Topics to be Covered

• Central bank defined

• Central Banking tools and Instruments
• Cash Reserve ratio or Requirement
• History of Central Bank
• Core Functions of State Bank of Pakistan
• Various Departments of Central Bank of
Pakistan
 Central bank defined

• Central Bank is also known as the Reserve

Bank is a Financial Institution granted with
the exclusive privilege of creating the currency
of that Nation which is loaned to the
Government in the form of legal tender

• Controls the money supply

• Controls inflation
 Central Banking: Tools & Instruments
There are four tools that are used:-

1.Open Market Operations and Short term

Interest Rates (OMO’s)

2.Cash Reserve Ratio or Requirement (CRR) &

(SLR)

3.REPOS Contracts

1.Bank Rate
 Open Market Operations and Short term
Interest Rates (OMO’s)
• Buying and selling of securities takes place

• This controls the supply of bank reserves and

circulation of money in the economy

• Expansionary OMO creates downward pressure

on short term Interest rates

• Contractionary OMO create upward pressure on

short term interest rates
Cash Reserve Ratio or Requirement (CRR)
& (SLR)

• In this commercial banks are obligated to

maintain reserves in the form of cash

• CRR is the rate at which Banks are required to

maintain their reserves with the Central Bank

• Increased Reserve ratio decreases the lending

power of the commercial banks
 Cash Reserve Ratio or Requirement
(CRR) & (SLR)

• In Pakistan all Banks are required to keep a

weekly average balance of 5% of their total
time and demand liabilities with SBP subject
to daily minimum balance of 4%.

• SLR currently is 15% of time and demand

liabilities
 REPOS Contracts
• These are contracts of the sale and future repurchase
of a financial asset

• The seller repurchases the asset at rate which he sold

it and pays interest for the use of fund he had taken

• The interest rate paid on loan is called repo rate

• Repos is used to manage the aggregate banking

system
 REPOS Contracts
• Repos is used to manage the aggregate
banking system

• Lending facility is for 3 days for scheduled

banks by State bank

• This is done through Reserve Rep transaction

 Bank Rates

• Bank rate is the rate at which Central Banks

lend money to other Banks by discounting the
Bill brought to it
 HISTORY OF CENTRAL BANKS

• Oldest Central bank in the world is in Sweden,

opened in 1668

• 2nd was Bank of England created in 1694

• Peoples Bank of China evolved as a Central

Bank in 1979
 History in Pakistan
• Before independence Bank Of India acted as
central bank
• 30th December Bank of India reserves were
distributed among India and Pakistan on 70%
and 30% respectively
• July 7 1948 State Bank Of Pakistan came into
existence
• SBP had very important task to carry
 History in Pakistan
• On Jan 1, 1974 SBO was nationalized

• Before nationalization SBP had a mixed

ownership, Central govt. held 51 percent of the
share capital of Rs 30 million divided into 300,000
fully paid up shares of the normal value of Rs 100
each while the balance was held by the public

• After nationalization total control was taken by

the Govt.
 History in Pakistan
• After nationalization it has focused more on
its developmental roles like:-

• Established Banking Council

• Exercise stronger control over the Banking

Systems.
 History in Pakistan
• 1997 amendments were made to SBP 1956 act.

• SBP was given authority to :-

• Regulate the Banking System according to World

Supervisory Parameters.

• Set limit to a Government borrowings

• To formulate independent Monetary Policy

 History in Pakistan
• Consequences:-

• High NPL’s

• SBP lost control of money supply

• Long term investments collapsed

• Interest rate fluctuated

 Core Functions of State Bank
• The main functions of SBP include

• Regulation of liquidity

• Ensuring the soundness of the financial systems

• Regulation & Supervision

• Exchange Rate Management & Balance of Payments

• Developmental role of State Bank

 Regulation of liquidity

• SBP formulates and conducts the monetary and

credit policy

• Promotes the economic growth in the country

• Regulates the volume and flow of money

towards different sectors

• Use indirect instruments like cash reserve, OMO

etc
 Ensuring the soundness of financial
system Regulation and Supervision
• Protection to depositors

• On site and off site surveillance has started

• Prudential regulations and other rules for

business have been introduced

• This is to manage credit risk ,money

laundering & other unlawful activities
 Exchange Rate Management &
Balance of payments
• Maintaining the external value of currency

• Regulate the foreign exchange reserves

• Maintain the Balance of Payments

• Value of rupee is managed with reference to

the basket of currencies of Pakistan
 Developmental Role of SBP
• Target to achieve macroeconomic goals

• State bank has worked well for the

rehabilitation of the banking sector

• Developed new Financial institutions and DFI’s

• Providing subsidized credit to preferred sector

 Other Functions of SBP
• There are two types of functions:

• Traditional functions that are preformed by

almost all the central banks
its has further two types:
Primary Secondary

• Non-traditional functions that are apart from

other functions
 Primary Functions
Issue of notes
Central Banks have the sole authority to issue
currency notes and provide liquidity to
Commercial banks

Bankers Bank
Commercial Banks are required under law to
keep a certain proportion of their cash
deposits in reserve with Central Bank
 Primary Functions
Lender of Last resort
Whenever CB’s are short of money they revert
toward SBP for provision of money. The Central
banks gives the loan by rediscounting the bill of
exchange

Banker to government
Through this function SBP helps Government in
lending funds in times of need and crisis by
discounting bills and this helps out to stabilize the
economy
 Primary Functions
Conduct of Monetary and Credit policy
SBP controls the money supply in the country. It
controls credit money through the monetary
policy using the tools of OMO’s, Bank Rate policy
etc.

