bank has been granted the sole right of issuing
notes in the country under Section 24 of the State Bank of Pakistan Act, 1956.
The overall affairs with respect to the issuing of notes are conducted through
separate departments of SBP, viz., Issue Department which deals with the issue
of notes. There are four issue departments one each in four provincial capitals
viz., Karachi, Lahore, Peshawar and Quetta.
Under section 30 of the State Bank Act, 1956 the assets of the Issue
Department should at no time fall short of its liabilities, i.e., total notes issued.
Of the total amount of the assets of the Issue Department, a stipulated amount,
which Government can vary from time to time, is to be kept in the form of
gold coins, gold bullion, silver bullion, special drawing rights held with IMF, or
approved foreign exchange. Since 1965, the Bank has been required to keep a
minimum amount of Rs.1.2 billion in the shape of gold coins, gold bullion, and
silver bullion or approved foreign exchange as the backing for note issue. The
remainder of the assets of Issue Department should consist of rupee coins,
rupee securities and the internal bills of exchange and other commercial papers
as are eligible for purchase by the Bank under Section 17 (2a, 2b, & 2d) of the
SBP Act, 1956.

2. Conduct of Monetary and Credit Policies

The State Bank of Pakistan under section 17 of the Act, 1956 is responsible to
regulate the monetary and credit system of the country in such a manner that
ensures monetary stability in the economy.

Section 9A of SBP Act, 1956 entrusts the Central Board of the Bank to
formulate and monitor monetary and credit policy by taking into account the
Federal Government's targets for growth and inflation, in accordance with the
recommendation of the Monetary and Fiscal Policies Co-ordination Board
(MFPCB).

State Bank under Section 22 of the Act, 1956 prescribes Bank Rate from time
to time, basis on which finances are disbursed to different sectors along with
the terms and conditions of such finance.
3. Regulation and Supervision of the Financial System
Another principal task of the Bank is to safeguard the soundness of the
financial system. To perform this crucial role effectively and efficiently, State
Bank of Pakistan has been given autonomous authority under State Bank of
Pakistan Act, 1956, Banking Companies Ordinance, 1962, Banks
Nationalization (Amendment) Act, 1974 and Microfinance Institutions
Ordinance 2001 to regulate and supervise the activities of Banks, Development
Finance Institutions and Microfinance Banks. These laws have been subject to
amendments over time to meet changing circumstances. It is the responsibility
of State Bank to systematically monitor the performance of every banking
company to ensure its compliance with the statutory criteria, and banking rules
& regulations.

Under the prevalent legislative structure the supervisory responsibilities in case

of Banks, Development Finance Institutions (DFIs), and Microfinance Banks
(MFBs) fall within legal ambit of the State Bank of Pakistan while the rest of
the financial institutions are monitored by Securities and Exchange
Commission of Pakistan.

Prudential Regulations
In order to safeguard the interest of depositors and to ensure the safety and
soundness of the banks/DFIs, the State Bank has issued Prudential
Regulations. These Prudential Regulations present a prudent operating
framework for the banks/DFIs. The regulations incorporate the spirit and
essence of Bank of International Settlement (BIS) regulations and are
constantly watched for possible improvement so that their enforcement yields
the best possible results to promote the overall objectives of financial sector
supervision.

4. Bankers' Bank and Lender of the Last Resort

The Bank also functions as the bankers’ bank. Banks are classified as scheduled
and non-scheduled. The Bank maintains an updated list of all scheduled banks
at its various offices as mentioned under Section 57 of the Act. These banks are
entitled to certain facilities from the State Bank and in return they have some
obligations to it. An important obligation with the scheduled banks is to keep
with the State Bank certain percentage of their demand and time liabilities
under Section 36 of SBP Act, 1956. It is obligatory for scheduled bank to
maintain minimum reserve of 5% of their demand and minimum of 2% of their
time liabilities respectively, with the State Bank, on the close of business on the
last working day of the week. Failing which State Bank is authorized to charge
penalties as prescribed under Section 36 (4) a and b. State bank can also sell,
purchase or hold shares and debentures of any banking company in Pakistan.

