financial msector

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A collection of firms that providefinancial services to commercial and

retail customers. This sector includes

Banks

Investment funds

Insurance companies


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An institution transacting the business ofaccepting, for the purpose of lending

or investment of deposits of moneyfrom Public, repayable on demand orotherwise, and withdraw able by

cheque, draft order or otherwise and

includes any post office saving bank


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A central Bank is responsible for

Safeguarding the financial stability of the

country. It holds the ultimate reserves of the nation.

Controls/Regulates the purchasing power.

Acts as banker to the state


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Under the State Bank of Pakistan Order1948

"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".


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Under the State Bank of Pakistan Act 1956 The structure, operation and authority of state

bank was determined.

Mixed ownership Govt.(51):Private sec(49) scope of the Banks operations was considerably

widened to

"regulate the monetary and credit system ofPakistan and to foster its growth in the bestnational interest with a view to securingmonetary stability and fuller utilization of thecountrys productive resources".


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On1st January 1974 the Bank wasnationalized.

Full ownership of federal government. Management by Board Of 7 Directors

headed by Governor.


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Under financial sector reforms, the State

Bank of Pakistan was granted autonomy in

February 1994.

On 21st January, 1997, this autonomy was

further strengthened by issuing three

Amendment Ordinances namely,

State Bank of Pakistan Act,1956, Banking Companies Ordinance, 1962 and

Banks Nationalization Act, 1974.


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The changes in the State Bank Act gave fulland 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 Bankof Pakistan

The amendments in Banks Nationalization Act

abolished the Pakistan Banking Council (aninstitution established to look after the affairs ofNCBs)


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Traditional Role

Developmental Role


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The traditional functions, which aregenerally performed by central banks

almost all over the world and includesa) Bank of Issue

b) Banker to the Government

c) Adviser and Agent to the Government

d) Bankers Bank

e) Controller of Credit

f) Exchange Control


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Bank of Issue

Sole Authority of printing notes

Previously Notes should be backed byProportionate reserve system.

30% should be maintained in the form of Goldcoins/bullion, and approve foreign currency.

Presently Minimum reserve system has beenadopted by SBP.

Banker to the Government Make/ Receive Payments for Government

Advances money to Government


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Adviser and Agent to the Government

Advice on Economic issues

Govt. agent for exchange control

Receive loans and make interest payments

Agent for issuing T-Bills

Bankers Bank

Lender of Last Resort Provides liquidity to Banks


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Controller of Credit Credit to different sectors

Controlling credit by changing interest rate

Implementing Restrictions

Exchange Control Custodian of foreign Exchange.

keep the exchange rate of the rupee at anappropriate level and prevent it from wide

fluctuations Control over foreign Exchange payments

The surrender requirement of foreignexchange receipts on account of exports.

Export price check


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The non-traditional or promotionalfunctions, performed by the State Bankinclude

1. Development of financial framework,institutionalization of savings and investment,

2. Provision of training facilities to bankers,

3. And provision of credit to priority sectors.

4. Growth of Banking System

5. Mobilizing domestic savings

6. Disbursement of credit for Ruraldevelopment.


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7. Assistance to Specialized FinancialInstitutions.(ZTBL, HBFC etc.)

8. Monetary and Credit Policy

Check on Inflation

Adequate supply of Finance

9. Credit for priority Sectors

10. Export Refinance Scheme

11.Islamization of Financial System

12. Establishment of Banking Publicity Department.

13. supervision of the financial system to ensure itssoundness and stability by off-site surveillanceandon-site inspection


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Among these 31are Pakistani and

13 are Foreign Banks

In the period of July-August 2011-12

Year ScheduledBanksDeposits Rs T

Scheduled BanksAdvances

Rs T

NPLs forall BanksRs Billion

DepositRate perAnnum %

AdvancesRate perAnnum %

2011-12 5.69 3.30 610 4.51 13.68


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Financial Sector Development and Economic

Development are inter-related.

No economy can grow and improve the living standards

of its population in the absence of a well functioning and

efficient financial sector.

