functions of the state bank of pakistan

8/3/2019 Functions of the State Bank of Pakistan

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Functions of the State Bank of Pakistan

1. Banker to the Government: As banker to thegovernment, SBP:

a. Receives deposits (taxes, fees, fines, etc.) on behalf ofthe federal government.

b. Disburses payments (tax refunds, interest, etc.) onbehalf of the federal government.

c. Manages the national debtbuys, sells, and cashes

government securities and pay interest/profit on them.

d. Lends money to the federal government as needed.

2. Banker to Banks: As banker to the scheduled banks,SBP:

a. Holds deposits made by them as a part of theirrequired reserves5% at this time.

b. Lends them funds as a lender of the last resort tomeet their pressing needs by discounting their bills ofexchange and other

3. Acts as a Clearing House:

Provides facilities, physical and/or electronic, to scheduled

banks to clear cheques and other claims drawn againsteach otherdeposited by their customers for collection--by adding up what they owe or owed them and transferfunds from their accounts at SBP.


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4.Supervisor of Banks and other FinancialInstitutions:

One of the fundamental responsibilities of the State Bank

is regulation and supervision of the financial system toensure its soundness and stability as well as to protect theinterests of depositors. The banking activities are nowbeing monitored through a system of off-site surveillanceand on-site inspection and supervision. Off-sitesurveillance is conducted through regular checking ofvarious returns regularly received from the different

banks. On other hand, on-site inspection is undertaken bythe State Bank in the premises of the concerned bankswhen required.

To broaden financial markets as also to diversify thesources of credit, a number of non-bank financialinstitutions were allowed to increase substantially. TheState Bank has also been charged with the responsibilities

of regulating and supervising of such institutions.

5. Issuer of Paper Currency:

State Bank has the sole authority to issue paper notes. Ithas the prime responsibility to control its supply in orderto ensure a stable price of money, i.e., its value orpurchasing power. Its notes, however, are not convertible

into gold or silver.

6. Exchange Rate Management and Balance ofPayment:


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The Bank is responsible to keep the exchange rate of therupee at an appropriate level and prevent it from widefluctuations in order to maintain competitiveness of our

exports and maintain stability in the foreign exchangemarket. As the custodian of countrys external reserves, itis responsible for management of the foreign exchangereserves.

7.Developmental Role of SBP:

The Banks participation in the development processhas been widened in the form of rehabilitation of bankingsystem, development of new financial institutions and debtinstruments in order to promote financial intermediation,establishment of Development Financial Institutions,directing the use of credit according to selecteddevelopment priorities, providing subsidized credit, anddevelopment of the capital market.

8. Non-traditional Role: The non-traditional orpromotional functions, performed by the State Bankinclude development of financial framework,institutionalization of savings and investment, provision oftraining facilities to bankers, and provision of credit topriority sectors. The State Bank also has been playing anactive part in the process of Islamization of the bankingsystem.

9. To Formulate and Implement the MonetaryPolicy: The Bank is also in charge of conducting monetarypolicy which means changing the supply of money in theeconomy. The tools of the monetary policy are:


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a. Changing the monetarybase: This directly changes the total amount of moneycirculating in the economy. The State Bank can use open

market operations to change the monetary base. TheBank would buy/sell bonds in exchange for hard currency.When the central bank sells government bonds it receiveshard currency in payment, thus reducing the moneysupply. It buys government bonds and pays hard cash tothe sellers, thus, increasing the money supply.

b. Changing the reserve requirements: Monetary

policy can be implemented by changing the proportion oftotal assets that banks must hold in reserve with SBP.Banks only maintain a small portion of their assets as cashavailable for immediate withdrawal; the rest is invested inilliquid assets like mortgages and loans. By changing theproportion of total assets to be held as liquid cash, the SBPchanges the availability of loanable funds. This acts as achange in the money supply.

c. Changing the discount rate: Banks borrowmoney from the State Bank by cashing or discountingcredit instruments, such as bills of exchange. By raisingthe discount rate SBP discourages banks to borrowmoney. If and when the goal is to increase the moneysupply, the Bank lowers its discount rate to encourage

borrowing by the banks and, thus, helps increasing themoney supply.

Also by calling in existing loans or extending new loans,the monetary authority can directly change the size of themoney supply.


