Economics Chapter 13 Banking in Pakistan

Economics Chapter 13 Banking in Pakistan Class 12 notes for FA FSc.

Banking in Pakistan

Q.1) Discuss the important features of the banking system in Pakistan.

Answer:

Importance of banking

Banks are an indispensable part of modem economies. The close relation between economic prosperity of a nation and banking services is well highlighted when we see that all advanced countries, without exception, possess a developed banking system. Poor countries, along with other common features, have insufficient and undeveloped banking systems.

Pakistan has fortunately a good banking system. The following points show the important role our banks are playing.

1. Banks encourage the habit of saving, by collecting small scattered savings to make them huge funds for investment. In the absence of banks, a large part of peoples’ incomes would either be hoarded or consumed.

2. Banks increase mobility of capital by bringing the borrowers and lenders close together. They receive money from those who cannot use it and lend it to those who can use it in some productive activity.

3. Banks create instruments of credit, which are convenient substitutes for cash. In this way, the use of precious metals and currency is reduced. In Pakistan more than 70 % of money supply consists of bank deposits usable by cheques, in advanced countries, most of the payments are made through cheques.

4. Banks make it easy and simple to transfer money from one place to another and from one person to another. In the absence of banks, the payment at distant places will be very difficult. It Is due to banks that we can make payments.

5. Banks encourage trade and commerce by providing short-term loans. Every business needs credit. Banks provide this facility and help to promote business. Successful businessmen work in cooperation with banks.

6. Banks play a vital role in export and import activity. Without banks it is not possible to carry on trade with customers at far off places in four corners of the world. The banks provide loans, open letters of credit, discount foreign bills of exchange, give information and arrange payments.

7. Banks promote capital formation and increase the rate of economic development. They provide finance to industry, transport and agriculture for medium term and long term projects.

8.Banks help in optimum utilization of resources. Various sectors of the economy compete to get funds. Textile industry, engineering, construction, transport and agriculture sectors all need funds. Through banks, a country’s resources are distributed among the most productive investments in various fields.

9. Banks channel funds to the needy investors. The idle funds of individuals and firms get utilized through banks.

10. Banks act as agents. They undertake, on behalf of their customers, purchase and sale of spread (8%) is high compared to stocks and make payments and collect funds.

11. They collect government taxes and pay salaries conveniently and save the departments from unnecessary trouble of protecting government funds.

12. They provide safe custody for valuable jeweler and documents of the people in bank lockers and save them from a lot of worries, which they would otherwise have faced, if things were kept at homes.

13. Banks reduce the rate of unemployment by providing loans to business and industry. Skilled persons, who have no capital, can get the help of banks to establish their own business.

14. Banks help to promote new joint stock companies (limited companies) by selling shares. Joint stock companies need huge funds, which only banks can provide.

Read more: Economics Chapter 11 (Economic Development and Planning) Class 12 Notes

Q.2) Discuss the need and development of commercial banking in Pakistan.

Answer:

Need of banks

Banks are an indispensable part of modem economies. The close relation between economic prosperity of a nation and banking services is well highlighted when we see that all advanced countries, without exception, possess a developed banking system. Poor countries, along with other common features, have insufficient and undeveloped banking systems. Pakistan has fortunately a good banking system. The following points show the important role our banks are playing.

1. Banks encourage the habit of saving, by collecting small scattered savings to make them huge funds for investment. In the absence of banks, a large part of peoples’ incomes would either be hoarded or consumed.

2. Banks increase mobility of capital by bringing the borrowers and lenders close together. They receive money from those who cannot use it and lend it to those who can use it in some productive activity.

3. Banks create instruments of credit, which are convenient substitutes for cash. In this way, the use of precious metals and currency is reduced. In Pakistan more than 70 % of money supply consists of bank deposits usable by cheques, in advanced countries, most of the payments are made through cheques.

4. Banks make it easy and simple to transfer money from one place to another and from one person to another. In the absence of banks, the payment at distant places will be very difficult. It Is due to banks that we can make payments.

