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Chapter 3

Central Bank

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Central BankDefinition:

“An institution which is charged with the responsibility of managing the expansion & contraction of the volume of money in the interest of the general public welfare”.

“the guiding principle of a central bank is that it should act only in the public interest for the welfare of the country as a whole & with out regard to profits as a primary consideration”.

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Functions of Central Bank

Central Bank

Traditional Functions

Primary Functions

Non-Traditional Functions

SecondaryFunctions

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Functions of Central Bank

Traditional Functions : Which are generally performed by central banks all over the world, are classified into two groups;• Primary Functions: including issue of notes, regulation of

financial system, and conduct of monetary policy • Secondary Functions: including management of public debt,

management of foreign exchange, advising the government on policy matters, and maintaining close relationships with the international financial institutions

Non-Traditional Functions: these functions are performed by the State Bank include development of financial frame work, provision of training facilities to bankers, and provision of credit to priority sectors.

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Primary Functions Sole authority to issue notes

» Issue Department • Karachi, Lahore, Peshawar, Quetta

» Banking Department Conduct of monitory policy & credit policy Supervision of financial system Banker’s Bank

• Services to the scheduled banks» Reserves of scheduled banks» Demand & time liabilities of scheduled banks» Excess reserves » Clearing House » Remittance Facility at concessional rates

Banker to Government Lender of the last Resort

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Secondary Functions

Public Debt Management• Subscribing federal and provisional govt. securities at the time of their issue• Sale/purchase and interest payments of prize bonds &some saving schemes

Management of foreign Exchange » Foreign Exchange Reserves » Foreign Exchange control» Foreign Exchange Rate Stability

Advisor to Government» Help in monetary policy, Economic & Foreign exchange policy, fiscal policy

(imports & exports) Relationship with international Financial Institutions

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Non-Traditional Functions

Development of the Banking System Training facilities to Bankers

» Institute of Bankers Pakistan » Training Department » NIBAF & etc.

Development of specialized Financial Institutions» PICIC (Pakistan Industrial Credit & Investment Corporation)» IDBP (Industrial Development Bank of Pakistan)» NDFC (National Development Finance Corporation)» ADBP & etc.

Credit to priority sectors» Credit for agriculture » Export Finance Scheme

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Departments of Central Bank

Accounts Department • provide effective & efficient services & information for

planning, control and decision making regarding annual budget

• It undertakes the sale & purchase of foreign currencies Agricultural Credit Department (ACD)

• ACD coordinate the operations of the bank in connection with the agriculture credit and its relations with the provisional co-operative banks & any other organizations engaged in the business of agricultural credit.

Banking Inspection Department• Insuring the safety and soundness of the financial system

and safeguards the interest of the depositors.• To asses a financial institutions , BID conduct regular on-

site inspection of all scheduled banks

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Departments of Central Bank Banking Policy Department

• BPD reviews and formulates proactive policy framework for Banks, proposal for mergers /acquisitions, privatization matters, management of the banks

• Conducting special studies for improvement in the banking sector with a view to safe guard the depositor’s interest.

Banking Supervision Department• Ensures enforcement of regulatory and supervision policies, monitor risk

profiles, & evaluates operating performance of individual banks & DFIs as also of the overall banking system.

• BSD also provides online collection & dissemination of credit related information to financial institutions.

Economic Policy Department• Prepares monetary survey, credit plans, keeps constant watch and

analyses developments in the financial markets and matters relating to Pakistan's relationship with IFIs.

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Departments of Central Bank

Exchange & Debt Management Department• Its function is effective and efficient execution of

monetary and exchange rate policies through money market and foreign exchange operations.

• It also perform domestic debt management. Islamic Banking Department

• All matters relating to Islamic banking in the country Payment System Department

• It is setup recently to oversee the existing payment and settlement in place an develop a strategy with the banking industry for improvement in the banking system.

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Departments of Central Bank Research Department

• Makes objective analyses of economic development , explore inter-linkages between macroeconomic policies, and examine their relationship with overall economic growth

• It also prepares annual and quarterly reports on the status of the economy Statistics Department

• The department is responsible for collection, compilation, dissemination and publication of statistics on economic, financial and monetary aspects most pertinent

Human Resource Department• Its objective is excellent at acquiring, developing and retaining the right

talent for SBP by continuous innovation & improvement of the HR policies & procedures, providing effective facilities and advisory services to line departments and effective and timely delivery of HR services.

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Departments of Central Bank Audit Department

• It provides independent appraisal of all activities of SBP aiming to add value, improve operational efficiency, risk management & internal control system.

Information System Department• It is responsible for oversight and management of the technology

operations, development and implementation, including all corporate systems, LANs,WANs, databases, websites, system administration and desktop support for the SBP.

Corporate & Media Affairs Department• This department is entrusted to arrange Central Board Meetings. • It takes care of all the affaires related with board of the bank, acts as

spokesman of the bank for media and other external stakeholders, and manage publications of the State Bank of Pakistan.

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Importance of Central Bank

• Controller of Credit • Expansion & growth of Banks• Specialized Financial Institutions• Mobilization of savings• Capital Formation• Export promotion activities• Statistical Information• Foreign Exchange Control• Sound Banking System• Monetary stability• Regional Development• Establishment of Stock Exchange Markets