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Affecting a change in nominal interest rates: Thecontraction of the monetary supply can beachieved indirectly by increasing or decreasing the

nominal interest rates. By changing the Discount Rate andby conducting Open Market Operations a change in moneysupply would affect the nominal interest rates. A tightmoney supply tends to increase nominal interest rateswhile an increase in money supply can help bring downthe interest rates. A change in the nominal interest ratesinfluences the overall economic activity, rate of inflation,GDP, and economic growth.

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Banking secrecy is the official term used to refer to

what is normally known to us as banking

confidentiality. By banking secrecy, we refer tothe professional discretion that bankinginstitutions, bank employees, surveillanceauthorities, legal and accounting professionals andrepresentatives linked to the bank must upholdwith respect to the information and knowledge

obtained about the banks customers or other

persons or companies which may be involved invarious bank transactions (third parties).


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Through banking secrecy the objective is toprovide safe and secure conditions for individualsand corporations to do banking business. As a

matter of choice, a banks customer may ask thathis information be revealed and thereby releasethe bank from its obligation to provideconfidentiality at all times. A banker however,cannot take the decision to release the details of acustomer on its own as this would be a breach ofconfidentiality or secrecy laws.

In civil law jurisdictions bank secrecy is governedby a contractual obligation signed by a banker inwhich a vow is taken to protect and maintain thedetails of a customers situation.

Secrecy, however, is not a feature which is peculiarto banking and can be found in many professionalareas including the medical and legal professions,clergy, management, accounting and secretarial oradministrative assistant duties. Banking secrecy isoften treated as different from the discretion given

to customers of the mentioned professional fields,but in reality functions on the very same basis ofnot disclosing any information about a customerspersonal situation. In the USA trading on the stockmarket is also entitled to confidentiality under


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Article 43 Federal Act on Stock Exchanges andSecurities Trading; SR 954 1.

Banking secrecy was first introduced in Switzerlandunder the Swiss Banking Act 1934 and gave rise towhat is commonly known today as Swiss banking

which is heavily identified for its secrecyprovisions.

Following the tragic incidents of September 11,legislations establishing due diligence measures tobe made effective for the prevention andelimination of bank transactions linked withterrorist financing were passed by the Bush (Jr.)administration.

The Know Your Client or KYC rules passed called

for a reduction and in some cases termination ofcertain banking secrecy practices. For example,anonymous banking whereby offshore accounts

were opened without identifying the beneficialowner of an account and a number or code wasassigned for performing transactions was broughtto a halt. Currently, banks offering anonymousbanking are very few and provide the service on a


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limited level whereby the customers details arekept with a specific officer or at the managementlevel of the bank and is not given to the tellers and

other employees who work with codes or numberswhen working with anonymous customers. Thesetypes of accounts are referred to as numberaccounts as the clients name is replaced by anumber and disclosed only with a particular persongroup of people within the bank. Hence, althoughbanking secrecy is available in many countries

including Belgium, Germany, USA, France and theUK, it exists in varying forms and extentsaccording to the laws of the country. Due diligencealso ought to be performed and a bank must at alltimes be able to identify its customers.

Banking secrecy is also carried out withinlimitations set by internationally acceptedexceptions provided for under administrative law,

bankruptcy law and criminal law, particularlywhere mutual assistance is required in legalmatters. If a banks customer has been suspectedof unacceptable dealings, banking secrecy can be

lifted by the courts order. In these circumstances,banking secrecy is not total and becomes nonfunctional where prosecution by the court isconcerned.


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In the US, the Bank Secrecy Act of 1970 calls on

financial institutions to facilitate governmentagencies with identifying and stopping moneylaundering. One of the requirements of the Act isthat banks file reports whenever transfers overUSD10,000 are made on a daily basis, reportsuspicious activities and maintain records of cashpurchases of negotiable instruments. Terroristfinance tracking programs are also established toprovide the employees and professionals offinancial institutions with tools and guidelines toidentify suspicious and irregular transactions.