5. Banks encourage trade and commerce by providing short-term loans. Every business needs credit. Banks provide this facility and help to promote business. Successful businessmen work in cooperation with banks.

6. Banks play a vital role in export and import activity. Without banks it is not possible to carry on trade with customers at far off places in four corners of the world. The banks provide loans, open letters of credit, discount foreign bills of exchange, give information and arrange payments.

7. Banks promote capital formation and increase the rate of economic development. They provide finance to industry, transport and agriculture for medium term and long term projects.

8. Banks help in optimum utilization of resources. Various sectors of the economy compete to get funds. Textile industry, engineering, construction, transport and agriculture sectors all need funds. Through banks, a country’s resources are distributed among the most productive investments in various fields.

9. Banks channel funds to the needy investors. The idle funds of individuals and firms get utilized through banks.

10. Banks act as agents. They undertake, on behalf of their customers, purchase and sale of spread (8%) is high compared to stocks and make payments and collect funds.

11. They collect government taxes and pay salaries conveniently and save the departments from unnecessary trouble of protecting government funds.

12. They provide safe custody for valuable jeweler and documents of the people in bank lockers and save them from a lot of worries, which they would otherwise have faced, if things were kept at homes.

13. Banks reduce the rate of unemployment by providing loans to business and industry. Skilled persons, who have no capital, can get the help of banks to establish their own business.

14. Banks help to promote new joint stock companies (limited companies) by selling shares. Joint stock companies need huge funds, which only banks can provide.

Development of commercial banking in Pakistan

History of Banking in Pakistan starts from the partition of the Indo-Pakistan subcontinent in August, 1947. At that time, the areas consisting of Pakistan had 631 offices of 45 scheduled banks out of which 487 were located in West Pakistan and 114 in East Pakistan which was also served by 500 offices of small and non-scheduled banks.

There were 19 branches of foreign banks in Pakistan but they had a very limited role to play. Just after the partition, the Indian bankers started immigrating and shifting the head offices of their banks and capital to India. It caused a great set back to the banking field in Pakistan and resulted in a decline in the number of offices in scheduled banks from 631 to 195 by 30th June 1948. In West Pakistan, the number fell from 487 to 81 in East Pakistan from 144 to 69 by 30th June 1951. Among these Habib Bank Ltd., with 25 offices and Australia Bank Ltd. with 19 offices were institutions run by Muslims who shifted their head offices to Pakistan.

The technical and administrative difficulties of establishing a central bank just after independence compelled Pakistan to enter into an agreement with the Reserve Bank of India by which the bank was to perform the function of a central bank in this area also up to 30th September 1948. The Reserve Bank of India started following wrong policies against the interest of Pakistan. The situation became so grave that after the consultation of two governments the Reserve Bank of India was asked to finish the agreement from 30th June instead of from 30th September,1948.

So the Government of Pakistan decided to establish the State Bank of Pakistan as its central bank from 1st July, 1948. In the same year first Pakistani notes in the denomination of Rs.5, 10, and 100 were issued and Indian currency was withdrawn from circulation. After it the government was advised to a bank which should serve as an agent of State Bank of Pakistan., On this suggestion National Bank of Pakistan which was established in 1949 to finance jute trade in East Pakistan to take over the agency functions from the Imperial Bank of India.

Furthermore, banking companies control act 1949 was promulgated which empowered the State Bank of Pakistan to control the operation of other banks. To boost the economic development the State Bank of Pakistan encouraged the commercial banks and gave them schemes to advance in the agricultural and industrial fields. In addition to this, I specialize in finance. institutions were set up to meet the acute shortage of funds in these fields. The State Bank of Pakistan’s policy encouraged expansion in established banks, the establishment of new banks, and weeding out unsound banks just to faster the growth of the banking system in the country. This policy not only established the banking system by 1965 but increased its functional efficiency, scope of operations and soundness to a great extent and the following banking structure emerged:

