State Bank Needs Structural and Qualitative Changes in Its Programs and Administrative Set up


The State Bank of Pakistan in its 2018 reports have emphasized for broad-based and deep structural reforms in key areas of the economy to address longstanding structural issues, which are impeding investment, industrialization, trade, and resource mobilization. According to SBP reforms in any particular area of the economy may not be effective unless coordinated with reforms in other sectors and the success of reforms would crucially depend on an improvement in governance.

But for that apart from Government, SBP also needs structural changes in its own set up.

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 performed by central banks almost all over the world, may be classified into two groups: (a) the primary functions including issue of notes, regulation and supervision of the financial system, bankers’ bank, lender of the last resort, banker to Government, and conduct of monetary policy, and (b) the secondary functions including the agency functions like management of public debt, management of foreign exchange, 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 to play an active part in the process of islamization of the banking system.

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.

Now coming to another question is Central bank autonomy that refers to the extent to which the bank can carry out its operations independent of executive and legislative control. Generally, the degree of autonomy largely depends on the political will of the government.

Most recent example is of India where government has named Shaktikanta Das, a seasoned financial bureaucrat, as the new governor of the Reserve Bank of India (RBI) replacing Urjit Patel, whose abrupt resignation roiled financial markets. Das held key positions both under the ruling Bharatiya Janata Party and the previous Congress-led government before retiring in 2017.

Outgoing governor Patel’s resignation came after over a month-long tussle over policy with the government that raised concerns about the central bank’s independence.

So it is the will of the government that always prevail in any country of the world for deciding whether its central bank is independent or not.

Apart of its own functions SBP holds “four” fully owned subsidiaries to augment its functions. These are:

SBP-Banking Services Corporation (SBP-BSC) to supports SBP in performing functions such as handling of currency and credit management, facilitating the inter-bank settlement system, and sale/purchase of savings instruments of the Government on behalf of Central Directorate of National Savings. SBP-BSC also collects revenue and makes payments for and on behalf of the Government. It also carries out operational work relating to development finance, management of public debt, foreign exchange operations and export refinance.
SBP-BSC consists of 16 field offices in Pakistan with the head office in Karachi.

National Institute of Banking and Finance (NIBAF) provides executive development trainings to new inductees and various levels of SBP employees. The subsidiary also conducts international courses on central and commercial banking in collaboration with the federal Government. Furthermore, NIBAF offers training to SBP-BSC and other financial institutions. NIBAF is incorporated under Companies Ordinance, 1984 and has a separate Board of Directors. NIBAF is located in Islamabad with an office in Karachi.

Deposit Protection Corporation (DPC) has been established as a wholly owned subsidiary of SBP under the DPC Act 2016. Upon commencement, this entity is responsible to provide protection of deposits of member financial institutions operating in Pakistan. The objective of DPC is to compensate the depositors to the extent of protected deposits in the event of failure of a member Financial Institution. The limit of protected deposits shall be determined by DPC and will be announced in due course. For the purpose of protecting depositors of Islamic Banks and branches, a separate Shariah compliant mechanism of deposit protection shall be put in place.

Pakistan Security Printing Corporation has also been acquired in 2017. The core functions of PSPC are to print bank notes and Prize Bonds.

The Financial Monitoring Unit  an intelligence service department active within the Ministry of Finance (MOF) Government of Pakistan  works under regulations of State Bank of Pakistan since it was established in 2007. it is responsible for analyzing money laundering cases, building efforts against the terrorist financing, and all sorts of financial crimes within the jurisdiction of financial laws of Pakistan. Financial Monitoring Unit was established to ensure compliance with the Pakistan’s Financial Action Task Force (FATF)’s recommendations on Anti-Money laundering (AML) and terrorist financing.

Apart from above as of 31 December 2017, the Government of Pakistan, via State Bank of Pakistan (SBP) also owns a combined stake of 75.6% of NBP total share capital.

SBP has seen 19 Governors since its establishment. However only three of them were prominent economists others were bureaucrats.

Currently only one Dy Governor Mr. Jameel Ahmed is looking after his job. Hence in addition to him at least two more Dy Governors are needed one for monetary management, Market activities and Islamic banking and other for banking control and monitoring of the market with its development, subsidiaries of SBP and training side. They all should be and preferably selected from within the SBP executives as they have central banking experience. Though MOF appoints Governor and Dy Governors for 3 years specific terms but they can do it in consultation with SBP.

Like other institutions of Pakistan SBP has yet to cover its grey areas, like.

It is highly weak in monitoring Money Laundering activities though having FMU for the purpose. For example the FIA is carrying out investigation against 32 suspects in the first phase while it plans to extend the scope of probe to 400 people in money laundering cases.

It is highly weak in monitoring banks particularly on their account holder status. Like many account holders with poor income have been found in holding billions in their accounts.

It is highly weak in monitoring FX market activities. Central bankers say that despite all warnings, some banks still continue to make such delays that, in effect, promote handling of remittances through informal channels including hundi/hawala. One key area of misuse of foreign exchange has been imports of gold. Exporters of jewellery had provided incorrect data of exports and withdrawn foreign exchange from banks to import gold against those exports. When this scam was unearthed, it transpired for the horror of policy makers that the bulk of export proceeds of jewellery were never materialized. The draft forex manual says that banks, too, will continue to determine their own exchange rates both for ready and forward transactions with a buying-selling gap of 20 paisa’s per dollar. But, the condition of 20 paisa’s will not apply on interbank transactions. Forex manual stipulates that banks will now provide forward cover against import letters of credit ‘for a period not less than one month and up to a maximum period of one year on roll over bases. This is aimed at discouraging bankers from speculating against the rupee intentionally or unintentionally by way of excessive and very short-term forward selling of foreign currencies, senior bankers say. In recent years it is not uncommon for importers to over-book import dollars by paying exceptionally high forward premiums to banks whenever the rupee began to slide for right reasons or on speculation-led forex buying spree.

It is highly weak in monitoring risk management system under Basle arrangements. Credit rating agency, Moody’s has recently said in its report that Habib Bank Ltd. (HBL), National Bank of Pakistan (NBP) and United Bank Ltd UBL have to meet the additional capital requirements, despite the recent increase in private-sector lending and the short time frame for the implementation of the D-SIB buffer.

It is managing government borrowings but yet it has not been able to get new government securities Act (Still using Public Debt Act 1944) to have a proper check on government borrowings.

It has not been able to work for the proper growth of Islamic banking. Like it has not been able to bring a proper legislation on Islamic Banking and Finance, neither it has been successful in developing Islamic financial products to make Islamic banks competitive with their counterparts on the conventional side. Governor SBP in its address on Dec 12, 2018 has not been able to pin point that when Islamic Banking would cover its sphere, currently at just 13% of total banking assets. He stressed to have liquidity management tools and persons competent to lead the Islamic banking progress but from where these persons would come, whether from sky. Likewise Mufti Taqi Usmani has said that Islamic banking started in Pakistan has now gone back as compared to other countries but whether he would clarify that since he was leading the system from day one than who is now responsible for its lapses.

It has not been able to guide the government properly on macro development programs and how to go for poverty alleviation programs and steps through role of strong and quality institutions, efficient allocation of resources, promotion and protection of new knowledge and infrastructure development in furthering the growth agenda of the state.


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