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Table of Contents

Part I
Executive Summary ................................................................................................ 4
Introduction ......................................................................................................... 5
Background..................................................................................................................................................... 5
Objectives ....................................................................................................................................................... 5
Vision ............................................................................................................................................................. 5
Mission ........................................................................................................................................................... 5
INTRODUCTION TO BSC (BANKING SERVICE CORPORATION) .................................. 6
Functions Delegated to SBP (BSC): ..................................................................................................... 7
SPB-BSC Field Offices .................................................................................................................................. 8
NIBAF: ............................................................................................................... 9
Functions of NIBAF ....................................................................................................................................... 9
Organizational Chart............................................................................................................................. ......10
Role of SBP-BSC in Currency Circulation ........................................................... .......11
National bank of Pakistan ............................................................................................................................. 11
National bank and State bank act of 1956............................................................................................ 11
Enhanced Role of Currency Chests..................................................................................................... 12
National bank operations on behalf of state bank of Pakistan. ............................................................... 13
Currency Circulation Through NBP Chests: ................................................................ 14
Currency circulation process ........................................................................................................................ 14
Currency circulation from NBPs main chests to its sub-chests: ............................................................ 15
Withholding capacity of the chest ....................................................................................................... 15
Process of sending the remittance to the chests: ................................................................................... 16
Channel used in sending the remittance: ............................................................................................. 16
Maintaining chest vault in state bank of Pakistan: .......................................................... 17
Accounting Process ...................................................................................................................................... 17
Types of Accounts17
Home note account ....................................................................................................................................... 18
Value account ............................................................................................................................................... 19
Units,which have been visited during internship ......................................................... 20
Deposit Accounts Unit.................................................................................................................................. 20
Prize Bond and Saving Certificate Unit............................................................................................... 21
Internal Audit Unit .......................................................................................................................... 233
Public Accounts Unit .................................................................................................................................... 24

Foreign Exchange Unit..28

Administration Unit ...................................................................................................................................... 30
Development Finance Unit ........................................................................................................................... 31
Currency Management Unit ......................................................................................................................... 33
SWOT Analysis ................................................................................................... 36

Part II
Project Carried out at SBP (BSC) D.I.Khan.39
Suggestions and Recommendations ............................................................................ 78
Bibliography ................................................................................................. .



First and foremost, I am greatly thankful to Almighty ALLAH, who gave me strength to
complete this report. I would like to deeply thank State Bank of Pakistan for giving me the great
opportunity to be the part of its internship program. It gave me lot of precious and valuable
knowledge regarding all the banking functions. I wish to express my sincere gratitude to Mr.
Shahab, my internship program supervisor, his willingness to motivate me, contributed
tremendously to my internship program and conducting the report. Besides, I would like to thank
all the supervisors and mentors of the state bank units, whose great efforts and kind teachings
gave me the opportunity to take part and learn about the operations of those units working
actively in the bank.

Fahim Ullah khan

BBA (Hons.) 2010-14


Banking Services Corporation

Chief Manager
Deputy Chief Manager
Assistant Chief Manager
Accountant General
Accountant General Pakistan Revenue
Bank Draft
Banking Service Corporation
Central Directorate of National Savings
Currency Management Unit
Cheque Truncation System
Deposit Account Unit
Drawing and Disbursing Officer
Demand Promissory
Federal Board of Revenue
Foreign Exchange Unit
Federal Treasury Officer
Government Draft
General Prevalent Fund
Group Terms Assurance
Internal Audit Unit
Letter of Credit
Mail Transfer
National Bank of Pakistan
National Institute of Banking and Finance
National Institutional Facilitation Technologies
National Savings Scheme
Officer Grade
Public Accounts Unit
Pakistan Business Council
Public Debt Office
Pakistan Security Printing Corporation
Real time gross settlement
State Bank of Pakistan
Treasury officer
Telegraphic Transfer

Executive Summary

As we all know that state bank is the central bank of Pakistan and the whole economic structure
of the country revolves around it and it controls and regulates all the commercial banks which
operate in Pakistan. It is a monetary body. It monitors all the commercial banks and maintains
and manages the money supply in the country.
State Bank of Pakistan is the Banker's Bank and it is also the Bank of Government this is the
reason by virtue of which I took my attention towards State Bank for internship. There are some
Units in this bank and each Unit perform separate actions for daily financial matters thats why
one can learn a large number of things in this bank. I routed in several Units of SBP-BSC. I also
discussed the Strengths, weaknesses, Opportunities and Threats related to the SBP-BSC.I
prescribed some valuable suggestions to policy makers of State Bank and in the end I concluded
the overall discussion.

1. Introduction

1.1 Background
State bank of Pakistan is the central bank of Pakistan. It was established in 1948. Initially State
Bank of Pakistan was entrusted with the task 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" (SBP order, 1948).In financial sector
reforms of 1994 State Bank of Pakistan got full autonomy. On January 21, 1997 this autonomy
was further strengthened when the government issued three Amendment Ordinances. 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 (Wikipedia, 2010). Currently its primary functions include regulating
banking sector, maintenance of public accounts, devising monetary policy, management of
public debt, issuance of currency notes, and maintaining inflation.
1.2 Objectives
As I all know that state bank of Pakistan is a non-profit making organization. Its main objective
is to manage or maintain the currency supply in country. Increase and decrease in money supply
can create inflation or deflation in country, so these things should be handled immediately and
state bank is doing this. The mission and vision of SBP is as under.
1.3 Vision
To develop SBP-BSC into a dynamic and efficient organization equipped with requisite
technology and human resource capable of extending sustainable support to the State Bank of
Pakistan in achieving its objectives (SBP website).

1.4 Mission
To provide excellent banking and financial services to stakeholders besides ensuring
implementation of SBP policies, in order to command their trust and respect

State Bank of Pakistan has two Subsidiaries


Banking Services Corporation (BSC) set up in January 2002, is the subsidiary of the State
Bank of Pakistan and is entrusted with the task of currency management, operational and
administrative oversight of foreign exchange Units, export and other finance, management of
Government accounts and operational work related to Government certificates. With the
changing environment of banking sector, BSC has undergone significant change. On one hand
BSC has had to relinquish certain functions,
It performed at the time when interest, credit and foreign exchange was rigorously regulated. On
the other hand, it has to reposition itself to the deregulated environment (while continuing to
perform some old functions such as related to Export Finance Scheme) and be equipped to deal
with a transformed Central Bank and banking system.

The challenges posed by these changing requirements have been phenomenal but BSC has been
steadily shifting its goals and objectives to align it with the new demands. Going forward, SBP is
now working closely with BSC to develop a strategy for its further transformation to assign a
more relevant Mission to it in line with the withdrawal of some of its old functions, consolidate
the organization, fully automate its services and introduce a new culture of change management
along with better enforcement of the performance management systems. Developing adequate
capacity and managerial skills along with better internal controls will be critical to achieve the
anticipated transformation. SBP (BSC) was established to perform operational work of State
Bank of Pakistan (SBP website). SBP-BSC is subsidiary of State Bank of Pakistan having 16
offices in major Cities of the country and SBP (BSC) core function and operation area, is
Currency Management. SBP (BSC) consists of following Units.

Internal Audit Unit.


Currency Management Unit.


Public Accounts Unit.


Development Finance Unit.


Engineering Unit.


Foreign Exchange Unit.


Administration Unit.


Internal Bank Security Unit.


Training and development Unit.

2.1 Functions Delegated to SBP (BSC)

Banker to the State Bank;

Provide necessary assistance to SBP for indenting of currency notes

Operational work relating to management of public debt (i.e. floatation of loan) &
Foreign exchange.

Banker to the Govt. for the purpose of Revenue collection.

Payments and maintenance of accounts for and on behalf of the federal/ provincial/local
Govt. etc and Business relating to National Savings Scheme (NSS).

Currency Management i.e. issue, distribution and exchange of bank notes and coins as Ill
as destruction of soiled bank notes.

Management of country wide clearing houses for settlement of payment

Any other business which the State Bank may specify to perform.

SPB-BSC Field Offices

Field Offices

Karachi Office
Chief Manager

Lahore Office
Chief Manager

Islamabad Office
Chief Manager

Peshawar Office
Chief Manager

Rawalpindi Office
Chief Manager

Quetta Office
Chief Manager

Hyderabad Office
Chief Manager

Faisalabad Office
Chief Manager

Multan Office
Chief Manager

Muzaffarabad Office
Chief Manager

Bahawalpur Office
Chief Manager

Sialkot Office
Chief Manager

N. Nazimabad Office
Chief Manager

Sukkur Office
Chief Manager

Gujrawala Office
Chief Manager

D.I.Khan Office
Chief Manager

The state bank of Pakistan since its inception has played a pioneering role in the sphere of
banking education and training, both for its own staff as for the banking industry in the country.