Read more: Economics Chapter 10 National Income of Pakistan Class 12

  • 1. STATE BANK OF PAKISTAN (CENTRAL BANK)
  • 2. COMMERCIAL BANKS.
  • 3. SAVING BANKS
  • 4. CO-OPERATIVE BANKS
  • 5. EXCHANGE LANES
  • 6. SPECIALIZED FINANCIAL INSTITUTIONS

According to the State Bank of Pakistan Act,1956 a bank having a paid up capital and a reserve of rupees five lacs and fulfilling certain other requirements can be scheduled with the State Bank of Pakistan. With the opening of the State Bank of Pakistan and the keen interest which it took in the establishment of the sound banking system in Pakistan despite the separation of East Pakistan, commercial banking made tremendous progress which can be judged from the following figures. Offices of the following 14 banks (scheduled) increased from 195 to 1948 to 3600 with 71 branches outside Pakistan in 1972, deposits from 88 Crores in 1948 to 1900 crores in 1972 and advances from 20 crores in 1948 to 1250 crores in 1972.

  • 1. National Bank of Pakistan
  • 2. Habib Bank Ltd.
  • 3. Habib Bank (Overseas) Ltd.
  • 4. United Bank Ltd.
  • 5. Muslim Commercial Bank Ltd.
  • 6. Commerce Bank Ltd.
  • 7. Australasia Bank Ltd.
  • 8. Standard Bank Ltd.
  • 9. Bank of Bahawalpur Ltd.
  • 10. Premier Bank Ltd.
  • 11. Pak Bank Ltd.
  • 12. Sarhad Bank Ltd.
  • 13. Lahore Commercial Bank Ltd.
  • 14. Punjab Provincial Cooperative Bank Ltd.

On January 1, 1974 the Government of Pakistan nationalized all the Pakistani scheduled banks including State Bank of Pakistan, Industrial Bank of Pakistan, Agricultural Development Bank of Pakistan through the bunk- nationalization act, 1974 to achieve the desired objectives. The weaker commercial banks were merged with stronger ones and in all five major banking companies were formed.

1. NATIONAL BANK OF PAKISTAN

2. HABIB BANK LIMITED

3. UNITED BANK LIMITED

4. MUSLIM COMMERCIAL BANK LIMITED

5. ALLIED BANK OF PAKISTAN

The Federal Government also set up a Pakistan Banking Council on March 21, 1974 to look after the organizational and operational matters including evaluation and progress of the nationalized commercial banks. The State Bank was to provide the overall policy guidelines to commercial banks.

Q.3) Write notes on functions and achievements of National Bank

Answer:

Functions and Achievements

  • 1. It acts as the agent of the State Bank. It receives money and makes payments on its behalf.
  • 2. It provides credit for state trading, industry and import-export trade.
  • 3. It keeps deposits, provides lockers and agency services and invests in government securities and bonds.
  • 4. It handles salaries and pensions of government employees.
  • 5. Collects utility bills, makes Haj arrangements.
  • 6. The Bank runs many savings schemes. It offers schemes like Monthly Income, accident insurance.
  • 7. Provides small loans like, “Advance Salary Scheme’. ‘NBP SME KARSAZ’, “SAIBAN’ housing loans, and Micro Credit Scheme, Kisan Dost.
  • 8. Provides agriculture finance and supports rural economy. It provides for purchase of farm inputs like fertilizers, seeds, tube wells, tractors etc.
  • 9. The Bank finances special schemes for employment generation and poverty alleviation e.g. Rozgar Scheme, KAROBAR.
  • 10. The bank channelizes home remittances of overseas Pakistanis.
  • 11. Invests Funds in Mutual Funds, government, securities, bonds.
  • 12. The bank is offering interest free Islamic banking modes of finance.
  • 13. The bank feels social responsibility’ and takes part in social welfare projects. It donates funds for sports, flood relief etc.
  • 14. The bank has a Problem of non-performing loans. Due to political interference there is a huge amount in default loans.

