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STATE BANK OF PAKISTAN
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Page 1: STATE BANK OF PAKISTAN

STATE BANK OF PAKISTAN

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Report on state Bank of Pakistan

Acknowledgment

All praise is for Almighty Allah, the most merciful most

compassionate who help his poor creatures in the time of crisis

and best owned upon it, his unfathomable kindness and

guidance.

STATE BANK OF PAKISTAN

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We felt satisfaction to write this page as this project is on the

way of its destination. We are thankful to our worthy professor

Sir. Omer Hayyat for his most co-operative attitude, valuable

comments, constructive suggestions and step-by-step

guidance. Without his help, it would have been impossible to

complete this task.

Last but not least we wish to express our feelings and

passion of gratitude to our parents who always prayed for our

success, health and brilliant future. Our words cannot express

our deepest thanks to our parents whose love and sacrifices

are invested and written on every page.

STATE BANK OF PAKISTAN :

Introduction:

Before the World War First, there were only a few countries, which had

there own central banks. After the War, the number of central banks

has increased and now there is not a single country in the world, which

does not have its own central bank.

STATE BANK OF PAKISTAN

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There were many considerations underlying the establishment of a

central bank. After the first war, there was complete confusion in

currency and exchange markets. There were large withdrawals of

money form banks. The bank reserves fell below the needed levels.

There was no institution, which could supervise the working of banks

and also serve as a fiscal agent. In addition to the above difficulties,

there was a rigidity or lack of elasticity in the supply of the currency.

There were also reoccurrences of failures of the commercial banks. In

order to solve the monetary problems of the countries and set them on

the healthy footings, a conference was held at Brussels in 1920. It was

decided in that conference that to control the supply of money and

credit in the economy and maintained stable business conditions, each

country must establish its own central bank in order to solve the

problems.

Brief History of State Bank of Pakistan:

At the time of independence, the immediate and foremost work of the

government of Pakistan was to establish a central bank so that it

should have an independent currency and banking system. At that

time Pakistan faced a lot of complex problems on account of partition

of the Sub-continent. It was decided with India that the Reserve Bank

of India would continue to act as a central bank and currency authority

for Pakistan till the establishment of its own central bank. The

transitional arrangement of having one central bank for two

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independent countries was promulgated by Governor General of

undivided India on August 14, 1947 by an order called “Monetary

System and Reserve Bank Order 1947”. Following are the main

provisions of the said order.

1) The reserve bank of India would be the sole note issuing

authority in Pakistan till September 1948.

2) The Indian note will remain legal tender in both Pakistan and

India until 30th September 1948. The Govt of Pakistan will issue

its own currency from October1, 1948.

3) The reserve bank of India would transfer the assets of value

equal to Pakistani note to Pakistani government after 30th

September 1948.

4) The Govt of Pakistan will issue notes and coins in the country

after 30th September 1948. The coins issued by the Govt of India

would remain the legal tender in Pakistan for at least one year

from the date of issue of Pakistani coins.

5) The reserve bank of India would perform the full functions of

central bank in Pakistan up to September 30th, 1948.

Establishment of State Bank of Pakistan:

Immediately after partition, the newly born state was forced with a

serious banking situation due to the wholesale migration of the

banking staff to India. The reserve bank of India showed reluctance in

solving the banking crises. It rather created further problems and

difficulties by refusing to give Rs55 Crore, which Pakistan was entitled

to share the cash balance of the undivided India. The Govt of Pakistan

then realized that reserve bank of India cannot existence of Pakistan.

It therefore decided to establish its own currency authority earlier then

it was mutually agreed upon. The reserve bank of India was relieved of

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its factions in Pakistan from the first day of July 1948. The Governor

General of Pakistan Quid-e-Azam Muhammad Ali Jinnah issued order for

the establishment of State Bank of Pakistan on 1st July 1948. According

to the State Bank order 1948, the bank is entrusted with the duty of

regulating the issue of bank notes and keeping of reserve with a view

to seeking monetary stability in Pakistan

What The Central Bank is?

“The guiding principle of a Central Bank is that it

acts only in the public interest and for the

welfare of the community as a whole and

without regard to profits a primary

consideration.”

The objectives of establishing Central Bank: .

Firstly, the objectives of establishing the central bank are

different from that of commercial bank. The commercial banks

are profit seeking companies where as the central bank does

not compete with the commercial banks in the hunting of

profits. Earning of profits is the prime objectives of today

commercial banks, while for the central bank it has only a

secondary consideration. The central bank is charged with the

responsibility of managing the banking and credit system to

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achieve high and stable level of employment and production

in the economy.

Secondly, the central bank is subordinates to the government

or state. It controls the monetary as well as the banking

system on the behalf of the government.

Thirdly, it deals with the member banks and supervises their

work.

Organizational Hierarchy

STATE BANK OF PAKISTAN

Governor

Deputy Governor

Deputy Governor

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Statutory Obligations (RMD)

STATUTORY CASH RESERVE

In terms of Section36 (1) SBP Act, 1956, every scheduled bank is

required to maintain with State Bank a balance the amount of which

shall not at the close of business or any day be less than such

percentage of Time & Demand Liabilities in Pakistan as may be

determined by State Bank.

Presently the requirement is 5% on weekly average basis subject to

daily minimum of 4% of Time & Demand Liabilities.

STATUTORY LIQUIDITY REQUIREMENT

In terms of Section 29(1) of Banking Companies Ordinance, 1962 every

banking company shall maintain in Pakistan in cash, gold or un-

encumbered approved securities valued at price not exceeding "the

lower of cost or the current market price" an amount which shall not at

the close of business in any day be less than such percentage of the

total of its time & demand liabilities in Pakistan, as may be notified by

State Bank from time to time.

STATE BANK OF PAKISTAN

Executive Directors

Joint Director

Dy. Director

Assistant Director

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Presently the requirement is 15% (excluding 5% statutory cash

reserve) of the total of its time and demand liabilities in Pakistan.

