The State Bank of Pakistan (SBP)

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.

History

Before independence on 14 August 1947, during British colonial regime the Reserve Bank of India was the central bank for both India and Pakistan. On 30 December 1948 the British Government's commission distributed the Reserve 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

Muhammad Ali Jinnah, the founder of Pakistan, making a speech at the opening of the State Bank of Pakistan.

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 Nationalizations 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 having 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.

Organizational Structure

 Governor

The principal officer of the SBP is the Governor. The current Governor of State Bank of Pakistan is Mr. Yaseen Anwar.

Central Board of Directors

The Central Board consists of nine members: the Governor (who is Chairman), the Secretary, Finance Division, Government of Pakistan – and seven Directors, including one Director from each Province, to be nominated by the Federal Government ensuring representation to agriculture, banking and industrial sectors. The Directors are appointed for terms of up to three years.

1.    Chairman: Yaseen Anwar ( Governor SBP)

2.    Dr. Waqar Masood Khan (Secretary Finance)

3.    Zaffar A. Khan

4.    Mirza Qamar Beg

5.    Asad Umar

6.    Waqar A. Malik

7.    Sahar Z. Babar - Corporate Secretary SBP(Secretary to the Central Board)

Share Capital

Types of Share Capital

v  Authorized capital: It is the maximum amount of capital which a company can collect or raise by selling its shares to the general public. Authorized capital is known as nominal capital or registered capital. For example: A company wants to sell 100 shares of Rs. 10/- each, so the total amount collected by the company is Rs. 1000/- i.e. 100 shares x 10 each = 1000

The capital with which a company is registered is known as its authorized capital.

v  Issued capital: It is that part of the authorized capital which is actually issued to the general public. For example: A company has issued 80 shares of Rs. 10/- each so the issued capital is Rs. 800/-

v  Unissued capital: It is that part of the authorized capital which is not being issued to the general public. That is, company has not issued 20 shares of Rs. 10/- each, so the unissued capital is Rs. 200/-.

v  Subscribed capital: It is that part of the issued capital which is actually subscribed by the general public. That is company has issued 80 shares out of which 70 shares are being bought by the general public, so the subscribed capital is Rs. 700/-. That is 70 shares of Rs. 10/- each.

v  Unsubscribed capital: It is that part of the issued capital which is not subscribed by the general public. That is, if the company has issued 80 shares out of which 70 are bought by the general public and 10 are not being bought by them, so the unsubscribed capital is 10 x Rs. 10 = Rs. 100. That is 10 shares of Rs. 10 each.

v  Called up capital: It is that part of the subscribed capital which is actually called up by the company. For instance, if a company has asked its shareholders to pay Rs. 5/- per share so on 70 shares, they have to pay 70 shares x Rs. 5 each = Rs. 350/-. This is the called up capital.

v  Uncalled up capital: It is that part of the subscribed capital which is not being called up by the company. It may be called up as and when the company needs funds. That is out of Rs. 10/- per share, Rs. 5/- per share is being called up by the company and Rs. 2 is being uncalled up and Rs. 3 is kept as reserve that is yet to be called.

v  Reserve capital: Reserve capital is that part of the uncalled capital which is reserved to be called up only at the time of winding up or liquidation of the company. It cannot be called during the life time of a company. It is to be used only for meeting extra- ordinary situation such as liquidation of the company. The purpose of reserve capital is to meet the interests of the creditors at the time of winding up of the company.

v  Paid up capital: It is that part of the called up capital which is actually paid up by the shareholders. For example, out of 70 shares which were subscribed for 60 shareholders have paid up their call money, that is 60 x Rs. 5 = Rs. 300/- is called as the paid up capital of the company.

v  Unpaid up capital: It is that part of the called up capital which is not being paid by the shareholders. For example: out of 70 shareholders, 60 shareholders have paid up their call money and 10 shareholders have not paid their call money, so 10 x Rs. 5 = Rs. 50/- is called as unpaid up capital.

Unpaid up capital is also known as Calls in Arrears.

These were the meaning, features and types of share capital.

State Bank of Pakistan AND Scheduled Banks

v  Standards and Classifications

Effective from December 2001, the category of deposit holders and advances

Classified by borrower for domestic constituents has been reclassified as

Government, Non-Financial Public Sector Enterprises (NFPSE‟s), Non-Bank

Financial Companies (NBFC‟s), Private Sector (Business), Trust Funds & Non-

Profit Institutions (NPI‟s), Personal, and Others.