Read more: Economics Chapter 4 Value of Money Class 12 Notes

Q.4) Write notes on any two of the following:

  • i) Agricultural Development Bank of Pakistan.
  • ii) Pakistan Industrial Credit and Investment Corporation.
  • iii) Industrial Development Bank of Pakistan.
  • iv) House Building Finance Corporation

Answer:

1. Agricultural development bank of Pakistan.

ADBP came into being in 1952. It advances loans to farmers relating to short term, medium and long term duration. Short term loans are given to improve and increase the crops and for marketing. Medium term loans are given to purchase and implement equipment, and for leveling of land. Long term loans are provided to add tube wells, purchase tractors and for construction of tube wells. The main purpose of ADBP is the wellbeing of Pakistan.

2. Pakistan industrial credit and Investment Corporation.

Pakistan Industrial Credit and Investment Corporation (PICIC) is a financial institution in Pakistan, one of the first development finance institutions established with World Bank group assistance in 1957. In 2007, Commercial banks were bought by Singapore owned NIP bank. Recently, NIB Bank has sold its thirty percent stake to Sakib Berjees & Consortium Private Limited.

PICIC Insurance Limited is a part of the Temasek holdings. NIB Bank Limited, a Temasek’s subsidiary in Pakistan, is a major shareholder of PICIC Insurance Limited with a 30% stake. Temasek Holdings is an investment company owned by the Government of Singapore, it manages a portfolio of more than US$100 billion, focused primarily in Asia. Temasek’s investments are in various industries: telecommunications and media, financial services, property, transportation and logistics, energy and resources, infrastructure, engineering and technology, as well as pharmaceuticals and biosciences. Temasek Holdings is one of a few global firms with the highest corporate credit rating of AAA/Aaa by Standard & Poor’s and Moody’s respectively.

3. Industrial development bank of Pakistan.

The Industrial Development Bank of Pakistan is one of the leading financial institutions of Pakistan. It was established in 1961. Prior to nationalization of banks in January 1974 the IDBP had a paid up capital of Rs. One billion of which 51% was held by the Federal Government and rest by provincial governments, commercial banks, insurance companies and other Pakistan private investors. On nationalization of banks, the entire share capital previously held by private individuals and other institutions was transferred to the Federal Government.

A unique feature of IDBP now is that it is also a scheduled bank and an authorized dealer of foreign exchange. The IDBP thus operates as a full-fledged commercial bank in addition to its role as a developmental financial institution.

In 1989 the IDP began to provide universal banking facilities to its clients. As a universal bank IDBP is committed to diversification of its banking business. It is providing a combination of commercial banking and investment banking services to its clients. It is maintaining close links and having extensive consultations with its customers in the private sector. The IDBP operates in the framework of the development programmer for the private sector. Its prime objective is wide diffusion of credit and broad based ownership for creating the middle class of industrial entrepreneurs.

In order to obtain its objectives, the IDBP, it performs the following functions.

i) Provides medium and long term loans in local and foreign currency for the establishment of new industrial units and for modernization and replacement of existing units in the private sector.

ii) Guarantee loans, debits and credits raised or incurred by an industrial concern.

iii) Undertakes complete commercial banking business.

iv) Undertakes merchant banking business (underwriting of public issue of shares, leasing etc.)

v) Administers the Equity Participation Funds.

vi) Acts as a refinancing agency in respect of the world. Bank and Asian Development Bank, Credit to small scale industrial units.

vii) Extends consultancy and technical assistance service to clients in the execution and management of projects.

The financial health of the IDBP is not satisfactory at present. It is facing serious problems of non-payment of loans. This has adversely affected the profitability and liquidity of the Bank. The major factors contributing to its low performance are

i) Inadequate legal and judicial system

ii) Deteriorating culture system

iii) General slowdown of the economy

iv)  Adverse impact of sanctions, etc.

The IDBP had equity of Rs.907 million as of June 2003 against which the total losses stood at about Rs.24 billion. The bank has also failed to maintain the required paid up capital up Rs. 1 billion.