MAINTENANCE OF LIQUIDITY AGANINST CERTAIN LIABILITIES

In terms of Rule 6 of non banking financial institutions (NBFIs) Rules of

Business, all NBFIs are required to invest 14% of their liabilities defined

in the Rule, in Government Securities, NIT Units, shares of listed

companies or listed debt securities in the prescribed manner. For the

purpose of this rule, liabilities shall not include NBFIs equity,

borrowings from financial institutions including accruals thereon, lease

key money, deferred taxation not payable within 12 months, dividend

payable within two months, advance lease rentals and deposits from

financial institutions. In addition, they are also required to maintain

cash balance with State Bank, which shall not be less than 1% of their

liabilities as defined above.

SUBMISSION OF ANNUAL AUDITED ACCOUNTS BY NBFIs

Under Rule 17 of NBFIs Rule of Business, all NBFIs are required to

submit their annual audited accounts within a period of 6 months after

the close of their accounting year.

ANNUAL ACCOUNTS:

At the expiration of each calendar year every banking company

incorporated in Pakistan, in respect of all business transacted by it, and

every banking company incorporated outside Pakistan, in respect of all

business transited through its branches in Pakistan, shall prepare with

reference to that year a balance-sheet and profit and loss account as

on the last working day of the year in the prescribed forms (Section 34

of Banking Companies Ordinance, 1962).

SUBMISSION OF RETURNS:

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The accounts and balance-sheet referred to in section 34 together with

the auditor’s report as passed in the annual General Meeting shall be

published in the prescribed manner, and three copies thereof shall be

furnished as returns to the State Bank within three months of the close

of the period to which they relate (Section 36 of Banking Companies

Ordinance, 1962).

MINIMUM CAPITAL REQUIREMENTS:

In terms of Section 13 of Banking Companies Ordinance, 1962 no

banking company shall commence business unless it has a minimum

paid up capital as may be determined by the State Bank or carry on

business unless the aggregate of its capital and unencumbered

general reserves is of such minimum value within such period as may

be determined and notified by the State Bank from time to time for

banking companies in general or for a banking company in particular.

As present, all banks operating in Pakistan are required to maintain

capital and unencumbered general reserve, the value of which is not

less than 8% of their risk weighted assets. Additionally they are also

required to maintain a minimum paid up capital of Rs.500 million.

Core Functions of State Bank of Pakistan:

State Bank of Pakistan is the Central Bank of the country. While its

constitution, as originally laid down in the State Bank of Pakistan Order

1948, remained basically unchanged until 1st January 1974 when the

Bank was nationalized, the scope of its functions was considerably

enlarged. The State Bank of Pakistan Act 1956, with subsequent

amendments, forms the basis of its operations today.

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Under the State Bank of Pakistan Order 1948, the Bank was charged

with the duty to "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". The scope of the Bank’s operations was considerably

widened in the State Bank of Pakistan Act 1956, which required the

Bank to "regulate the monetary and credit system of Pakistan and to

foster its growth in the best national interest with a view to securing

monetary stability and fuller utilization of the country’s productive

resources". 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 (which were approved by the Parliament in May, 1997)

namely, State Bank of Pakistan Act, 1956, Banking Companies

Ordinance, 1962 and Banks Nationalization Act, 1974. The changes in

the State Bank Act gave full and 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 Bank

of Pakistan. The amendments in Banks Nationalization Act abolished

the Pakistan Banking Council (an institution established to look after

the affairs of NCBs) and institutionalised the process of appointment of

the Chief Executives and Boards of the nationalised commercial banks

(NCBs) and development finance institutions (DFIs), with the Sate Bank

having a role in their appointment and removal. The amendments also

increased the autonomy and accountability of the Chief Executives and

the Boards of Directors of banks and DFIs.

Like a Central Bank in any developing country, State Bank of Pakistan

performs both the traditional and developmental functions to achieve

macro-economic goals. The traditional functions, which are generally

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performed by central banks almost all over the world, may be

classified into two groups:

1)The primary functions including:

Issue of notes,

Regulation and supervision of the financial system,

Bankers’ bank,

Lender of the last resort,

Banker to Government,

Conduct of monetary policy.

2) The secondary functions including:

The agency functions like management of public debt,

Management of foreign exchange, etc.

Sole right of Note Issue:

The central bank has the monopoly of note issue in world. In Pakistan

state bank of Pakistan is central bank and has sole right to issue

currency notes (coins are issued by the Ministry of Finance in

Pakistan). The monopoly in issuance of currency notes has the

following advantages.

Advantages:

o It brings uniformity in the circulation of currency.

o The central bank is in a better position to exercise control over

the money supply in the country.

o The sole power to issue notes enables the central bank to

control the lending operations of the commercial banks.

o Law regulates the right of note issue. Therefore it enhanced and

increased public confidence in the monetary system of the

country.

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Methods of Note Issue:

There are two methods of note issue named as Fixed Fiduciary

System and Proportionate Reserve System. In Pakistan

proportionate reserve system is prevailing at the moment.

1. Fixed Fiduciary System:

Under this system a fixed amount is laid down, which need to

be covered by government securities. Note issued in excess

of this amount must be fully backed gold and silver etc. this

methods assures maximum safety for the notes without any

doubt but it lacks elasticity. The supply of notes is tied down

to the supply of gold available in the country. This system

also fails to take into consideration the commercial banks

power to create credit. And this system is not in a position to

meet the needs of growing trade industry and commerce and

not a favorable system for less developed countries like the

economy of Pakistan.

2. Proportionate Reserve System:

According to Proportionate Reserve System, the central bank is to keep a certain

percentage of the total notes issued in gold, silver etc.

And other functions like advising the government on policy matters

and maintaining close relationships with international financial

institutions.

The non-traditional or promotional functions, performed by the

State Bank include development of financial framework,

institutionalization of savings and investment, provision of training

facilities to bankers, and provision of credit to priority sectors. The

State Bank also has been playing an active part in the process of

islamization of the banking system. The main functions and

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responsibilities of the State Bank can be broadly categorized as

under.

    

REGULATION OF LIQUIDITY:

Being the Central Bank of the country, State Bank of Pakistan has been

entrusted with the responsibility to formulate and conduct monetary

and credit policy in a manner consistent with the Government’s targets

for growth and inflation and the recommendations of the Monetary and

Fiscal Policies Co-ordination Board with respect to macro-economic

policy objectives. The basic objective underlying its functions is two-

fold i.e. the maintenance of monetary stability, thereby leading

towards the stability in the domestic prices, as well as the promotion of

economic growth.

