STATE BANK OF PAKISTAN:

The State Bank is the Central bank of Pakistan, which acts as the governments
bank, serves member commercial banks, and controls the nations money supply.

* THE STRUCTURE oF THE STATE BANK:

The Board of Governors: The banks board of governors consists of seven members
appointed by the president.
Member Banks: All chartered commercial banks are members of the state bank of
Pakistan.

*THE FUNCTIONS OF THE SBP:

The Governments Bank: The state bank produces the nations paper currency and
lends money to the government.
The Bankers Bank: The state bank makes loans to individual banks. The state bank
provides storage for commercial banks. The state bank clears checks.
Controlling the Money Supply: The state bank is responsible for the conduct of
monetary policy.
Overseeing the Banking Community Controlling the Money Supply

*THE TOOLS OF THE SBP:

Reserve requirement: is the percentage of its deposits that a bank must hold in cash
or on deposit with State bank.
Discount rate: is the interest rate at which member banks can borrow money from
the State Bank Reserve.
Open-market operations: refer to the state banks sale and purchase of securities in
the open market.
Selective credit controls: is the state banks Reserve authority to set both margin
requirements for consumer stock purchases and credit rules for other consumer
purchases.
To achieve desired interest rates, SBP uses two types of instruments, namely: 1.
Direct Instruments: 2. Indirect Instruments: 1. Direct Instruments:

Direct Instruments: Direct instruments are typically directives given by the

central bank to control the quantity or price (interest rate) of money deposited with
commercial banks (and sometimes other financial institutions) and credit provided
by them.
Examples of Direct Instruments are:
Interest Rate Controls
Credit Ceilings
Directed Lending
Statutory Liquidity Requirements
Pros and Cons of Direct Instruments:
Advantages: They are perceived to be reliable, at least initially, in controlling credit
aggregates or both the distribution and the cost of credit.
They are attractive to government that wants to channelize credit to meet specific
objectives.
They may constitute the most effective or practicable approach in circumstances of
underdeveloped financial markets or where the central bank has inadequate
techniques of indirect monetary control.
Disadvantages: Bank-by-bank controls hold back competition in financial markets
which could benefit both borrowers and depositors.
Selective credit controls-credit controls on some banks but not on favored ones,
distort markets and impose a cost on society.
Direct controls encourage disintermediation into non-controlled markets or abroad.
So, overtime, they become less effective as lenders and savers search for ways to
circumvent them.
Reserve Requirements: Reserve requirements are the percentage of commercial
banks liabilities (or some sub-set thereof) which they are required to hold as
reserves at the central bank.
Cash Reserve Requirement (CRR): Under this requirement, banks are required to
keep a weekly average balance of 7% of their total demand liabilities with the SBP,
subject to daily minimum balance of 6% of total demand liabilities.
Statutory Liquidity Ratio: Commercial banks are required to keep some fraction of
their assets in the form of cash, Treasury Bills (T-Bills) or other approved securities.
This fraction is called Statutory Liquidity Ratio.
Indirect Instruments: SBP uses targeting monetary aggregates for its monetary
management function, So Indirect instruments are used for controlling price or
volume of the supply of its own liabilities. Examples of Indirect instruments are

T-Bill Auctions:
1. Treasury bills are sold through auction system.
2. The cut off yield is determined by the Auction Committee, keeping in view
monetary targets, prevailing economic and financial conditions and
expected market response. The Six months T-bill is considered the most
important benchmark by the money market and is considered to be the
signaling tool of SBP for interest rate movements.
3. T-Bills are issued in 3, 6 and 12 months tenors.
Pakistan Investment Bond (PIB) Auction:
PIB are issued in tenors of 3, 5, 10, 15, 20 and 30 years in auctions, according to
the quarterly targets given by MOF.
PIBs are sold to meet the GOP long term requirements and to provide benchmark
rates to the Capital Market Transactions.
15 days prior to the auction, targets are announced on Reuters and sealed bids are
invited.
The 15 days period, i.e. from the day of announcement to the auction day, is called
short selling period.
Auction committee decides the cut-off yields.
Open Market Operations (OMOs):
Using computerized reporting system SBP monitors the daily liquidity position of the
market and on the basis of those reports SBP either injects money to the market by
lending against collateral through reverse repo transaction or by an outright
purchasing, or mops-up money from the market by selling securities or by
conducting repo transaction.
OMOs are conducted on as and when market desires. Is issued through Reuters and
bids are received through fax. Only banks are allowed to participate in OMOs and TBill auctions.
Discounting Facility (3-Day Repo):
In Pakistan, SBP has extended a 3-day Repo facility to schedule and investment
banks. This is an overnight lending facility provided to banks, through which SBP
provides cash accommodation at a penal rate (currently 10 %) to any needy bank
by undertaking a reverse repo transaction with it.
Cash accommodation is normally for overnight; however transaction period can be
lengthened to 3-days or more to cover occasional long week-ends.

SBP also uses changes in discount rate primarily as a way of signaling a change in
monetary policy.
Exchange Rate Management:
In Pakistan, since 2000, free float regime is in place i.e. Exchange Rate is
determined on supply/demand position of the market.
Factors Requiring Ex. Rate Management:
Appreciation / depreciation of rupee vs.US. $ in interbank market.
Heavy Fluctuation in Forex market in interbank.
Market sentiments .
Heavy payment (Commercial and government).
Unforeseen events.
Factors Affecting Exchange Rate:
Trade Activities (Imports & Exports).
Foreign Investment (FDI).
Home Remittances.
Market Saturation.
Political Factors.
Conclusion:
SBP has its role important in every sector of economy whether it is
Industrial Sector.
Agriculture Sector.
Consumer Sector.
SBP provides guide lines to each of these Sectors to uplift the
economy. OR SBP is fully involved in every walk of life