The new focus of the Bank is to shift the operational emphasis to commercial banking operations. Emphasis is also being laid on providing export finance.and meeting the sunning financial needs of the existing industrial projects.

4.     House Building Finance Corporation.

House Building Finance Company Limited (HBFCL), is Pakistan’s leading housing finance institution. Through our Head office in Karachi and a country wide network of Regional, Zonal and Branch Offices, we are able to offer our services to clients in every part of the country.

Since its inception we have provided a range of housing finance products and services for nearly half a million housing units. Now, HBFCL is geared up to play a pivotal role in addressing the increasing housing shortage in the country, currently estimated to be in excess of 7.5 million housing units.

Q.5) Write a note on Micro finance banks in Pakistan.

Answer:

Microfinance banks of Pakistan

Around the globe microfinance institutions have revolutionized access to financial services to the poor segments of the society. Policy makers are increasingly using microfinance as a tool to eradicate poverty. Pakistan has a large number of poor people who have no access to finance. Microfinance is a simple approach that has proved to empower poor people around the world and pull them out of poverty.

The MF sector in Pakistan is still at an early stage of development and the current outreach of MF services in the country is relatively low given the fact that nearly 30 percent of the country’s population is living below the national poverty line. Microfinance has been able to bring some of the large number of unbanked people into the banking network and has also helped in improving their socioeconomic condition. There are eight microFinance banks working in the country and their branch network has increased to 280. Female clients make up 50% of the total microfinance clientele. Majority of microfinance clients reside in rural areas of the country, in general microfinance banks prefer female clients based on the assumption that women are less likely to default. Compared to commercial banks which extend loans in millions or billions, the average value of MF loans in Pakistan is just Rs. 12000

One of the key problems facing microfinance providers is that some non- eligible affluent people secure loans on behalf of others by using their national identity card. It has been observed that once loans were obtained by women they were later used by men. Despite this, since women are provided the loan this has led to their empowerment.

The MF banks are:

  • 1. Khushhali Bank
  • 2. The First MicroFinance Bank
  • 3. Network Microfinance Bank
  • 4. Rozgar Microfinance Bank
  • 5. Tameer Micro Finance Bank
  • 6. Pak Oman Microfinance Bank

2 others

  • Micro finance banks disbursed 26 billion rupees as loans till Dec. 2010
  • Microfinance sector is serving more than 2 million borrowers.

Tameer MFB has taken lead in the banking industry by adopting branchless banking. Under branchless banking model ‘Easy Paisa’ , financial services such as bills payment, domestic remittances, and mobile phone accounts have been introduced. MFBs have increased services in rural and remote areas.

Q.6) Discuss the principles of Note-issue. Which principle of note issue is being followed by the State Bank of Pakistan?

Answer:

Principle of note issue

There are two principles of note issue. First is the currency principle and the second is the banking principle. There are different views about these principles. One school of thought says that there should be full convertibility of notes into gold bullion. The second gives importance to the elasticity of supply. Now we discuss these two principles.

Currency principle

The lovers of this principle say that paper money is better than metallic money but there should be 100% backing of gold reserves. They say that in order to maintain the prestige of paper money gold should be available for the conversion of notes when presented.

Banking principle

According to this principle there is no need for reserve requirements of gold and silver for the notes issued. The banks are authorized to regulate the note issue keeping in view the need of the business in the country. The banks themselves will maintain adequate reserves of gold for meeting their obligations of note. If there is an over issue of notes, the excess money will be automatically presented for cash payment and a proper ratio will be maintained between the supply of money and the gold reserves.

Fixed Fiduciary System

Under this system the central bank of the country is permitted to issue bank notes of a given amount without giving gold and silver cover. The fixed quantity of notes allowed by law to be issued is to be backed by Govt. securities only. This is named the fiduciary limit. The amounts of notes circulated in excess of the fiduciary limit must be 100% backed by gold.

Proportional reserve system or percentage system

According to this system the central bank is required by law to keep a fixed percentage varying from 25 to 40 percent against the note issue. The essential feature of this system is the provision of proportional metallic reserves against the notes in circulation. The reserve ratio may be allowed to drop below the legal minimum.

