Legal framework

1. Legal framework
(SBP Act 1956, BCO 1984 of SBP Prudential Regulations)
 Introduction
 History
 Function of SBP
 Pros and Cons of Direct Instruments
 T-Bill Auctions
 Pakistan Investment Bonds (PIBs)
 Open Market Operations (OMOS)
 Discounting Facility (3-Day Report)
 Exchange Rate Management
 The Non-Traditional or Promotional Functions
 Legal framework in Pakistan
 Organizational Structure
 Conclusion

2.  Introduction
The state bank of Pakistan (SBP) is the central bank of Pakistan. While its constitution, as originally lay down in the state bank of Pakistan order
1948, remained basically unchanged until January 1, 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. The headquarters are
located in the financial capital of Pakistan, Karachi with its second headquarters in the capital, Islamabad.
 History
Before independence on 14 August 1947, the reserve bank of India was the central bank for what is now Pakistan. On 30 December
1948 the British Government's Commission distributed the Bank of India's reserves between Pakistan and India 30 percent for
Pakistan and 70 percent for India. The losses incurred in the transition to independence were taken from Pakistan's share (a total of
230 million). In May, 1948, Mr. Jinnah took steps to establish the SBP immediately. These were implemented in June 1948, and the
state bank of Pakistan commenced operation on July 1, 1948. Under the state bank of Pakistan order 1948, the State Bank of
Pakistan 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".
A large section of the state bank's duties were widened when the State Bank of Pakistan Act 1956 was introduced. It required the
state 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". In February 1994, the State Bank was
given full autonomy, during the financial sector reforms. On January 21, 1997, this autonomy was further strengthened when the
government issued three amendment ordinances (which were approved by the parliament in May 1997). Those included were the
State Bank of Pakistan Act, 1956, banking company's ordinance, 1962 and Banks Nationalization Act, 1974.

3. .
 Pros and Cons of Direct Instruments:
Advantages:
They are perceived to be reliable, at least initially, in controlling credit aggregates or both the distribution and the cost of credit. They are attractive
to government that wants to channelize credit to meet specific objectives. They may constitute the most effective or practicable approach in
circumstances of underdeveloped financial markets or where the central bank has inadequate techniques of indirect monetary control.
Disadvantages:
Bank-by-bank controls hold back competition in financial markets which could benefit both borrowers and depositors. Selective credit controls-
credit controls on some banks but not on favored ones, distort markets and impose a cost on society. Direct controls encourage disintermediation
into non-controlled markets or abroad. So, overtime, they become less effective as lenders and savers search for ways to circumvent them.

4. .
Open Market Operations (OMOS)
 Exchange Rate Management:
In Pakistan, since 2000, free float regime is in place i.e. Exchange Rate is determined on supply/demand position of the market.
Factors requiring Ex. Rate Management:
 Appreciation / depreciation of rupee vs.US. $ in interbank market
 Heavy Fluctuation in Forex market in interbank
 Market sentiments
 Heavy payment (Commercial and government)
 Unforeseen events
 Factors affecting Exchange Rate
 Trade activity (Imports Exports)
 Foreign Direct Investment (FDI)
 Home Remittances (HR)
 Market Saturation (MS)

5. .
The Non-Traditional or Promotional
Functions:
 Performed By The State Bank Include.
 Provision of Training Facilities to Bankers. Provision of Credit to Priority Sectors.
 Islamic Banking:
 Banking:
 State bank's sharia board approves essentials and model agreements for
 Islamic modes of financing.
 Banking sector supervision in Pakistan.
 Micro finance regulations.
 Small Medium Enterprises (SMEs) regulations.
 Minimum capital requirements for banks.
 Remittance facilities in Pakistan.
 Opening of foreign currency accounts with banks in Pakistan under new scheme.
 Handbook of corporate governance.
 SBP scheme for agricultural financing.

6. .
Legal framework in Pakistan:
 SBP Act 1956.
Definitions.
In this Act, unless there is anything repugnant in the subject or context
(a) Omitted
(b) “Advanced degree" means a postgraduate qualification
(c) (b) “approved foreign exchange” means currencies declared as such by any notification
under Section 19
(d) (c) “the Bank” means the State Bank of Pakistan
(e) “bank notes” means notes made and issued by the Bank in accordance with Section 24
and include currency notes of the Government of Pakistan issued by the Bank

7. c
 As soon as may be after the commencement of this Act, steps shall be taken to establish, in
accordance with the provisions of this Act, a bank to be called the State Bank of Pakistan or
Bank Daulat-e-Pakistan, for the purposes of taking over, as from the first day of July, 1948,
the management of the currency from the Reserve Bank of India, and carrying on the
business of Central Banking.
 The Bank shall be a body corporate by the name of State Bank of Pakistan or Bank Daulat-e-
Pakistan, having perpetual succession and a common seal, and shall by the said name sue
and be sued.
 Subject to this Act, the Bank shall have the power to acquire, hold and dispose of movable
and immovable property of any kind, to enter into contracts and to undertake all activities
necessary for the achievement of its objectives.
 Share capital. (1) The authorized capital of the Bank shall be five hundred billion Rupees,
divided into five billion shares of one hundred Rupees each. The authorized capital may be
increased by the resolution of the Board, subject to the approval of the Federal
Government.
 The paid-up capital of the Bank shall be one hundred billion Rupees, divided into one
billion shares of one hundred Rupees each, which shall be made up through issuance of
bonus shares by capitalizing of profits or general reserve or through subscription of shares
in cash by the Federal Government.

8. .
 Conclusion
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
utilisation of the country’s productive resources".

9. Thanks for your commendable and
laudable attention
(Menathwar)