HISTORY

Before 14 august 1947 here was a combine Bank of Pakistan and India which was federal reserve bank of India. It remain bank of Pakistan 1948 on 1^st

July 1948 Quaid e azam loved foundation one of state bank of Pakistan.State bank of Pakistan is the controll bank of the country while it,s constitution ,as

Originally laid down in the state bank of Pakistan order 1948 basically

Unchanged until 1^st January 1974 when the bank was nationalized the scope of its

Function was considerably enlarge. The state bank of Pakistan act 1956 with subsequent amendments forms the basis of its operation today. Under the state bank of Pakistan order 1948 the bank was charged with the duty to regular the issue of bank notes and keeping of reserves with view to security monetary stability in Pakistan and generally to operate the currency and credit system of the country to advantage”.

The scope of bank operations was considerably widened in the state bank of Pakistan act 1956 which required the bank to “regulate monetary and credit system of Pakistan and to foster its growth in the best national interest with a view to seare monetary stability and fuller utilization of the country productive resources”. Under financial sector reforms the state bank of Pakistan granted autonomy 14 Feb 1974. On 21^st Jan 1974 this autonomy was further strengthened by issuing three amendment ordinances which were approved by the parliament 14 May 1947, namely state bank of Pakistan act 1956, banking company ordinance 1962 and banks nationalization act 1974. The changes in state bank act gaved full and exclusive authority to state bank to regulate the banking sector to conduct and independent monetary policy and to set limit on government borrowings from the state bank of Pakistan. The amendiments in banks nationalisation act abolished the Pakistan banking council and institutionalized the process of appointments of chief exectives and board of the nationalized commercial banks and development finance institutions with the state bank having their appointments and removals the amendments also increased the autonomy and accountability of chief exectives and the board of directors of banks and DlfS pak rupees issued by state bank is under its policy .

Pak rupee remained link to pound sterling till September 1971 and subsequent to us dollar .it was decided to adopt the managed floating exchange rate system W.E.F. jan8 1982 under which the value of the rupee was determined on daily basis. During the course of time and important development look place when Pakistan accepted obligations of article _111 section 2,3 and 4 of the IMF article of agriment there by making the Pak rupee convertible for current international transactions with effect from July 1 1994.

After nuclear detonation by Pakistan 1998 , a two tier exchange rate system was introduced W.E.F 22^nd July 19198 with view to reduce the pressure on official reserves and prevent the economy to some excellent from adverse implication of sanctions imposed on Pakistan however effective 19^th may 1999.

The exchange rate has been unified with the introduction of market based floating exchange rate system.

CAPITAL OF THE STATE BANK

The paid up capital of state bank of Pakistan is Rs30 million which is divided in 3 lea share Rs100 each befor nationalization its 51% share were owned by the federal Govt and remaining 49 by the people. On nationalization on 1^st January 1974 its 100% shares were transferred to federal govt and now it is completely a govt organization.

FUNCTIONS OF SBP

1. Like a central bank in any developing country state bank of Pakistan performed both traditional functions which are normaly performed by centeral banks lmost ll over the world may be classified in two groups.

The primary functions including issue of notes regulation and supervision of financial system bankers bank , lender of the last resort banker to govt , conduct of monetary policy.

2. The secondary functions including the agecy functions lile management of public debt management of foreign exchange and other functions like advising the govt on policy matters and maintaining close relationships with international financial institutions.

3. The non traditional and promotional functions performed by SEB include development of financial from work institution aligation of savings and investment provision of training facility to bankers and provision of credit to priority sector the state bank also has been playing an active part in the process of islamization of the banking system.

CHAT FUNCTIONS OF STATE BANK OF PADISTAN.

FUNCTION OF SBP

Traditional Non trading

Primary Secondary

1:issue of note 1:public debt management 1:Development

2:Conduct of monetary 2:Management of foreign exchange of financial

and credit policy 3:Adviser to govt intitutions

3:Regulation of financial 4:Reltions with IFIS 2 :Trading faculty

system to bankers

4:Bankers bank 3:Credit to primary

5:lender of last resort sectors

6:Banker to govt

FUNCTIONS (TRADITIONA)

The central bank performs following functions

1MONOPOLY OF NOT ISSUE

The SBP has the monopoly to issue currency notes are issue according to need of the public no other bank can issue note.

2 BANKER TO GOVT

SBP maintains govt accounts, its reserves deposits and make payments on the behalf of govt SBP grants loans to the govt . it lso makes investment in govt bills and securities.

SBP management the public debt, and also handle the financial business.

SBP acts as advisor to the govt in all monetary matters

3 BANKERS BANK

SBP acts as banker to commercial banks in following ways

1 The commercial banks keep a fixed portion of their total deposits as a reserve with SBP its ratio is 7.5 of total deposits

2 Whenever the commercial banks re in trouble the take loans and rediscount their bills from SBP

3 SBP also provides remittance facility to the commercial banks

4 SBP manages and supervises the clearing house to facilitate the clearing of cheques between banks

.