Pakistan state bank has used a proportional reserve system up to December 1965. Under this method 30% was to be kept as reserve in the form of gold coin , gold, silver bullion and approved foreign exchange. The balance was covered by rupee coin and government security. After 1965. The State Bank of Pakistan adopted a fixed minimum reserve system under this system; the bank has to keep only a legally fixed amount of minimum reserve in gold, or silver. Moreover the government in consultation with the State Bank can alter it.

Q.7) Write a note on the functions and achievements of the State Bank of Pakistan.

Answer:

Function of state bank

Pakistan being a developing country, the State Bank performs both the traditional and developmental functions. The traditional functions are:

Primary functions include issue of notes, regulation and supervision of the financial system, bankers’ bank, lender of the last resort, banker to Government, and conducting monetary policy.

Secondary functions include the agency functions like management of public debt and foreign exchange. The Bank maintains close relationships with international financial institutions,

Non-traditional or promotional functions include development of financial framework in Pakistan, training of bankers, provision of credit to priority sectors like agriculture, directing the process of islamization of banking system.

Traditional Functions

1.     Monopoly of Note Issues

The State Bank of Pakistan has the monopoly of note issue, It follows the proportional reserve system to issue currency. The notes issued are backed by reserves in the form of gold coins, gold bullion and approved foreign currencies. Presently 99% of the currency in Pakistan consists of notes, issued by the State Bank.

2.     Banker to the Government

The State Bank;

i. Holds cash balances of the Federal and Provincial Govts, free of interest.

ii. Accepts the deposits for the Government.

iii. Provides short term loans to the government.

iv. Collects tax revenue and makes payments on behalf of the government.

3.     Bankers’ Bank

The State Bank is the leader of the banking system.

i. All banks keep the minimum required cash reserves with the State Bank.

ii. It provides loans to banks through discounting of bills.

iii. It directs other banks about deposits, credit and interest rate policies.

iv. It fixes the cash/deposit ratio for commercial banks, (present ratio is 15%.)

v. All banks send weekly statements and annual reports about their deposit and reserve position to State Bank.

4.     Adviser to the Government

In monetary matters, the government gets the advice of the State Bank i.e. about currency, exchange rates, saving schemes, Islamization of banking. It also acts as representative of the government of Pakistan in international organizations.

5.     Manager of Public Debt

The Bank manages domestic and foreign debt of the government. It makes interest payments and arranges prize-bond draws.

6.     Clearing House

All banks have accounts at the State Bank. Mutual claims of commercial banks are settled and cleared through transfer of funds from one bank account to another.

7.     Guardian of Reserves

The State Bank is the guardian of all types of monetary reserves. Gold and foreign exchange reserves of the government are kept with the bank.

8.     Manager of Foreign Exchange

Foreign exchange which Pakistan receives or pays on account of trade or aid is recorded by the Bank. The Bank is responsible to keep the exchange rate of the rupee at an appropriate level.

9. It deals with International Financial Institutions like IMF

10.  It is Lender of Last Resort

If some bank runs short of cash and is unable to get help from other sources, it approaches State Bank. The Bank lends funds to ensure its liquidity and solvency.

11. Controller of Credit (Monetary Policy)

The State Bank is the guardian of the money market. It is responsible to regulate the monetary and credit system of the country. The bank has-vast powers to regulate the volume and direction of bank loans. It adopts the following methods for this purpose

  • i. Open Market Operations (OMO).
  • ii. Discount Rate Policy.
  • iii. Reserve Requirement.
  • iv. Liquidity Ratio.

12.  Non-traditional Functions

State Bank is also supposed to promote the objective of economic growth, development of new financial institutions and debt instruments. It sets priorities for use of credit and takes steps for development of the capital market.

13.It prepares annual reports on the state of the economy and presents it to Parliament.

