State Bank of Pakistan

The State Bank of Pakistan (SBP) is the central bank of

Pakistan. While its constitution, as originally laid 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.

State Bank of Pakistan

State Bank of Pakistan is the Central bank of Pakistan. Its Headquarters are in Karachi,
Pakistan. It was established in 1948. Its Currency is Pakistani rupee ISO 4217 Code PKR. Its
website is www.sbp.org.pk.

History
Before independence on 14 August 1947, during British colonial regime the Reserve Bank
of India was the central bank for both India and Pakistan. On 30 December 1948 the British
Government's commission distributed the Reserve Bank of India's reserves between Pakistan and
India -30 percent (750 M gold) 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 Muhammad Ali Jinnah (Founder of Pakistan) took steps to
establish the State Bank of Pakistan 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 utilisation 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 Companies Ordinance, 1962 and
Banks Nationalisation Act, 1974. These changes 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 to the Banks
Nationalisation Act brought the end of the Pakistan Banking Council (an institution established to
look after the affairs of NCBs) and allowed the jobs of the council to be appointed to the Chief
Executives, Boards of the Nationalised Commercial Banks (NCBs) and Development Finance
Institutions (DFIs). The State Bank having a role in their appointment and removal. The
amendments also increased the autonomy and accountability of the chief executives, the Boards
of Directors of banks and DFIs.

The State Bank of Pakistan also performs both the traditional and developmental functions to
achieve macroeconomic goals. The traditional functions, 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, and conduct of
monetary policy.
2. 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, institutionalisation 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 islamisation of the banking system.

Regulation of liquidity
The State Bank of Pakistan has also been 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 Co-ordination Board without trying to
effect the macroeconomic policy objectives.

The state bank also regulates the volume and the direction of flow of credit to different
uses and sectors, the state bank makes use of both direct and indirect instruments of monetary
management. During the 1980s, Pakistan embarked upon a program of financial sector reforms,
which lead to a number of fundamental changes. Due to these changed the conduct of monetary
management which brought about changes to the administrative controls and quantitative
restrictions to market based monetary management. A reserve money management programme
has been developed, for intermediate target of M2, that would be achieved by observing the
desired path of reserve money - the operating target.

State Bank of Pakistan has changed the format and designs of many bank notes which are
currently in circulation in Pakistan. These steps were taken to overcome the problems of
fraudulent activities.
Banking
The State Bank of Pakistan looks into a lot of different ranges of banking to deal with the
changes in economic climate and different purchasing and buying powers. Here are some of the
banking areas that the state bank looks into;

• State Bank’s Shariah Board Approves Essentials and Model Agreements for Islamic
Modes of Financing
• Procedure For Submitting Claims With Sbp In Respect of Unclaimed Deposits
Surrendered By Banks/Dfis.
• Banking Sector Supervision in Pakistan
• Micro Finance
• Small Medium Enterprises (SMEs)
• Minimum Capital Requirements for Banks
• Remittance Facilities in Pakistan
• Opening of Foreign Currency Accounts with Banks in Pakistan under new scheme.
• Handbok of Corporate Governance
• Guidelines on Risk Management
• Guidelines on Commercial Paper
• Guidelines on Securitization
• SBP.Scheme for Agricultural Financing

Bank assets and liabilities

This is a chart of trend of major assets and liabilities reported by scheduled commercial
banks to the State Bank of Pakistan with figures in millions of Pakistani Rupees.

Year Deposits Advances Investments

2002 1,466,019 932,059 559,542
2006 2,806,645 2,189,368 799,285

Departments
• Agriculture credit
• Audit
• Banking Inspection
• Banking Policy & Regulations
• Banking Supervision
• Corporate Services
• Economic Analysis
• Financial Monitoring Unit
• Monetary Policy
• Research
• Statistics and Data Warehouse
 • Exchange Policy
• Human Resource
• Information Systems & Technology
• Islamic Banking
• Legal Services
• Library
• Payment System
• Real Time Gross Settlement System (RTGS System)
• Small and Medium Enterprises
• Training and Development Department (TDD)
• Treasury Operations
• Strategic & Corporate Planning
• Microfinance
• Pakistan Remittance Initiative

Governor
The principal officer of the SBP is the Governor. The current Governor of State Bank of
Pakistan is Mr. Shahid Hafiz Kardar.

