Legal Environment in Business

(LAWB3003)
PROJECT REPORT
PROFESSOR M. HAFIZ ADNAN KHAN

Submitted by: Registration number:

Abdul Hadi Irfan BBA213036

Fiza Rizwan BBA213015

Raja Ali Husnain BBA213008

Rehman Azeem BBA213044

Date of submission:
9th June, 2024

State Bank of Pakistan

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 Certificate
We solemnly declare that the project report titled "State Bank of Pakistan" submitted by us for
the completion of Legal Environment in Business course is an authentic and original work
carried out under the guidance of Professor Hafiz Adnan Khan. We affirm that this report has
not been submitted earlier for any other academic purpose, and the sources of information and
data used in the preparation of this report have been duly acknowledged. We take full
responsibility for the accuracy and completeness of the content presented in this report.
Furthermore, we acknowledge that any attempt to misrepresent or falsify the information
contained herein may result in serious consequences, including academic penalties and
disciplinary action. We understand and adhere to the ethical standards and guidelines set forth
by the institution.

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 Acknowledgements
We would like to express our sincere gratitude to all those who have contributed to the
successful completion of this project. First and foremost, we extend our heartfelt appreciation
to our supervisor Hafiz Muhammad Adnan Khan, whose guidance, and valuable insights have
been instrumental throughout this journey.

We are also grateful to our colleagues and peers who generously shared their perspectives,
engaged in meaningful discussions, and provided constructive feedback, enhancing the overall
quality of the work. Additionally, we want to acknowledge the wealth of knowledge and
inspiration drawn from the vast body of literature and research in the field.

Finally, our sincere thanks go to our families and friends for their unwavering encouragement,
understanding, and patience during the course of this undertaking. Their support has been a
source of strength, motivating us to persist and excel in the pursuit of this endeavor.

This acknowledgment is a reflection of the collective effort and support that has made this
project possible. We are truly fortunate to have such a remarkable network of individuals who
have contributed to its successful completion.

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 Executive Summary
The State Bank of Pakistan (SBP) is the central bank of Pakistan, responsible for regulating the
country's monetary and credit system to foster economic growth and stability. Established in
1948, SBP's core functions include issuing currency, managing foreign exchange reserves,
implementing monetary policy, and overseeing the banking sector to ensure financial stability.
The bank also plays a pivotal role in developing financial infrastructure, promoting inclusive
finance, and advancing the digital financial services ecosystem. Through its policies and
initiatives, SBP aims to maintain price stability, control inflation, and support sustainable
economic development in Pakistan.

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 Table of Contents

1 Introduction ........................................................................................................................ 1
1.1 Core Functions of State Bank of Pakistan ................................................................... 1
1.2 REGULATION OF LIQUIDITY................................................................................ 2
1.3 ENSURING THE SOUNDNESS OF FINANCIAL SYSTEM: ................................. 3
2 Islamic Banking vs Conventional Bank ............................................................................. 6
2.1 Islamic Banking: ......................................................................................................... 6
2.2 Background of Islamic banking: ................................................................................. 7
2.3 Modern Islamic banking: ............................................................................................ 7
2.4 Different Islamic banking products that are commonly used in Pakistan: .................. 7
2.5 Conventional banks ..................................................................................................... 8
2.6 Key Characteristics ..................................................................................................... 8
2.6.1 Core Functions ..................................................................................................... 9
2.6.2 Advantages ........................................................................................................... 9
2.6.3 Challenges .......................................................................................................... 10
2.7 Different Islamic Banking and Conventional Banking ............................................. 10
2.7.1 Islamic Banking: ................................................................................................ 10
2.7.2 Conventional Banking: ...................................................................................... 11
2.8 Products and Services................................................................................................ 11
2.8.1 Islamic Banking: ................................................................................................ 11
2.8.2 Conventional Banking: ...................................................................................... 11
2.9 Risk Management ...................................................................................................... 12
2.9.1 Islamic Banking: ................................................................................................ 12
2.9.2 Conventional Banking: ...................................................................................... 12
2.10 Ethical Considerations............................................................................................... 12
2.10.1 Islamic Banking: ................................................................................................ 12
2.10.2 Conventional Banking: ...................................................................................... 12
2.11 Regulatory Environment ........................................................................................... 12
2.11.1 Islamic Banking: ................................................................................................ 12
2.11.2 Conventional Banking: ...................................................................................... 13
3 Monetary Policy of the State Bank of Pakistan (SBP) ..................................................... 14
3.1 Objectives of Monetary Policy:................................................................................. 14
3.2 Tools and Instruments: .............................................................................................. 14
3.3 Monetary Policy Framework:.................................................................................... 15
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 3.4 Recent Monetary Policy Stance: ............................................................................... 15
3.5 Impact of Monetary Policy ........................................................................................ 15
3.6 Challenges and Future Directions: ............................................................................ 16
3.7 Difference between Monetary and Fiscal Policy: ..................................................... 17
3.7.1 Monetary Policy ................................................................................................. 17
3.7.2 Fiscal Policy ....................................................................................................... 17
3.8 Objectives: ................................................................................................................. 17
3.8.1 Monetary Policy ................................................................................................. 17
3.8.2 Fiscal Policy ....................................................................................................... 17
3.9 Tools .......................................................................................................................... 17
3.9.1 Monetary Policy ................................................................................................. 17
3.9.2 Fiscal Policy ....................................................................................................... 18
3.10 Implementation.......................................................................................................... 18
3.10.1 Monetary Policy: ................................................................................................ 18
3.10.2 Fiscal Policy: ...................................................................................................... 18
3.11 Impact ........................................................................................................................ 18
3.11.1 Monetary Policy: ................................................................................................ 18
3.11.2 Fiscal Policy: ...................................................................................................... 18
3.12 Security of Currency ................................................................................................. 19
3.12.1 Design and Features of Banknotes ..................................................................... 19
3.12.2 Printing and Production ..................................................................................... 19
3.12.3 Issuance and Distribution ................................................................................... 20
3.12.4 Counterfeit Detection and Prevention ................................................................ 20
3.12.5 Currency Monitoring and Regulation ................................................................ 20
3.12.6 Technological Integration .................................................................................. 20
4 Regulations of SBP ........................................................................................................... 21
4.1 State Bank of Pakistan Act, 1956: ............................................................................. 21
4.2 Banking Companies Ordinance, 1962:...................................................................... 21
4.3 Financial Institutions (Recovery of Finances) Ordinance, 2001: .............................. 21
4.4 Foreign Exchange Regulations Act, 1947: ................................................................ 22
4.5 Prudential Regulations for Banks:............................................................................. 22
4.6 Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT)
Regulations: .......................................................................................................................... 22
4.7 State Bank of Pakistan Act, 1956: ............................................................................. 22
4.7.1 Key provisions of the Act include: .................................................................... 22

