Twenty-five years ago, on 1st July, 1948 Quaid-i-Azam Mohammad Ali Jinnah inaugurated the State Bank of Pakistan as the central banking authority of the country. The functions of the State Bank as originally conceived and embodied in the State Bank of Pakistan Order, 1948 were 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.” Thus the founding law envisaged a role for the State Bank that conformed to the traditional concept of central banking. Soon after its inception, however, the State Bank came face to face with the reality of a shattered banking structure in the aftermath of the Partition. The State Bank was, therefore, entrusted with the responsibility to develop an efficient financial infra-structure on a top-priority basis in addition to its role of a Central Bank. Moreover, it had not only to develop these institutions but also to influence their outlook, policies and practices in such a way as to bring them in harmony with the major national economic objectives. These wider objectives and functions were embo-died in the State Bank of Pakistan Act, 1956.
In promoting the development of the financial system in Pakistan, the State Bank has endeavored to ensure that (a) the emerging banking structure is not unduly dominated by foreign-owned institutions and (b) the banks are financially sound and functionally efficient.
The first important step that the State Bank took in regard to the development of the banking system was to sponsor a scheme in 1949 for setting up the National Bank of Pakistan, with 25% government participation in its share capital. In 1950, the State Bank decided to restrict the opening of new branches by foreign banks only to port towns or larger cities, where the volume of foreign trade justified opening of branches by them. In the interior of the country only Pakistani banks were allowed to open branches. Moreover, in order to encourage banks to spread into the interior of the country and to discourage undue concentration of bank offices in big cities, the Bank has laid down that for every new branch in a big city, a bank should open two offices in smaller towns. The State Bank also sponsored .the establishment of a regional bank in East Pakistan in 1959 with a view to encouraging the spread of banking facilities in that wing.
Besides promoting commercial banks the State Bank also sponsored the establishment of a number of specialised credit institutions such, as PICIC, IDBP and ADBP to cater to the credit requirements of industrial and agricultural sectors. The State Bank has also endeavored to develop the capital market in the country.
The State Bank has played a crucial role in enabling the banking system to meet the growing demand for funds for development. Assistance by the State Bank to the banking system with due regard to the requirements of the monetary situation has helped them to tide over short-term resource gaps which enabled them to meet smoothly the credit needs of the economy. It has also made available sizeable counter-finance to the banks against loans to the government for its food procurement and commodity operations. It has granted liberal credit limits to the scheduled banks under the Bill Discounting Scheme with a view to enabling them to meet the financing requirements of the cash crops without difficulty.
The volume of loans provided by the State Bank to the agricultural sector has also grown rapidly. It has been lending on a substantial scale to the cooperatives. At the same time, it has served as an important source of funds for the lending operations of the Agricultural Development Bank of Pakistan. Since 1958, it has also augmented the resources of the House Building Finance Corporation by purchasing debentures issued by the Corporation from time to time.
While trying to maintain a delicate balance between the objectives of monetary stability and sustained economic growth, the State Bank has endeavored to evolve techniques of monetary management suited to the conditions in the country. The system of credit budgeting and changes in selective credit controls are designed to regulate the overall availability and the flow of credit for various purposes so as to safeguard against excessive credit expansion and misuse of credit and, at the same time, to ensure adequate availability of credit for productive purposes.
In keeping with its statutory obligations, the State Bank has also tendered advice to the government on financial matters. It has also endeavored to infuse a greater realism in Plan formulation, so that claims and real resources may by and large remain in balance, keeping in view the development goals.
In May, 1972, far-reaching Banking Reforms were intro-duced by the new popularly-elected government with a view to bringing about a more purposeful and equitable distribu-tion of credit, ensuring social accountability of banks and improving their efficiency and soundness. A number of measures have been taken in pursuance of the Banking Re-forms. To bring about more equitable distribution of bank credit, a system of ceiling on borrowings from banks related to their paid-up capital and reserves, covering individual borrowers, was established. The control of the State Bank over banks’ management has been strengthened to avoid mis-management of their affairs. To improve the soundness of the banks, they have been required to gradually strengthen their capital base. The institutional framework needed to implement the provisions of the Banking Reforms has also been established. A National Credit Consultative Council has been set up under the aegis of the State Bank of Pakistan to make recommendations about the distribution of bank credit among various sectors and regions in the country and to set specific targets for sectors which hitherto remained neglected. An Agricultural Credit Advisory Committee has also been set up under the aegis of the State Bank which has the responsibility to coordinate the working of the various agricultural agencies and to watch the progress of the flow of credit to the agricultural sector. A standing committee on Export Finance has also been set up in pursuance of the Banking Reforms. The main functions of the Committee are to review the credit situation in respect of exports in general and the newly emerging exports in particular, to create maximum possible liaison between various agencies connected with export credit and to periodically review the progress made in the implementation of its recommendations. To supervise the imple-mentation of the targets for Small Loans and to study the credit problems of the small businessman on a continuing basis, a Small Business Division has been created in the State Bank. The State Bank has also introduced a number of special financing schemes with a view to facilitating the achievement of the objective of a more purposeful and equitable distribution of bank credit. These schemes include (i) Small Loans Scheme for businessmen and industrialists, (ii) Scheme for Agricultural Loans by commercial banks, (iii) Scheme fox financing local sales and exports of locally manufactured machinery, and (iv) Refinance Scheme for non-traditional and newly-emerging exports.