Functions of State Bank of

Pakistan
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 (reference BPRD Circular No.27 dated 2nd July,1999).

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. Presently the requirement is 15%
(excluding 5% statutory cash reserve) of the total of its time and demand liabilities in Pakistan
(BPRD Circular No.26 dated 2nd July, 1999).

MAINTENANCE OF LIQUIDITY AGANINST CERTAIN

LIABILITIES
In terms of Rule 6 of 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 invest 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 woking day of the
year in the prescribed forms(Section 34 of Banking Companies Ordinance, 1962).

SUBMISSION OF RETURNS.
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 unhecumbered
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 nationalised, 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.

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". 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 Nationalisation 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 Nationalisation 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 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,
institutionalisation 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 responsibilities of the State
Bank can be broadly categorised 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 programme
has been developed. In terms of the programme, 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 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. All this requires the State Bank for endeavoring
hard to keep pace with the fast-changing financial landscape of the country. 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, on-site inspection is undertaken by the State Bank in the
premises of the concerned banks when required.
 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
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 laon 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, modarbas 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

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 authorised 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 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 be made to
State Bank through authorized dealers, has now been done away with and the commercial banks
and other authorised 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 maximises 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
markets but also to assist the process of economic growth and promote the fuller utilisation 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
realisation 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 orthodox central banking functions have been combined by
the State Bank with a well-recognised developmental role.

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 subsidised credit, and
development of the capital market.
 BANKS/ DEVELOPMENT FINANCE
INSTITUTIONS
BEING REGULATED BY STATE BANK OF
PAKISTAN
PUBLIC SECTOR BANKS
 National Bank of Pakistan
 First Women Bank Limited
 The Bank of Khyber
 The Bank of Punjab

SPECIALIZED BANKS
 Industrial Development Bank of Pakistan
 SME Bank Limited

 The Punjab Provincial Cooperative Bank Ltd

 Zarai Taraqiati Bank Limited

PRIVATE BANKS
 Allied Bank Limited
 Summit Bank Limited
 Askari Bank Limited
 Atlas Bank Limited
 Bank Alfalah Limited
 Bank Al Habib Limited
 Faysal Bank Limited
 Habib Bank Limited
 Habib Metropolitan Bank Limited
 JS Bank Limited
 KASB Bank Limited
 MCB Bank Limited
 Mybank Limited
 NIB Bank Limited
 SAMBA Bank Limited
 SILKBANK Limited
 Soneri Bank Limited
 Standard Chartered Bank (Pakistan) Limited
 The Royal Bank of Scotland Limited
  United Bank Limited

ISLAMIC BANKS
 BankIslami Pakistan Limited
 Dawood Islamic Bank Limited
 Dubai Islamic Bank Pakistan Limited
 AlBaraka Bank (Pakistan) Limited
 Meezan Bank Limited

FOREIGN BANKS
 Barclays Bank PLC
 Citibank N.A. - Pakistan Operations
 Deutsche Bank AG - Pakistan Operations
 HSBC Bank Middle East Limited - Pakistan Operations
 Oman International Bank S.A.O.G -Pakistan Operations
 The Bank of Tokyo-Mitsubishi UFJ Limited - Pakistan Operations

MICRO FINANCE BANKS / INSTITUTIONS

 KASHF Microfinance Bank Limited
 Khushhali Bank Limited
 Network Microfinance Bank Limited
 Pak Oman Microfinance Bank Limited
 Rozgar Microfinance Bank Limited
 The First Micro Finance Bank Limited
 Tameer Micro Finance Bank Limited

DEVELOPMENT FINANCE INSTITUTIONS

 House Building Finance Corporation Limited
 Pak Brunei investment Company Limited
 Pak-China Investment Company Limited
 Pak Iran Joint Investment Company Limited
 Pakistan Kuwait Investment Company Limited
 Pak Libya Holding Company Limited
 Pak Oman Investment Company Limited
 Saudi Pak Industrial & Agricultural Investment Company Limited