CUSTODIAN OF FOREIGN EXCHANG RESERVES

All the foreign exchange and gold reserves of the country re kept under the custody of SBP

EXCHANGE COTRACT

SBP manages foreign exchange transactions and enforces exchange control regulations, The allocation of foreign exchange expenditure is made by the govt through central bank

EXCHANGE RATE STABILITY

SBP is responsible for maintaining a stable foreign exchange rate.

CREDIT CONTROL

It is also the responsibility of SBP to regulate the volume of credit and its direction according to the requirment of the economy of the country.

PRICE STABILIZATION

Another important function of SBP is to from the monetary policy in such maner the price inside country remain stable.

DEFLATION

In case of falling price SBP adopts the inflationary policy and increase the supply of money and credit.

INFLATION

In case of increase in price SBP adopts the deflationary policy and decrease the supply of money and credit so that inflation can be checked.

EXPANSION AND CONTROL OF BANKS

It is duty of SBP to promote the expansion of banking system on sound footing. It also controls the commercial banks.

(PROMOTIONAL FUNCTIONS)

ASSISTANCE TO SPECIALIZED INSTITUTIONS

The state bank of Pakistan provides the finance specialized financial institutions like.

ADBO- IDBP- ICP- HBFC- FBC- PICIC- NDFC

EXPORT FINANCE SCHEME

Under the SBP export finance scheme the commercial banks are providing finance to exporters or concessional rates to encourage exports.

ISLAMIZATION

From 1985 the SBP has prepared a programme to introduce istamec economic system PLS scheme is practiced in all banks.

SPECIALIZED INSTITUTIONS

1. Pakistan industrial credit and investment corporation (picic)

2. Industrial development bank of Pakistan (IDBP)

3. National development finance corporation (NDFC)

4. Agricultural development bank of Pakistan (ADBP)

5. Federal bank for corporation (FBC)

6. House building finance corporation (HBFC)

ROLE OF STATE BANK OF PAKISTAN IN ECONOMIC DEVELOPMENT

Before independence hindus had a strong hold on the banking sector of the then India economy. They migrated to India after the independence of Pakistan. So there was no virtually banking system in the country to establish level promot the banking structure in the country state bank of Pakistan was set up on 1^st July 1948. Since then this bank has been keenly working to develop the financial sector of our economy 0ptill now its achivement have been commendable and they are as follows.

EXTENTION AND DEVEOPMENT OF NANKING STRUCTURE

There were only 69 bank branches after independence which for below the requirements of the country. So SBP took special measures to promot the banking structure in the country. As a result of this new banks came into existence new branches were opened in large number banking facilities are now available in rural and underdevelop regions of the country. Now the total number of branches operating in has increased manifold.

SBP has also played a vital role in setting up specialized financial institutions like ADBP and IDBP. Besides this is giving adequate amount of loans to run house building finance corporation, small business finance corporation, national development finance cooporation.

ASSITANCE TO SPECIALIZED FINANCIAL INSTITUTIONS

SBP gives financial assistance to different specialized financial institutions every year. It gives heavy loans to agriculture development bank of Pakistan every year. Under order of govt of Pakistan issued on 7^th December 1979. SBP gives loan to ADBP at a rate of interest which is 6% less than the bank rate and federal govt compensates SSBP at ate 4%.

SBP gives a sufficient loan to federal bank for cooperatives every year at 3% less than the bank rate.

SBP also gives the loans to house building finance corporation on profit and loss basis.

Special loans are also given by the SSSBP to investment corporations of the Pakistan (ICP) and industrial development bank of Pakistan (IDBP).

PROPER DISTRIBUTION OF CREDIT

SBP sets sector wise credit targets for commercial banks which has helped to achive proper distribution of credit between different sectors of our economy. For example 14 June 1954 62% of bank credit was being given to tred and commerce whereas the industrial sector received only 18% of total bank credit. Now due to measures taken by SBP the pattern of credit distribution has allogether changed. In 1993-94 the industrial sector got 45% of the bank credit 31% went to trade and commerce and remaining 24% was distributed to different sectors of the economy.

ISSUANCE OF SMALL LOANS

In 1959 credit inquiry commission of the govt of Pakistan pointed out the proper credit facilities are not being given to small business man. Therefore SBP paid special attertion for the issue of small loans to petty shop keepers and small industrialists are reasonable rate of interest. In May 1970 SBP directed commercial banks to allocate 20% of their loans for small business commercial banks did not coprate with the SBP in this regard and therefore this policy also failed to yield any result. In may 1972 under the order of the govt SBP set up a small business division to establish whether commercial banks have aehived their credit target for small busness like small agriculture units construction of low cost houses small industries purchase of tractors and tube well etc. Later on SBP initiated credit guarantee scheme under which SBP compensates for 50% of loss in case the loan is not repaid these days commercial banks under the order of state bank give interest free loans th agriculturists upto ten thousand for purchase of agriculture inputs.