NIBAF was established by PBC and was taken over by SBP in 1997. The new complex of the
institute is daily suited for conducting residential training program. In which the institute is
located, specifically for public and private educational. Training institutions by the government
ensures peaceful and serene environment highly congenital for academic pursuits.
The location being adjacent to Shakar Pariyan Hills and opposite to Margalla Hills presents a
scenic and panoramic view of the city of Islamabad. Strategically located, the Institute provides
an easy access to Federal Government Ministries, Parliament, Embassies and Islamabad
International Airport.
3.1 Functions of NIBAF
Following are the functions which are conducted by the NIBAF

Design and develop training modules/programs.

Training material preparation and publication.

Deliver Domestic and International training programs.

Evaluate training programs.

Business planning and review.

Provide Support for training programs, seminars and workshops.

Organizational Chart of State Bank of Pakistan

(Banking Service Corporation)


4. Role of SBP-BSC in Currency Circulation

Both the SBP and the BSC has a vital role in the currency circulation in the country through its
chests. Following are the roles of SBP in currency circulation
Considering the request of TO ( treasury officer) to establish a chest in any area,
To give authority to the chest to operate in that circle.
To monitor the chest whether its functioning properly and accordingly to the rules and
regulations of the SBP.
The roles of BSC in currency circulation are:
Currency management to ensure adequate supply of good quality notes and coins across
the country

Banking services to federal, provincial and district government, departments, commercial

banks and SBP

financial policies for developing an inclusive financial system

4.1 National bank of Pakistan

National Bank of Pakistan is one of the largest commercial bank operating in Pakistan. It has
redefined its role and has moved from a public sector organization 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 presence).
4.2 National bank and State bank act of 1956
According to the State Bank Act of 1956, The amount of currency and the bank notes in
circulation, which constitute the liability of the issue department shouldnt exceed assed of that
department held in gold, coins, and sterling securities
The bank shall have sole right to issue bank notes made payable to bearer on demand in Pakistan
accordance with the provision hereinafter made.


In this act, an agreement was signed between the State bank of Pakistan and national bank of
Pakistan which included that The national bank of Pakistan will serve the Govt. Employees on
behalf of the state bank of Pakistan.
SBP has only 16 fields offices in whole country. Therefore, in order to serve government and
public, there was a necessity of an agent who works instead of them in remote areas where no
office of State Bank of Pakistan exists. Each chest report to its respective issue circles i.e. four
issue circle set at SBP BSC Karachi, Lahore, D.I.Khan and Peshawar.
Being the Agent of SBP, the national bank of Pakistan established its chests and sub-chests
across the cities and areas in the country. National Bank of Pakistan (NBP) has been engaged
through an agency agreement signed by Finance Department, SBP with NBP to work as agent
for assisting government departments using a wide network of its 1,243 branches in withdrawal/
deposit of cash and facilitating other banking transactions pertaining to Government collections /
payments etc
Q: What are Currency Chests?
Ans: To facilitate the process of distribution of notes/ coins and to carry out money transactions
of the government, NBP branches and treasury offices/sub-treasury offices are selected to work
as currency chests. These are storehouses where Bank notes/coins are stocked and distributed to
other banks branches located in their vicinity. At present there are 260 chests all over in

4.3 Enhanced Role of Currency Chests

The network of currency chests maintained by National Bank of Pakistan (NBP) and by the
Government treasuries plays a key role in carrying out currency management function in an
effective manner. The stock of bank notes and coins held by the currency chests is also taken into
account for working out the cash reserve requirements of BSC concerned. The chest/ sub-chests
maintained with NBP branches are authorized to accept claim notes from commercial banks and
deposit them with BSC field offices under whose jurisdiction they fall.
With a view to minimize the expenditure on frequent dispatch on remittance, the holding
capacity of NBP chests / sub-chests have been enhanced, in addition to setting up of more chests
at different locations across the country, ensuring the supply of bank notes both new and re-


issuable with ease and less time. Detailed information about the chests / sub-chests is available in
the Annexure of this report.
4.4 National bank operations on behalf of state bank of Pakistan:
Following are the operations conducted by the national bank of Pakistan on behalf of state bank
which are:

Management of Government Accounts:

The maintenance, consolidation and reporting of Federal/ Provincial/ District
Governments and Zakat accounts is one of the main responsibilities of the Accounts Unit
of BSC. NBP provides data on Government Accounts to the Accountant General of
provinces, Accountant General Pakistan revenue, Pakistan Railways and other
Government functionaries on daily or periodic basis.

Reporting of Zakat Balances

Maintenance of Zakat account including its collection, disbursement and consolidation is

another important responsibility of Accounts Department of NBP.

Reporting of FBR Transactions:

The collection of all Government taxes including FBR Tax Revenues at far areas of
various districts of KPK remained a vital area for NBP on behalf of BSC during the
period under review. Implementation of FBR Module at all BSC offices enabled the
offices to credit the relevant accounts and report the tax revenue collected by them and
NBP branches to FBR on daily basis through on line system.

Operational Work Relating to National Savings Schemes

Pursuant to the policies vested in the BSC Ordinance 2001, the BSC through its 16 field
offices and scheduled banks has been playing a pivotal role in savings mobilization by


managing sale/ encashment/profit payment of certificates in respect of following schemes

of the Central Directorate of National Savings (CDNS), Government of Pakistan:

1. National Prize Bonds

a. National Saving Certificates
a. special saving certificate
b. Defense saving scheme

5. Currency Circulation through NBP Chests

There are 30 NBP chests actively running in KPK. The main chests of NBP are feeded by the
D.I.Khan BSC issue office and the sub-chests are supported by the main chests of NBP. The
currency is circulated from BSC to NBP chests and the sub-chests are then replenished through
the NBP main chest located in that district.

5.1 Currency circulation process

Indent sent from

NPB chest

Indent received
from NBP by SBP

sent to NBP

Report to SBPBSC D.I.Khan


5.2 Currency circulation from NBPs main chests to its sub-chests:

The sub-chests of the national bank of Pakistan are restocked from their key chests without
receiving remittance straight from the BSC D.I.Khan. Following are the chests/sub-chests of
NBP, operating in D.I.Khan:

Chests / Sub-chests

BSC Office



Lakki Marwat


Kaloor Kot






5.3 Withholding capacity of the chest

Each NBP chest is given ordered to hold a specific amount of currency capacity in their vaults,
keeping in view the number of the government employees working in that area and the
Government pension takers living there.
The larger the number of government employees working and government pension takers living
there, the more will be the withholding capacity of that specific chest.
On the other hand, if the capacity of any chest or sub-chests of the NBP is depleted to 40% of
their withholding capacity. They are given instructions to notify the BSC D.I.Khan office, which
will in return send the remittance to those chests.
Subsequently, if the withholding capacity of any chest increases from its required volume of
currency, the BSC D.I.Khan after analyzing its financial data, will give order to the NBP( exceed
currency chest) to send the surplus amount of currency from their capacity to any of the subchest located near to it.


5.4 Process of sending the remittance to the chests

The process of sending the remittance to the NBP chests else wise from NBP main chests to its
sub-chests is done in the following ways:
Any chests, whose withholding capacity reaches to 40% of its total capacity should notify
the BSC D.I.Khan branch by sending the indent to BSC D.I.Khan branch.
The BSC D.I.Khan branch once receives the indent, will examine the financial data of
that specific chest. Which also include: which domain currency is needed and in how
much quantity.
Later on, the BSC D.I.Khan requests that particular chest to send the Annexure letter. The
Annexure is the letter in which the following things are mentioned
a) Name of the chest which needs the remittance
b) Location of that chest
c) Capacity/ oblique required
d) Number of requests which Ire requested before
The annexure is then signed by the ACM(cash),
The final authority is of the currency officer, who, after signing the annexure, the
remittance is sent to that chest.
The chest can be replenished by both the new notes taken out from the Stock vault as Ill
as from the re-issuable notes.

5.5 Transport Channel used in sending the remittance

Although there are many mean of transport in the country in the shape of railways, by air, and by
road but the SBP-BSC have chosen the Pakistan railway as their mean of transport of sending the
remittance to their chests.
The reason behind selecting this transport channel is because, SBP prefers to use the government
sector channels, which is the Pakistan railways. Similarly, for the security of the remittance the
Pakistan police officers are hired to accompany the transport of the remittances to its destination,


even though the private security agencies are present in the city and are ready to be hired and
provide the services.
However in D.I.Khan, the transport channel used is the Phoenix vehicles which are a reliable
private security and as there is also no facility of railway in these areas.
5.6 Maintaining chest vault in state bank of Pakistan:

The state bank of Pakistan has a currency vault of its national bank chests by the name of chest
vaults. Where all the currency received from its chests is maintained on daily and Weekly basis.
The chest vaults of NBP are examined having the NBPs representative present at that moment.
5.7 Accounting Process
The transactions occurring in each Currency Chest are reported to SBP on daily basis through
Currency Chest Slips (A-17) also called as TE-2 form. These transactions are the deposits and
withdrawal from chest which are recorded and accounted for in the Globus system. The total
amount of Deposits and Withdrawals from all chests and their net difference are also reported to
SBP in a summarized form on a statement called F-157. Accounting entries on daily basis are
done in Globus for the total deposits, withdrawals, net difference (Dr./Cr.) and for Coins issued
or received in chests. Further, accounting entries are also made for the remittances
dispatched/received from all the chests in KPK.