To regulate the volume and the direction of flow of credit to different

uses and sectors, the Bank makes use of both direct and indirect

instruments of monetary management. Until recently, the monetary

and credit scenario was characterised by acute segmentation of credit

markets with all the attendant distortions.

Pakistan embarked upon a program of financial sector reforms in the

late 1980s. A number of fundamental changes have since been made

in the conduct of monetary management, which essentially marked a

departure from administrative controls and quantitative restrictions to

market-based monetary management. A reserve money management

programmed has been developed. In terms of the programmed, the

intermediate target of M2 would be achieved by observing the desired

path of reserve money - the operating target. While use in now being

made of such indirect instruments of control as cash reserve ratio and

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liquidity ratio, the program’s reliance is mainly on open market

operations.

   

 ENSURING THE SOUNDNESS OF FINANCIAL SYSTEM:

     REGULATION AND SUPERVISION

One of the fundamental responsibilities of the State Bank is regulation

and supervision of the financial system to ensure its soundness and

stability as well as to protect the interests of depositors. The rapid

advancement in information technology, together with growing

complexities of modern banking operations, has made the supervisory

role more difficult and challenging. The institutional complexity is

increasing, technical sophistication is improving and technical base of

banking activities is expanding.

Accordingly, the out dated inspection techniques have been replaced

with the new ones to have better inspection and supervision of the

financial institutions. The banking activities are now being monitored

through a system of ‘off-site’ surveillance and ‘on-site’ inspection and

supervision. Off-site surveillance is conducted by the State Bank

through regular checking of various returns regularly received from the

different banks. On other hand, the State Bank in the premises of the

concerned banks when required undertakes on-site inspection.

To deepen and broaden financial markets as also to diversify the

sources of credit, a number of non-bank financial institutions (NBFIs)

were allowed to increase substantially. The State Bank has also been

charged with the responsibilities of regulating and supervising of such

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institutions. To regulate and supervise the activities of these

institutions, a new Department namely, NBFIs Regulation and

Supervision Department was set up. Moreover, in order to safeguard

the interest of ultimate users of the financial services, and to ensure

the viability of institutions providing these services, the State Bank has

issued a comprehensive set of Prudential Regulations (for commercial

banks) and Rules of Business (for NBFIs).

The "Prudential Regulations" for banks, besides providing for credit and

risk exposure limits, prescribe guide lines relating to classification of

short-term and long-term loan facilities, set criteria for management,

prohibit criminal use of banking channels for the purpose of money

laundering and other unlawful activities, lay down rules for the

payment of dividends, direct banks to refrain from window dressing

and prohibit them to extend fresh loan to defaulters of old loans. The

existing format of balance sheet and profit-and-loss account has been

changed to conform to international standards, ensuring adequate

transparency of operations. Revised capital requirements, envisaging

minimum paid up capital of Rs.500 million have been enforced.

Effective December,1997, every bank was required to maintain capital

and unencumbered general reserves equivalent to 8 per cent of its risk

weighted assets.

The "Rules of Business" for NBFIs became effective since the day NBFIs

came under State Bank’s jurisdiction. As from January, 1997, Modaraba

and leasing companies, which are also specialized type of NBFIs, are

being regulated/supervised by the Securities and Exchange

Commission (SECP), rather than the State Bank of Pakistan.

EXCHANGE RATE MANAGEMENT AND BALANCE OF PAYMENTS

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One of the major responsibilities of the State Bank is the maintenance

of external value of the currency. In this regard, the Bank is required,

among other measures taken by it, to regulate foreign exchange

reserves of the country in line with the stipulations of the Foreign

Exchange Act 1947. As an agent to the Government, the Bank has

been authorized to purchase and sale gold, silver or approved foreign

exchange and transactions of Special Drawing Rights with the

International Monetary Fund under sub-sections 13(a) and 13(f) of

Section 17 of the State Bank of Pakistan Act, 1956.

The Bank is responsible to keep the exchange rate of the rupee at an

appropriate level and prevent it from wide fluctuations in order to

maintain competitiveness of our exports and maintain stability in the

foreign exchange market. To achieve the objective, various exchange

policies have been adopted from time to time keeping in view the

prevailing circumstances. Pak-rupee remained linked to Pound Sterling

till September 1971 and subsequently to U.S. Dollar. However, it was

decided to adopt the managed floating exchange rate system w.e.f.

January 8, 1982 under which the value of the rupee was determined on

daily basis, with reference to a basket of currencies of Pakistan’s major

trading partners and competitors. Adjustments were made in its value

as and when the circumstances so warranted. During the course of

time, an important development took place when Pakistan accepted

obligations of Article-VIII, Section 2, 3 and 4 of the IMF Articles of

Agreement, thereby making the Pak-rupee convertible for current

international transactions with effect from July 1, 1994.

After nuclear detonation by Pakistan in 1998, a two-tier exchange rate

system was introduced w.e.f. 22nd July 1998, with a view to reduce the

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pressure on official reserves and prevent the economy to some extent

from adverse implications of sanctions imposed on Pakistan. However,

effective 19th May 1999, the exchange rate has been unified, with the

introduction of market-based floating exchange rate system, under

which the exchange rate is determined by the demand and supply

positions in the foreign exchange market. The surrender requirement

of foreign exchange receipts on account of exports and services,

previously required to make to State Bank through authorized dealers,

has now been done away with and the commercial banks and other

authorized dealers have been made free to hold and undertake

transaction in foreign currencies.

As the custodian of country’s external reserves, the State Bank is also

responsible for the management of the foreign exchange reserves. The

task is being performed by an Investment Committee which, after

taking into consideration the overall level of reserves, maturities and

payment obligations, takes decision to make investment of surplus

funds in such a manner that ensures liquidity of funds as well as

maximizes the earnings. These reserves are also being used for

intervention in the foreign exchange market. For this purpose, a

Foreign Exchange Dealing Room has been set up at the Central

Directorate of State Bank of Pakistan and services of a ‘Forex Expert’

have been acquired

DEVELOPMENTAL ROLE OF STATE BANK

The responsibility of a Central Bank in a developing country goes well

beyond the regulatory duties of managing the monetary policy in order

to achieve the macro-economic goals. This role covers not only the

development of important components of monetary and capital

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markets but also to assist the process of economic growth and

promote the fuller subsidized of a country’s resources.