MONETARY POLICY DECISION

29th November 2010
 The economy’s ability to achieve sustainable recovery remains constrained owing to slow
progress in the prevailing security and economic conditions. The key economic variables
impeding stabilization and thereby growth are high and persistent inflation, continuing fiscal
slippages and unresolved power sector issues. Whereas adjustments in administered prices of fuel
and energy and the post-flood disruption in the supply chain of food items have contributed to the
recent upsurge in inflation, the high level of government borrowing from the SBP is diluting the
effectiveness of monetary policy in containing excessive monetary expansion and thus inflation.
The need for such borrowing is largely emanating from a seemingly difficult fiscal predicament.
While rising security and flood-related expenditures and continued power sector subsidies are one
aspect of the problem, a narrow tax base and a declining tax to GDP ratio are bigger issues
magnifying the fiscal challenges. The cost to the economy is being paid through erosion in the
purchasing power of the rupee, growing total debt, and discouragement of productive private
sector activity.
High inflation, at a fundamental level, persists because of money creation in excess of
productive activity in the economy. Of the Rs308 billion expansion in reserve money up till 19th
November 2010 during the current fiscal year, Rs266 billion is due to government borrowing
from the SBP, which has been on an increasing trend since January 2010. Such borrowing has
stoked expectations of increasing inflation, resulting in high interest rates. The nature of this fiscal
expansion is the fundamental source of high inflation in Pakistan over the last year.
Increases in electricity and domestic petroleum prices and the impact of the catastrophic
floods on food prices did play their part in providing impetus to CPI inflation but do not fully
explain the persistence in inflation. Further, apprehensions that these supply shocks would
dramatically worsen the inflation outlook have thus far not fully materialized. Temporary price
hikes in the food category, as seen in a monthly increase of over 5 percent during August and
September 2010, have somewhat subsided. As a result, in Oct 2010, CPI inflation posted a
marginal decline of 0.4 percent on year-on-year basis, while a 0.6 percent growth on month-on-
month basis was well below the last 12 month’s average.
On the other hand, the persistent component of inflation, provide by core trimmed
inflation, remains sticky at over 12.5 percent on year-on-year basis since January 2010 and has
increased to a 1 percent monthly change in October 2010, with expectations of further increases.
An important source of this stickiness is the expectations of a persistent reliance of the
government on SBP to finance its deficit. Indeed, the co-movement between persistence of
inflation and that of government’s financing gap is no coincidence. Therefore, it would be
difficult to bring inflation down unless government borrowing from SBP is curtailed substantially
and kept under control on a sustained basis.
Government borrowing from SBP at an increasing rate reflects severe fiscal
vulnerabilities. Given the delays in the introduction of tax reforms and weak industrial
production, the task of achieving close to 27 percent enhancement in tax revenues during FY11 is
beginning to look quite ambitious. To increase its capacity to raise revenues and contain
inflationary borrowings from SBP within an explicit and clearly defined limit, the government has
shown its intention to: i)- widen the tax net through introduction of the Reformed General Sales
Tax (RGST) along with other tax measures; ii)- effectively contain the power sector subsidies;
and, iii)- amend the SBP Act, including explicit limits on government borrowings from SBP,
which is now in the final stage of legislation. Together, these could potentially address the
problem in the medium term of stubbornly high inflation expectations, reduce the cost of
borrowing, and hence pave the way for long term economic growth. However, it may take some
time before the benefits of such important measures, after their implementation, begin to have
their impact.
In the mean time, pressing flood-related expenditures and shortfalls in external financing
of the budget have increased reliance of the government on domestic sources. The seasonal
increase in the working capital credit requirements of the private sector during the second quarter
is also higher on the margin due to higher input prices. Consequently, pressure on the banking
system and interest rates has increased. With low growth in the banking system Net Foreign
Assets (NFA) and deposits, liquidity management has also become challenging. Therefore, to
further encourage the private sector, fiscal authorities need to demonstrate greater resolve in
implementing their strategy to contain the fiscal deficit through fundamental structural reforms
and their commitment to restrict inflationary central bank borrowings. However, the recent
rejection of the two PIB auctions in Q1-FY11 and acceptance of Rs50 billion instead of the Rs90
billion offered by the banks in the 16th November 2010 T-bill auction is apparently inconsistent
with the stated intentions.
Assuming a real GDP growth of 2.5 percent and that the expected decline in private and
public sector investment expenditures would be largely compensated by increases in public sector
consumption expenditures, the external current account deficit is likely to be narrower in FY11
than earlier projections of 3.5 percent. Helped by higher cotton prices, the export earnings of $7.1
billion during first four months of the current fiscal year seem fairly encouraging. Similarly, the
recent trends in remittances coupled with expectations of realization of Coalition Support Fund
(CSF) receipts could prove to be quite helpful in meeting import and other payments. The real
test, however, would continue to be in the financing of the external current account deficit.
Assuming that the projected external official inflows for FY11 do materialize, a substantial
growth in private foreign inflows would be required to maintain and build foreign exchange
reserves.
Monetary policy is essentially a short term instrument with which emerging risks and
uncertainties are managed. The impact of monetary policy on economic activity and inflation is
indirect and operates with a lag, and unlike the case of fiscal policy that tends to be reactive, it has
to be proactive. Under the present circumstances, if the expansionary fiscal position is not
expected to translate into a high external current account deficit during the current fiscal year then
it could be the case that the private sector demand is muted. Therefore, the monetary policy stance
could probably remain unchanged. However, inflation is rising and showing persistence because
of relentless government borrowing from the SBP. The rising NDA to NFA ratio of SBP balance
sheet and its strong association with CPI inflation also suggest that inflation is likely to persist at
double digit levels during much of FY11 and possibly in FY12. SBP’s efforts to counterbalance
the rapid expansion in reserve money and arrest the rising inflation expectations would require an
increase in the policy rate. After careful consideration of this trade-off, SBP has decided to
increase the policy rate by 50 basis points to 14 percent with effect from 30th November, 2010.
A principled decision has also been taken to strictly implement the revised limits on
borrowings of the provinces from SBP, even if it involves stopping payments to the provincial
governments. SBP believes that the entire responsibility of tackling macroeconomic problems has
been unfairly placed on monetary policy only. SBP also understands that the burden of this
monetary tightening is being borne largely by the private sector, as it gets crowded out by the
excesses of government borrowing for budgetary purposes and commodity operations, with all its
adverse implications for sustainable economic growth.
 Guidelines for Islamic Modes of Finance
The Shariah Board of the State Bank of Pakistan has approved and incorporated some of
the suggestions given by different stakeholders in the Essentials of Islamic Modes of Financing to
ensure compliance with minimum Shariah standards by banks conducting Islamic banking in
Pakistan. These essentials have been placed on SBP website (http://www.sbp.org.pk/) as General
Guidelines to be followed by banking institutions conducting Islamic banking in the country.

