Money&Banking Pakistan Related

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TYPES OF BANKS IN PAKISTAN

There are various types of banks which operate in our country to meet the financial
requirements of different categories of people engaged in agriculture, business, profession,
etc.

On the basis of functions, the banking institutions in Pakistan may be divided into the
following types:

a) Central Bank: A bank which is entrusted with the functions of guiding and regulating the
banking system of a country is known as its Central bank. Such a bank does not deal with the
general public. It acts essentially as Government’s banker; maintain deposit accounts of all
other banks and advances money to other banks, when needed. The Central Bank provides
guidance to other banks whenever they face any problem. It is therefore known as the
banker’s bank. The Central Bank maintains record of Government revenue and expenditure
under various heads. It also advises the Government on monetary and credit policies and
decides on the interest rates for bank deposits and bank loans. In addition, foreign exchange
rates are also determined by the central bank. Another important function of the Central Bank
is the issuance of currency notes, regulating their circulation in the country by different
methods. No other bank than the Central Bank can issue currency.

b) Commercial Banks: Commercial Banks are banking institutions that accept deposits and
grant short- term loans and advances to their customers. In addition to giving short-term
loans, commercial banks also give medium-term and long-term loan to business enterprises.
Now-a-days some of the commercial banks are also providing housing loan on a long-term
basis to individuals.

Types of Commercial banks: Commercial banks are of three types i.e., Public sector banks,
Private sector banks and foreign banks.

1. Public Sector Banks: These are banks where majority stake is held by the Government of
Pakistan or State Bank. Examples of public sector banks are: State Bank of Pakistan,
Corporation Bank, the Bank of Punjab, First Women Bank Limited, the bank of Khyber, Sind
Bank Limited.

2. Private Sectors Banks: In case of private sector banks majority of share capital of the bank
is held by private individuals. These banks are registered as companies with limited liability.
For example: Silk Bank Limited, Bank Al Habib, Nib Bank Limited, United Bank Limited
etc.

3. Foreign Banks: These banks are registered and have their headquarters in a foreign country
but operate their branches in our country. Some of the foreign banks operating in our country
are:

1. THE BANK OF TOKYO-MITSUBISHI UFJ LIMITED - PAKISTAN OPERATIONS

2. CITIBANK N.A. - PAKISTAN OPERATIONS

3. HSBC BANK MIDDLE EAST LIMITED – PAKISTAN

4. DEUTSCHE BANK AG - PAKISTAN OPERATIONS

5. BARCLAYS BANK PLC

6. OMAN INTERNATIONAL BANK S.A.O.G – PAKISTAN OPERATIONS


7. INDUSTRIAL AND COMMERCIAL BANK OF CHINA LIMITED – PAKISTAN
BRANCHES

c) Development Banks: Business often requires medium and long-term capital for purchase
of machinery and equipment, for using latest technology, or for expansion and
modernization. Such financial assistance is provided by Development Banks. They also
undertake other development measures like subscribing to the shares and debentures issued
by companies, in case of under subscription of the issue by the public. House building
finance corporation, Pakistan Kuwait Investment Company limited, Pak- China Investment
Company limited are examples of development banks in Pakistan.

d) Co-operative Banks: People who come together to jointly serve their common interest
often form a co- operative society under the Co-operative Societies Act. When a co-operative
society engages itself in banking business it is called a Co-operative Bank. The society has to
obtain a license from the State Bank of Pakistan before starting banking business. Any co-
operative bank as a society is to function under the overall supervision of the Registrar, Co-
operative Societies of the State. As regards banking business, the society must follow the
guidelines set and issued by the State Bank of Pakistan. Types of Co-operative Banks: There
are three types of co-operative banks operating in our country. They are primary credit
societies, central co-operative banks and state co-operative banks. These banks are organized
at three levels, village or town level, district level and state level.