Ever since its establishment, the State Bank of Pakistan, besides

discharging its traditional functions of regulating money and credit, has

played an active developmental role to promote the subsidized of

macro-economic goals. The explicit recognition of the promotional role

of the Central Bank evidently stems from a desire to re-orientate all

policies towards the goal of rapid economic growth. Accordingly, the

State Bank with a well-recognised developmental role has combined

the orthodox central banking functions.

The scope of Bank’s operations has been widened considerably by

including the economic growth objective in its statute under the State

Bank of Pakistan Act 1956. The Bank’s participation in the

development process has been in the form of rehabilitation of banking

system in Pakistan, development of new financial institutions and debt

instruments in order to promote financial intermediation,

establishment of Development Financial Institutions (DFIs), directing

the use of credit according to selected development priorities,

providing subsidized credit, and development of the capital market

Banking Sector Supervision in Pakistan:

State Bank of Pakistan (SBP) which is the Central Bank of the country

has been interalia entrusted with the responsibility for an ongoing

effective supervision of the banking sector. The relevant provisions of

law, which vest powers in State Bank of Pakistan (SBP) to carry out

inspection of banks, are contained in the Banking Companies

Ordinance, 1962. Besides, State Bank of Pakistan Act, 1956 and the

Bank’s Nationalization Act, 1974, The Financial Institutions (Recovery

of finances) Ordinance, 2001, Companies Ordinance, 1984 and

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Statutory Regulatory Orders (SROs) are the relevant legislations, which

cover the activities concerning the banking sector. The financial sector

in Pakistan comprises of Commercial Banks, Development Finance

Institutions (DFIs), and Micro finance Banks (MFBs), Non-banking

Finance Companies (NBFCs) (leasing companies, Investment Banks,

Discount Houses, Housing Finance Companies, Venture Capital

Companies, Mutual Funds), Modaraba, Stock Exchange and Insurance

Companies. Under the prevalent legislative structure the supervisory

responsibilities in case of Banks, Development Finance Institutions

(DFIs), and Microfinance Banks (MFBs) falls within legal ambit of State

Bank of Pakistan while the rest of the financial institutions are

monitored by other authorities such as Securities and Exchange

Commission and Controller of Insurance.

Under the WTO commitments the operational status of branch network

of foreign banks operating in Pakistan as on 31-12-1997 has been

protected and frozen. However, existing foreign banks having less than

3 branches can have branches to the extent of maximum number of 3

only. New foreign banks desirous of entering banking business in

Pakistan will now be required to incorporate as domestic bank under

the local laws. The branches of foreign banks operating in Pakistan can

also be converted into a local commercial bank by incorporating under

the local laws and subject to a minimum paid up capital of Rs.1 billion

provided foreign share holding is restricted to a maximum of 49%.

At present there are 41 scheduled banks, 6 DFIs, and 2 MFBs operating

in Pakistan whose activities are regulated and supervised by State

Bank of Pakistan. The commercial banks comprise of 3 nationalized

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banks, 3 privatized banks, 15 private sector banks, 14 foreign banks, 2

provincial scheduled banks, and 4 specialized banks.

Under the Banking Companies Ordinance, 1962 the State Bank of

Pakistan is fully authorized to regulate and supervise banks and

development finance institutions. During the year 1997 some major

amendments were made in the banking laws, which gave autonomy to

the State Bank in the area of banking supervision. Under Section 40(A)

of the said Ordinance it is the responsibility of State Bank to

systematically monitor the performance of every banking company to

ensure its compliance with the statutory criteria, and banking rules &

regulations. In every case in which the management of a bank is failing

to discharge its responsibility in accordance with the applicable

statutory criteria or banking rules & regulations or is failing to protect

the interests of the depositors or for advancing loans and finance

without due regard for the best interests of the bank or for reasons

other than merit, the State Bank is empowered to take necessary

remedial steps. The State Bank of Pakistan can, interalia, exercise the

following powers vested upon it under the Banking Companies

Ordinance:-

Prohibiting the bank from giving loans, advances & credits. Prohibiting

the bank from accepting deposits. Cancel license of a bank. Give

directions to the bank as it deem fit. Remove chairman, directors, chief

executive or other managerial persons from the office and appoint a

person as chairman, director or chief executive.

Supersede the Board of Directors. Direct prosecution of directors, chief

executive or other officer. Caution or prohibit bank against entering

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into any particular transaction(s). Require bank to make changes in

management. Appoint its officers to observe the manner in which

affairs of bank/its branches/office are conducted. Winding up the bank

through high court. Apply to Federal Government for an order of

moratorium in respect of a bank and to prepare scheme of

reconstruction or amalgamation. Impose penalties including civil

money penalties.

The State Bank has framed Prudential Regulations for banks and Rules

of Business for DFIs that present a prudent operating framework within

which banks and DFIs are expected to conduct their business in a safe

and sound manner taking into account the risks associated with their

activities. These regulations incorporate the spirit and essence of BIS

regulations and are constantly watched for possible improvement so

that their enforcement yields the best results to promote the

objectives of supervision.

The State Bank is empowered to determine Statutory Liquidity and

Cash Reserve Requirements for banks/DFIs. Presently the Cash

Reserve Requirement is 5% on weekly average basis subject to daily

minimum of 4% of Time & Demand Liabilities. In addition to that banks

are required to maintain Statutory Liquidity Requirement (SLR) @ 15%

of their Time & Demand Liabilities. Similarly, DFIs are required to

maintain SLR of 14% and Cash Reserve of 1% of their specified

liabilities. Additionally, The Banking Companies Ordinance had been

amended in 1997 which empowers the State Bank to prescribe capital

requirements for banks. In exercise of these powers the State Bank has

laid down Minimum Capital Requirements for banks based on Basle

capital structure. The banks have to maintain a Capital Adequacy Ratio

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in a way that their capital and unencumbered general reserves are, at

the minimum, 8% of their risk weighted assets, and effective from 1st

January, 2003 banks are required to maintain a minimum paid up

capital level of Rs.1 Billion.