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 4.8 Banking Companies Ordinance, 1962:...................................................................... 23
4.8.1 Key provisions of the ordinance include: .......................................................... 23
4.9 Rules and Regulations of SBP .................................................................................. 23
4.10 Regulations for banks by SBP ................................................................................... 25
Recommendations .................................................................................................................... 28
Conclusion ............................................................................................................................... 29
References ................................................................................................................................ 30
Annexure .................................................................................................................................. 31

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 1 Introduction

1.1 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 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.

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 Nationalization 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 Nationalization Act abolished the
Pakistan Banking Council (an institution established to look after the affairs of NCBs) and
institutionalized the process of appointment of the Chief Executives and Boards of the
nationalized 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

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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.

1.2 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.

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1.3 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

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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

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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.

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 2 Islamic Banking vs Conventional Bank

2.1 Islamic Banking:

Islam prohibits interest, so the Islamic banking system involves the products which do not
include riba (interest) and which are according to Shari’ah principles, therefore it is also called
the interest-free banking. The system is developing with the passage of time as the demand of
interest-free products is also increasing. More and more customers are keen to bank in the
Islamic way and many commercial banks are also introducing Islamic banking products
separate from the conventional ones. Many non-Muslims also are the customers of Islamic
banks. Islamic banking is also very popular in some non-Muslim countries. According to a
report by the State Bank of Pakistan, there are more than 300 Islamic financial institutions
operating in almost 75 countries (Anwar, 2010)

Islamic banks are continuously growing and in numbers since1971. “At a growth rate of
15percent, a year, Islamic banking has $65billion in assets. However, this is less than 1 percent
of bank assets worldwide” (Wilson, 1995). The first Islamic bank was established in 1963 in
Egypt while in Pakistan, the Islamic banking emerged in 1970s (Ariff,1988). Islamic banking
was re-launched in Pakistan in the year 2002. And now, many full-fledged Islamic banks in
Pakistan are operating (such as Faysal bank, Meezan bank, and Bank Islami, Dubai Islamic
Bank, etc.). Many conventional banks (such as Askari bank, Bank Alfalah, etc.) are having
separate Islamic Banking branches. So, the overall banking system can be called as a dual
banking system where Islamic and conventional banking is in operation side by side. The fourth
annual Islamic Finance news poll was held in the year 2008 and State Bank of Pakistan was
vote das at second number from the central banks all over the world that are taking interest in
promoting Islamic banking. The current global financial crisis is the result of the interest-based
economies. The countries which were having very successful markets and were leading the
whole world, were also hit with the crisis to such an extreme that now the interest rate is brought
down nearly to zero. These countries are now taking keen interest in Islamic banking because
it is not based on interest rate systems. Rather it is asset-based banking as compared to the
conventional banking which is money based. A report by the State Bank of Pakistan confirms
that the Islamic banking is not directly infected by the crisis (Anwar, 2012).

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2.2 Background of Islamic banking:
Islamic financial system is based upon a commerce law known as fiqh al-mu’amalat. This law
considers issues of social justice, equity, and fairness in all business transactions, and promotes
the entrepreneurship, protects the property rights and emphasizes the transparency of
contractual obligations according to divine law of Allah and his last messenger Muhammad
(PBUH). It is based on Shariah approved products which do not involve Riba (interest/usury),
gharar (uncertainty), maisir (gambling), and non-halal(prohibited) activities. Although Islam
has allowed the profits, but the pre-determined fix amount of returns is not allowed. Risk of
loss and variability of profits must be faced to get the returns (Ariss, 2010)

2.3 Modern Islamic banking:

The Islamic banking was started with the simple profit and loss sharing accounts, Islamic
savings and investment products but it is now flourishing as the Islamic bonds (Sukuk) and
hedge funds are introduced in the market, the main products of Islamic banks are now based
on profit and loss sharing principle (Mudarabah), partnerships or joint ventures (Musharakah),
Sales contract (Salam), leasing contract (Ijarah) and interest-free loans (Qard-e-Hasna), trade
with markup (Murabaha)