Achievements and performance

1.     Sound Currency System

Economic development brings expansion of markets, greater specialization and more use of money. To deal with this situation the State Bank has wisely regulated the currency system and has helped the government to control inflation and recession by controlling expansion of credit, the Bank maintains stability in the monetary sector.

2.     Expansion of Banking System

Government controlled banks; National Bank, First Women Bank, First MicroFinance Bank, Khushhali Bank and SME Barik were established with the help of State Bank.

3.     Establishment of Specialized Institutions

State Bank of Pakistan helped to establish specialized institutions e.g. Zarai Taraqiati Bank, (ZTBP), 1DBP, House Building Finance Corporation, SME Bank.

4.     Price Stability

The State Bank controls the price line. Pakistan has faced inflation since 1972. But due to policies of the State Bank, the situation remained under control.

5.     Balanced Distribution of Credit

Under direction of the State Bank, the pattern of lending by commercial banks has changed. Previously, 60% of the credit went to trading and only 18% to industry. Now trading gets 20% and industry 50%. This is a good sign for the country’s development.

6.     Annual Credit Plan

The Bank prepares Annual Credit Plans for the economy and fixes targets of loans for the government, and private sectors. The banking sector works to achieve the target.

7.     Wider Distribution of Credit

The Bank prevents the concentration of bank credit in a few hands, a small number of industrial groups and families. It compels banks to provide more funds for small loans

8.     Special Financing Schemes

The State Bank has introduced many schemes to provide special financial facilities to small enterprises in agriculture, business and industry.

  • i. Financing local sale and Export of Locally Manufactured machinery.
  • ii. Credit Guarantee Scheme to cover the risk of commercial banks in case of small loans.”
  • iii. Export Finance Scheme to provide loans to exporters at low rate of interest
  • iv. The Poverty Alleviation Fund was created to help the poorest sections of society.
  • v. Deposit insurance scheme has been introduced to protect small depositors.

9. Training imparted to banking staff of local and foreign banks.

10. Promotes Islamic Banking: It runs Islamic Banking Department to promote Islamic modes of banking and issue licenses to Islamic Banks.

11. Expanding Money Market and Capital market

The Bank

i) established stock exchanges at Karachi, Lahore, and Islamabad to promote capital market

ii) Established auction market (bill market) of Treasury Bills.

iii) Appointed authorized money changers for foreign exchange.

12. Source of Govt. Income for FY 2011-12 the estimate of profit is Rs.200 billion.

13. Promotes E-banking: Is to transform banks into professional, and efficient institutions, SBP pursues and encourages use of latest information technology.

14.  Strengthening of Payment Systems

To increase efficiency of the national payment system SBP has introduced reforms that include migration from a mainly cash and paper-based system to electronic payments.

15. State Bank protects the interest of banks’ customers

The SBP instructs banks to adopt fair practices and make complete disclosure of lending and deposit rates of their consumer products It takes steps to enhance security of plastic money transactions.

Read more: Economics Chapter 1 National Income Class 12 Notes

16.  Internship Programs

State Bank offers internship programs to the top students of universities.

17. For information for general public the Bank maintains a Web site and brings out publications

Q.8) Discuss the role of the State Bank in the economy.

Answer:

Role of state bank

Pakistan being a developing country, the State Bank performs both the traditional and developmental functions. The traditional functions are:

Primary functions include issue of notes, regulation and supervision of the financial system, bankers’ bank, lender of the last resort, banker to Government, and conducting monetary policy.

Secondary functions include the agency functions like management of public debt and foreign exchange. The Bank maintains close relationships with international financial institutions,

Non-traditional or promotional functions include development of financial framework in Pakistan, training of bankers, provision of credit to priority sectors like agriculture, directing the process of islamization of banking system.

Traditional Functions

1. Monopoly of Note Issues

The State Bank of Pakistan has the monopoly of note issue, it follows the proportional reserve system to issue currency. The notes issued are backed by reserves in the form of gold coins, gold bullion and approved foreign currencies. Presently 99% of the currency in Pakistan consists of notes, issued by the State Bank.