FINANCIAL FACILITIES TO PROMOTE EXPORTS

Export finance scheme.

Under this scheme commercial banks provide loans at 5% rate of interest and SBP provides them loans at zero rate of interests. This scheme operates in two parts. Under the first commercial banks provide loans to exporters on irreioverable “Letter of credit” Whereas under the second part commercial banks fix the limit of credit for exporter on the basis of previous year basis of their export proformanee refinance scheme.

Under this scheme different financial institutions provide loans at 2% rate of interest for export of manufactured machinery and for this SBP provides them loans at zero interest rate under this scheme SBSP generally provides loans to IDBP, picic and NDFC.

CONTROL OF CREDIT

SBP sells govt in the open market to control credit money. SBP has so many times increased its bank rate for rediscount of bills bow it is increased to 10%. SBP also changes the liquidity rates of CBS now for advances its ratio of CB to control credit being created by them today all banks deposits 5% of their time and demand liabilities with the , state bank of Pakistan.

SUGGESSIONS

TIGHT MONETARY AND FISICL POLICIES:

Banks should be directed to give loans for production purpose only moreover margin requirement on bank loans should be re adjusted, bank rate be furthur increased and reserve ratio of commercial banks should also be in increased .

REDUCE BUDGET DEFICIT:

Govt of Pakistan must reduce the size of its budget deficit so that the deficit remains with in manageable limits the govt must avoid printing of more money in this way supply and its velocity of circulation will remain in control.

RAPID GROWTH OF NATIONAL OUTPUT:

For this govt should discover more natures resources patronize the diffusion of modern techneiques of production, faclitate ccumulation f capital in the country encourage the use of entrepreneurial capabilities and labour efficiency.

CUT DOWN NON DEVELOPMENT

Non development expenditure must be cut down .in this connection deffence expenditure should be brought down .un necessary use of govt telephones be checked and wasteful expenditure in our embassies abroad should be controlled to reduce the demand pressure on national economy.

ELIMINATION TAX EVASION:

The govt must control tax evasion by administrative measures .in this connection sever punishments be awarded to those who do not pay the tax. It will help to raise revenue and to controll deficit financing .

SIMPLE LIVING:

The people of Pakistan must adopt the principle of simple living so that wastfull private sector controlled .

RAPID GROWTH AGRICULTURE AND INDUSTRIAL SECTORS:

Agriculture sector should be developed on the basis of sound planning,

For the development in industrial sector investment in the private sector should be encouraged and adequate credit facilities should be provided to private entrepreneurs.

ECONOMIC PLANING:

Planning for future development must be made in accordance with the aspiration of the people so that out Pak increased rapidly and prices are stabilized.

NEW LABOUR POLICY:

The govt must annonnce a new labour policy to redress the grievances of the labour class. So that the oabour may cooprate with the entrepreneurs.

CAPITAL ACCMMULATION;

For this saving scheme be introducing in the country to accumulate small savings for investment the govt should free the private sector of its sanctions of investment and the behave in accordance with the situation the market.

CONSUMER,S COOPERATIVES;

Consumers should organize them selves to run cooportive stores it is the way on which consumer goods will be available to people at cheaper rates in the price level.

IMPORT SUBSTITIUTION

We must ttempt to produce substitutes for goods which are being imported from abroad.

ELIMINATE NON-ECONOMIC ILLS

None economic like smuggling, black marketing, harding must be eradicated so that supply of goods in the market is incoreaed for this govt must take efficient administrative measures and those responsible for such illegal activites should should be punished.

INFLATION:

The rate of inflation as measured by consumer price index peaked at 11,1 percent year on year April 2005 and has since declined to around eight percent on year in November .This has largly been on account of moderating food inflation which has eased from 157 in april to 5.8 percent on year in November .

How ever non food non oil inflation remains the around the same level at 7.6 percent. The worry now is that since cpl has moderated from its nights the economic team is becoming complacent that the inflation problem is over. Inded the state banks light-ening 0.2 monetary policy from earlier this year has helped but not enough. As ABN AMRO,S Economic bulletine for December says real interest rates are still near zero and state bank is clearly ignoring the impact of easy monetary conditions on the balance of payments.

Pakistan is a developing country which is faced with the problem of population explosion the general price level in the country has been increasing rapidly Pakistan has been facing the problem of inflation for the last two decdes.