5.7.1 Types of accounts maintained in CMU

Issue department maintains the two types of accounts.

1. Home Note account

2. Value account

17 Home Note account

I know that a currency note is the liability of SBP. Home Note A/c is reflected on the Liability
side of SBPs Balance Sheet. As the currency note come into the vault of SBP, it is recorded in
books of Home Note A/c. And so on, as the same currency notes changes its position i.e. from
SBP vault to Circulation, Chest, Cancelled etc. the same is maintained in the books of Home
Note A/c.

Currency chest slips

Daily transactions of chest are recorded on cc slip, and this slip is then forwarded to SBP
D.I.Khan on the next day to issue department to maintain accounts and the same cc copy is send
to main branch NBP
A-17 book/ subsidiary register of chests.
Transactions reported by each chest through currency chest slip are recorded in the subsidiary
register of chest called A-17 book. It contains the details about currency denomination wise. It
has a separate record of each type of note issued by SBP and aggregate balances are extracted.
These balances are further utilized to prepare the home note ledger account.

F-157 statement

This statement is sent by the NBP main branch D.I.Khan. SBP D.I.Khan daily receives this
statement. It contains the aggregate amount of receipt and withdrawals of each chest and their net
balances. This statement is then used to make A-10
It is the chest balance book. It is prepared on the monthly basis. Each chest ending balances are
recorded on it


It is the balance reconciliation book. It is prepared to verify the balances.
It is home note ledger account. It consists of main accounts, currency account is head of
accounts, it must have credit balance, and the other 6 main ledger accounts are
A. Transfer account
B. Cancelled note account
C. Exchange note account
D. Chest account
E. Circulation account
F. Invoiced account
They must have debit balances
It is prepared to report Karachi SBP about the transactions of chests Value account
Value account is as Asset account and is shown under Assets in SBPs Balance Sheet. This
account hits the circulation. I also record all type of coin transactions in Value A/c like:
a) Coins transferred from reserve to exchange
b) Coins transferred from exchange to reserve
c) Remittances of coins sent to chest
d) Remittances of coins received from chest
e) Remittances received from mint Lahore
f) Remittance sent by SBP Karachi to SBP D.I.Khan chests
g) Net T.T effect
h) Remittances sent by SBP D.I.Khan chest so SBP Karachi.


6. Units in which I have visited during my internship

These are the units in which I have been routed and had the experiences.
6.1 Deposit Accounts Unit
Main functions of the Deposit account unit are;
SBP-BSC acts as a banker to the banks. Commercial banks open their accounts with state
bank. 43 commercial bank accounts are maintained in the deposit accounts unit
DAU deals with the current accounts of Commercial Banks.
Handles export refinance scheme.
Deals with Government drafts
Clean Cash: Balances all transactions.
The facility of remittance of government payments is provided through this Unit.
Account reconciliation
Handles Miscellaneous Problems
Also facilitate public remittances and fee is charged for that whereas no fee is charged from
the government.
6.1.1 Personal Experience in Deposit Account unit Mail Transfer (M.T)
It is the payment order issued by D.A.U when an employee of one branch of SBP wants to make
payment to the employee of the other branch. Usually no fee is charged for this operation as SBP
uses it to facilitate its employees.

20 Telegraphic Transfer (T.T)

Telegraphic transfer is used to transfer detail figures of Net transactions to SBP head office .The
detail of all the transactions took place in DAU are summarized the net balance and report to
head office by T.T. Bank Draft (B.D)
A bank draft is used when general public make payments to government institutes. Government Draft (G.D)
If one government institution wants to make payments to the other institute then they make use
of the govt. draft.
6.2 Prize Bond and Saving Certificate unit
The Prize Bond scheme is the part of national saving scheme. The SBP-BSC provides
management services to the government for this scheme. SBP-BSC can decide about the terms
and conditions of the scheme can increase or decrease the amount of prize money and can
change the denomination. Prize bond unit perform the following functions.

Sale and purchase of Prize bonds

Maintenance of the prize bond stock

Giving the prize money

Help in organizing draws

Apart from prize bond this unit is involved in the management of defense saving certificates and
special saving certificates. These two instruments are dealt with in the interest bearing account
and the prize in non-interest bearing account of the unit.


6.2.1 Personal Experience in Prize Bond Unit

In Prize Bond unit I came to know that
Its a part of the Government saving scheme.
Through this scheme, public debt is generated which is used for funding various public
Prize bonds are of seven denominations; 100, 200, 750, 1500, 15000, 25000, and 40000.
Prize bond of each denomination has a shut period of 2 months, and is included in draw
after one month of issuance, thus included in 4 draws per year.
Prize bonds can be issued and en-cashed in all SBP BSC banks, National Savings Centers
and scheduled banks.
Bonds of the


Price (Rs)

Working Days

denominations of 100

Up to 20000

Same day

win, and is claimed,


10 days

the amount up to Rs


15 days

1500 are paid through

Above 500,000

20 days

cash counter in SBP.

The winning amount which exceeds Rs 1500 will be given through a check.
Government charged 10% tax on winning bond. Prize of up to 20,000 is paid in Cash and
more than 20000 prize paid through payment order.
High amount winning bond will be send to PSPC (Pakistan Security Printing
Corporation) for further Confirmation.
6.2.3 The Process of Issuance and Payment of Bond

At the time of bonds issuance it is recorded in "Receipt Register" and at the time of
payment it is recorded in "Payment Register".

Different prices are paid with in different periods.

The prices are paid in following time periods.


After the submission of the application form for claiming the prize, the genuineness of
the bond is first checked by the receiving OG-1 officer. Then after entering it to the
GLOBUS it is passed on to OG-2 for further verification and authentication
The bonds of Rs.25000 and 40000 are proceed in Bonds Unit for which the original bond,
copy of N.I.C of Bond holder with 2 signatures which must be similar to N.I.C.
After Manual verification it will be input in Globus Software.
The SBP- BSC will send the claim to PDO (Public Debt Office) by inputting the prize
bond number in Globus.
There are Two PDOs in Pakistan situated in Karachi and Lahore. Bonds issued in
D.I.Khan are confirmed by PDO Karachi.
After confirmation the payment order will be signed by authorizer.
Later-on, the Bond Unit will issue a token for the payment, which is recorded in Transit
The application is send to Cash Department.
After it is confirmed by cash department, the claimer will be assigned the payment order
and he will submit it to the commercial bank to deposit it in his account.
State Bank never pays directly to claimant. He will be paid by commercial bank
6.3 Internal Audit Unit
Internal auditing is a profession and activity involved in helping organizations achieve their
stated objectives. Internal Audit unit is an independent appraisal function established within
SBP-BSC to examine and evaluate its activities as a service to the organization.
Main functions and responsibilities of IAU are given as follows;
It involves in-depth and independent examination of cases in the light of rules and
regulations to minimize the risk.
Pre audit the cases and vouchers received from various units under SBP expenditure
regulation, budgetary limit and head of accounts.
Prize Bonds Payment cases.
Export Refinance Cases before making payment to banks
Pay periodical surprise visits on timely basis (i.e. weekly, fortnightly, monthly, quarterly
etc.) to see various operations and activities of Units/Departments.

Verification of Examination Halls as per approved policy and prescribed procedures.