2.4 Different Islamic banking products that are commonly used in Pakistan:
• Ijarah: This product is mostly used for the purchase of vehicles like cars, delivery vans,
etc. the bank purchases the vehicle for the client and the client pays monthly rentals.
When the cost of the vehicle plus the profit amount is paid by the client, the ownership
is transferred to the client (Chhapra, Ahmed, Rehan, & Hussain, 2018). Mudarabah:
This product is used to finance the businesses. The bank provides the finances and the
business provides the labor. If any loss is occurred, it is borne by the bank provided if
there is no intent of the Mudarib of the loss (Gunputh, 2014).
• Murabaha: It is a contract to sell the goods with a mark-up profit on the cost of the
goods. The client instructs the bank to purchase the goods from a third party. The bank
then sells the goods to the client on the price that includes cost plus the profit. This
product is also used to finance the business (Shahid, Hassan, & Rizwan, 2015).
• Musharakah: it is a partnership contract between the bank and the client in which both
the partners invest their capital in a project in a proportion. They share profit or loss in
a way that the loss is shared between the partners in the proportion they invested their
capital, but the profit is shared in a predetermined proportion with mutual consensus

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 (Mehtab, Zaheer, & Ali, 2015).This product is generally used in home loans (for
construction and renovation purposes)

2.5 Conventional banks

Conventional banks only have one mode of financing for its customers and that is ‘Loan’. Be
it an individual customer, a business partnership or a corporate client. They all can avail an
array of products with an underlying mode of debt only from a conventional bank. However,
conventional banks have designed several products such as credit cards, running finance,
car/house loans and long-term loan facility for different customer segments but all of them
simplify to a loan advanced by a bank to its customer. For instance, a credit card is also a debt
instrument, also a car lease finance translates into an accrued loan for any customer. Likewise,
a registered partnership/ corporate customer avails both short-term and long-term financing
facilities. All of them are essentially outstanding loans to a company and they pay
interest/mark-up to the bank on quarterly/annual basis.

For example, if a customer avails a house/car finance from a bank and due to some reason
car/house gets destroyed (total loss). The bank would then ask the customer to keep paying
monthly instalments despite the asset loss till insurance settlement comes in or else the
customer would be reported defaulter in case of non-payment of the same and their e-CIB shall
also be adversely affected

Conventional banking refers to the traditional form of banking services provided by financial
institutions such as commercial banks, savings and loan associations, and credit unions. These
institutions offer a variety of financial products and services to individuals, businesses, and
governments. Here are the key aspects of conventional banking:

2.6 Key Characteristics

1. Interest-Based System: Conventional banks operate on an interest-based model. They
pay interest on deposits and charge interest on loans. The difference between the
interest paid on deposits and the interest earned on loans is known as the interest rate
spread, which is a primary source of profit for these banks.

2. Profit Orientation: The primary goal of conventional banks is to generate profit for
their shareholders. They achieve this by efficiently managing their resources,
minimizing risks, and maximizing returns on investments.

3. Regulation and Supervision: Conventional banks are regulated by central banks and
other regulatory authorities to ensure financial stability and protect depositors.

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 Regulations may include capital requirements, liquidity requirements, and regular
audits.

4. Comprehensive Services: Conventional banks offer a wide range of services including

deposit accounts, loans, payment processing, investment products, and financial
advisory services.

2.6.1 Core Functions

1. Accepting Deposits: Conventional banks provide various deposit accounts like savings
accounts, checking accounts, and fixed deposits. They offer interest on these deposits
as a way to attract funds from customers.

2. Providing Loans and Advances: Banks extend credit to individuals and businesses in
the form of personal loans, mortgages, business loans, and credit lines. They assess the
creditworthiness of borrowers to mitigate risk.

3. Payment and Settlement Services: Banks facilitate transactions by processing checks,

electronic transfers, card payments, and other payment methods. They also provide
infrastructure for clearing and settling these transactions.

4. Investment Services: Conventional banks offer investment products such as mutual

funds, stocks, bonds, and retirement accounts. They may also provide wealth
management and financial planning services.

5. Financial Advisory Services: Banks provide advice on financial matters including

investment strategies, retirement planning, estate planning, and tax optimization.

2.6.2 Advantages
• Wide Accessibility: Conventional banks have extensive branch networks and ATM
services, making banking services easily accessible to customers.

• Diverse Product Offerings: They offer a broad range of financial products and
services, catering to various customer needs.

• Established Trust: Long-standing institutions with established reputations provide a

sense of security and trust for customers.

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2.6.3 Challenges
• Interest Rate Fluctuations: Profitability is influenced by changes in interest rates,
which can impact the spread between lending and deposit rates.

• Regulatory Compliance: Keeping up with regulatory requirements can be costly and

complex, affecting the bank’s operations and profitability.

• Technological Competition: The rise of fintech companies and digital-only banks

presents competition, pushing conventional banks to innovate and adopt new
technologies.

2.7 Different Islamic Banking and Conventional Banking

Islamic banking is different from the conventional banking as it is interest free. Islamic banking
operates under different principles and they have different risk profiles. The Islamic banks have
regulations of two types; first is the government and the central bank that govern the
conventional banks as well and the other is the Shariah Supervisory Board that approves the
products of the Islamic banks and keeps a check over the implementation of the rules defined
by the board. The central bank defines some rules which are specific to the Islamic banks. For
example, minimum capital requirements are higher to establish an Islamic bank than the
conventional banks. Islamic banks have to pay more taxes and registration costs because it is
asset-based banking and the bank has to own the goods it further sells which eventually are
paid by the client, but it increases the cost.