While the off-site monitoring aspect is looked after by the State Bank

of Pakistan’s Banking Supervision Department the responsibility for the

on-site examination of the banking system in Pakistan lies on the

shoulders of the Banking Inspection Department. This has been

designed to ensure that institutions operate in a safe and sound

manner. The focus of the supervisory efforts by the State Bank of

Pakistan is on the health and stability of the banking system in

Pakistan.

Off-Site Monitoring at Banking Sector Development:

The objectives of off-site surveillance over the banking system are

to monitor the condition of individual banks, as well as condition within

the banking system; to provide early identification of problems so that

corrective action can be effected; and to target scarce on-site

supervisory resources to areas or activities of greater risk.

Off-site surveillance system revolves around receipt, review and

analysis of periodic financial statements and returns submitted to the

State Bank. The off-site analysis facilitate monitoring of each bank’s

performance and its observance of supervisory requirements over

time, so that problems may be identified as soon as these emerge. The

process thus assists in making the most effective use of scarce on-site

inspection resources. The system also works as an early warning to

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identify those areas, which reflect high probability of financial

difficulties so that policies and corrective actions can be designed and

implemented accordingly.

In consonance with the responsibilities envisaged under the Core

Principles recommended by the Basle Committee, the On-Site

examination capabilities at the State Bank of Pakistan have been

substantially augmented to bring them at par with the expected

international standards. While regulations have existed for some time

aimed at convergence of the essential industry indicators to the

globally accepted criteria, the bank in all its assessments has adopted

a risk-based approach to evaluations. Periodic On-Site examinations of

the financial condition of institutions, falling within SBP’s jurisdictions,

remains the most effective supervisory tool, which support Banking

Supervision Departments in maintaining a proactive approach in

discharge of the statutory responsibilities.

The State Bank of Pakistan’s policy for frequency of inspection of banks

and DFIs is designed to provide flexibility in scheduling inspections

consistent with the need to maintain safety and soundness. The policy

provides a framework within which supervisory ratings, surveillance

and financial monitoring results, and other appropriate indicators of

banks soundness, are to be considered in carrying out the State Bank

of Pakistan’s fundamental policy of subjecting each bank and non-bank

financial institution under its supervision to a periodic on-site

inspection.

With a view to streamline the approach and the underlying procedures

for effective and efficient banking supervision State Bank of Pakistan

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has embarked upon a major overhauling of its own capabilities so as to

bring them at par with international practices. This entailed hiring of

services of consultants of world repute (M/s. Arthur Andersen) under

the FSID Project of the World Bank. These Consultants have compiled

extensive on-site and off-site manuals. Besides qualified and

professional trained human resource have been recruited and rigorous

theoretical and hands-on training has been provided to them. With the

shift in supervisory focus from ‘compliance oriented’ to ‘Risk

Assessment Approach’ State Bank of Pakistan has developed a uniform

bank rating system in conformity with international

standards/benchmarks. Now each bank is appraised under the

CAMELSS/CAELS Rating System.

In order to portray a legitimate and true financial condition of a bank

the off-site surveillance system and the on-site inspection functions of

banking supervision work extremely close together. As a result of

these close coordination bank ratings reflects as accurately as

possible, the true financial condition of a bank and the banking system

as a whole.

MINIMUM CAPITAL REQUIREMENTS:

Banks are aware that Section 13 of the Banking Companies Ordinance,

1962 relating to requirement of minimum paid up capital and reserves

has recently been modified through the Banking Companies (Second

Amendment) Ordinance, 1997 (copy enclosed). The modified law

interlay states that no banking company shall commence business

unless it has a minimum paid up capital as may be determined by the

State Bank or carry on business unless the aggregate of its capital and

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unencumbered general reserves so of such minimum value within such

period as may be determined and notified by the State Bank from time

to time. Accordingly, in exercise of the powers vested under the above

provisions of law it has since been decided that effective from

December 31, 1997 all banks shall maintain minimum capital as laid

down in the enclosed Annexure.

INSTRUCTIONS ON CALCULATION OF MINIMUM CAPITAL

Requirements Based On Risk Weighted Assets

1. No banking company incorporated in Pakistan shall commence

and carry on banking business unless it has a minimum paid up

capital or Rs 500 million. Similarly, no banking company

incorporated outside Pakistan shall commence and carry on

banking business in Pakistan unless it has a minimum paid up

capital of the value of Rs 500 million.

2. Provided that where a banking company already in existence is

found short of the minimum required paid up capital on 31st

December, 1997, it shall meet shortfall by 31st December, 1998.

3. Effective from where the capital and unencumbered general

reserves maintained by a banking company are found short of

the minimum required capital and unencumbered general

reserves (MCR) on December 31st, 1997, the State Bank shall, on

request from the banking company concerned, consider grant of

extension in time for meeting the required capital adequacy.

4. The capital and unencumbered general reserves for the purposes

of the minimum requirement of 8% of risk weighted assets shall

mean and include:-

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A) Equity:

i. Fully paid up capital / capital deposited with SBP*

ii. Balance in share premium account

iii. Reserve for Bonus Shares

iv. General Reserves as disclosed on the balance-sheet

v. Unappropriate/unremitted* profits (net of accumulated

losses, if any)

IN THE CASE OF FOREIGN BANKS OPERATING IN PAKINSTAN.

A. Supplementary Capital:

i. General Provisions or Reserves for loan losses

ii. Revaluation Reserves

iii. Undisclosed Reserves

iv. Subordinate debt.

1. The computation of the amount of Equity and

Supplementary Capital shall be subject to the following

limitations and restrictions:-

i. The sum total of the different components of the

Supplementary Capital will be limited to the sum total of

the various components of the Equity.

ii. While calculating the amount of equity the followings shall

be deducted:-

Book value of intangible assets such as goodwill, etc.

Shortfall in provisions required against classified assets

irrespective of any relaxation allowed by the State Bank.

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NIBAF Files and Information’s

Location

 

National Institute of Banking and Finance is also referred as State Bank

Training Institute (SBTI) NIBAF Islamabad .It is situated at Sector H –8

Pittras Bukahri Road near Zero Point. Government offices at Islamabad

are situated at a distance of 6/7 kilometers from the institute. The

sector H is famous for educational and vocational institutions and

offices. The institute provides the residential facilities equivalent to

four-star hotel. The Public transport is easily available while other

facilities like telephone, postal services; hospitals are located quite

close to institute.