Essentials of Islamic Modes of Financing

These Essentials are proposed to be enforced as Prudential Regulations for Islamic banks
in due course. Similarly, in order to facilitate the existing Islamic banks and the potential market
players to develop Islamic banking products in particular and to create awareness about Islamic
banking products in general, Model Agreements for the following modes have also been updated
in the light of stakeholder’s comments by the SBP Shariah Board. The following links may be
clicked to access the same from our website (http://www.sbp.org.pk/)

1. Murabaha Facility Agreement

2. Musawamah Facility Agreement
3. Lease Agreement
4. Salam Agreement
5. Musharaka Investment Agreement
6. Istisna Agreement
7. Agreement for Interest free Loan
8. Mudaraba Financing Agreement
9. Syndication Mudaraba Agreement

It may be pointed out that these are model agreements, which can be modified, according
to the products designed by the banks conducting Islamic banking business, with the approval of
banks Shariah Adviser to ensure that such changes are consistent with the principles of Shariah.

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 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), Microfinance Banks (MFBs), Non-banking Finance Companies (NBFCs)
(leasing companies, Investment Banks, Discount Houses, Housing Finance Companies, Venture
Capital Companies, Mutual Funds), Modarabas, 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 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 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 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.

National Bank of Pakistan

National Bank of Pakistan is the largest
commercial bank operating in Pakistan. It
has redefined its role and has moved from a
public sector organisation into a modern
commercial bank. While it continues to act
as trustee of public funds and as the agent to
the State Bank of Pakistan (in places where
SBP does not have a presence) it has
diversified its business portfolio and is today a major lead player in the debt equity market,
corporate investment banking, retail and consumer banking, agricultural financing, treasury
services and is showing growing interest in promoting and developing the country's small and
medium enterprises and at the same time fulfilling its social responsibilities, NBP headquarters in
Karachi, Pakistan with over 1,200 branches country wide. The bank provides both commercial
and public sector banking services. It has assets worth USD 12.293 billion in 2007. Its
subsidiaries include NBP Capital, NBP Modaraba Management Company, NBP Exchange
Company, Taurus Securities, NBP Almaty et al.'