The Banking Secrecy Act identifies five main types

of reports to be made to the government. Thereports include the FinCEN (Financial Crimes

Enforcement Network) Form 104 CurrencyTransaction Report, which is required to be filed forevery currency exchange, payment, deposit,withdrawal or transfer exceeding $10,000. Ifseveral transactions were done by or in the name

of one particular person or transactions are above$10,000, they must be dealt with as one

transaction; Department of the Treasury Form 90-22, which must be filed for a US citizen, national orbank with interest in, is a signatory to or the owner


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of securities, bank (s) or accounts abroad that aremore than $5,000; Designation of Exempt PersonFinCEN Form 110 which must be filed by banks to

list its exempt customers; FinCEN Form 105 Reportof International Transportation of Currency orMonetary Instruments, which must be files byevery person and bank that physically transports,ships, receives or mails any form of instrumentamounting to over $10,000; Suspicious ActivityReport, which must be filed by banks if any

transaction is in violation of law or considered tosuspicious activity.

Businesses and individuals face the possibility ofbeing charged if they do not adhere to these filingand reporting laws established by the Banking

Secrecy Act.

Limitations placed on banking secrecy tend todefeat the whole idea of going offshore in the firstplace. But, certain rules and sanctions have beenestablished to prevent and eliminate the incidence

of terrorist financing and illegal money traffickingwhich affect us all as these activities are veryclosely linked to organized crime, drugs andterrorism. While we do not doubt and question theimportance of banking secrecy in light of the


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multiple uses of offshore vehicles, certain practicesneed to be put in place to ensure that the financialsystem is a clean one, especially where offshore

banking is concerned that it remains alegitimate, safe and blameless way of doingbusiness, protecting assets and reducing taxburdens.

BANKS OBLIGATION TO MAINTAIN SECRECY OFACCOUNTSWhen a person opens an account in a bank he/she isentitled to a reasonable assurance that informationregarding the account remains a matter of knowledge onlybetween the banker and the account holder. This isbecause, it is one of the principal duties of the banker tomaintain complete secrecy of the status of the customersaccount. This obligation of the Bank to maintain secrecycontinues even after the customers account is closed. Ifthe banker makes an unwarranted disclosure of the statusof account of the banks customer, the banker becomesliable to compensate the customer. However, the banksobligation of keeping the secrecy of the status of the

customers account is qualified and not absolute. Thereare certain circumstances in which the banker is entitled orrequired to make disclosures about a customers account.Let us understand the conditions under which a banker is

justified in making disclosure.Disclosures permitted by


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Law

(i) Underiaw: A Bank is justified to disclose any

information about the customersaccount when it isstatutorily required to do so under(a) Income Tax Act, 1961(Section 131 & Section 133(6)(b) Companies Act, 1956 (Section 235 andSection 237)(c) Bankers Book Evidence Act, 1891 (Section 4)(d) ReserveBank of India Act, 1 937 (Section 26)(e)(1) Foreign Exchange Management Act1973 (Section11)

(f) Gift lax Act, 1958 (Section 36)

(ii) Under express orimplied consent of thecustomer: When an account is opened with the bank,there is an implied contract between the customer and theBank that the latter will not disclose information relating tohis account without the customers consent. If however, a

customer permits, this information can be disclosed. Forexample, the customer may permit giving informationabout his! her account to a prospective guarantor, or,customer. It is necessary to obtain the customers consentbefore disclosing the information. The consent can beexpressed or implied.

(iii) Common courtesy among bankers: As per thepractices/usages in the banking system (business) it iscustomary to share information about customers amongthe bankers, that whenever a bank makes inquiries withanother bank, on matters such as proposed sureties oracceptors etc. An implied consent of the customer is


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presumed to exist therefor. However, such information iskept confidential at both the ends and adequateprecautions should be taken while furnishing such

information.

(iv) Disclosure in the banks interest: A bank candisclose information when it is essential to protect its owninterest, legally. For instance, if there is any disputebetween the customer and a banker, regarding balancestanding in the account of the customer or if there is a loandefault, then the bank will be justified in revealing the

information to the guarantor or to a solicitor for initiatinglegal proceedings in the court of law.The sharing ofinformation between a bank and its agent for collectionpurposes will fall under this head. It is necessary that theinformation shared with the agent is exclusive and not toput to other uses. Therefore the banks should takeadequate care and due diligence in selecting the agents..

(v) Disclosure in Public/National interest: Banker maybe required to make disclosure in the interest of the nationand public at large. Public interest may be reckoned onlyaccording to the prevailing circumstances.

functions of the state bank of pakistan

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