Regulation and supervision of financial system

Through the regulation and supervision SBP
ensures a sound financial system in the country.
For this prudential regulations have been
introduced
 Secondary Functions
• These include:

• Debt management

• Acting as Advisor to the Government

• Management of Foreign Exchange

• Maintaining relationships with other

• International Financial Institutions

 Departments of SBP
1. Agriculture Credit Development
This department is responsible to meet the Agriculture Credit
Needs of Pakistan’s economy. It formulates policies and
programs for agriculture.
2. Banking Inspection (Onsite Department)
This department supervises. the financial Institution through
regular on-site inspections of all scheduled Banks, Foreign
Banks and Development Financial Institution.
3. Banking Surveillance Department
BSD has been set up to ensure Regulatory and Supervisory
oversight of Banks and DFI’s. Monitors the risk profile of the
banks and ensures there compliance with rules.
 Departments of SBP
4. Banking Policy and Regulation Department
Reviews and formulates proactive policy framework
for Banks/NBFI’s, prepares proposals for
mergers/acquisitions and other privatization matters

5.Business Support Service Department

It provide services to stake holders. It has five divisions
to assist its performance, these include Employees
Benefit Division, Services Division, Procurement
Division, Property management Division, Leasing
Resource Centre and Internal Monitoring Division.
 Departments of SBP

6.Domestic Market and Monitoring

Management Department
Main object is Management of Government
Debts, providing funds to Financial
Investments as lender of last resort , Reserve
Management Monitory operations
 Departments of SBP

7. Economic Analysis Department

• Monitors macro economic issues

• Provides input for economic policy regulations

• Quarterly and yearly annual reports on the state

of economy
 Departments of SBP

8. Exchange Policy Department

• This is the core department of SBP with 3
divisions Policy Division, Investment Division
and Exchange Companies Division.
• It formulates the policies relating to the
foreign exchange matters
 Departments of SBP
9. Finance department
It maintains book of account in accord to
international standard and has seven divisions

Financial Accounts Divisions (FAD), Forex,

Securities and Investment Division (FSID)
Systems and Procedure Divisions Payment
Controller Division (PCD) Asset Management
Division (AMD) Currency Management
Division (CMD) and Support Services Division.
 Departments of SBP
10.Financial Markets Shortage and Conduct
Department (FSCD)

• This department is responsible for :

• Formulating policies and Regulating Conduct
of Domestic Money
• Exchange Securities and derivatives markets
• It also has 3 divisions
 Departments of SBP
11. Human Resource Department

• This department acquires, develop and retain the right

talent for continuous improvement in SBP HR policies

Divisions working under are:

• Regulation and Compliance

• Division, Reward Management
• HRIS Division
• talent management division
 Departments of SBP
12.Information System and Technology
Department

It manages the technological operations

Development and implementation including
all corporate systems like LAN, WAN,
Database etc.
 Departments of SBP
13.Internal Audit and Compliance Department
• Improve operational efficiency
• Risk management
• Internal control systems
• It examine and evaluate SBP’s frame work of
• Risk management
• Control
• Governance processes
 Departments of SBP
14. Islamic Banking Department
• It was formulated on 15th September 2003 to
promote and develop Islamic Banking Industry
in line with Shariah Compliance.

15. Off site Supervision and Enforcement

Department
Keeps offsite supervision of financial institutes
including banks, DFI’s etc
 Departments of SBP
16. Payment System Department

• It formulates the policies for the payment

systems
• Develops strategies for modern payment
system
• RTGS is being used
 Departments of SBP
17.Research Department

• Provide in depth economic analysis

• Publishes research bulletin
• Serve as SAARC finance country cell for
Pakistan
• Organizes seminars and annual conferrnces
 Departments of SBP
19.Real Time gross Settlement Systems

• Enable banks to make large value payments

• Using online telecommunication facilities and
computer systems
• RTGS system has been implemented
• The RTGS in Pakistan has been renamed Pakistan
Real Time Inter bank settlement mechanism
(PRISM). 40 commercial Banks and DFI’s are
members of PRISM.
 Departments of SBP
20. SME Finance Department

• Promotes the finance to SME on fast track basis

• This Department provides regulatory framework for

SME’s keeping in view their credit needs.

21. Statistics and Data Warehouse Department

• This Department is responsible for collection

compilation, dissemination and publication of Statistics
on Economic, financial and monetary aspects pertinent
to the Central Banking. 
 Departments of SBP
22.Strategic & Corporate Planning Department

This Department coordinates SBP’s strategic

plans and Business Plans and reports to BOD
on Quarterly basis. It also coordinates with
International finance Institutions such as WB,
IMF, ADB and UNDP