Pre-audit of NIBAFs Payments cases received for payments to different stakeholder of
Pre-audit of staff loans (like HBA, temporary advance against GPF balance etc.)
Pre-audit of the cases regarding Policy Matters (i.e. Promotion, Confirmation, Reification
of pay etc.) to ensure that Banks Rules/Regulations are implemented while processing
such cases.
6.4 Public Accounts Unit
Under Section 21 of the State Bank of Pakistan Act 1956, the SBP has been entrusted to perform
banking services on behalf of the federal and provincial governments and also to carry out their
exchange, remittance and other banking operations including the management of public debt.
The banking services provided by SBP-BSC to the federal, provincial and local governments
Includes following services.
Collection of revenues on behalf of government departments i.e. property tax, income
tax, sales tax and all other receipts of Govt of Pakistan.
Making payments on behalf of government departments
Modes of payment

Modes of receipts





The Public Accounts Unit of SBP-BSC is responsible for maintenance of

The federal Govt. A/C
Provincial Govt. A/C
Local governments
Zakat accounts.
Defense A/C


The data pertaining to government transactions carried in various accounts is reported to

accountant general of the provinces, Accountant General Pakistan Revenue (AGPR), Pakistan
Railways and other concerned departments on daily/ periodic basis.
BSC provides following banking services to the government through its field offices:
Facility of transfer of funds of government departments from one place to another.
Payment of pensions to the pensioners of various government departments.
Facility of safe deposit of articles to government departments, banks etc... On nominal
Other banking services as and when required by the government departments.
6.4.1 Personal Experience Public Accounts Unit (PAU)
Public Account Unit deals with Government Departments. Every department before initiating its
operations opens an account in SBP for its financial matters. PAU runs operations of
Government Receipts and Payments through clearing, transfer or cash. Payments
PAU mostly receives cheques by AG and AGPR office for payments.
Green Cheques are for Federal Departments.
Red Cheques are for Provincial Departments.
After verification and payment of the cheques by PAU it will be send back to the
Only registered government departments can withdraw amounts.
The payments up-to Rs.5000 paid by TO (Treasury officer) and above Rs.5000 will be
verified by PAU.
PAU also pays prize bonds. Up-to Rs.18000 paid in cash and above Rs.18000 will be
deposit in their accounts.

Types of Accounts

There are three types of accounts that public account unit maintain.

Drawing account

Drawing account is a general account

It does not have any restriction or limitation regarding amount
The State Bank has to pay what is drawn on it.
The Balance of this account may be in Debit or credit.

Personal Ledger Account

Government of Pakistan allocates a specific and limited Budget for different government
Those institutions are entitled to draw the amount up to the extent of their budget.
The cheque must be endorsed by federal treasury officer (FTO).
The State Bank of Pakistan has the right to dishonor the cheque without the endorsement.
The cheque drawn on this account has validity of one month from issuing date.
6.4.2 Types of payments

Payment over the Counter

Payment over the counter means the payment of the required amount in cash in SBP-BSC. The
procedure for over the counter payment is given as follows.
Verification of cheque:
The cheque issued for encashment must be drawn by Drawing and Disbursing Officer
(DDO) of the concerned department.
The DDO may authorize a person for collection of payment.
The signature of DDO, the name and picture of the person to whom DDO has authorized
must be recorded with SBP.
The Cheque must be endorsed by DDO from the back side of the Cheque with a stamp of
Cash received.
Only these DDO or his authorized person is entitled to receive cash.


A Schedule must be sent by the instrument issuing authority to State Bank of Pakistan for
the verification of issued cheques.
The state Bank of Pakistan is entitled to refuse to pay without schedule.
The Schedule must contain:
Information about Draft
Information about Amount of the Cheque
Information about Draft
Information about Issuing Date
The particular of the cheque must match with schedule.
Recording of Transaction
A token is issued against receiving of cheque/s.
The token No. and the number of cheque/s received against that token is also recorded in
the Transit Book.
Only the complete and satisfied transactions are recorded in Transit Book
After recording the book is sent to the cash counter with a messenger, where the payment
is made. Payment through Clearance
In payment through clearance the amount from government account is shifted to receivers
account and no cash is paid. Duration of clearance and its transfer to receivers account depend
on the issuer and receiving banks locations. It may take from 3 to 7 days.
State Bank of Pakistan has given mandate to National Institutional Facilitation Technologies
(pvt) limited (NIFT) to act as clearing house. NIFT has a network throughout the country. It
collects cheques from collecting banks where cheque is presented, sort them and save data
through automated mechanism RTGS and then send them to issuing banks for their settlement.
NIFT provide settlement advice to commercial banks and net settlement position to BSC
for debit and credit of concerned bank accounts.

Same procedure is adopted for government payments; NIFT collects cheques of

Government accounts from presenting banks and send them to BSC for settlement.
Cheque is matched with the schedule of the issued department, and
Genuineness of the instrument and signatures of the DDO are verified
Issuing departments account is debited and concerned banks account is credited as per
cheque amount.
Day Closing
At the end of the day the cash counter sends all instruments e.g. cheques to PAU for
A Summary of payments is prepared
This summery is matched with Head Wise Report generated by automated system.
A voucher is made with the debited amount of cash payments to the relevant accounts.
6.5 Foreign Exchange Unit:
The operational matters relating to Foreign Exchange are handled by the Foreign Exchange Unit
(FEU) of SBP Banking Services Corporation (BSC). The operations are as follow:

The implementation of different schemes announced by Federal Government concerning

exports enhancement also comes under the domain of FEU.

Implementations of SBP foreign exchange policies.

Export Verification under Export Finance Scheme.

Perusing export overdue cases against delinquent exporters.

Implementation of various subsidy schemes of Federal Government

Dissemination of SBP and Government policies


Following slips are used in the FEU

6.5.1 Export form (E form):

The export form is that form which is used to export any goods out of the country. This form is
given to the exporter and to be filled by person. The form has the following important contents.

Name of the exporter

NIC of the exporter

Kinds of goods which the person wants to export

Country to which the goods are to be exported

The currency in which the business transactions is done

Invoice of the goods

The total value of goods

Custom clearance

Mean of transport

6.5.2 Import form (the M form)

The import form used and is filled by the importer, whenever he wants to import any goods from
outside of the country. The import form is given to him and has to be filled and submitted in a
bank where the importer has a maintaining account. Import form has the following essential

Name of importer

NIC of the importer

Type of goods which are to be imported

The country from which the goods are imported

Invoice of the goods from the importers country

The currency in which the business is carried out

Mean of transport


6.5.3 The Remittance form (I form):

The remittance form is used whenever a government employee or student through government
scholarship is studying abroad and the education is financed from home country. Therefore, the
remittance form is assigned to that person who wants to send the remittance. The form has the
following contents.

Name of the student

Country in which he/she is studying

The course which he/she is currently enrolled

The amount of remittance sent

Total education expenses.

6.6 Administration Unit

The major functions of Administration Unit are.
Disbursement of monthly salaries and allowances
Financing of life insurance
Making other payments like pension, retirement,
Making business plans, preparation of annual budget.
Assessment of employee loans
Procurement of office furniture, stationary, vehicles etc
Activation and deactivation of employee medical facilities.
Permission for medical treatment outside BSC medical centers
Evaluation of employees through personal evaluation report and performance
management report.
6.6.1 Personal learning in Administration Unit

In SBP-BSC basic pay and other allowances are not maintained separately like other
Government institutions. Here in SBP-BSC they maintain Net monetize base salary
which is sum-up of basic salary and all allowances


The GPF (General Prevalent Fund) and GTA ( Group Terms Assurance) under which the
employ is insured by any insurance company in case of any unfortunate accident.

Under Benevolent fund deducts 5% which will be paid for marriages of children or in
case of death given to recommended person by the employ.

Income tax deduction done on Net salary amount of the year starts from Rs. 300, 00.
Different ratios for different Net amounts of salary.

Regulates the functions of paying pensions to retired employees.

General Services section maintains the record of assets, expenses, depreciation of

various assets, utility bills etc

Medical section provides medical facilities to the employees of state bank. Different
hospitals have agreement with SBP-BSC to provide health facilities to the employs, their
wives and children.

6.7 Development Finance Unit

6.7.1 Export Refinance Scheme
To increase the exports of Pakistan. SBP has started a financing scheme to exporters
known as exports refinance scheme.
Under this scheme, loan is granted to exporter at low interest rate (8.20%).
Commercial banks acts as an intermediary between exporter and the SBP and charges 1%
of the interest as its commission whereas the rest goes with the SBP.
The loan is usually granted for 180 days. After 180 days the SBP credits the account of
that commercial bank and notifies it about that (regardless the payment made or not).
If the exporter pays before 180 days, then that bank is liable to pay to SBP within 72
Any exporter can avail the Export Finance Facility through any of commercial bank, after
fulfilling collateral requirements of the bank.
The decision to lend shall be taken by the bank under its own internally approved credit


6.7.2 Financing Methods

There are two types of payments for export financing

Pre shipment payment

Post shipment payment Pre-shipment financing

It is the financing to the exporter before the shipment occurs.
Following documents are required for pre shipment payments.

Purchase order


Demand Promissory Note (D.P note)

In this after 180 days of loan 30 days are given to exporter to submit their shipment documents to
commercial bank.
Bank is given 7 days after those 30 days to give those documents to SBP. If not then the bank is
charged with fine of 42 paisa per thousand per day. Post shipment financing

This is the financing after shipment had occurred.