1. Primary Credit Societies:

2. Central Co-operative Banks:

3. State Co-operative Banks:

e) Specialized Banks: There are some banks, which cater to the requirements and provide
overall support for setting up business in specific areas of activity. Zarai Tarakiyat Bank
Limited, SME Bank Limited, and Industrial Development Bank of Pakistan are examples of
such banks. They engage themselves in some specific area or activity and thus, are called
specialized banks.

f) Micro-Finance Bank: The purpose of the establishment of micro finance bank was to
provide micro finance services to poor persons, particularly poor women, in order to mitigate
poverty and promote social welfare and economic justice through community building and
mobilization. Examples of MFB are KHUSHHALI BANK LIMITED, ROZGAR
MICROFINANCE BANK LIMITED, NRSP MICROFINANCE BANK LIMITED.

g) Islamic Bank: Islamic banking is banking or banking activity that is consistent with the
principles of Islamic law (Sharia) and its practical application through the development of
Islamic economics. Examples are Bank Islami Pakistan Limited, Meezan Bank, Bank Alfalah
Islamic, AlBarakah Islamic Bank and etc.

h) Investment Bank: An investment bank is a financial institution that assists individuals,


corporations and governments in raising capital by underwriting and/or acting as the client's
agent in the issuance of securities. An investment bank may also assist companies involved in
mergers and acquisitions, and provide ancillary services such as market making, trading of
derivatives, fixed income instruments, foreign exchange, commodities, and equity securities.

Commercial Bank:

The objectives of a commercial bank:


1. To establish as an institution for maximizing profits and to conduct overall economic
activities.

2. To collect savings or idle money from the public at a lower rate of interests and lend these
public money at a higher rate of interests.

3. To create propensity of savings amongst the people.

4. To motivate people for investing money with a view to bringing solvency in them .

5. To create money against money as an alternative for enhancing supply of money.

6. To build up capital through savings.

7. To expedite investments.

8. To extend services to the customers.

9. To maintain economic stability by means of controlling money market.

10. To extend co-operation and advices to the Govt. on economic issues.

11. To assist the Govt. for trade& business and socio-economic development

The functions of commercial bank are given below:

A: General Functions:

1. Receiving Deposits:

The first and foremost function of commercial bank is to receive or collect deposits from the
public in different forms of accounts e.g. current, savings, term deposits. No interest is
charged in the current account, lower rate of interest is charged in the savings account and
comparatively higher interest rates charged in fixed deposits. Thus, commercial bank builds
up customer network.

2. Accommodation of loans and advances:

Commercial Bank attaches much importance to providing loans and advances at a higher
rates than the deposit rates and thus earns profits on it. Working capital is accommodated to
the borrower for expansion and smooth running of business. In the similar manner,
commercial bank extends financial accommodation for the development of agriculture and
industry. Credit accommodation is provided to the entrepreneurs for reviving sick and old
industries as per Govt. directives. Thus, commercial bank also extends welfare services to the
people at large.

3. Creation of Loan Deposits:

Commercial Bank not only receives deposits from public and accommodates loans to public
but also creates loan deposits. For example: while disbursing loans as per sanction
stipulation, the amount of loan is credited to the borrower‟s account. The borrower may not
withdraw the full amount at a time. The residual amount i.e. balance left in the account
creates loan deposits.

4. Creation of medium of exchange:

Central Bank has got exclusive right to issue notes. On the other hand, Commercial Bank
creates medium of exchange by issuing cheques. Like notes, cheque is transferrable being
popularly used in the banking transactions.
5. Contribution in foreign trade:

Commercial Bank plays a vital role in expediting foreign exchange and foreign trade business
e.g. import, export etc. It contributes greatly in the economy through import finance and
export finance and thus, earn foreign exchange for the country.

6. Formation of capital:

Commercial Bank extends financial assistance for the formation of capital in the trade,
commerce and industry in the country which expedites its economic development.

7. Creation of Investment Environment:

Commercial Bank plays a significant role in creating investment environments in the country.

B. Public Utility Functions:

In modern banking,commercial bank executes public utility services:

1. Remittance of Money:

Remittance of money to the public from one place to another is one of the functions of
commercial bank. Remittance is effected in the form of demand draft ,telegraphic transfer etc.
through different branches and correspondents home and abroad.

2. Help in trade and commerce:

Commercial Bank helps expand trade and commerce. In inland and foreign trade customers
are allowed credit accommodation in the form of letter of credit , bill purchased and
discounted etc.

3. Safe custody of valuables:

Commercial Bank introduces „locker‟ services to the customers for safe custody of valuables
e.g. documents, shares, securities etc.

4. Help in Foreign Exchange business:

While opening letter of credit, commercial bank obtains credit report of the suppliers and thus
help expedite import and export business.

5. Act as a Referee:

Commercial Bank acts as a referee for and on behalf of the customers.

6. Act as an Adviser:

Commercial Bank provides valuable advice to the customers on different products, business
growth and development, feasibility of business and industry.

7. Collect utility service bills:

As a social commitment, Commercial Bank collects utility service bills e.g. water, electricity,
gas, telephone etc. from the public.