2.7.1 Islamic Banking:

1. Sharia Compliance: Islamic banking operates in accordance with Islamic law (Sharia).
This includes the prohibition of Riba (interest) and Gharar (excessive uncertainty), and
investments in Haram (forbidden) industries, such as alcohol, gambling, and pork.

2. Profit and Loss Sharing: Transactions are based on profit and loss sharing principles.
Financial institutions and customers share risks and rewards.

3. Asset-Backed Financing: All financial transactions must be backed by tangible assets

or services. This means money cannot be created from money; there must be an
underlying asset.

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2.7.2 Conventional Banking:
1. Interest-Based System: Conventional banks operate on an interest-based system,
where they charge interest on loans and pay interest on deposits.

2. Profit Maximization: The primary goal is to maximize profits for shareholders,

primarily through interest rate spreads, fees, and other financial activities.

3. No Asset Requirement: Loans do not necessarily need to be backed by tangible assets;

they can be made purely on the creditworthiness of the borrower.

2.8 Products and Services

2.8.1 Islamic Banking:
1. Mudarabah (Profit Sharing): A contract where one party provides the capital and the
other provides expertise and management. Profits are shared according to a pre-agreed
ratio, while losses are borne by the provider of the capital.

2. Musharakah (Joint Venture): Both parties contribute capital and share profits and
losses according to their investment ratios.

3. Murabaha (Cost-Plus Financing): The bank buys an item and sells it to the customer
at a profit margin agreed upon by both parties. The payment is usually made in
installments.

4. Ijara (Leasing): The bank buys and leases out an asset. The bank retains ownership,
and the customer pays rental fees.

2.8.2 Conventional Banking:

1. Savings and Checking Accounts: Accounts that earn interest on deposits or provide
easy access to funds.

2. Loans and Mortgages: Lending money to individuals or businesses with interest

charged on the principal amount.

3. Credit Cards: Cards that allow customers to borrow funds up to a certain limit, with
interest charged on outstanding balances.

4. Investment Products: Includes mutual funds, bonds, and stocks where customers can
invest their money to earn returns.

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2.9 Risk Management
2.9.1 Islamic Banking:
• Shared Risk: Risks are shared between the bank and its customers. Profit and loss
sharing reduces the risk for both parties and promotes ethical financing practices.

• Asset-Backed Security: The requirement for transactions to be asset-backed reduces

the risk of speculative bubbles and excessive leverage.

2.9.2 Conventional Banking:

• Risk Transfer: Banks typically transfer risk to borrowers through interest charges and
collateral requirements.

• Credit Risk: Conventional banks manage credit risk through interest rates, credit
scoring, and collateralization.

2.10 Ethical Considerations

2.10.1 Islamic Banking:
• Ethical Investments: Investments are made in socially responsible and ethically sound

projects that comply with Sharia law.

• Prohibition of Harmful Activities: Financing activities related to alcohol, gambling,

pork, and other prohibited industries are avoided.

2.10.2 Conventional Banking:

• Profit-Driven: Ethical considerations are secondary to profitability, though many

conventional banks now offer socially responsible investment options.

• Flexibility: Conventional banks can invest in a wider range of industries and financial
instruments, including those not permitted in Islamic finance.

2.11 Regulatory Environment

2.11.1 Islamic Banking:
• Sharia Boards: Islamic banks have Sharia boards composed of scholars who ensure

that all products and services comply with Islamic law.

• Dual Regulatory Compliance: Islamic banks often have to comply with both
conventional banking regulations and Sharia law.

12
2.11.2 Conventional Banking:
• Regulatory Compliance: Conventional banks comply with national and international

financial regulations, which are primarily concerned with financial stability, consumer
protection, and anti-money laundering measures.

• Centralized Regulation: Regulation is typically uniform across the banking system,

without the need for compliance with religious laws.

13
 3 Monetary Policy of the State Bank of Pakistan (SBP)
The State Bank of Pakistan (SBP), established in 1948, is the central bank of Pakistan. It plays
a crucial role in formulating and implementing monetary policy to achieve macroeconomic
stability, control inflation, and foster economic growth. The monetary policy framework of the
SBP encompasses a range of tools and strategies designed to influence the availability and cost
of money and credit in the economy.

3.1 Objectives of Monetary Policy:

The primary objectives of the SBP’s monetary policy are:

1. Price Stability: To maintain a low and stable inflation rate.

2. Economic Growth: To support sustainable economic growth by ensuring a conducive

monetary environment.

3. Financial Stability: To ensure the stability of the financial system by managing systemic
risks.

4. Balance of Payments Stability: To manage external sector vulnerabilities and ensure stable
foreign exchange reserves.

3.2 Tools and Instruments:

The SBP utilizes several instruments to achieve its monetary policy objectives:

1. Open Market Operations (OMOs):

These involve the buying and selling of government securities in the open market to regulate
the money supply. OMOs are the primary tool for controlling short-term interest rates and
managing liquidity in the banking system.

2. Policy Rate (Discount Rate):

The SBP sets the policy rate, which serves as a benchmark for interest rates across the economy.
Changes in the policy rate influence borrowing and lending rates, thus affecting consumption
and investment decisions.