Facilities Available

All major training activities /courses and State Bank ’s Training

Programmes are held at NIBAF. The institute has a modern complex

constructed on a plot of land measuring 2.5 acres, having academic

and hostel blocks.

The Academic block of the institute is well equipped with all latest

state of all audio visual aids & a computer laboratory. The spacious

training rooms, Auditorium, and Syndicate rooms are suitable for any

type of training program /courses. The library of the institute contains

a rich collection of books, banking journals and periodicals besides

providing a client and congenial atmosphere for all the participants to

get benefit of learning.

The Publication Wing housed in the Academic Block provides all sort of

published material which includes course books, reading material,

photocopies, arranging of training material, hand books of training and

other publications of NIBAF to the trainees, participants, trainers,

STATE BANK OF PAKISTAN

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training managers and other senior officials from SBP and other

institutions as well. It is also equipped with modern, electronic

equipment for scanning, typing, word processing of documents,

Internet exploring etc.

The hostel block of NIBAF consists of 120 single occupancy rooms and

4 executives suits that are fully furnished having all facilities of four-

star hotel providing homely environment. There is also a well-

maintained cafeteria supported by a modern commercial kitchen,

providing catering services to trainers & participants. Indoor games

and other recreational facilities like TV, VCR is available in the lounge

of the block. To promote healthy competition tournaments are held for

each course participants. Sight seeing trips are also arranged to visit

hill stations like Murree, Nathiagalli, Taxilla, Bhourbon, Kaghan, Naran,

etc on weekends /holidays. Such activities are part of the recreational

program arranged for participants to enjoy their leisure hours and to

keep them healthy and fit after long training.

NIBAF is now regarded as an institution of excellence in the area of

training of Banking & Finance in Pakistan. The top international

institutions like IMF; Bank Negra Malaysia has appreciated NIBAF for its

arrangements.

Functional and Organizational Set Up:

The functional and organizational set up of NIBAF has undergone a

quantum change in order to utilize the existing facilities of NIBAF at

optimum level. Director General NIBAF is the overall in charge of the

Academic Side of the Institute .He is assisted by two Directors one is

looking after Academic and the other Logistics side.

The institute now has it own in house capacity to organize the design,

development and review of relevant training programmed for both

STATE BANK OF PAKISTAN

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domestic and foreign institutions in the field of banking and finance.

The institute has conducted a number of training programmes, which

are

State Bank Officers Training (SBOT) (For new inductees at OG II

level)

Joint Directors Training Program

Research Officers Training Program

International Courses on Central and Commercial banking

 Institutional Arrangements:

The Bank has made contractual arrangements with other partners’

institutions like Institute of Bankers Pakistan (IBP) and Pakistan

Institute of Development Economics (PIDE) for conduct training courses

at NIBAF and Training Department Karachi. The arrangements are

meant for external trainers to be engaged through these institutions as

well as for training design and delivery of different modules on

Pakistan economy, Foreign Exchange, Macro Finance, Commercial

Banking etc.

Account Department:

A Brief Of The Working Of The accounts Department 

Functions of the Department:

Issuance of notes and coins in Pakistan

Bankers of the Federal and Provincial Governments.

Bankers of the commercial banks and custodian of their

cash reserves.

Custodian of Pakistan’s reserves of approved foreign

exchange.

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Sale purchase of foreign currencies.

Preparation of Balance Sheet and P/L account of the bank.

Preparation of annual budget of the bank.

Issuance of weekly statement of affairs of Banking and

Issue departments.

Management of Provident/General Provident Fund

balances.

Management of Prize bonds and saving schemes of the

government.

Functional control of the offices of the bank.

The Accounts Department is responsible to perform and

manage the functions detailed on pre-page. It controls the

working of the Offices under the provisions of Issue and

Banking Department Manuals. Issue Department deals with

management of currency operations, which includes

designing, printing of currency notes and its circulation.

Banking Department relates to the operation of offices of

the Bank, maintenance of Federal and Provincial

Government Accounts, booking of financial transactions in

the books of accounts of Central Directorate and issue of

weekly Statement of Affairs as required under the

provisions of SBP Act, 1956, preparation of Profit and Loss

Account and Balance Sheet on yearly basis, formulation of

budget estimates of revenue and capital expenditure.

Management of General Provident Fund and Provident

Fund balances of all employees of the Bank. Operational

control of working of offices by framing policies and

procedures under the provisions of Banking/Issue

Department Manuals, Sale/ purchase of foreign currencies,

maintenance of foreign reserves of the country. Accounts

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Department is also responsible for management of Prize

Bonds and Savings Schemes of the Government of

Pakistan.

To achieve the above objectives, the Department has been

divided into six divisions as detailed below:-

Currency Division

International Division

Accounts Division

Audit Division

Support Services Division

Prize Bonds & Savings Scheme Division:

Brief Functions Of The Divisions

1. CURRENCY DIVISION

Arrange currency operation in the country which relates to

designing of currency notes, its printing through Pakistan

Security Printing Corporation and its issue through our offices of

issue i.e. Karachi, Lahore, Peshawar and Quetta.

Regulate the withdrawal of old notes from circulation and

maintenance of its account etc.

Issuance of weekly statement of Affairs and preparation of

Balance Sheet of Issue Department.

Arrange purchase of confiscated Gold from Government

Departments.

Make arrangements for opening of new offices of State

Bank of Pakistan.

STATE BANK OF PAKISTAN

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INTERNATIONAL DIVISON:-

This Division is responsible for investment of Bank’s funds in

foreign as well as local currencies. Sale/Purchase of approved

foreign currency through the authorised dealers. Realisation of

interest income on our investments in foreign and domestic

securities and maintenance of their respective record. Placement

of Bank’s Foreign Reserve as per decision of Investment

Committee in term deposits with Commercial banks of

International repute. Dealing with IMF transactions in respect of

acquisition/allocatio of SDR’s/receiptof

tranches/Purchase/Repurchases, Payments to IMF. Making

payments to parties/executing agencies under various etc., by

the International Donor Agencies viz. IBRD,ADB etc. Issue of

payment guarantees in respect of foreign currency loans

negotiated by the Federal Government/Provincial Government,

autonomous bodies and approved organization on the strength

of counter guarantee from the Ministry of Finance, Government

of Pakistan, and Allocations/distributions of Government’s Letters

of Credit of Pakistani Commercial Banks as per ratio prescribed

by Ministry of Finance. Receipt/payments under ACU

arrangements and settlement thereof with ACU Secretariat, Iran.