Banks in Pakistan account for 95 percent of the financial

sector and hence a sound and healthy banking system isdirectly related to economic growth and development of

Pakistan.


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The modern growth theory identifies two

main channels through which the financial

sector might affect long-run growth in a

country:

1. First, through catalyzing the capital accumulationand

2. Second by increasing the rate of technologicalprogress.


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Financial intermediaries perform five basicfunctions that affect an economy.

1. Mobilizing savings from domestic households

and corporates2. Pooling and managing risk

3. Acquiring and disseminating informationabout investment opportunities

4. Monitoring borrowers and exerting corporatecontrol and

5. Facilitating the exchange of goods andservices.


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These functions of an efficiently workingfinancial sector allow the above two

channels to work for promoting growth by:

Mobilizing savings for investment

Facilitating and encouraging capital inflowsand

Allocating the capital efficiently amongcompeting uses


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1st January 1974 all Banks werenationalized

Objectives of nationalization Effects of Nationalization


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Large segments of the economy, population and geography

remain underserved by the formal financial system.

Lack of consumer protection and low level of financial literacy contributeto financial sector underdevelopment

The privatization of the banking system made it more dynamic and

competitive but it still has some way to go.

Some new products have been developed, especially in consumer lending. But

competition is impeded by lack of transparency in the pricing of deposit-taking, and

dominance of a few large banks with vast branch networks and captive rural markets.


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The banking sector has been consolidating and most banks have

strengthened their financial positions in recent years but It has also distort

competition.

The operations of Development Finance Institutions (DFIs) require

reconsideration.

Competition and continuous market innovations raise challenges for SBP

in its role as regulator and supervisor of banks

The recent global financial market turmoil and the current privately-

owned structure of the domestic banking system, highlight the need for a

financial safety net to deal with systemic risks.(This includes depositor

protection, liquidity and Lender of Last Resort facilities )


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Macroeconomic stability in general, and monetary and financial stability

in particular, are prerequisites for financial sector development.

The financial sector is too bank-centered and needs to become more

diversified in order to meet the country's future financing needs.

The growth and development of banking system and other financial

institutions and markets are limited by shortcomings in the infrastructure

for financial services and transactions.


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Improved credit information and credit rating systems be

developed to facilitate efficiency.

while more certainty and finality in financial transactions

needs to be achieved by modernization of payment systems,

Land and property registries need modernization

The judicial system needs reform for the efficient functioning

of the financial system


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Implement a financial inclusion program for banks to meet theneeds of underserved economic subsectors, including outreachprograms to meet the requirements of the agriculture, housing,SME and microfinance sectors.

Strengthen consumer protection through new legislation, codes ofconduct and new institutional arrangements and improve financialeducation through educational outreach programs.

Strengthen competition and efficiency in the banking sector withmore transparency, more diversification with new products anddelivery channels as well as measures to reduce the marketdistortions created by the large banks in rural areas


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Further strengthen and consolidate the banking sector by continued efforts

to raise governance and risk management standards, higher capitalrequirements and resolution of underperforming commercial andspecialized banks.

Strengthen prudential regulation and supervision by updating bankinglegislation and regulations, methods of supervision, and stricterenforcement of prudential rules for all banks, including state-owned ones.

Introduce a framework for consolidated supervision and reorganize the regulatoryarchitecture to allow better regulation and supervision of financial groups and

conglomerates.

Deepen financial intermediation by developing not only the banking sector butalso NBFIs, private and government debt markets and the stock market.


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Develop a financial safety net of protection for small depositors, clearly structured lender of

last resort (LOLR) facilities, an updated framework for market exit and resolution of

unviable banks, and coordination arrangements with the GOP for dealing with systemic

banking problems.

Strengthen the powers of SBP to maintain monetary and financial stability by updating the

half-century-old SBP Act in accordance with best international practices for central bank

independence, accountability and governance structures.

Develop the financial infrastructure, especially payment systems, but also human resources,

credit information, credit ratings, land and property registries and minimize procedural

delays in the legal system to improve the efficiency of financial sector transactions.

financial msector

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