Evolution of State Bank of Pakistan as primary monetary institution

ByAbdul Basit

Works in finance and industry and is well versed in commercial affairs


August 3, 2022

Evolution of State Bank of Pakistan

The evolution of State Bank of Pakistan represents the liquid side of the fiscal and monetary policies of the state. It is the financial face of the state entrusted with managing wide-ranging monetary issues and empowered with vast regulatory authority. It is the last and final port of call for parties engaged in all financial activity as it is the ultimate arbitrator in all fields of financial endeavour. The aura surrounding the institution was rightly pointed out by Quaid-e-Azam when he inaugurated it 70 years ago and called it as a symbol of the sovereignty of the state in the financial sphere. Since then the institution has traversed a long way and has established itself as the lynchpin of financial regulator of the country.

At its inception the SBP 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. To begin with the bulk of SBP funds were provided by industrial families, particularly Valika family, whom Quaid-e-Azam promoted and they were generous enough to allot a percentage of their annual profit towards the functioning of the bank.

SBP is the central bank of the country located at Karachi widely acknowledged as the financial hub of Pakistan. SBP owns a subsidiary known as SBP Baking Services Corporation (SBP-BSC) which acts as its operational arm and has branch offices in 15 cities across Pakistan. It also has other fully owned subsidiaries as well namely: (1)National Institute of Banking and Finance (NIBAF) which is the training arm of the bank and also provides training to commercial banks, (2) Deposit Protection Corporation (DPC) and (3) Pakistan Security Printing Corporation (PSPC) which was recently given under the jurisdiction of SBP.

SBP was created out of the British colonial institution Reserve Bank of India whose monetary reserves were distributed amongst both new states and Pakistan received 30 per cent (750 M gold) and India got 70 per cent for India. It was born autonomous under the SBP Order 1948 but soon the Government of Pakistan took it under its wings. Till 1956 commercial banks were also quite independent of the SBP and deposits grew more than private sector demand for credit, with minimal resort to SBP reserves till the first dose of heavy bank borrowing hit the SBP in 1955-57.

Ayub era saw dominance of liberal economic policies that spurred private industrial sector dynamism and demand for credit soared. Banks had to look towards the SBP for reserves, thus creating the necessary condition for the operation of monetary policy. The government encouraged the SBP to direct credit to neglected sectors, persons and areas but did not succeed much. Governors were kept free to pursue an independent policy.
All of this was reversed by PM Bhutto’s government when all banks including the SBP were nationalised in 1974 and the practice of an annual address by the governor was discontinued. The Pakistan Banking Council was created with functions overlapping with the SBP. General Zia’s regime introduced Islamic financing in 1980. The regime misused the SBP’s extensive powers to eventually leave a legacy of massive loan write-offs.

SBP worked under the tight control of the federal government till it was granted full autonomy in February 1994. In 1997, this autonomy was further strengthened when the government issued three Amendment Ordinances empowering SBP with full and exclusive authority to regulate the banking sector, conduct an independent monetary policy and set a limit on government borrowings from it. The amendments to the Banks Nationalization Act brought the end of Pakistan Banking Council and gave the role of appointing Chief Executives, Boards of the Nationalized Commercial Banks (NCBs) and Development Finance Institutions (DFIs) to SBP.

In its present shape SBP performs both the traditional and developmental functions to achieve macroeconomic goals. The traditional functions pertain to issue of notes, regulation and supervision of financial system, bankers’ bank, lender of the last resort, banker to Government, and conduct of monetary policy. The secondary functions deal with management of public debt, management of foreign exchange, advising government on policy matters and maintaining close relationships with international financial institutions.The non-traditional or promotional functions include development of a financial framework, institutionalization of savings and investment, provision of training facilities to bankers, and provision of credit to priority sectors. SBP actively promotes financial inclusion policy.

SBP has a large portfolio to look into that includes many ranges of banking to deal with changes in the economic climate and different purchasing and buying powers. It is also entrusted with the responsibility to carry out monetary and credit policy in accordance with government targets for growth and inflation with the recommendations of the Monetary and Fiscal policies Coordination without trying to affect the macroeconomic policy objectives. One of the most important tasks of the SBP relates to its regulating the volume and the direction of flow of credit to different uses and sectors and it uses both direct and indirect instruments of monetary management.

Deregulation, liberalisation and privatization have provided autonomy to SBP and gradually it is restraining the federal financing agencies to meddle in its affairs. The autonomy, however, is required to be exercised and it is now seen exercising in due measure strengthened by appropriate parliamentary approval given to it quite recently. TW


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