Establishment
National Bank of Pakistan (NBP) was established in 1949, under the National Bank of Pakistan
Ordinance 1949 and was government-owned. NBP acted as an agent of the central bank wherever
the State Bank did not have its own branch. It also undertook government treasury operations. Its
first branches were in jute growing areas in East Pakistan. Offices in Karachi and Lahore.

Mission
NBP will aspire to the values that make NBP truly
the Nation’s Bank, by:
• Institutionalizing a merit and performance culture
• Creating a distinctive brand identity by providing the
highest standards of services
• Adopting the best international management practices
• Maximizing stakeholders value
• Discharging our responsibility as a good corporate
citizen of Pakistan and in countries where we operate

Vision
To be recognized as a leader and a brand synonymous with trust, highest standards of service
quality, international best practices and social responsibility.

Core Values
• Highest standards of Integrity
• Institutionalizing team work and performance culture
• Excellence in service
• Advancement of skills for tomorrow’s challenges
• Awareness of social and community responsibility
• Value creation for all stakeholders
Share In Stock Market
In today's competitive business environment, NBP needed to redefine its role and shed the public
sector bank image, for a modern commercial bank. It has offloaded 23.2 percent share in the stock
market, and while it has not been completely privatized like the other three public sector banks,
partial privatization has taken place. It is now listed on the Karachi Stock Exchange.

Corporate Banking
NBP further consolidated its position as one of the top players in corporate and investment
banking of the country in 2007 and has built a strong customer relationship with the premier
corporate clients.

Islamic Banking
• NBP's First Islamic Banking Branch started operations in Karachi on December 15, 2006.
• Two more Branches started Operations by the end of 2007 – Peshawar and Lahore.
• At present 8 Islamic Banking branches are functional all over Pakistan having Group
office at Karachi, Pakistan.
• Mr. Shafiq Khan is newly appointed Group Chief of Islamic Banking Group.
• Mufti Abdul Sattar Laghari is a Shariah Advisor.

Financing Facilities
Commercial and Corporate customers requiring financing will have the following financing
facilities available to them to meet their requirements:

Murabaha
Murabaha may be defined as a contract between a Buyer and Seller under which the Seller
discloses to the Buyer the cost of goods being sold and adds an agreed profit. Price is payable on
spot or at a certain future date, in lump sum or in installments (deferred payments).

 Under the MURABAHA FACILITY, the Bank will first purchase the required goods
directly or through an Agent. All costs incurred on such purchases will be borne by the
Bank.
  Subsequently the Bank will sell the goods to the customer on deferred payment basis (30
days to one year) at an agreed price comprising cost of goods purchased and Bank's profit.
 On due date the customer will pay to the Bank the agreed price, in lump sum or as per the
agreed installment schedule.

Ijarah(Leasing)
Ijarah means “to give something on rent”.The term “IJARAH’ is analogous to the English term
“leasing“.

Firstly the Bank will purchase the Assets as required by the Customer and subsequently the assets
will be leased to the Customer on the terms and conditions as agreed with him.

Ijarah Facility will be offered for the following assets:

 Vehicles (both Commercial and Private)

 Office Equipment
 Plant and Machinery

Operations of National Bank of Pakistan

National Bank of Pakistan is the largest commercial bank operating in Pakistan . Its balance
sheet size surpasses that of any of the other banks functioning locally. It has redefined its role and
has moved from a public sector organisation into a modern commercial bank. The Bank's services
are available to individuals, corporate entities and government. While it continues to act as trustee
of public funds and as the agent to the State Bank of Pakistan (in places where SBP does not have
a presence) it has diversified its business portfolio and is today a major lead player in the debt
equity market, corporate investment banking, retail and consumer banking, agricultural financing,
treasury services and is showing growing interest in promoting and developing the country's small
and medium enterprises and at the same time fulfilling its social responsibilities, as a corporate
citizen.