3. Reserve Requirements:

The SBP mandates commercial banks to hold a certain proportion of their deposits as reserves.
By altering reserve requirements, the SBP can influence the amount of funds available for
lending.

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4. Liquidity Facilities:

The SBP provides short-term liquidity to banks through various facilities such as the overnight
repo and reverse repo facilities. This helps in managing short-term liquidity mismatches in the
banking system.

5. Foreign Exchange Interventions:

To stabilize the exchange rate, the SBP occasionally intervenes in the foreign exchange market
by buying or selling foreign currency.

3.3 Monetary Policy Framework:

The SBP follows an inflation targeting framework, where the primary focus is on achieving a
specific inflation rate target. The Monetary Policy Committee (MPC) of the SBP meets
regularly to review economic conditions and make decisions regarding the policy rate and other
monetary measures. The MPC’s decisions are based on a comprehensive analysis of
macroeconomic indicators such as inflation, GDP growth, exchange rate movements, fiscal
policy stance, and global economic trends.

3.4 Recent Monetary Policy Stance:

In recent years, the SBP has faced several challenges, including high inflation, external account
pressures, and the economic impact of the COVID-19 pandemic. The policy stance has been
adaptive, balancing between controlling inflation and supporting economic recovery.

- Inflation Control: The SBP has raised the policy rate multiple times to curb high inflation
driven by factors such as rising commodity prices, supply chain disruptions, and depreciation
of the Pakistani rupee.

-Economic Support: During the pandemic, the SBP implemented measures to support the
economy, including lowering the policy rate, providing concessionary loans, and implementing
regulatory forbearance to ease financial conditions for businesses and households.

3.5 Impact of Monetary Policy

The effectiveness of the SBP’s monetary policy can be assessed through various indicators:

1. Inflation Rate:

The primary target of the SBP’s monetary policy. Successful policy implementation should
result in a stable and predictable inflation rate within the target range.

15
2. Economic Growth:

The secondary objective, measured by GDP growth rates. An accommodative monetary policy
can stimulate economic activity, while a restrictive policy can slow it down.

3. Exchange Rate Stability:

The impact of foreign exchange interventions and overall monetary policy on the stability of
the Pakistani rupee against other currencies.

4. Financial Sector Stability:

The health of the banking system and financial markets, indicated by non-performing loan
ratios, bank profitability, and liquidity levels.

3.6 Challenges and Future Directions:

The SBP faces several challenges in achieving its monetary policy objectives:

1. Inflationary Pressures: Persistent inflation due to structural issues, supply-side constraints,

and external shocks.

2. Exchange Rate Volatility: Managing exchange rate stability amidst global financial market
fluctuations and geopolitical uncertainties.

3. Fiscal Dominance: High fiscal deficits and public debt levels can undermine monetary
policy effectiveness.

4. Global Economic Conditions: External factors such as commodity price volatility and
global economic slowdowns impacting domestic economic conditions.

To address these challenges, the SBP is focusing on:

• Enhancing monetary policy transmission mechanisms through financial sector reforms.

• Strengthening the analytical framework for better forecasting and decision-making.
• Coordinating with fiscal authorities to ensure a balanced macroeconomic policy mix.
• Improving communication and transparency to manage market expectations
effectively.

The monetary policy of the State Bank of Pakistan is a critical tool for achieving
macroeconomic stability and fostering sustainable economic growth. Despite facing numerous
challenges, the SBP continues to adapt its policy stance to evolving economic conditions,
utilizing a range of instruments to manage inflation, support economic activity, and ensure
16
financial stability. Effective coordination with fiscal policy and ongoing reforms in the
financial sector are essential for enhancing the effectiveness of the SBP’s monetary policy
framework.

3.7 Difference between Monetary and Fiscal Policy:

Monetary and fiscal policies are two key tools used by governments to influence a country's
economy. While both aim to achieve economic stability and growth, they operate through
different mechanisms and are implemented by different entities. Here are the main differences
between monetary and fiscal policies:

3.7.1 Monetary Policy

• Implemented by the central bank (e.g., the State Bank of Pakistan).
• Involves managing the money supply and interest rates to influence economic activity.

3.7.2 Fiscal Policy

• Implemented by the government (e.g., the Ministry of Finance).
• Involves changes in government spending and taxation to influence the economy.

3.8 Objectives:
3.8.1 Monetary Policy
• Control inflation.
• Stabilize the currency.
• Achieve full employment.
• Promote economic growth.

3.8.2 Fiscal Policy

• Stimulate economic growth, especially during recessions.
• Reduce unemployment.
• Redistribute income and wealth.
• Provide public goods and services.

3.9 Tools
3.9.1 Monetary Policy
• Open Market Operations (OMOs): Buying and selling government securities.
• Policy Interest Rates: Setting the benchmark interest rate (e.g., discount rate).
• Reserve Requirements: Mandating the amount of funds that banks must hold in
reserve.

17
3.9.2 Fiscal Policy
• Government Spending: Adjusting public expenditure on goods and services,
infrastructure, defense, education, and welfare programs.
• Taxation: Changing tax rates and tax policies to influence disposable income and
consumption.
• Subsidies and Transfers: Providing financial assistance to individuals and businesses.

