SBP. 1. Public Finances 2. Currency and Exchange 3. International Trade and Commerce 4. Credit System

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1 SBP Purpose of Central Bank was first founded in 16 th Century when Banco di Rialto (State Bank o f Italy) was formed in Genoa to regulate the affairs of Banking System in Italy. However, culture of State Bank/ Central Bank was not necessarily considered as required till 20 th Century when after First World War International Financial conference was held in Brussels to study the Financial Crisis faced by the countries(39) and to mitigate the dangerous consequences arising from it. It was resolved that all countries shall establish a central bank which shall regulate the 4 underlying problems as follow: 1. Public Finances 2. Currency and Exchange 3. International Trade and Commerce 4. Credit System SBP Act was promulgated with the following object: i. to regulate the monetary system ii. to regulate the credit system of Pakistan iii. to foster its growth in the best national interest with a view to securing monetary stability iv. fuller utilization of the country s productive resources History of SBP in Pakistan At times of Independence of Pakistan, there were no industries rather the only source to improvise the economy was by focusing on agricultural raw material. Thus commercial banking facilities were provided for such export. Record confirms that there were 487 offices of banks in the area that was later defined territory of Pakistan. However, lack of resources made it impossible for Pakistan to have its own banking system.

2 INDIAN INDEPENDENCE ACT 1947 Act of the British Parliament, in terms of which two countries attained their dominion included certain significant features yet two important aspect included as follow: i. To divide the joint properties and assets. Shares of both countries were settled at following ration: India 82.5% Pakistan 17.5% Basis on the above share percentage, Pakistan was entitled to receive amount of Rs. 750 Million (75 caror) to be added to Government Securities of Pakistan. Whereas, only 200 Million(20 caror) was only received and remaining balance was withheld by India. ii. Till Government of Pakistan establishes a banking system including Central Bank for itself the Monetary Authority shall be with Reserve Bank of India till 30 th Sep This was affected in terms of recommendations as made by the Expert Committee appointed especially to resolve the issue among two countries over Banking dominion, currency, coinage and demand liability. However, Pakistan was required to take over the management of public debt and exchange control from Reserve Bank of India. Public Debt: mean debt owned by public in a country. Types: Internal and External Debt Exchange Control: is restriction by Government against amount of foreign currency or local currency It was agreed that Indian Notes were to be used as legal tenders. Following the independence Hindus residing in territories now defined as Pakistan, migrated with all their assets to India. Statistic confirms that before independence their existed 487 branches in areas of Pakistan and only 196 operated post independence. Out of which only 19 foreign non Indian banks were engaged in agriculture export. After the independence there existed only two native banks; Habib Bank Limited and Australasia

3 Bank Limited. Insecurity among the public from investing and trading, over the uncertain future of Pakistan was the primary challenge confronted by Government. So as to secure the general public, Banking Companies Ordinance 1947 was introduced to guarantee and safeguard interests of Banker and Customer. India made all its effort to bring down Pakistan and in this quest after withholding the securities also closed down most of offices of Imperial Bank of India in Pakistan. India was not even willing to by token amount of Government of Pakistan securities in terms of the pleas that such securities are not marketable. Government Securities: bond or type of debt obligation to paid back on maturity. Example: Saving Bonds/Treasury Bonds/Treasury Bills Marketable Securities: securities or debts redeemable in 1 year or convertible in cash. Basis on the poor economic conditions and underlying concerns of the country it was felt by the Government to instantly establish banking control and currency. Thus it was agreed that Monetary Authority of Reserve Bank of India to serve in Pakistan will now remain till 30 th Jun 1948 instead of 30 th Sep EXPERT COMMITTEE was constituted by the government to recommend necessary step for establishment of State Bank of Pakistan and Legislation as required to establish Central bank. Committee on the basis of shortage of qualified staff and keeping in view the monetary stability suggested in negative rather recommended establishing Currency Board until such time the conditions become favorable. Despite this the State Bank of Pakistan was established on 1 st July 1948 by virtue of promulgating State Bank of Pakistan Order (promulgated on 12 th May 1948). Primary Tasks Performed by SBP Issuance of Currency Notes and withdrawal of Reserve Bank of India Notes. First Notes were issued in October 1948 with denomination of Rs. 1, 5, 10, 100. De La Rue and Company (Great Britain) Printed currency for Pakistan b/w By August 1949 Reserve bank of India Notes valuing of Rs Caror were withdrawn. However, Notes of Rs Caror were still in circulation. Thus