Major changes are carried out in the classification of banking sector attributes. The

Classification of economic groups under private sector has been enhanced in the light

Of International Standard Industrial Classification (ISIC)-Rev.3.1 of the United

Nations Statistics Division.

v  Composition of Banking Groups

All the scheduled banks operating in Pakistan are classified into three main groups

For presentation of statistical data namely public sector banks, domestic private banks

and foreign banks. Public sector banks are further divided into public sector

Commercial banks and specialized banks.

v  Scheduled Banks

In terms of Section 37(2) of the State Bank of Pakistan Act-1956, banks operating in

Pakistan with capital and reserve of an aggregate value not less than Rs 1 billion (Rs

1.5 billion By December 31, 2004, Rs 2 billion by December 31, 2005, Rs 3 billion

by December 31, 2006, Rs 4 billion by December 31, 2007, Rs 5 billion by

December 31, 2008, Rs 6 billion by December 31, 2009 & Rs 7 billion by

December 31, 2010) and conducting their affairs in a manner not detrimental to the

Interest of their depositors have been declared as scheduled banks

v  Public Sector Banks

The banks incorporated in Pakistan and their shares & capital controlled by the

Government units are referred to Public sector banks (Appendix II).

v  Public Sector Commercial Banks

These are the scheduled banks mainly involved in the activities of deposits

Mobilization through a branch network and extending credit. They deal in short term

collateralized lending such as trade financing, overdraft and provide a range of

Financial services to the clients. With the liberalization of banking rules and laws,

commercial banks are now allowed to undertake related activities i.e. underwriting,

portfolio investment, securities market operations, specialized financing, and

related services.

v  Specialized Banks

Specialized banks are established to provide credit facilities, assistance and

Advice to clients in a designated sector or in a designated line of credit; for example

agriculture sector, industrial sector, housing sector, SME sector. These institutions

perform lending function, but may not engage in routine commercial banking

activities. These are established, organized, and chartered under special legislative

acts instead of being chartered as a bank under the banking law.

v  Domestic Private Banks

The banks incorporated in Pakistan and controlled by the private sector are termed

as domestic private banks.

v  Foreign Banks

Bank branches not having head offices in Pakistan are called foreign banks.

v  Islamic Banking

For the promotion of Islamic Banking in Pakistan, SBP issued policies/guidelines

As per BPD circular No.1 of January 2003. Wherein a three-pronged strategy was

adopted as under:

a) Establishment of full-fledged Islamic Bank(s) in the private sector.

b) Setting up subsidiaries for Islamic banking by existing commercial banks.

c) Allowing Stand-alone branches for Islamic banking in the existing commercial

banks.

All Islamic banks, subsidiaries, and stand-alone branches offer Sharia compliant

products and services only.

“Sharia compliant products and services” means banking product and services offered by banks to their clients which are duly approved by their Sharia advisers/