a. In return among other privileges, scheduled banks are entitled to rediscount

facilities from State Bank.
b. Scheduled banks are further provided extensive remittances facilities at a
concessional rate under the Remittance Facilities Scheme introduced since
1948. This facility helps the flow of funds smoothly and efficiently between
various centres in the country. The Bank provides this facility through the
media of its own offices, the branches of National Bank of Pakistan acting
as its agents, and treasuries and sub-treasuries holding permanent currency
chests at places where the State Bank has no office. Telegraphic Transfers
(T.T.), Mail Transfers (M.T.), Demand Draft (D.D.) and Government Draft
(G.D.) are the principal instruments used for remittances.
c. Under Section 27 and 28 of the Banking Companies Ordinance 1962 State
Bank has the sole authority to entertain applications for opening of new
branches of banks or changing locations of existing branches.

SBP as the regulatory authority among other powers can take following
action:

• Issue of determining the amount of authorized and paid up capital of

banking companies has been entrusted with SBP.
• Under Section 41 of the Banking Companies Ordinance 1962, SBP
takes measures against the mismanaged bank.
• Under Section 35 of the Act 1956 unsound bank can be prohibited
from accepting fresh deposit.
• SBP can move to court of law for liquidation of bank which fails to
comply with legal requirement.

5. Banker to Government
Under Section 21 of the Act 1956 State Bank conducts the banking business
of Federal and Provincial Government and some government agencies.
These functions performed by the Bank are akin to those ordinarily
performed by commercial banks for their customers. The Bank provides the
following services to the governments:
 • It accepts the deposits of cash, cheques and drafts by the
Government and undertakes the collection of cheques and drafts
drawn on other banks. The Bank transfers government funds from
one account to another or from one centre to another as advised by
them.
• The Federal and Provincial governments can obtain advances from
the Bank subject to mutual agreements in respect of the terms and
conditions for such advances. Such advances are to be payable not
later than three months. However, advances disbursed are interest
free.

SECONDARY FUNCTIONS

1. Public Debt Management

The Bank is responsible for the management of government debt under
section 17(13)(e) and section 21 of the SBP Act, 1956. Responsibilities of
SBP are also defined in The Public Debt Act 1944 for public debt
management.

• Subscribing Federal and Provincial governments’ securities at the

time of their issue

• Sale/purchase of such securities in the Money Market (through

auction or discount window)

2. Management of Foreign Exchange

Foreign Exchange control is exercised by State bank under Section 3 & 4 of
the Foreign Exchange Regulation Act, 1947 and Section 17 & 23 of the 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. Various exchange policies have been adopted at different
times for this purpose keeping in view the circumstances.
 SBP exercises full control on payments that are transmitted in or out of the
country and therefore issues licenses to Exchange business and also other
banks. Export price checks for different commodities are also maintained to
safeguard against their under invoicing.

3. Advisor to Government The State Bank of Pakistan, also acts as an advisor

to the Government on financial and economic matters particularly with
reference to their monetary aspects. The Bank counsels the Government on
loan operations and advises it with regard to the timings, terms and
conditions and rate of return on these loans. The advice is also tendered on
matters like agricultural credit, cooperative credit, industrial finance,
exchange regulations, banking and credit control, mobilization of savings,
financial aspects of planning and development and similar other economic
issues. State Bank of Pakistan also tenders advice to the Government on
debt management issues. The advisory role of the Bank has been made
mandatory in accordance with the Section 9A(d & e) of the SBP Act 1956.

The Bank submits its review of the economy to the Parliament through its
annual and quarterly reports. The advisory function of the State Bank has
been assigned to it by sub-sections (d), (e) and (f) of Section 9A of the SBP
Act, 1956 which enjoins the Central Board of the State Bank to (i) tender
advice to the Federal Government on the interaction of monetary policy
with fiscal and exchange rate policy; (ii) analyse and advice the Federal
Government on the impact of various policies on the state of the economy;
and (iii) submit a quarterly report to the Majlis-e-Shoora (Parliament) on the
state of the economy with special reference to economic growth, money
supply, credit, balance of payments and price developments.