ACCOUNTS DIVISION

(Accounts (Main) Section):

Maintenance of Accounts of Central Directorate.

Consolidation of accounts received from offices.

Preparation of weekly statement of Affairs for issuance in the

Government Gazette as provided in the State Bank of Pakistan

Act,1956.

STATE BANK OF PAKISTAN

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Preparation of Profit and Loss Account and Balance Sheet

(Banking Department) as on 30th June each year.

Preparation of Annual Budget of the Bank for Revenue and

Capital expenditure under different heads of Charges/Dead stock

Accounts.

Reconciliation of State Bank of Pakistan General Account relating

to Inter-Office transactions.

Monitoring of contraction and expansion of Currency operations.

Government Accounts Section

Maintenance of Federal & Provincial Government Account on the

basis of receipt and payments effected at our offices and

National Bank of Pakistan.

Preparation of daily balance position and communication thereof

to the Federal Finance Division and Provincial Finance

Departments.

Central and Provincial Zakat Funds Account are also maintained

on the basis of financial and lunar year.

Monitoring of debtor balances of Provincial Governments

AUDIT DIVISION:

Responsible for internal audit control on the expenditure of the

Bank incurred in Central Directorate as also the expenditure

incurred in various offices of the Bank on monthly basis.

Monitor the expenditure budgetary limit under various heads of

charges Account by the offices of the Bank and Departments of

Central Directorate.

STATE BANK OF PAKISTAN

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Implementation on the audit inspection reports submitted by Audit

Department after annual audit of Offices and Departments of Central

Directorate.

SUPPORT SERVICES DIVISION

Policy & Regulation Section

Framing rules and regulations relating to the working of Offices,

interpretation of provisions of Banking Department and Issue

Department Manuals.

Amendment in Banking Department Manual.

Fraud Forgery cases, Matters relating to Government Audit

Report on working of Office and meetings of Public Accounts

Committee.

Specimen signature of Officers, printing and circulation to the

Offices.

Administration Section:

Internal administrative control of the Department, maintenance

of Petty Cash/ Imprest Account, deals with the cases of Payment

Unit, Receipt and supply of Stationery articles.

Maintenance of leave record of Officers/Staff of the Department.

Funds Section:

Management of PF/GPF balances and retirement benefits of the

retired employees of the Bank.

Maintenance of BF Account and payment thereof.

STATE BANK OF PAKISTAN

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Payment of GTA premia to State Life Insurance Corporation,

death claim in respect of GTA, Private insurance policies financed

from PF/GPF.

Stationery Management Section:

Procurement of Stationery articles, Forms, Registers and papers

etc. on the basis of annual indent received from Offices and

Departments of Central Directorate, its costing, billing and

dealing with other affiliated work.

Arrange its supply to outstation Offices in annual basis and

Offices in Karachi and Departments of Central Directorate on

monthly basis.

Special Cell (Menual):

Looking after the work of updating of Banking Department

Manual etc.

i. (Central Accounts {Remittance/ Audit & Record}

Sections)

Deal with the adjustment of Remittance transactions under the

Remittance facilities scheme under section17 (7) of SBP Act-

1956.

Drawing and encashment received from Treasury Agencies, SBP

Offices and National Bank of Pakistan-Scrutiny of advises, sorting

of paid instruments and application Forms etc. and deal with

other affiliated work.

Payment of freight/ commission to Railway authorities in

connection with the dispatch of treasure etc.

STATE BANK OF PAKISTAN

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Payment of expenditure incurred in connection with the

dispatch/receipt of remittance of treasury by the N.B.P and

payment of commission to them on Intra-Provincial Government

drafts/drawings and encashment.

Maintenance of Record of Intra Provincial NBP / SBP

drafts.

PRIZE BONDS AND SAVINGS SCHEMES DIVISION:

Printing of Prize Bonds through Pakistan Security Printing

Corporation.

Its distribution to our offices through respective Public Debt

Offices.

Management and control under the provisions of Prize Bonds

Rules/Procedure of sale/ encashment of Prize Bonds.

Dealing with the cases of frauds and forgeries in the Prize Bonds

Scheme.

Preparation of consolidated position of sales/ encashment of

Prize Bonds on fortnightly basis or such intervals as required by

the Central Directorate of National Savings, Government of

Pakistan.

Making arrangements for prize bonds draws as per schedule

proposed by the Central Directorate of National Savings.

Management and control of Saving Schemes of the Government

effected at our offices and branches of Commercial Banks.

Economic Department:

Economic Policy Department is primarily engaged in eight

fundamental activities. These include:

STATE BANK OF PAKISTAN

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Preparation of Monetary Policy Statement;

Preparation of Monetary Surveys;

Preparation of Annual Credit Plan;

Consultations with the IMF;

Computation of REER index;

Computation of domestic public debt,

Analysis of financial markets; and

Empirical research papers.

 

The Department also deals with external sector issues and references

on money, credit and exchange rates management. For operational

purposes, the Department has been divided into the following four

groups:

Monetary Survey & IMF Consultations Group:

This group is responsible for preparation of Monetary Survey, details of

Government budgetary borrowings, commodity operations, bank credit

to private sector, public sector enterprises including (major

autonomous bodies) and other items separately for SBP and Scheduled

banks. In addition to this, the group is also assigned the task of

preparation of material for IMF Consultations, World Bank and Ministry

of Finance, monitoring of Performance Criteria and disposal of queries

and references.

Money, Credit & Prices Group

The group is responsible for preparing credit plans, working papers for

NCCC meetings and performs Secretariat work for NCCC. Other

assignments include credit targeting, credit monitoring, banking issues

and reforms, Inflation watch, analysis of lending rates, large scale

STATE BANK OF PAKISTAN

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manufacturing developments & disposal of references on credit

allocation. The group also prepares periodic reports/reviews on Credit

assessment of Private sector, credit assessment of govt. sector,

analysis of tax revenue, NSS rates, domestic debt and impact analysis

of various policy initiatives. The group also intends to initiate work on

micro credit and SMEs.