Sharia Supervisory Committee

DOMESTIC AND FOREIGN BANKS AND DFIs

BEING REGULATED BY STATE BANK OF PAKISTAN

I. NATIONALISED SCHEDULED BANKS

1. First Women Bank Limited

2. Habib Bank Limited

3. National Bank of Pakistan

II. DE-NATIONALIZED SCHEDULED BANKS

4. Allied Bank of Pakistan Limited

5. Muslim Commercial Bank Limited

6. United Bank Limited

III. SPECIALIZED SCHEDULED BANKS

7. Federal Bank for Co-operatives#

8. Industrial Development Bank of Pakistan

9. Punjab Provincial Co-operative Bank Ltd.

10. Zarai Taraqiati Bank Limited

IV. PRIVATE SCHEDULED BANKS

11. Askari Commercial Bank Limited

12. Bank Al Falah Limited

13. Bolan Bank Limited

14. Bank Al- Habib Limited

15. Faysal Bank Limited

16. KASB Bank Limited

17. Meezan Bank Limited

18. Metropolitan Bank Limited

19. Prime Commercial Bank Limited

20. PICIC Commercial Bank Limited

21. Saudi-Pak Commercial Bank Limited

22. Soneri Bank Limited

23. Union Bank Limited

V. PROVINCIAL BANKS (NOW SCHEDULED BANKS)

24. The Bank of Khyber

25. The Bank of Punjab

VI FOREIGN BANKS*

26. ABN Amro Bank N.V

27. Al-.Baraka Islamic Bank B.S.C. (E.C.)

28. American Express Bank Limited

29. Bank of Tokyo Mitsubishi Limited

30. Bank of Ceylon

31. Credit Agricola Indosuez (The Global French Bank)

32. Citibank N.A

33. Deutsche Bank A.G.

34. Doha Bank

35. Habib Bank A.G Zurich

36. Hong Kong & Shanghai Banking Corporation Limited

37. International Finance Investment & Commerce Bank Limited

38. Mashreq Bank P.S.C.

39. Oman International Bank S.O.A.G.

40. Rupali Bank Limited

41. Standard Chartered Bank

* These are the branches of foreign banks.

 Under Liquidation.

VII. DEVELOPMENT FINANCIAL INSTITUTIONS

42. Pakistan Industrial Credit & Investment Corporation Limited

43. Pak Kuwait Investment Company (Pvt) Limited

44. Pak Libya Holding Company (Pvt) Limited

45. Pak Oman Investment Company (Pvt) Limited

46. Saudi Pak Industrial & Agricultural Investment Company (Pvt) Limited

47. SME Bank Limited

VIII. MICRO FINANCE BANKS

48. Khushhali Bank

49. The First Micro Finance Bank Ltd

Function of the Central Bank

Islamisation of the Banking System

The State Bank has also been involved in the process of Islamisation of the

economy in general and the banking system in particular. 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.

A unit was created in the Research Department of the Bank in late 1950s that was

subsequently developed into a full-fledged Division, to undertake research work

on economic system of Islam. Considerable amount of research work was

undertaken in Islamic Economics Division (I.E.D) of the Bank during 1960s and

1970s. this particularly included the nature and connotation of ‘Riba’, the Shari’e

Position of present day interest based financial system, various alternatives to

interest and the fiscal system of Islam. Similarly in 2001 an Islamic Banking

Division was established in Banking Policy Department to deal with the

Regulatory and supervisory issues in Islamic Banking. To meet the challenges of

developing a dynamic, responsive and viable Islamic banking system, a new

Islamic Banking Department has been established in the Bank in September, 2003

through the merger of Islamic Economic Division and Islamic Banking Division.

4.1 Secretariat of Council of Islamic Ideology

The Islamic Economic Division of the Bank served as a secretariat to the Council

of Islamic Ideology (C.I.I.) in late 1970s when the President of Pakistan asked the

Council to prepare a blueprint for the establishment of an interest-free economic

system compatible with the Shariah. Various reports of the C.I.I. formed the

genesis for changes in the banking system that were introduced in later years. The

Banking Control Department of the Bank, under guidance of the Ministry of

Finance and in collaboration with the Pakistan Banking Council, issued directives

to the banks for transformation of the conventional banking system into the noninterest

based system. The process started in 1979 and reached its culmination in

1985. As of 1st April, 1985, all banking companies were required to provide

finance to all entities, including individuals, only under the identified interest free

modes. As of 1st July, 1985, no banking company could accept any interest

bearing deposits. The Islamization programme, however, did not apply to foreign

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branches of Pakistani commercial banks as well as foreign currency accounts/

foreign currency dominated loans kept in Pakistan.

The financing procedure based on ‘mark-up’ adopted by banks in 1985 was,

however, declared un-Islamic by the Federal Shariat Court (FSC) in November

1991. The FSC declared that various provisions of the laws held repugnant to the

injunctions of Islam would cease to have effect as of July 1, 1992. However, the

Government and one commercial bank filed an appeal in the Shariat Appellate

Bench of Supreme Court due to which the FSC judgment remained suspended for

a long time. The Supreme Court’s Shariat Appellate Bench delivered its judgment

on December 23, 1999 with the directions that laws involving interest would cease

to have effect finally by June 30, 2001, which date was further extended to June

30, 2002. The supreme court of Pakistan directed that the present financial system

had to be subjected to radical changes to bring it into conformity with the Shariah.