4. Relationships with International Financial Institutions

Pakistan is the member of International Monetary Fund. The State Bank of
Pakistan deals with the IMF on behalf of the Government of Pakistan under
Section 17 (13) (f) & 17(15) the Act. The State Bank of Pakistan also deals
with other international financial organizations including Bank for
International Settlement, the World Bank, Central Banks of foreign
countries, etc. Almost all the agreements of Provincial and Federal
Government with International Financial Institutions (IFIs) are executed
through the State Bank of Pakistan.
 NON-TRADITIONAL FUNCTIONS

1. Development of the Banking System

The most significant contribution made by the State Bank of Pakistan
towards facilitating and fostering economic development in Pakistan was the
rehabilitation of the banking system in Pakistan and over all development of
banking industry in the country.

2. Training Facilities to Bankers

Keeping in view an acute shortage of trained bankers at the time of
independence, the State Bank introduced "Bank Officers Training Scheme".
Institute of Bankers Pakistan was established in 1951 for conducting
examinations in prescribed banking courses for qualified banking staff in the
country. All the branches of SBP have local offices of the Institute which
organize seminars and short courses on current and important issues in
banking industry of Pakistan. The institute also conducts annual essay
competition on various economic issues and awards prizes to the four best
essays. Some other services includes:
• National Institute of Banking and Finance (NIBAF)
• Scholarship programmes
• Training and Seminars

3. Credit to Priority Sectors

Different credit funds from time to time are allocated to motivate sectors
like agriculture, industry etc. in areas where there is potential of gaining
produce for the purpose of commercial export etc.
For Example Rural Credit Fund and Export Finance Scheme

4. Islamisation of the Banking System

The State Bank had been making efforts since its inception to evolve and
introduce a financial system based on the norms of the Shariah. While
inaugurating the State Bank of Pakistan, the Father of the Nation, Quaid-e-
Azam Muhammad Ali Jinnah, and later on the first Governor of the Bank,
late Zahid Hussain, gave a direction to make efforts to build the economic
and financial system of the country on the lines dictated by Islam. However,
the work could not be started forthwith as the experts in Islamic
jurisprudence and the modern economics both were not available.
 SBP BANKING SERVICES CORPORATION
ORDINANCE 2001

SBP banking Services Corporation as such a subsidiary company of SBP,

was established on 01st January, 2002 by virtue of the Ordinance 2001 so at
to mitigate the burden of SBP so that SBP focus on the most important
functions that are in the larger interest of State. Provided that functions as
enumerated in Section 9A of the Act 1956 are prohibited to be transferred
or delegated by SBP in terms of Section 5(2) of the Ordinance 2001. Section
5 of the Ordinance 2001 entrusted following function of SBP over the
corporation :

1. Revenue Collection and payment for and on behalf of the Government

etc.
2. Maintenance of accounts of Government etc.
3. Operational Work relating to management of debt.
4. Operational work relating to foreign exchanges
4. Prize bonds and government saving schemes
5. Any other business or function as may be delegated in writing or
otherwise to the corporation.
PROHIBITIONS
Section 20 of the Act 1956 prohibits SBP from undertaking following
business:

1. Engage in trade or otherwise have a direct interest in any commercial,

industrial or other undertaking except such interest as it may in any way
acquire in the course of the satisfaction of any of its claims, but all such
interest shall be disposed of at the earliest possible moment;

2. Purchase its own share or the share of any other bank or of any company,
or grant advances or loans upon the security of any such shares;

3. Advance money on the mortgage, or otherwise on the security, of

immovable property or documents of title relating thereto, except where
such advance is made to any of its officers or servants for building a house
for his personal use against the security of the said house;
3A. Become the owner of any immovable property except where ownership is
necessary for the use of such property by the Bank, or for the residence,
recreation or welfare of its officers or servants;

4. Make unsecured advances and loans;

5. Draw or accept bills payable otherwise on demand;

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