2. Banker to the Government

The State Bank;

  • i. Holds cash balances of the Federal and Provincial Govts, free of interest.
  • ii. Accepts the deposits for the Government.
  • iii. Provides short term loans to the government.
  • iv. Collects tax revenue and makes payments on behalf of the government.

3. Bankers’ Bank

The State Bank is the leader of the banking system.

  • i. All banks keep the minimum required cash reserves with the State Bank.
  • ii. It provides loans to banks through discounting of bills.
  • iii. It directs other banks about deposits, credit and interest rate policies.
  • iv. It fixes the cash/deposit ratio for commercial banks, (present ratio is 15%.)
  • v. All banks send weekly statements and annual reports about their deposit and reserve position to State Bank.

4. Adviser to the Government

In monetary matters, the government gets the advice of the State Bank i.e. about currency, exchange rates, saving schemes, Islamization of banking. It also acts as representative of the government of Pakistan in international organizations.

5. Manager of Public Debt

The Bank manages domestic and foreign debt of the government. It makes interest payments and arranges prize-bond draws.

6. Clearing House

All banks have accounts at the State Bank. Mutual claims of commercial banks are settled and cleared through transfer of funds from one bank account to another.

7. Guardian of Reserves

The State Bank is the guardian of all types of monetary reserves. Gold and foreign exchange reserves of the government are kept with the bank.

8. Manager of Foreign Exchange

Foreign exchange which Pakistan receives or pays on account of trade or aid is recorded by the Bank. The Bank is responsible to keep the exchange rate of the rupee at an appropriate level.

9. It deals with International Financial Institutions like IMF

10. It is Lender of Last Resort

If some bank runs short of cash and is unable to get help from other sources, it approaches State Bank. The Bank lends funds to ensure its liquidity and solvency.

11. Controller of Credit (Monetary Policy)

The State Bank is the guardian of the money market. It is responsible to regulate the monetary and credit system of the country. The bank has-vast powers to regulate the volume and direction of bank loans. It adopts the following methods for this purpose.

  • i. Open Market Operations (OMO).
  • ii. Discount Rate Policy.
  • iii. Reserve Requirement.
  • iv. Liquidity Ratio.

12. Non-traditional Functions

State Bank is also supposed to promote the objective of economic growth, development of new financial institutions and debt instruments. It sets priorities for use of credit and takes steps for development of the capital market.

13. It prepares annual reports on the state of the economy and presents it to Parliament.

Q.9) Write notes on the following:      

  • a) Bank Rate Policy
  • b) Open Market Operations,
  • c) Reserve ratio.

Answer:

1. Bank rate policy

Whenever a bank has a shortage of funds, they can typically borrow from the central bank based on the monetary policy of the country. The borrowing is commonly done via repos, where the repo rate is the rate at which the central bank lends short-term money to the banks against securities. This is termed as Bank rate policy.

2. Open market operations

DEFINITION of ‘Open Market Operations is the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Purchases inject money into the banking system and stimulate growth while sales of securities do the opposite.

3. Reserve ratio

The reserve requirement (or cash reserve ratio) is a central bank regulation employed by most, but not all, of the world’s central banks, that sets the minimum fraction of customer deposits and notes that each commercial bank must hold as reserves (rather than lend out).

Read more: Economics Chapter 2 Equilibrium of National Income Class 12 notes

List of Commercial Banks in Pakistan

  • Barclays Bank Pakistan
  • Allied Bank Limited
  • Citibank Pakistan
  • Royal Bank of Scotland Pakistan
  • United Bank Limited
  • Askari Bank
  • Soneri Bank
  • Bank Alfalah
  • Bank AL Habib
  • Faysal Bank
  • First Women Bank
  • Habib Bank Limited
  • HSBC Pakistan
  • JS Bank
  • KASB Bank Ltd
  • MCB Bank Limited
  • MyBank
  • National bank of Pakistan
  • NIB Bank Pakistan
  • Standard Chartered Bank Pakistan
  • Silkbank Limited
  • Summit Bank

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