It also directed the Government to set up, within specified time frame, a

commission for transformation of the financial system and two task forces to plan

and implement the process of the transformation. The Court indicated some

measures, which needed to be taken, and the infrastructure and legal framework to

be provided in order to have an economy conforming to the injunctions of Islam.

4.2 Commission for Transformation of Financial System

The Commission for Transformation of Financial System (CTFS) was constituted

by the Government in January 2000 in the State Bank of Pakistan under the

Chairmanship of Mr. I.A. Hanfi, a former Governor State Bank of Pakistan. A

Task Force was set up in the Ministry of Finance to suggest the ways to eliminate

interest from Government financial transactions. Another Task Force was set up in

the Ministry of Law to suggest amendments in legal framework to implement the

Court’s Judgment. The CTFS constituted a committee for Development of

Financial Instruments and Standardized Documents in the State Bank to prepare

model agreements and financial instruments for new system. The committee

submitted its report to the commission in May 2001. The CTFS submitted 2

reports one in October 2000 and other in August 2001, which identified a number

of prior actions needed to be taken to prepare the ground for transformation of the

financial system.

However, on a Review petition filed by the United Bank Limited, Shariat Bench

of the Supreme Court set aside the previous verdicts on Riba, i.e. judgment by the

Federal Shariat Court dated November 14, 1991 and the verdict by the SAB dated

December 23, 1999 in its short judgment dated June 24, 2002 and remanded the

case back to Federal Shariat Court for hearing afresh and decide the unresolved

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issues discussed in both the above mentioned judgments. Consequently, the CTFS

was also dissolved in June 2002.

4.3 Measures for Transformation of Financial System

The State Bank issued detailed criteria in December 2001 for establishment of

full-fledged Islamic commercial banks in the private sector. Al Meezan

Investment Bank received the first Islamic commercial banking license from SBP

in January 2002 and the Meezan Bank Limited (MBL) started commercial

operations in March, 2002 as a model Islamic bank in Pakistan and has also

acquired the business of ‘Societe Generalé Bank’s branches operating in Pakistan.

As of December 31, 2003 it has a network of 10 branches in different cities.

In order to allow existing banks to open subsidiaries for Islamic banking, an

amendment in section 23 of Banking Companies Ordinance, 1962 was made on 6th

November, 2002.

SBP issued BPD Circular No. 1 dated 1st January, 2003 outlining its policies for

promotion of Islamic banking, which includes criteria for:

_ Establishment of Islamic commercial banks in private sector

_ Setting up of Islamic banking subsidiaries by existing commercial Banks

_ Opening of stand-alone branches for Islamic banking by existing

commercial banks

Accordingly five existing commercial banks (Muslim Commercial Bank, Bank

Alfalah, Bank of Khyber, Habib Bank AG Zurich and Habib Bank Limited) were

allowed to open 9 Islamic Banking Branches (IBBs), out of which eight branches

of four banks have already started their operations.

The State Bank has also taken a number of other measures to play its role for

Islamization of the banking industry as mentioned below;

a. A Shariah Board has been formed in the Bank, which consists of two

renowned Shariah scholars, an accountant, a lawyer and a banker. The Shariah

Board will guide the Bank in various Islamic banking issues.

b. Islamic banks have been allowed to maintain statutory liquidity under section

29 of BCO, 1962 in the form of current account with SBP to the extent of 40%

of Statutory Liquidity Requirement for other banks (which is presently 15%

and works out to 6% of time and demand liabilities) till the issuance of Islamic

bonds by the Government or other similar non-interest bearing GOP

securities.

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c. Similarly they have also been allowed to maintain Special Cash Reserve

(SCR) on FE-25 deposits in current account with State Bank in local currency

to the extent of 40% of SCR for other banks in order to avoid interest

payments on SCR.

d. An Islamic Export Refinance Scheme has been formulated by SBP to facilitate

the Islamic Banks/ IBBs in providing a Shariah compliant export financing to

the exporters.

e. A committee has been constituted with Institute of Chartered Accountants

Pakistan (ICAP) in which SBP is also represented, for development of

accounting standards for Islamic modes of financing. The committee is

reviewing the accounting standards prepared by Accounting & Auditing

Organization for Islamic Financial Institutions (AAOIFI) with a view to adapt

them to our circumstances and if considered necessary to propose new

accounting standards. The committee has prepared the standard on Murabaha

and is now working on the Ijara and Musharika standards.