Following documents are required for it

Purchase order

D.P Note


Shipment document


6.7.3 Part-I of Export Financing Scheme

Financing under Part I of the Scheme is a transaction-based facility.
The finance is granted by the bank to the exporter on the basis of a Firm Export Order /
Export Letter of Credit, for a maximum period of 180 days.
The financing facility can be availed at pre shipment stage for procuring inputs and
manufacturing the goods to be exported.
Financing at Post Shipment stage is also granted against goods already shipped to the
importer abroad, for the period up-to realization of export proceeds or 180 days,
whichever is earlier.
6.7.4 Part2 of Export Financing Scheme
Under Part-II of the Scheme, a revolving finance limit is sanctioned to the exporter
equivalent to 50% of his export performance during the previous year on July -June basis.
Exporters can avail this financing facility for a period of 180 days. Facility once availed
needs to be repaid in totality.
Exporters having availed Part-II facilities have to export / ship eligible goods and realize
export proceeds and submit the evidence of performance on the prescribed statement
within two months from close of each financial year.
6.8 Currency Management Unit
Currency management unit involves a wide range of activities including.
Ensuring adequate supply of good quality notes across the province.
Examination and storage arrangements on receipt of fresh notes from PSPC,
Maintenance of sufficient balances of currency notes/ coins.
Withdrawal of soiled/defective notes from circulation and their destruction under
appropriate control mechanism.


6.8.1 Personal learning in CMU

Currency Management Unit CMU is the unit where all functions related to currency management
handled. In this unit I learned following. Bank and non-bank treasuries

At district treasury sub treasury the cash business of which is conducted by the bank the manager
or agent as the case may be is responsible for the provision of funds to meet the government
disbursement. Non-bank treasury

At places where the cash business is not conducted by the bank the treasury officer is responsible
to keep sufficient fund at district treasury or sub treasury

Pre requisite of currency chest

Existence of a standard and spacious strong room

Arrangements for security and police guards

Feeding arrangements with safe movements

Posting of trained staff to handle the work

Means of communications for prompt reporting of government receipt and payment

Cash remittances

Kinds of cash remittance

Outward inward Outward remittance

Cash remittances are sent to other field offices, NBP chests and govt. sub treasuries locating in
the region. On approval of the currency officer packing of cash and escort arrangements are
carried out and the receiving chest is informed in advance in coded form

34 Inward remittance

Cash remittances received in the office

All invoices are recorded in register of remittance

Cash remittances are duly examine. Examination of quarterly cash verification reports of NBP chests.

NBP regional authorities nominates Ill conversant officers for examining the chest balances and
other valuable documents viz. bland bank draft, govt draft and code books etc.
On receipt of the from NBP authorities the same are examined at this office and irregularities if
found therein are communicated for rectifications Inspection of currency chest

In terms of federal treasury rules and agreement betIen SBP and NBP

NBP is responsible for safe custody of currency balances in properly strong rooms
according to their holding capacity

SBP is allowed to access the chests for inspecting the contents arrangements for safe
custody of the balances, code books and draft forms

This office has an annual plan to inspect chests continuously on yearly basis.

6.8.2 Cypher code book

As all information about remittances is highly confidential, so codes are used in letters
/telegrams related to the remittance, which is translated by using cypher code book.
The core functions are to:

Issue and distribute fresh notes and coins

Withdraw soiled notes from circulation and destruction thereof

provide exchange facility

Disseminate ant counter forge measures


Maintain books of accounts in such a manner to provide reliable and timely financial
information to internal and external stakeholders and

To oversee the operations of NBP Chests.

7. SWOT Analysis

7.1 Strengths

Strong Check and Balance

The structure of verification, authorization, checking and counter checking of transactions is very
sophisticated, reliable and strong. This is the major reason why fraud and false payment cases are
rare in SBP-BSC.

Job security and attractive Salary

Employees of SBP-BSC enjoy good salary packages and benefits. For example interest free
loans are given for building house and buying car etc. employees feel secure because of the
permanent nature of job. Therefore young and talented candidates opt for SBP-BSC posts. Senior
employees enjoy more benefits in the form of recognition and other fringe benefits which work
to retain them.
7.2 Weaknesses
7.2.1 Technological backwardness
Unlike most of the Central Banks of other countries SBP-BSC is not updated in technology.
They are using old Pentium processor computers and CRT monitors. The GLOBUS software
used is not updated. Computers and GLOBUS software was introduced in 2003 and they are in
the same form, not updated. This causes system freezes and hang ups and hence time wastage.
7.2.2 over strictness
The strictness is a tool of discipline but the over strictness may convert into mental stress for the
employees of state bank.

7.2.3 Staff is not Ill trained in IT

SBP-BSC employees in general and imputers should be trained at least for improving their
typing speed. It will speed up the payment process and entry system.
7.2.4 Over Burden of work and No Backup Staff
In many units of SBP-BSC lack of staff caused over burden of work on employees working in
that particular unit. Due to the unavailability of backup staff, when an employee is not present in
that unit, all the work for which he is responsible is not operating. Therefore, the unit may face
trouble in flow of work.


7.3.1 Investment in IT and latest technology

There is a great opportunity for SBP-BSC to invest in latest technology. By replacing the present
system of physical movement of cheque for clearance with image based clearance system like
Cheque Truncation System (CTS) SBP can enable commercial banks to offer new products and
services. It could be a source of earning for SBP and would also help achieve its goal of
providing a facilitating financial market.

Political instability and pressure can harm the operations of SBP

Frequently changing governments and their policies harm the functionality and consistency of
SBP-BSC policies.


Excessive government borrowings

Excessive borrowings of the present government is making difficult for SBP to maintain foreign
exchange reserves.


7.4.3 Circulation of fake currency

A huge amount of fake currency is floating in the market which is causing inflation in the
economy and is devaluing rupee. Fake money makers have improved the quality of their fake
notes and it is hard for general public to distinguish them from original currency notes.


Part II
Project Carried out at State Bank
E-Banking, Role and Measures to enhance Awareness
Table of Content

Introduction ..40
Definition of E-Banking....41
Services provided by Commercial Banks through E-Banking...44
E-Banking Growth in Pakistan.47
Awareness of E-banking...56
Measure to Enhance E-banking...62
Pros. and Cons...64
Various Risks associated with e-banking.68




When Internet has entered into our daily life, the most dimensions of our lives such as education,
communication, business, etc, were overshadowed by this novel phenomenon. One of these
dimensions is to handle banking affairs through the Internet (Shirley & Shahreza, 2007).
According to (Richard Nyangosi & Arora, Sumanjeet Singh, 2009) banking through electronic
channels has gained much popularity in recent years.

This system, popularly known as 'e-banking', provides faster delivery of banking services to a
wide range of customers. Information technology is becoming an important factor in the future
development of financial services industry, and especially in banking industry (Nami. M. R,

In current business environments, customers using the services products of the banks want better
choice. (Avkiran, 1999) stressed the importance of the human touch in the customer services.
The capability of banking staff can be expected to directly affect the customers satisfaction.
However, e-banking technologies can help in better understanding customers needs and
customizing the services/ products according to their needs.

In the new era there is a need of bank customers to get improved electronic banking services and
also better relations with the bankers. It is also the need of time to provide efficient
services/products to the customers. In Pakistan however, such kind of electronic banking has
started recently.

Online banking system present to their consumers a set of information-related benefits that
favors to adopt e-banking, including the facility for the customers to control their bank accounts
at any time and any place, and to access information content for making investment and
financing decisions (Howcroft B, 2002).


Due to the competition among the banks in Pakistan, the banks want to provide the services
which are more efficient, rapid and enhanced the banking system. Therefore, the objective of ebanking is to create such working environment where customers can easily find about the
information they require for performing financial transactions.

Definition of E-Banking
Electronic banking, also known as Electronic Funds Transfer (EFT), online banking or internet
banking. It is basically the use of electronic methods or means to transfer money electronically


directly from one account to another account, from one person to another, rather than cash or
We can use electronic funds transfer for:

Withdraw money by an ATM machine with a personal identification number (PIN), for
our convenience, day or night.

We can guide our bank or credit union to pay automatically monthly utility bills from our
account, or our auto loan even our mortgage payment.

Buy food, fuel for our personal transport, and other goods at the purchasing point, using a
credit card rather than cash.

Use a prepaid smart card embedded for our daily purchasing like pay phone, toll
expenses, daily college expense or any bookstores.


The increasingly change in worldwide competitiveness in commercial behaviors has improved

the volume of bank in the world. It has produced additional banking knowledge and also
improved customer demand of services given by banks.

This revolution has set a motion in the banking sector for the provision of a payment system that
is compatible with the demands of the electronic market (Balachandher, 2001). On the behalf of
increased competition, many banks and organization did not only reduce their costs but they
have also increased their products. Technology has changed the preconditions for service
delivery, dramatically in recent years (Frederickson, 2003).