3.10 Implementation
3.10.1 Monetary Policy:
• Decisions are made by the central bank's monetary policy committee.
• Can be adjusted relatively quickly in response to economic changes.
• Often used as a short-term economic stabilization tool.

3.10.2 Fiscal Policy:

• Decisions are made through the legislative process involving the government and
parliament.
• Implementation can be slower due to political processes and the need for legislative
approval.
• Often used for long-term economic planning and structural changes.

3.11 Impact
3.11.1 Monetary Policy:
• Directly affects interest rates, which in turn influence borrowing, spending, and
investment.
• Can impact inflation and exchange rates.
• Usually has a quicker but less direct effect on the broader economy.

3.11.2 Fiscal Policy:

• Directly affects aggregate demand through changes in government spending and
taxation.
• Can have a more direct and immediate impact on economic activity and income
distribution.
• Effects are usually more pronounced in the long term.

Both monetary and fiscal policies are crucial for managing economic stability and growth, but
they operate through different channels and are suited to different aspects of economic
management. Understanding their differences helps in appreciating how policymakers use
these tools to achieve macroeconomic objectives.
18
3.12 Security of Currency
The security of currency is a critical function of the State Bank of Pakistan (SBP). Ensuring
the integrity and trust in the national currency involves multiple facets, including the design,
printing, issuance, and monitoring of banknotes and coins. Here is a detailed overview of how
the SBP secures the currency:

3.12.1 Design and Features of Banknotes

The SBP designs banknotes with advanced security features to prevent counterfeiting. These
features include:

• Watermarks: Unique images or patterns embedded into the paper that are visible when
held up to the light.
• Security Threads: Embedded or windowed threads in the paper that may contain text
or images visible from both sides of the note.
• Holograms: Reflective, multi-colored images that change appearance when viewed
from different angles.
• Color-Shifting Inks: Inks that change color when the note is tilted.
• Microprinting: Extremely small text that is difficult to reproduce with standard
printing techniques.
• Intaglio Printing: Raised printing that can be felt by touch, providing a tactile element
to the security.
• UV Features: Elements visible only under ultraviolet light, used to verify the
authenticity of the note.
• Serial Numbers: Unique numbers for each banknote to ensure traceability and prevent
duplication.

3.12.2 Printing and Production

The SBP oversees the printing and production of banknotes through a highly secure and
controlled process:

• Pakistan Security Printing Corporation (PSPC): The primary facility responsible

for printing banknotes. It operates under stringent security protocols to prevent
unauthorized access and counterfeiting.
• Advanced Printing Technologies: Use of state-of-the-art printing presses and
technology to incorporate complex security features that are difficult to replicate.

19
3.12.3 Issuance and Distribution
The SBP manages the issuance and distribution of currency to ensure secure and efficient
circulation:

• Controlled Distribution: Distribution of banknotes is handled through a network of

SBP branches and designated commercial banks, ensuring secure and efficient supply.
• Monitoring Circulation: Regular monitoring of currency in circulation to detect and
withdraw counterfeit or damaged notes.
• Cash Management Centres: Facilities for sorting, counting, and verifying banknotes
to maintain high standards of currency integrity.

3.12.4 Counterfeit Detection and Prevention

The SBP employs various strategies to detect and prevent counterfeiting:

• Training Programs: Providing training for commercial banks, law enforcement, and
businesses to identify counterfeit notes.
• Public Awareness Campaigns: Educating the public on recognizing security features
of genuine banknotes.
• Collaboration with Law Enforcement: Working closely with police and other
agencies to investigate and prosecute counterfeiting activities.
• Advanced Detection Equipment: Deployment of sophisticated machines for detecting
counterfeit notes at cash handling points.

3.12.5 Currency Monitoring and Regulation

The SBP has established mechanisms for ongoing monitoring and regulation of the currency:

• Regular Inspections: Periodic inspections of commercial banks and other financial

institutions to ensure compliance with currency handling regulations.
• Data Analysis: Analyzing data on currency circulation, counterfeiting trends, and
public feedback to make informed decisions on currency management.
• Policy Development: Formulating policies and guidelines for currency handling,
distribution, and security to maintain public confidence in the national currency.

3.12.6 Technological Integration

The SBP integrates technology to enhance currency security and management:

• Digital Tracking Systems: Implementing systems to track the distribution and

movement of currency notes.

20
 • Blockchain and Cryptographic Techniques: Exploring advanced technologies to
enhance the security features of banknotes and coins.
• Electronic Payments Promotion: Encouraging electronic transactions to reduce
reliance on physical cash and mitigate counterfeiting risks.

The security of currency in the SBP involves a comprehensive approach encompassing design,
production, issuance, monitoring, and public education. By leveraging advanced technology,
stringent security protocols, and collaborative efforts with various stakeholders, the SBP
ensures the integrity and trustworthiness of the Pakistani Rupee, thereby maintaining public
confidence in the national currency.

4 Regulations of SBP
The State Bank of Pakistan (SBP) plays a crucial role in maintaining the stability and soundness
of the financial system in Pakistan. To achieve this objective, the SBP has established a
comprehensive legal and regulatory framework governing the operations of financial
institutions within the country. Here is an introduction to some of the key laws and regulations
administered by the State Bank of Pakistan:

4.1 State Bank of Pakistan Act, 1956:

This foundational legislation establishes the State Bank of Pakistan as the central bank of the
country and outlines its objectives, functions, and powers. It provides the legal basis for the
SBP's monetary policy formulation, currency issuance, and regulatory oversight of the banking
sector.