f. State Bank of Pakistan has become a founding full member of Islamic

Financial Services Board (IFSB) established in Malaysia on 3rd November,

2002. This Board will work for promotion and development of a prudent and

transparent Islamic financial services industry through introducing

international standards consistent with Shariah principles.

g. Islamic Banking Department is also working in close coordination with other

international organizations like AAOIFI, Bahrain Monetary Authority (BMA)

and Bank Negara Malaysia (BNM) etc. to promote Islamic banking and learn

from their international experience.

h. To develop a system for Shariah Compliance Audit of Islamic Banks/IBBs a

chartered accountant firm has been granted a contract which covers, Shariah

audit of Meezan Bank, preparation of a Shariah Compliance Inspection

Manual for future use of SBP and training of a few of SBP inspection staff.

i. Shariah compliant Islamic Ijara Sukuk for Government borrowings and as an

avenue of investment for SLR purposed by Islamic banks is being developed

in line with the experience of Ijara Sukuk issued by Bahrain Monetary Agency

and Bank Negara Malaysia.

MONETARY POLICY DECISION

8th October 2011 KARACHI: Pakistan's central bank on Saturday cut its key policy rate by 150 basis points to 12 percent for the subsequent two months, citing a decline in inflation and government borrowings, it said in a statement. 

This again exceeded expectations as analysts polled by Reuters earlier this week projected a cut in interest rates between 50 and 100 basis points.

The central bank said it cut its policy rate by 150 basis points as it was "taking some comfort from declining inflation and high probability of meeting the FY12 inflation target together with a need to support private sector credit and investment growth." 

In September, annual consumer inflation was 10.46 percent, compared with 11.56 percent in August, and 13.77 percent in July, mainly due to a high base effect which is to last through December. Although inflation had risen month-on-month by over 1 percent.

However, the central bank said there was a high probability that Pakistan would meet its target of average inflation at 12 percent for 2011/12 fiscal year. 

The decline in government borrowing from the central bank was also one of the reasons for the rate cut, the SBP said.

According to provisional data, the outstanding stock of government borrowings was Rs.1,051 billion ($12 billion) on Sept. 30, lower than the agreed limit of Rs.1,155 billion ($13.22 billion) for the 2011/12 fiscal year.

"This is higher than expected and it seems to be that since the government is the largest borrower, the State Bank decided to ease some fiscal pressures for them in terms of debt servicing costs," said Khalid Iqbal Siddiqui, director at Invest & Finance Securities Ltd. 

The government's domestic borrowing for fiscal year 2011/12 is Rs.6,230 billion ($71.3 billion). 

This was the first monetary policy announcement after Pakistan ended its $11 billion International Monetary Fund (IMF) loan program on Sept. 30. It is also the second rate cut in fiscal year 2011/12 (July-June). 

Only $8 billion was disbursed, as the program was halted due to the country's slow implementation of fiscal reforms.

"This surprising cut shows central bank's focus on economic growth at a time when IMF support is no longer there," said Mohammed Sohail, chief executive at Top line Securities Ltd.

Pakistan's economic growth was an anemic 2.4 percent in the 2010/11 fiscal year against a target of 4.5 percent.

The fiscal deficit widened to 6.6 percent of gross domestic product for 2010/11, compared with the earlier estimates of 5.3 percent and it aims to contain the deficit at 4 percent in the year ending June 30.

The rate cut would be welcomed by Pakistan's main stock index but would put pressure on the rupee, which hit a record low of 87.92 to the dollar last month, analysts said.

"This may put pressure on the rupee while equity and bonds will rally," said Mohammed Sohail, chief executive at Top line Securities Ltd. 

Pakistan raised rates by 50 basis points in November 2010, and held them steady until it cut rates by 50 basis points to 13.5 percent on July 30, also exceeding analyst expectations.

"This is the largest decrease (150 basis points) in policy rate since July 2003, when the monetary policy statement was first issued," said Syed Wasimuddin, chief spokesman of the central bank. 

The government also benefits directly from lower funding costs through treasury bills and Pakistan Investment Bonds.

All this has led to some speculation that any rate cut may be partly driven by government demands, wanting to reduce borrowing costs especially as elections are approaching.