The banks are the financial institutions to provide consumers savings services, money
transmission services and credit services (Sinkey, 1990). In other terms, banks are concerned
with safe transaction and collection of management functions. In this regard the main object of
the banks is to making profits and giving best services to their customers. Customers are eager to
a bank behavior because the customers are the most significant cause of a banks deposit and
revenue creation. These customers may either be a single person or group of a person or


organization. According to (Chaudhury &Kuilboer, 2002) the potential of providing innovative

services over the Web is limited only by ones imagination.

Online services, especially banking services, are becoming more attractive and alternative to
visiting service outlets or phone call centers for increasing their customers (HR- Focus, 2000).
Therefore it become easy for the customers to prefer online services (Szymanski & Hise, 2000),
feel more in control of the service process (Bateson, 2000) to avoid from human contact with
time saving (Meuter M.L. 2000).

In Pakistan however, banking organizations have been focused on censure for not given to their
customers with original and suitable banking services. Therefore, the outcome that some
customers, find it suitable to keep their money or reserves at home than the banks. Studies will
carry out by two famous banks working in Pakistan, which have researched and applied
computerized technology for the delivery of banking services. Most of the bank branches have
their own network across the country (Safo, 1990).

Although, banking administration has delayed to execute computer technology in banking

exercises. A number of studies have concluded that IT has positive effects on bank services
delivery to customers, bank productivity, cashiers work, banking transaction and banking
investment. So, these have positive effects on the growth of banking system (Balachandher,

In addition, delivery the high quality services is a way for the banking to improve their
relationships with their customers. By the Delivering high quality services, banks can achieve
customer satisfaction and through customer satisfaction banks can gain loyal customers
(Grnroos, 2000). Because of the highly undifferentiated services and products, financial
organizations specifically banks become main tool for competing in this marketplace (Kim J.K,
Han, Choi & Kim S.H. 1998).

Much research has been done about the quality of services and customer requirements in the
traditional banking environment, where personal interaction between the customers and the bank


employees takes place (Oppewal & Vriens, 2000). Therefore, this is very important for the
online banking services providers to become more capable about the customers perceptions of
the online banking services quality. On the other hand the customers also have more expectations
and demand when they are using e-banking services either the services are satisfactory or not.
Because it is quite easier for customers to evaluate and compare the benefits of competing
services (Santos, 2003).

Services provided by commercial banks through E-banking

The Basic Level Service is the banks web site which disseminates information on different
products and services offered to customers and members of public in general. It may receive
and reply to customers queries through email.

In the next level are Simple transactional Web sites which allow customers to submit their
instructions, applications for different services, queries in their account balances, etc. but do not
permit any fund-based transactions on their accounts;

The third level of Internet banking services are offered by Fully Transactional Web sites which
allow the customers to operate their accounts for transfer of funds, payment of different bills,
subscribing to other products of the bank and to transact purchase and sale of securities, etc.

The above forms of Internet banking service to the customer by new banks are delivered through
Internet or other electronic delivery channels as value added services. Some of these banks are
known as Virtual banks or Internet only banks and may not have physical presence in a
country despite offering different banking services.

Internet Banking enables you to manage your accounts and investments more easily. It also gives
you greater control over balances, transfers and fixed deposits. The following services are
available for customers:


Account Info and Other Services

Balance Inquiry

Account Statement

Cheques Book Request

Fixed and Call Deposit

Cheques in Clearing

Change Password

Address Change Request

Funds Transfer

Bill Payment (Electricity, telephone bills etc)

Remittance Request

Account Usage

Credit Card Services

The credit card enables the cardholders to purchase any item like clothes, jewelry,
railway/air tickets, etc., pay bills for dining in a restaurant or boarding and lodging in hotel, avail
of any service like car rental, etc. on credit and the customer has to pay total expenses on
purchasing to the bank after a particular period.

Balance Inquiry

Transaction details

Credit Card Payment

Change Password

Account Usage


Debit Card services

A debit card is issued on payment of a specified amount to the bank. The customer will
use it anywhere to carry out the purchasing, amount for which will be debited from his account
by a bank.

Thus it is like an electronic purse, which can be read and debited by the required amount. It may
be noted that while through a credit card the customer first makes a purchase or avails service
and pays later on, through the debit card a customer has to first pay the due amount and then
make a purchase or avail the service.

Making purchases using your debit card

Withdrawals at any time through ATM

Secure mobilization of money

Cell phone Internet Services

This system allows you to access the banks cell phone banking service via the Internet
using your cell phone. The following transactions can be conducted:

Get balance enquiries

Make account payments

Make inter-account transfers

Get mini-statements of the last five transactions

Recharge MTN and Vodacom prepaid airtime

Increase or decrease your overdraft limit


Telephone Banking Services

Your telephone gives you access to your bank accounts 24 hours a day, seven days a
week. You can do your banking from your home or office, from your car, and even at the

Smart Cards:
Smart Cards have a built-in microcomputer chip, which can be used for storing and
processing information. For example, a person can have a smart card from a bank with the
specified amount stored electronically on it. As he goes on making transactions with the help of
the card the balance keeps on reducing electronically. When the specified amount is utilized by
the customer, he can approach the bank to get his card validated for a further specified amount.
Such cards are used for paying small amounts like telephone calls, petrol bills, etc.
ATM Cards:
The card contains a PIN (Personal Identification Number) which is selected by the
customer or conveyed to the customer and enables him to withdraw cash up to the transaction
limit for the day. He can also deposit cash or cheque.

E-banking Growth in Pakistan (State bank of Pakistan)

Electronic banking (e-banking) and branchless banking transactions continued to show growth
momentum as both the volume and value of these transactions displayed a rising trend in the
country during the last quarter of the fiscal year (2008-2009).
1. According to the Fourth Quarterly Report on Branchless Banking/ Electronic Banking, the
volume and value of e-banking/ branchless banking transactions in the country reached at 44.5
million and Rs 3.9 trillion respectively showing an increase of 11.1 percent in number and 7.8
percent in value as compared to 6.5 percent increase in number and 11.4 percent increase in
value in the previous quarter of FY09 (Jan-March 2009).


2. During the fourth quarter (April-June) of FY09, the volume and value of online banking
transactions in the country reached at 13.7 million and Rs 3.7 trillion respectively showing a
growth of 10.8 percent in numbers and

7.4 percent increase in value as compared to 14.8

percent increase in numbers and 11.7 percent increase in value in the previous quarter.

3. According to the report, during the fourth quarter, the volume and value of ATM transactions
in the country reached at 25.2 million and Rs 189.0 billion respectively showing a growth of 12
percent in numbers and 12.2 percent increase in value as compared to 5.2 percent increase in
numbers and 10.2 percent increase in value in the third quarter.

4. During the period under review, the volume and value of internet transactions in the country
recorded at 0.6 million and Rs 22.2 billion respectively, showing an increase of 15.4 percent in
numbers and 35.7 percent increase in value as compared to 2.8 percent decline in numbers and
2.1 percent increase in value in the previous quarter. Whereas, the volume and value of mobile
transactions in the country recorded at 21,733 and Rs 4.9 million respectively showing an
increase of 40.6 percent in numbers and 48.2 percent increase in value as compared to 12.1
percent decline in numbers and 15.4 percent decline in value in the previous quarter.

5. According to the report, the total quantity of ATM machines during April-June, 2009 period
reached at 3,999 registering a growth of 5.7 percent as compared to 7.4 percent increase in the
previous quarter. The volume of Real Time Online Branches (RTOB) during the quarter reached
at 6,040 and recorded a growth of 1.3 percent as compared to 1.8 percent increase recorded in the
previous quarter. The total quantity of POS terminal reached at 49,715 showing an increase of
2.7 percent in number as compared to 1.1 percent decline in previous quarter.

6. It said that total quantity of cards (debit / credit /ATM only) in circulation during fourth
quarter of FY09 reached at 8.9 million which shows an increase of 6.6 percent as compared to
3.1 percent decline in the previous quarter. The quantity of credit cards has decreased by 0.6
percent as compared to 6.2 percent decrease in the previous quarter. The quantity of debit cards
has increased by 9.6 percent as compared to 2.5 percent decline in previous quarter and stood at
6.4 million, it added.


7. The report pointed out that paper-based instrument during the fourth quarter of FY09
witnessed a growth of 4.8 percent to 85.6 million in numbers compared with 1.4 percent decline
in the previous quarter (81.7 million). The value of transactions decreased by 6.1 percent to Rs
33.1 trillion as against 1.6 percent increase or Rs 35.3 trillion recorded during third quarter of

It said that during the last six quarters the transition from manual (paper-based) banking to ebanking has been gradual, yet consistent, in terms of both volume and value of transactions. The
composition (in percentage) of electronic transactions increased to 34.2 percent of the total
number of transactions as compared to 32.9 percent recorded last quarter. In terms of value, the
same increased by 10.5 percent as compared to 9.3 percent rise recorded last quarter.