4.2 Banking Companies Ordinance, 1962:

This ordinance regulates the establishment, operation, and supervision of banking companies
in Pakistan. It sets forth requirements for obtaining banking licenses, capital adequacy,
governance standards, and prudential regulations aimed at ensuring the stability and integrity
of the banking sector.

4.3 Financial Institutions (Recovery of Finances) Ordinance, 2001:

This ordinance empowers the SBP to take measures for the recovery of non-performing loans
(NPLs) from financial institutions. It provides mechanisms for debt recovery, including the
establishment of specialized tribunals and asset management companies to resolve distressed
assets.

21
4.4 Foreign Exchange Regulations Act, 1947:
This legislation governs foreign exchange transactions and regulates the movement of currency
and assets across national borders. It empowers the SBP to issue regulations concerning foreign
exchange controls, trade financing, and capital flows to safeguard the stability of the external
sector and manage exchange rate stability.

4.5 Prudential Regulations for Banks:

The SBP issues prudential regulations to ensure the safety and soundness of banks operating
in Pakistan. These regulations cover various aspects such as capital adequacy, risk
management, corporate governance, liquidity management, and consumer protection.
Compliance with these regulations is mandatory for all banks under the SBP's supervision.

4.6 Anti-Money Laundering (AML) and Combating the Financing of

Terrorism (CFT) Regulations:
The SBP has implemented stringent AML/CFT regulations to prevent financial crimes,
including money laundering and terrorist financing. These regulations require financial
institutions to implement robust internal controls, customer due diligence measures, and
reporting mechanisms to detect and deter illicit financial activities.

4.7 State Bank of Pakistan Act, 1956:

This act serves as the foundational legislation establishing the SBP as the central bank of
Pakistan. It outlines the objectives, functions, and powers of the SBP.

The Act vests the SBP with significant powers to formulate and implement monetary policy,
regulate the banking sector, and promote financial stability.

4.7.1 Key provisions of the Act include:

• Objectives: Clarifying the primary objectives of the SBP, which typically include the
regulation of monetary and credit systems, maintaining price stability, and fostering
economic growth.
• Functions: Defining the functions of the SBP, such as issuing currency, acting as
banker to the government and commercial banks, managing foreign exchange reserves,
and regulating the monetary and credit system.
• Powers: Granting the SBP various powers, including the authority to issue regulations,
conduct monetary operations, and supervise financial institutions to ensure compliance
with prudential standards.

22
4.8 Banking Companies Ordinance, 1962:
This ordinance regulates the establishment, operation, and supervision of banking companies
in Pakistan. It provides a legal framework for the functioning of banks and defines the SBP's
role in regulating the banking sector.

4.8.1 Key provisions of the ordinance include:

• Licensing: Setting out requirements and procedures for obtaining a banking license in
Pakistan, including minimum capital requirements and suitability criteria for bank
directors and executives.
• Prudential Regulations: Empowering the SBP to issue prudential regulations
governing various aspects of banking operations, such as capital adequacy, asset
quality, liquidity management, and risk management practices.
• Supervision and Inspection: Authorizing the SBP to supervise and inspect banks to
ensure compliance with regulatory requirements, assess their financial health, and
address any concerns related to safety and soundness.
• Enforcement: Providing the SBP with enforcement powers to take corrective actions
against banks that violate regulations or pose risks to financial stability, including
imposition of penalties, restrictions on operations, or revocation of banking licenses.

These legal frameworks grant the SBP the necessary authority and mandate to fulfill its
responsibilities as the central bank of Pakistan, including safeguarding the stability of the
financial system, regulating banks, and formulating monetary policy to support the country's
economic objectives

4.9 Rules and Regulations of SBP

The State Bank of Pakistan (SBP) is the central bank of Pakistan, responsible for regulating
and supervising the country's financial system to ensure stability and promote economic
growth. Its rules and regulations cover a wide range of areas including monetary policy,
banking regulations, supervision, and oversight. Here's a detailed overview:

1. Monetary Policy:

➢ The SBP formulates and implements monetary policy to achieve the country's
macroeconomic objectives, primarily price stability, sustainable economic growth,
and full employment.
➢ It sets key interest rates such as the policy rate (discount rate) to influence money
supply, credit availability, and inflation.

23
 ➢ The SBP uses a mix of monetary policy instruments including open market operations,
reserve requirements, and discount rate adjustments to achieve its objectives.

2. Banking Regulations:

➢ The SBP regulates and supervises banks and financial institutions operating in
Pakistan to maintain stability and protect depositors' interests.
➢ It issues licenses and regulates the establishment, operation, and closure of banks.
➢ Capital adequacy requirements are imposed to ensure banks maintain sufficient
capital buffers to absorb losses and remain solvent.
➢ Prudential regulations govern various aspects of banking operations such as risk
management, corporate governance, lending practices, and liquidity management.
➢ Consumer protection regulations safeguard the interests of bank customers and ensure
fair treatment.

3. Supervision and Oversight:

➢ The SBP conducts both on-site and off-site supervision of banks to assess their financial
condition, risk management practices, and compliance with regulations.
➢ It has enforcement powers to take corrective actions against banks violating regulations,
including fines, sanctions, and license revocation.
➢ Collaboration with other regulatory bodies such as the Securities and Exchange
Commission of Pakistan (SECP) and the Federal Investigation Agency (FIA) enhances
oversight and enforcement efforts.