4 total claim on assets of issue was Rs. 176 Caror out of which only 127 Caror was paid on 23 rd March It was required to create a national banking system. HBL bank was encouraged to expand its network of branches. Secondly SBP recommended to establish an agent bank. Thus in 1949 National Bank of Pakistan was established to perform agency function and thus took over functions from Imperial Bank of India. Establish Sound Banking Government introduced Banking Companies Ordinance (Control) 1949 which empowered SBP to control Banking Companies in Pakistan including preparation of required trained manpower. Further limited the scope of foreign banks to establish branches in port areas and major cities of trading while the Pakistani banks were allowed to open as many branches in the country. Motivation to Trade Sectors Outbreak of Korean War 1950 caused great boom in Trade which raised bank demand in the sector, however after war came to an end caused immense shortfall of export and down fall of import. This naturally caused drainage of reserves and affected balance of payment position. Thus protective tariffs were introduced in the form of incentives to business and industry. Balance of Payment: is the record of all economic transactions between the residents of the country and the rest of the world in a particular period. Protective Tariffs: A duty imposed on imports to raise their price, making them less attractive to consumers and thus protecting domestic industries from foreign competition. Motivation to Industrial Sector 1950 SBP further sponsored setting up of Industrial Finance Corporation known as Pakistan Industrial Development Corporation under the Pakistan Industrial Development Corporation Act Object was to promote establishing of industries in key areas as well as backward areas.

5 Motivation to Agricultural Sector Food Shortage led the SBP to recommend agricultural credit and thus Agricultural Development Bank was established which assisted in maintaining commodity market and balance of payment position. Commodity Market: market that trades in primary economic sector Example: agricultural produce as compared to manufacturing. STATE BANK OF PAKISTAN ACT 1956 Act of 1956 broadened the functions of SBP conferring powers to increase credit facilities for both Agriculture and Industry. Resultantly, Government borrowed heavily against treasury bills from SBP. Treasury Bill: These are short-term debt instrument issued by the government treasury to raise funds for the government or to regulate money supply through open market operations of the central bank SBP in sequence further realized that due to restriction on import, credit demand could not increase in private sector. Thus it was recommended to liberalize import to private sector which held firm commodity market. Demand for commercial banks immensely increased and credit facilities were offered to private sector which helped improvising countries economy. Several more banks were introduced including MCB, UBL and Eastern Merchantile Bank (East Pakistan). Another important institution was introduced as Pakistan Industrial Credit and Investment Corporation to lend credit facilities to private sector. CREDIT INQUIRY COMMITTEE was constituted in 1959 to examine scope with the object to improvise banking facilities to all important sector like Agriculture, Trade, Industry and Commerce. Recommendation as made were found useful to balance commodity market and balance of payment position in country. Developed Credit System SBP by year 1960 underscoring its key objectives set up Funds for different rural areas for the purpose to further foster economically growth.

6 Rural Credit Funds for 1 caror People s Credit Department for small borrowers established by NBP 1964 Separation of East Pakistan had a major setback over Pakistan s Economic growth even than major development was seen in Pakistan Trade and Industry Development in Banking Industry By the year 1965, following statistic were recorded 36 banks existed in Pakistan Deposit increase to caror Credit expansion to caror BANK NATIONALIZATION ACT 1974 Nationalization process was to improve the growth of national economy of Pakistan. Since the 1950s, the country had a speedy industrialization and became an industrial paradise in Asia. But, as time progressed, the labour trade unions and labour-working class had strained relations with the industrial business class, completely neglected the work conditions and failed to provide healthy environment to the workers class in the industries. Nationalization on the other hand, shook confidence of investors who took away all their business and investments from Pakistan. Time has proved this decision to be counter-productive.