National Bank of Pakistan is today a progressive, efficient, and customer focused institution. It
has developed a wide range of consumer products, to enhance business and cater to the different
segments of society. Some schemes have been specifically designed for the low to middle income
segments of the population. These include NBP Karobar, NBP Advance Salary, NBP Saiban,
NBP Kisan Dost, NBP Cash n Gold

It has implemented special credit schemes like small finance for agriculture, business and
industries, administrator to Qarz-e-Hasna loans to students, self employment scheme for
unemployed persons, public transport scheme. The Bank has expanded its range of products and
services to include Shariah Compliant Islamic Banking products. For the promotion of literature,
NBP recently initiated the Annual Awards for Excellence in Literature . NBP will confer annual
awards to the best books in Urdu and in all prominent regional languages published during the
defined period. Patronage from NBP would help creative work in the field of literature. The Bank
is also the largest sponsor of sports in Pakistan . It has provided generously to philanthropic
causes whenever the need arose.

It has taken various measures to facilitate overseas Pakistanis to send their remittances in a
convenient and efficient manner. In 2002 the Bank signed an agreement with Western Union for
expanding the base for documented remittances. More recently it has started Electronic Home
Remittances Project. This project introduces technology based system to handle inward
remittances efficiently, by ensuring that the Bank's branches keep a track of the remittance
received from abroad till its final receipt.

A number of initiatives have been taken, in terms of institutional restructuring, changes in the
field structure, in policies and procedures, in internal control systems with special emphasis on
corporate governance, adoption of Capital Adequacy Standards under Basel II framework, in the
upgradation of the IT infrastructure and developing the human resources.

National Bank of Pakistan has built an extensive branch network with 1250 branches in Pakistan
and operates in major business centre abroad. The Bank has representative offices in Beijing ,
Tashkent , Chicago and Toronto . It has agency arrangements with more than 3000 correspondent
banks worldwide. Its subsidiaries are Taurus Securities Ltd, NBP Exchange Company Ltd, NBP
Capital Ltd, NBP Modaraba Management Company Ltd, and CJSC Bank, Almaty , Kazakhstan .
The Bank's joint ventures are, United National Bank (UK), First Investment Bank and NAFA, an
Asset Management Company (a joint venture with NIB Bank & Fullerton Fund Management of
Singapore).

The Bank's financial performance has been remarkable. In 2006, total assets are estimated at
Rs635 billion, while deposits have grown to nearly Rs502 billion. Pre-tax profit rose to Rs26
billion. Earnings per share have jumped to Rs24.01 in 2006. The increase in profit was achieved
through strong growth in core banking income. Interest income increased by Rs10 billion through
growth in the loan portfolio as well as increase in spreads. Advances increased by Rs48 billion to
Rs316 billion. The Bank maintains a sound loan portfolio diversified in nature to counter the risk
of credit concentration. It ranges from providing credit to the un-banked market segment under
NBP Karobar, to small and medium enterprises, to agricultural loans, to large corporate
customers.

Trade Services
NBP Financial Institutions & Cash Management Division (FI & CMD) division provides global
trade services & solutions in the major financial hubs; we offer complete solution for importers as
well as exporters. The services offered covers:

Letter of Credit

• Advising
 • Confirmation
• Negotiation/Discounting
• Reimbursement

Trade Collection Services

• Export Bill Collection Services

• Documentary/Clean Collection

Payment Services

• Electronic Payment / MT103

• Fund Transfer / MT 202

Trade Financing

• Account Receivable Discounting

• Usance Payable at Sight Structure
• LC Discounting
• Trade Payment Guarantees
• LC Refinancin

Structured Trade Finance

• Risk Participation
• FI Syndication
• FI Lending
• Bridge/Project Financing

Services Offered for Exporters

NBP finances & manages export receivables and monitor your business worldwide plus ensure
prompt payments and prompt delivery of information.

• Document presentation and payment services: Our team of experts can expedite the
preparation, presentation of documentation & collection of receivables.

• Pre– and post–shipment financing: Sell on both letter of credit and open account
payments; reduce payment cycles; enhance access to liquidity and eliminate routine
inquiries.

• Bank–to–bank reimbursements: We serve as your reimbursing bank under letter of

credits by using your NBP USD, Euro & other major currency nostro accounts to
 consolidate your letter of credit payments as well as for your export proceeds. We also
offer competitive rebate structure to our correspondents. You will enjoy consolidated pre–
debit advices, real–time balance, transaction reporting and overnight investment services
for excess balance on your nostro account.

• Export bills collection service: Combine courier delivery of open receivables letters,
payment tracing, tracking, reporting and received funds. Concentrated approach to quickly
deposit the funds due from export receivables into your account while keeping you
informed of paid and open items. Along with fine rebate offers; Export Bills Collection
financing is also available for valued clients.