8. Purchase and sale of prize bonds, sanchaya patra, shares etc.

Commercial Bank undertakes to purchase and sale of prize bonds, sanchaya patra, shares etc.
as a part of social commitment.
9. Help people travel abroad:

Commercial Bank helps customers in traveling abroad through issuance of travelers’ cheques,
drafts, cash etc. in favour of the customers.

C. Agency Functions:

Besides above stated functions, commercial bank acts as a representative of the customers.

1. Collection and payment:

Commercial Bank is engaged in collection and payment of cheque, bill of exchange,


promissory notes, pension, dividends, subscription, insurance premium, interest etc. on behalf
of the clients.

2. Purchase and sale of shares and securities:

Commercial Bank is entrusted with the responsibility of purchase and sale of shares and
securities on behalf of the customers.

3. Maintenance of secrecy:

Maintenance of secrecy is one of the most important functions of commercial bank.

4. Act as a trustee:

Commercial Bank acts as a trustee on behalf of the customer.

5. Economic Development and Welfare activities:

Commercial Bank contributes much for the welfare and economic development of the
country.

Central Bank:

Functions of Central Bank:

The functions of central bank are different from other banks. The following functions of
central bank are stated below:

A. Traditional or general functions:

1. Issue of notes and coins:

The first and foremost function of central bank is to issue notes and coins as per needs of the
public and requirement of business and commerce. As per rules, notes are issued against
gold, silver and foreign currency. Bangladesh Bank

(Central Bank) keeps foreign currency reserves as security against issuance of notes.
Bangladesh Bank unilaterally reserves the right to issue notes.

The arguments in its favour are as follows:

(a) To maintain equilibrium in quality between notes and currency issue

(b) To maintain equilibrium in size, types and values of notes and currency

© To maintain stability in rates of exchange both inland and foreign

(d) To create confidence on the people


(d) To control money market.

2. Government Bank:

Central Bank acts as banker and economic adviser of the Government. The central bank
conducts and maintains

Government accounts for all Government receipts and payments.

3. Banker’s Bank:

Central Bank acts as banker’s bank. As a rule, all scheduled and commercial banks have to
maintain Statutory

Liquidity Reserve (SLR) 18% with Bangladesh Bank (CRR: 5% and Bonds & Securities
13%).

4. Lender of the last Resort:

In case of financial crisis of the commercial banks, central bank acts as a lender of the last
resort through lending against first class securities, bill of exchange etc.

5. Reservoir of foreign currency:

Central Bank maintains Foreign Currency Reserve. For the purpose of control of foreign
currency, the following factors are responsible:

(a) For issuance of notes

(b) For payments of liabilities

(c) For payments of debts.

6. Clearing House:

Central Bank acts as a Clearing House for settlement of interbank transactions.

7. Credit Control:

Credit Control is one of the major functions of central bank. The following are the ways of
controlling credit:

(a) Change in bank rates

(b) Open market operation

© Change (increase or decrease) in reserve- ratio

(d) Selective credit

(e) Direct influence

(f) Moral suasion

(g) propaganda.

B. Purposeful functions:

(a) Control Currency Market:


Central Bank acts as a controller and guardian of the currency market. For the purpose of
formation, control and maintenance of currency market and for its overall development,
central bank is the pioneer.

(b) Stabilize Exchange Rate:

Central Bank maintains stability of the foreign currency exchange rates by means of
controlling credit. Stable exchange rates position helps create favourable balance of trade and
acceptability of stable currency gets momentum in the international market.

(c) Maintain Gold Standard:

Central Bank is responsible for maintenance and control of gold reserve.

(d) Stabilize Price-Level:

Fluctuations and frequent changes of price-level affect economic growth. With a view to
making good of the economic imbalances and crisis situations, central bank takes necessary
measures for stabilizing price-level.

(e) Stabilize business activities:

Central Bank formulates credit policy and with this spirit, central bank takes necessary steps
to protect economic depression for stabilizing business activities.

(f) Employment opportunities:

Central Bank takes initiatives for creating employment opportunities by means of credit-
control mechanism.

C. Expansion and Development Functions:

(a) Development of Agriculture Sector:

Central Bank formulates policy for expansion of Agri-sector for the purpose of economic
upliftment in the country.

(b) Development of Industry Sector:

(c) Development of natural resources:

Central Bank plays vital role for tapping natural resources which may lead to economic
growth.

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