E-Payment Grow To Rs. 4.1trillion FY 2010

The electronic payments continued to show a rising trend as both the number and value of such
transactions increased in the second quarter (Oct-December) of the current 2009-10 fiscal year
As per State Banks Second Quarterly Report on Retail E-Payments and Paper Based
Instruments released on Friday, the volume and value of E-Payments transactions in the country
during the second quarter of FY10 reached 46.4 million and Rs 4.1 trillion respectively showing
an increase of 0.2 percent in number and 6.1 percent increase in value as compared to 4.0 percent
increase in number and 0.3 percent increase in value in the previous quarter.

According to the Report, total number of Automated Teller Machines during the second quarter
reached to 4,217 registering a growth of 4.0 percent as compared to 1.4 percent increase in the
previous quarter. The volume of Real Time Online Branches (RTOB) during second quarter
reached at 6,587 and recorded a growth of 7.6 percent as compared to 1.3 percent increase
recorded in the previous quarter.


The total quantity of POS terminal reached 50,920 showing a decrease of 1.5 percent in number
as compared to 4.0 percent increase in previous quarter. The volume and value of debit cards
transactions were reported at 29.98 million and Rs. 235.25 billion respectively showing an
increase of 3.7 percent in numbers and 9.7 percent increase in value as compared to 3.0 percent
increase in numbers and 2.2 percent increase in value in the previous quarter.

Similarly, during the second quarter of FY10 the volume and value of credit cards transactions
were reported to be 3.8 million and Rs. 17.0 billion respectively showing a decrease of 10.0
percent in numbers and 8.7 percent decrease in value as compared to 6.9pc decrease in numbers
and 2.6pc decrease in value in the previous quarter. In addition, the total number of cards (debit /
credit /ATM only) in circulation during the second quarter reached to 9.95 million which shows
an increase of 6.8 percent compared to 4.3 percent increase in the previous quarter.

E-Banking Transactions Rose To Rs. 12 Trillion In Fiscal Year 2011 (JanJuly 2011)
The value of e-banking transactions aggregated to Rs 12 trillion during the second half of FY11,
showing an increase of 19.0 percent as compared to the first half of the year, according to State
Bank of Pakistan's Payment Systems Half Yearly Review.

The volume of such transactions during the period under review reached 125.9 million, depicting
an increase of 15.5 percent as compared to the first half of FY11, the Review said, adding that
payment system infrastructure in Pakistan had maintained overall growth trend for the second
half of FY11. The Automated Teller Machines (ATMs), which are the largest channel of ebanking transactions, showed 16.5 percent increase in number of transactions, and 19.0 percent
increase in value, raising the share of ATM transactions in total e-banking transactions to 58.8
percent and 5.4 percent respectively,

the Review said, adding that the number of Real-Time Online Branches (RTOB) transactions
grew by 14.7 percent and the value of transactions increased by 18.8 percent as compared to first


half of FY11. "These transactions contributed 31.6 percent in total volume of e-banking, and
93.2 percent in the value of such transactions respectively," the Review observed.

According to the Review, 466 more Automated Teller Machines were added in the system,
bringing total ATMs in the country to 5,200, while 380 more bank branches were converted into
Real Time Online Branches (RTOBs).
"A total of 7,416 bank branches (78 percent) are now offering real time online banking out of
total 9,541 branches in the country.

The number of plastic cards at 14 million also registered an increase of 6.2 percent during the
period under review as compared to the numbers during the preceding half year," the Review
added. It said that total number of POS terminals at 37,232 depicted a decline of 16 percent as
compared to 44,383 terminals in the first half of FY11."
This decline in the number of POS terminals is due to business considerations in terms of which
investment in ATMs was considered a more viable strategic option. The volume of POS
transactions in the country during the second half of FY11, however, reached 7.2 million
showing an increase of 2.8 percent. The value of POS transactions at Rs 33.9 billion registered a
4.4 percent decrease as compared to the first half of FY11," the Review said.
The overall increasing trend in payment system infrastructure was also witnessed in the large
value payments settled through Pakistan Real-time Interbank Settlement Mechanism (PRISM),
which increased by 14.8 percent in volume and 21.9 percent in terms of value as compared to the
first half of FY11, it said and added that the major portion of PRISM transactions, in terms of
value was of settlements against securities which accounted for 46 percent of the total
transactions followed by Interbank Funds Transfers at 37 percent and settlement of retail cheques
through multilateral clearing at 15 percent.

The Review said that the volume and value of paper-based retail payments during the second
half of FY11 were recorded as 177.3 million and Rs 84.6 trillion respectively indicating an
increase of 3.5 percent in the volume of transactions."The value of transactions has increased by
13.3 percent as compared to the first half of Year 2011. The contribution of paper-based


payments in total retail payment transactions was 58.5 percent in terms of volume and 87.5
percent in terms of value," it added.
July to September (2011)

Banking institutions are showing tremendous growth day by day. Significant positive changes
shown in statistics table: 2 below during the 3rd quarter of year 2011





Awareness of E-banking in Pakistan:

In order to know whether the public is aware about E-banking and the various services it is
offering and also to check the level of acceptance or the utilization of E-banking, a questionnaire
was prepared to get the idea.
Following results were achieved:

Table 1 shows the different questions and their association with gender. First question is about
Awareness of electronic banking. Total respondents who answered this question were 396 in
which 196 were male respondents and 200 were female respondents. Its result shows that
awareness of electronic banking is dependent on gender. Next question was answered by 385
total respondents from which the amount of male and female were 190 and 195 respectively.
Its results Show that providing e-banking services by banks were highly dependent on gender.
Third one is about awareness of SMS banking which was answered by 196 male and 195 female
respondents. Its result shows that awareness of SMS banking is also dependent on gender. Now
the next question is about Internet banking awareness which was answered by 189 male
respondents and 198 female respondents and its result shows that awareness of internet banking


is dependent on gender. Next question is about awareness of ATM card usage. Total 391
respondents answered that question from which the amount of male and female were 193 and
198 respectively. It results shows that awareness of ATM card usage is not dependent on gender.

Now there is a question about Phone banking awareness so total 392 respondents answered that
question from which 193 were male and 199 were female and its result shows that phone
banking awareness is not dependent on gender.

The seventh question was asked by respondents about their satisfaction about e-banking services
providing by their banks and total 390 answered that question and its result shows that
satisfaction about e-banking services providing by banks is depends on gender. Now there is
second last question which was answered by 191 male and 195 female respondents and its result
shows that satisfaction about security of e-banking providing by banks is not depends on gender.
Last question is about the using e-banking service in future and its results are highly dependent
on gender.

Now there is a table no.2 which shows the description of the question, Aware of electronic
Banking. It shows the amount of respondents from strongly disagree to strongly agree. The
highest figures of people are agreed about awareness of e-banking. In male respondents 64 were
agree which is 33% of total male respondents. Likewise, in female respondents 57
were agreeing about it which is 29% of total females.


Now there is a simple bar chart of the table no.2 which shows clearly that very less amount of
people are strongly disagree or disagree, mostly are agree and strongly agree that they know well
about e-banking. Now there is a table no. 3 which shows the association of education level with
different research questions

In table no. 3 there is a demographic of education whose relationship with research questions is


given in above table. First there is a question about awareness of electronic banking. Total
respondents were 384 from which the education of 8 respondents were primary, 7 people had just
completed high school, 10 respondents complete their secondary education,195 were graduate
and 164 were post graduate. Its result shows that awareness of electronic banking is highly
dependent on education. Secondly there is a question about use of debit or credit cards for online
transactions. Total respondents were 376 from which respondents were from different education
level which are given on above table. Next question is about awareness of ATM card usage,
which is responded by 381 people and its result shows that it depends on education. Next
question is about Phone banking awareness, which is answered by 380 people and it result shows
that it is not dependent on education. Fifth question is about feeling of risk for hacking of
passwords, 378 people responds that and its result tells that it is also not dependent on education
and next there question are also not dependent on education

In this table results shows that mostly people are graduate whose percentage is 51% percentage
of total respondents in which highest percentage of people have neutral point of view about that.
Following is the table no. 5 which shows the association of age with different research questions:


Above table shows the relationship of research questions with age. In first question it is asked
about command on computer. This question was answered by total 391 respondents from which
from which 91 respondents had age less than 19. The respondents from age group 20-29 were
241 which is highest amount, 30 respondents were from age group 30-39.
Respondents who had age 40-49 were 16, 10 respondents age was lied in 50-59 and only
respondents were above 60. Its result shows that having full command on computer is dependent
on age. Next question is about involvement in banking transaction which was answered by total
391 respondents and the amount of responses by different age groups are shown in table. Its
result shows that involvement in banking transaction is highly dependent on age.
Third question is about awareness of usefulness of e-banking which is answered by total 392
respondents and its results shows that it depends on age. Next question is about


Providing of online technical assistance or 24 hr. helpline which responds by 391 respondents
and its results tells that it is also dependent on age. Moreover, there is question about using of
debit or credit cards for online transactions which responds by 390 people, which shows the
result that it depends on age.