Services Offered for Importers

Companies importing goods need to mitigate cross–border trading risks, increase cash flows and
operating efficiencies. Our experienced & efficient team helps you to compete more effectively
on a worldwide basis with trade finance solutions tailored to your specific needs as an importer.

Import services include:

• Documentary Credits
• Import Finance
• Shipping Guarantees

We also offer traditional trade finance solutions that suits your requirement including private label
letters of credit, import documentary collections, banker's acceptances and standby letter of
credits.

National Bank sets new standards

The National Bank of Pakistan maintains its position as Pakistan’s premier bank and is
determined to set higher standards of achievements. It is the major business partner for the
Pakistan government with special emphasis on fostering its economic growth, said bank chairman
and president Ali Raza.
“This is through aggressive and balanced lending policies, technologically- oriented products and
services offered by its large network of branches locally, internationally and through
representative offices. “It also gives me great pleasure to announce that National Bank of Pakistan
is gearing up to the challenges faced by the domestic banking industry due to innovations and
advances in the international banking world, which is the consequence of globalisation. “The
bank wishes to effectively utilise the financial assistance being extended by Pakistan’s
government for banking sector reforms aimed at reducing operating costs and improving
profitability.
“National Bank of Pakistan is distinct from other banks in that it has a non-profit and service-
oriented motive, which has manifested itself in the area of salary deposits of government
employees and payment of utility bills. “The bank renders both of these services across the
country reaching as far as the remotest regions, from our northern borders to the Arabian Sea.
“These services do not contribute towards the earnings of the bank, rather they put pressure on
our resources. “Nevertheless, we are committed to serving small savers and the general public of
the country.
“By extending and targeting our research to improve bank earnings, through customer focus of
our commercial and corporate branches and by enhanced efforts towards the development of
human capital we shall very soon transform the bank to a fast-paced, modern, and competitive
bank,” said Mr Raza. “I firmly believe that we have the vision, which will enable us to achieve
even better results, safeguard the interest of our customers and to assist us in our march towards
progress and prosperity in future.”

Market Position of National Bank of

Pakistan in KSE

Investment synopsis
National Bank of Pakistan (NBP) is one of our picks in our banking sector universe, delineating
48% upside to our Justified Price to book target of Rs 133.3/share. NBP is expected to announce
its CY08 results within a fortnight. We expect CY08 earning deceleration by 17%.
The bank is expected to report after tax earning of Rs 15,817 mn (EPS: Rs 17.63) as against Rs
19,033 mn (adjusted EPS: Rs 21.22). We expect bank to announce cash dividend of Rs 3.0/share
(CY07: Rs 4.5) and also bonus issue of 15%. Some of the main highlights in our earning
estimations include 1) our forecasted spreads of 6% which is lower than MCB and UBL,
nevertheless, looks better if we consider magnitude of the balance sheet 2) our assumed 65% -
70% proportion of low cost deposit base 3) only 4% y-o-y growth in net interest income of Rs
35,018 mn given peculiar increase in cost of funds 4) only 6% y-o-y increase in non-core income
despite some good impact of dividend income of Rs 2.35 bn from NIT unit holding and nearly
tripling of income from FCY dealing to Rs 3.3 bn 5) our assumed provisioning against legacy
loans to the extent of Rs 8.5 bn 6) regressive growth in deposits during 9M-CY08 to Rs 561 bn as
against Rs 592 bn reported in CY07.
We expect bank to book lesser revaluation surplus of Rs 7 bn from NIT holdings as against nearly
Rs 17 bn reported last year. Moreover, there might be a lesser gains from old stakes in Saudi
Arabia based Bank Al-Jazira (BJAZ) which is 5.8% due to steep decline in share prices of BJAZ
at Tadawul Exchange (TASI). We see bank’s book value to remain fluctuating given ups and
down coming in investments in equities (our estimated CY08 BVS: Rs 107.47/share).
Stock data- NBP
Last Closing PKR/Share 67.90
Paid up Capital in mn shares 896.98
Free Float in mn shares 179.40
Free float Market CAP in mn US$ 153.22
Stdev 1 Week 3.55%
Stdev 30 day 4.48%
Stdev 60 day 4.17%
52-Week High/Low 272.90 / 46.56