When it measured by changes in the consumer price index (CPI) it remained at the double digit level during first seven years of 1990 except 1993-94 to 1997-98. It decelerated sharply to 7.8% in 1997-98. The return to a single digit inflation was mainly attributed to a light monetary policy complemented by a prudent fiscal policy.

As measured by changes in CPI inflation during the first ten months (july-April) of 1997-98 declined to 6.1% as against 8.2% of the comparable period of last year and against the target of 8%. Both food and non-food inflation remained close to overall inflation as shown in the following table.

INFLATION RATE (CPI)

Period	CPI General	Food Group	Non- Food Group
July-April 1997-98	8.2	8.2	8.2
July-April 198-99	6.1	6.2	5.9
July1998/July1997	6.7	6.0	7.5
Aug.1998/Aug.1997	7.0	6.5	7.5
Sep.1998/Sep.1997	6.4	5.5	7.4
Oct.1998/Oct.1997	6.5	5.6	7.5
Nov.1998/Nov.1997	6.2	7.2	5.2
Dec.1998/Dec.1997	6.4	7.2	5.4
Jan.1999/Jan.1998	6.2	6.8	5.7
Feb.1999/Feb.1998	6.2	6.6	5.9
Mar.1999/Mar.1998	4.8	5.7	3.7
Apr.1999/Apr1998	4.6	5.3	3.8

Above table was taken from federal of statistics.
According to economic general information rate in Pakistan for the last three years as under
2000 4.7
2001 3.4
2002 2.6
Poverty Reduction:
Poverty has many dinesion in Pakistan. The poor in Pakistan have not only low income but they also lack access to basic needs such s ecucation health clean drinking water and proper. The govt of Pakistan fuly recognize that growth is critcal for reducing poverty in the country but focus on growth alone is not enough. Ahigh economic growth must be accompanied by other poverty reducing. Such as investment in humn capital like education helth food supply programs e.t.c.
IMPORTANCE TO AGRICULTURE SECTOR
Agriculture in pkistan is the single largest sector employing the 42% of the country work force more than two third of the country papulation lives in rural areas andmajority of them is depentdent.
Directly or indirectly on agriculure for their living so poverty can be preduced by planning in agriculure sector SBP sould order commercial banks to introduce easy loan schemes for its better development.

HOUSING SECTOR
this sector is highly labour. About 35-40 industries have forward and bakward liking with it. In federal budgets SBP can take several concessonary to boost up the housing and consouction sector.

SMAL & MEDIUM ENTERPRISES

The SMES represents a significant component of pakistans economy.These help in providing employment to the workerw and technical information through micro credit banks mamely SME bank.

INFORMATION TECHNOLOGY.
For reducing poverty information tchnology is yet and other sector which has great potenttied to creat jobs for the educated unemployed youth in the conury.

INVESTMETN IN HUMAN CAPITAL
Investment in human capital is very essential the govt is increasing in the federal and provincial budgets in education health and nutrion both for the people living in urban and rural areas.
PROMOTING GENDER EQUALITY
The govt is encouraging and providing oppertanses women to work in various enterprises along with men bec.are more than 50 % of population.

CONSTRUCTION OF SMALL PUBLIC WORKS

SBP is creating employement opportunities by taking up small public works like construction of from to market, road worker supply sucheme reparing existing living water sourses e.t.c

INSTUMENTS
Money or credit instrument are today necessary for the development. In developed contry business are running on the bases of credit instruments so the SBP should also introduce bew instruments. It works like blood in body structure of the economy mn instruments are as following.

SBP 3-DAY PEPO RATE
SBP provides a facility to the schedual band for upto 3 days through revore transaction. The interest rate charged on this facility serves as the main tool to give interest rate singles to the money market. Increase in this rate gives a signal of monetary fighening.

T-BILL AUCTIONS
SBP 3-ays repo rate the yield of T-bills sold through action. The cute of yield is determind by the Action committee, keeping invies monetary targets current and expected market response. The six month T-bill is sonsidered the most important benech mark by the money market.

OPEN MARKET OPERATIONS
SBP is conductivity regular open market perartions (OMOS) since Jan 1995 uptill oct- 1997. OMOS were uniderctional SBP used to map up liquidity from market in case of acess but it refrainted to reject funds in case of liquidity erucnch.
` however in 1997 october to started bi-directional intervention now repo transactins are used toup liquidity and reserve repl to inject it dicion upon the direction and extent of taken by the OMO Committee.

STARURY LIQUDITY RATION:-

Commercial banks are required to keep some function of their assets in frm of cash T.B.S or other approve success. This fanction is called statury liquidity ration. Its main objective is to ensourse assets.

CASH RESERVE REQUIRMENT.

Under this requirment banks are required to keep & weekly average balance of 5% of their total time and demand liability with SBP subject to daily minimum balance of 40% state band has also has issued a mater circular regulation

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