4. Financial Stability:

➢ The SBP plays a crucial role in ensuring the stability of the financial system by
monitoring systemic risks, identifying vulnerabilities, and implementing measures to
mitigate potential threats.
➢ It develops and implements a macroprudential policy framework to address systemic
risks arising from interconnectedness, leverage, and procyclicality.
➢ Crisis management arrangements are in place to effectively respond to financial crises
and maintain confidence in the banking system.

24
5. International Cooperation:

➢ The SBP collaborates with international organizations, central banks, and regulatory
authorities to exchange information, best practices, and technical assistance.
➢ Participation in global forums and adherence to international standards and codes
enhance the credibility and effectiveness of Pakistan's financial regulation and
supervision.

Overall, the rules and regulations of the State Bank of Pakistan aim to promote a stable,
efficient, and inclusive financial system that supports sustainable economic development and
protects the interests of all stakeholders.

4.10 Regulations for banks by SBP

The State Bank of Pakistan (SBP) establishes regulations to govern the operations of banks
operating within the country. These regulations are aimed at ensuring the safety and soundness
of the banking sector, protecting depositors' interests, promoting financial stability, and
fostering fair and transparent banking practices. Here are some of the key regulations for banks
set by the SBP:

1. Licensing and Establishment:

➢ The SBP issues licenses to banks wishing to operate in Pakistan, outlining the criteria
and requirements for obtaining a banking license.
➢ Banks are required to meet certain capital adequacy, governance, operational, and
prudential standards before being granted a license.
➢ The SBP also regulates the establishment of branches and subsidiaries of foreign banks
in Pakistan, ensuring compliance with applicable laws and regulations.

2. Capital Adequacy Requirements:

➢ Banks are required to maintain adequate levels of capital to absorb potential losses and
meet regulatory capital adequacy ratios.
➢ The SBP sets minimum capital requirements based on international standards, such as
the Basel Accords, to ensure banks have sufficient capital to support their risk-taking
activities.
➢ Capital adequacy ratios, including the Capital Adequacy Ratio (CAR) and Tier 1 and
Tier 2 capital ratios, are used to assess banks' financial health and resilience.

25
3. Prudential Regulations:

➢ The SBP imposes prudential regulations to govern various aspects of banking

operations, including risk management, asset quality, liquidity management, and
corporate governance.
➢ These regulations cover areas such as lending practices, investment activities, exposure
limits, credit risk management, and loan classification and provisioning.
➢ Banks are required to develop robust risk management frameworks and internal
controls to identify, measure, monitor, and mitigate risks effectively.

4. Consumer Protection:

➢ The SBP establishes regulations to protect the interests of bank customers and promote
fair and transparent banking practices.
➢ Consumer protection regulations govern areas such as disclosure of terms and
conditions, fees and charges, complaint handling procedures, and responsible lending
practices.
➢ Banks are required to provide clear and accurate information to customers, ensure
product suitability, and address complaints and grievances in a timely and efficient
manner.

5. Compliance and Reporting:

➢ Banks are required to comply with all applicable laws, regulations, and prudential
standards set by the SBP.
➢ They must submit regular reports, returns, and disclosures to the SBP to provide
information on their financial condition, risk profile, and compliance with regulatory
requirements.
➢ Compliance examinations and inspections are conducted by the SBP to assess banks'
adherence to regulations and identify any deficiencies or non-compliance issues.

6. Supervision and Enforcement:

➢ The SBP conducts supervision and oversight of banks to ensure compliance with
regulations and prudential standards.
➢ It has enforcement powers to take corrective actions against banks found in violation
of regulations, including fines, penalties, sanctions, and license revocation.

26
Regular on-site and off-site examinations, audits, and reviews are conducted to assess banks'
risk management practices, internal controls, and overall compliance posture.

27
 Recommendations
• Develop infrastructure and partnerships to increase branchless banking services in rural
and underserved areas.
• Support development of microfinance institutions.
• Enhance access to finance for small and medium enterprises (SMEs).
• Enforce strict capital adequacy requirements.
• Establish effective mechanisms for consumer complaints.
• Adopt environmentally sustainable banking practices.
• Promote corporate social responsibility (CSR) initiatives.
• Continuously assess the impact of TERF and adjust terms to better support businesses
during economic recovery.
• Develop specific programs and incentives to increase women's participation in the
financial sector, both as customers and employees.

28
 Conclusion
Shan Foods, Honda Atlas Pakistan, and Nayapay exemplify the implementation of Total
Quality Management (TQM) in diverse industries. By focusing on rigorous quality control,
continuous improvement, and customer satisfaction, these organizations demonstrate how
TQM principles can drive operational excellence and market leadership. Their commitment to
quality, innovation, and sustainability underscores the critical role TQM plays in achieving
long-term success and customer trust.

29
 References

1. Bank Alpha

https://www.researchgate.net/publication/329980070_Islamic_Financial_System_and_Conve

ntional_Banking_A_Comparison

2. Elsevier B.V. 2018

https://www.researchgate.net/publication/329980070_Islamic_Financial_System_and_Conve

ntional_Banking_A_Comparison

3. State Bank of Pakistan. (n.d.).

Www.sbp.org.pk. https://www.sbp.org.pk/index.html

30
 Annexure

Appendix A: Note Checking

31
32
Appendix B: Fiscal vs Monetary Policy

33