Financial Market & Exchange Rates Group

This group is responsible to keep constant watch and analyze

developments in the financial markets. It prepares and supplies variety

of background information for circulation in MERPC meetings. The

group prepares analytical reports, and working papers relevant to

financial markets on issues as identified by the MERPC. Further, it is

also assigned the task of dealing with the matters relating to exchange

rate and foreign exchange reserves. The other assignments include

supplying of information/data relating to Exchange Rate/Forex

Reserves/FCAs to World Bank. It also prepares NEER and REER Indices

for submission to Governor. Besides, it deals with references/queries

relating to financial markets and exchange rate issues.

External Sector Group:

The group deals with the matters relating to Pakistan’s relationship

with IFIs like IMF, IBRD, ADB along with the issues of WTO and

SAARCFINANCE. Their policies and likely impact on Pakistan is also

evaluated. In addition, it prepares briefs on international trade,

payments & economic issues, meant for Pakistan’s delegations

attending the IMF/World Bank meetings and other International fora

e.g. World Economic Forum, Commonwealth Finance Ministers’

meetings. It also prepares comments on Fund Documents, and replies

of various references/queries received from international

STATE BANK OF PAKISTAN

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organizations/agencies etc. Further, the group is also assigned the task

of dealing with the matters relating to foreign trade, balance of

payments, workers remittances, and foreign investment, etc. and

impact of policy changes.

Foreign Exchange Policy:

Foreign Exchange Department (FED), one of the core departments of

the State Bank, is working to manage/monitor the foreign exchange

activities in the country. Foreign exchange business in Pakistan is

regulated under Foreign Exchange Regulations Act, 1947(FER Act,

1947). There exist a Foreign Exchange Manual for guidance of

Authorised Dealers (ADs), authorised by FED to carry out foreign

exchange business, and general public including local/foreign

investors. The change in instructions/policies/procedures is brought

through F.E. Circulars/Circular letters. Mostly, there are general

instructions. There are, however, certain areas for which FED's

approval is necessary,

2. The nature of the work of the Department is of policy as well as

operational for which the head office in Karachi is supported by 16

offices set up in major cities of Pakistan. The Department is divided

into four divisions namely, Policy, Investment, General and Operations.

3. Policy Division is responsible for issuance of F.E.Circulars/Circular

Letters and revision of FER Act, 1947/Foreign Exchange Manual.

Broadly, it deals with the following matters:-

Foreign Currency Accounts Scheme

Rates of forward cover fee-FCAs.

Exchange Risk Cover Fee on Medium & Long Term Loans.

Institutional SWAP Deposits under FE.45 of 1985.

Foreign Exchange Reserve Position.

STATE BANK OF PAKISTAN

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Home Remittances.

Policy matters regarding commercial and non-commercial

remittances.

Follow up of inspection reports of Banking Supervision

Departments in foreign exchange matters of the banks.

Courts cases concerning any of above matter.

5. Investment Division liases with the other Government

Department concerned with the investment in Pakistan and

corresponds to local as well as foreign investors. In short, the

Opening of foreign currency accounts with banks in

Pakistan under new scheme:

Under the existing instructions, the Authorised Dealers (Bank

authorised to deal in foreign exchange) without the prior approval of

the state Bank, open foreign currency accounts in Pakistan of Pakistan

nationals resident in or outside Pakistan including those having dual

nationality. These accounts can also be opened in the joint names of

residents and non-residents. Residents firms and resident companies

including investment banks and the companies incorporated in

Pakistan with foreign share holding are also eligible to open and

maintain foreign currency accounts. Charitable Trust, Foundations etc.

which are exempt from payment of income tax can also open foreign

currency accounts in Pakistan. This facility is also available to all

foreign nationals residing abroad, all foreign firms/corporation

s other than banks incorporated and operating abroad provided these

are owned by persons who are otherwise eligible to open foreign

currency accounts. Foreign nationals residing in Pakistan and foreign

firms and companies registered abroad and operating in Pakistan can

also open and maintain foreign currency accounts with the Authorized

STATE BANK OF PAKISTAN

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Dealers provided the foreign exchange credited to such accounts does

not represent their earnings abroad in respect of business conducted in

Pakistan or services rendered by such foreign nationals and

firms/companies while in Pakistan. These accounts can be fed by

remittances received from abroad as well as cash deposits locally.

The Authorized Dealers are free to decide the rate of return on these

accounts payable to the depositors. They are also free to recover

reasonable bank charges on handling cash transactions in foreign

currencies received into or paid out of such accounts.

The non-residents are exempted from payment of withholding tax and

compulsory deduction of Zakat. Withdrawals from these accounts in

the shape of cash currency notes is allowed and account holder is at

liberty to make remittances from his account to the extent of his

balance in his account.

Accounts of diplomatic missions and international organizations etc.

The Diplomatic Missions' staff in Pakistan, their Diplomatic Officers and

home based members of the Missions' staff in Pakistan, as also all

international organizations in Pakistan and their expatriate employees

are allowed to open special foreign currency accounts outside the

scope of Foreign Currency Accounts Scheme for the purpose of

receiving funds from abroad.

The diplomatic officers and home based members of the mission's

staff in Pakistan and the expatriate employees of International

Organizations can withdraw in the shape of foreign currency notes

from their foreign currency accounts without any restrictions,

However, withdrawal in the shape of cash is not allowed from the

official accounts of diplomatic missions and International

Organizations.

STATE BANK OF PAKISTAN

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Islamic Baking:

General Information on Islamic Banking Department

Islamic Banking Department (IBD) has been created in the State

Bank of Pakistan by merging Islamic Economics Division of the

Research Department and Islamic Banking

Division of the Banking Policy Department. Mr. Pervez Said has

joined the Bank as Director (IBD) and Advisor to the Governor on

Islamic Banking. IBD will be fully responsible of all matters related

to Islamic Banking and Finance. The Director will also be

Member/Secretary of the Shariah Board that is being established in

the State Bank.

STATE BANK OF PAKISTAN


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