Next questions are about awareness of internet banking and Phone banking whose result shows
they are not dependent on age. Further there is a question about its easy way of monitoring an
account which responds by 396 people and its result shows that it depends on age. Further there
is a question about feeling of risk about hacking of passwords, 392 people respond it and result
shows that it is independent to age.

Now there is a question about easy access to ATM machine whose result shows that it is highly
dependent on age. Satisfaction of e-banking services provided by banks is independent on age.
However, Satisfaction of security providing for e-banking by banks is dependent on age. Last
question is about trust on bank employees more than e-banking whose result shows that it is also
Dependent on age.

The table above describes about awareness of Phone banking with respect to age. In


this table greatest amount of respondents are agree that they are familiar with phone banking.
From age group ranges from 20 to 29 has greatest figure of 72 about knowing of phone banking
which is 30% of the age group who had age 20-29.

Measures to Enhance public awareness

Internet banking is gaining ground. Banks increasingly operate websites through which
customers are able not only to inquire about account balances and interest and exchange rates but
also to conduct a range of transactions.

Unfortunately, data on Internet banking are scarce, and differences in definitions make cross
country comparisons difficult. Even so, one finds that Internet banking is particularly widespread
in Austria, Korea, the Scandinavian countries, Singapore, Spain, and Switzerland, where more
than 75 percent of all banks offer such services.

The Scandinavian countries have the largest number of Internet users, with up to one-third of
bank customers in Finland and Sweden taking advantage of e-banking.

As we know that the world is developing and attaining new technologies day by day in order to
facilitate maximum people with maximum services within no time. Therefore there is a need of,
to increase the public awareness about E-banking.
The most commonly practiced tools for public awareness are the:

It means to keep the public aware about E-banking through Electronic media i.e.
Television, radio, internet and any other source of electronic media with a proper advertisement.

In includes the Newspapers, pamphlets any other paper media through which people gain
information about various things.


So these two are the basic tools in order to promote E-banking. Besides this, the various account
holders in each banks, can also be told about E-banking, their services and Benefits which the
customers will get.
Promotional Measures Used by Banks to Promote e-Banking
The banks can promote e-banking viz. print, internet, SMS, outdoor advertisement,
television and radio.

a. Choice of Promotional Media:

There are different sources used by banks to promote e-banking like
print media, internet, SMS on mobile, outdoor advertisements and television and
radio. Majority of the bankers are in a view that print media is used by the banks to a large extent
for the purpose. Regarding internet, highest percentage of the bankers said that internet is used
very little.

Regarding the use of SMS about most of the bankers in a survey reported that it is not at all
used. Outdoor advertisements are also used to some extent.

In the opinion of 37.50 percent bankers, television and radio are also used by the banks to some
extent. It signifies that banks mostly rely on print media to promote e-banking services.

b. Banks Providing Knowledge to Customers for Using E-banking Services

The extent to which banks are providing knowledge to customers for using e-banking,
many of respondents said that banks do provide knowledge but only to some extent, followed by
an average, who believed that sufficient guidance is supplied by the banks in this field, that the
banks extend a little or very little knowledge is expressed by a small percentage of the
So it is concluded the banking personals should focus on introducing the E-banking and their
services and benefits to the customers so that they should be aware of that.
Only in such case there will be improvement in use of E-banking if public has awareness.


Pros & Cons of E-banking


This is the single most important benefits that outweigh any shortcoming of internet
banking. Making transactions and payments right from the comfort of home or office at the click
of a button without even having to step out is a facility none would like to forego. Keeping a
track of accounts through the internet is much faster and convenient as compared to going to the
bank for the same. Even non transactional facilities like ordering check books online, updating
accounts, enquiring about interest rates of various financial products etc become much simpler
on the internet.

It is generally secure. But make sure that the website you're using has a valid security
certificate. This let's you know that the site is protected from cyber-thieves looking to steal your
personal and financial information.

You have twenty-four-hour access. When your neighborhood bank closes, you can still
access your account and make transactions online. It's a very convenient alternative for those that
can't get to the bank during normal hours because of their work schedule, health or any other

You can access your account from virtually anywhere. If you're on a business trip or
vacationing away from home, you can still keep a watchful on your money and financial
transactions - regardless of your location.


Rapid transactions:
Conducting business online is generally faster than going to the bank. Long teller lines
can be time-consuming, especially on a Pay Day. But online, there are no lines to contend with.
You can access your account instantly and at your leisure.

Home Online facilities:

Many features and services are typically available online. For example, with just a few
clicks you can apply for loans, check the progress of your investments, review interest rates and
gather other important information that may be spread out over several different brochures in the
local bank.

Shop and payment:

Through E-banking, one can shop and make the payment safely by sitting at home, office or

E-mails and statements:

Most banks also send statements and Notices via E-mails which save paper and notify you
immediately if there is any funny business with your account.

Cheaper services:
Online banking is often cheaper as compared to manual/traditional addition to
being able to offer competitive rates, many online banks dont charge hefty fee and you dont
have to pay for the gas to get there and you save money on postage if you are paying bills
Safe Money:
It is due to |E-banking that nowadays one can take money as much he want without
keeping it in shape of cash.i.e ATM cards etc.


Disadvantages of E-Banking:

The world has come from far and we are every day digging into the unknown, what was
unthinkable then, is now a practice. Today, you can bank right from the comfort of your home
and multitudes of benefits come with it. However, though internet banking is such a good and
desirable innocent, it has some disadvantages as listed;

Setting up an account may take time:

In order to register for your bank's online program, you will probably have to
provide ID and sign a form at a bank branch. Some banks even ask for photos

Legal issues:
If you and your spouse wish to view and manage your assets together online,
one of you may have to sign a durable power of attorney before the bank will display all of your
holdings together.

Learning difficulties:
Banking sites can be difficult to navigate at first. Getting acquitted with the banking
sites software may require some time to read the tutorials in order to become comfortable in your
virtual lobby.

Site changes and upgrades:

Even the largest banks periodically upgrade their online programs, adding new
features in unfamiliar places. In some cases, you may have to re-enter account information.

Customer service:
There is no personal contact with any of the staff, and if talk to any staff through
the telephone, you have guarantee you are talking to the best person available


Internet account:
You need to get an account with an Internet Service Provider (ISP) which may
be another hectic experience

Security concern:
Even though online banking sites are heavily encrypted, with the developing
technology, its hard to rule out the "hackers" who may access your bank accounts

Switching banks:
This can be more cumbersome online than in person

Money usage:
You cant spend your money from the online bank account as you wish, in the
end; you will need to go to an ATM to withdraw money for usage.

Technical breakdowns:
As with all technologies, online banking websites sometimes go down. If this happen
when you closed your local bank or credit card accounts, you will definitely go penniless.

However, even though online banking has some disadvantages, the advantages with no doubt
outweigh. It is there for important for everyone to prepare for the unknown with an online bank

Identity Confirmation:
Federal regulations require that financial institutions confirm each customer's
identity. This may present a logistical issue, as copying and faxing documents is sometimes
Security Concerns:
With hacking and identity theft on the rise, Internet banking customers have to
place a certain amount of trust in the bank that their account information and personal
information are safe.


Skills required:
As we know that the literacy rate in Pakistan is low so there are many peoples who
find it impossible to utilize the E-banking services as it is skill and education required work.
Many people thus prefer more the Manual banking system.

Various Risks Associated with E-banking

A major driving force behind the rapid spread of i-banking all over the world is its acceptance as
an extremely cost effective delivery channel of banking services as compared to other existing

However, Internet is not an unmixed blessing to the banking sector. Along with reduction in cost
of transactions, it has also brought about a new orientation to risks and even new forms of risks
to which banks conducting i-banking expose themselves. Regulators and supervisors all over the
world are concerned that while banks should remain efficient and cost effective, they must be
conscious of different types of risks this form of banking entails and have systems in
place to manage the same.

An important and distinctive feature is that technology plays a significant part both as source and
tool for control of risks. Because of rapid changes in information technology, there is no finality
either in the types of risks or their control measures. Both evolve continuously. The thrust of
regulatory action in risk control has been to identify risks in broad terms and to ensure that banks
have minimum systems in place to address the same and that such systems are reviewed on a
continuous basis in keeping with changes in technology. In the following paragraphs a generic
set of risks are discussed as the basis for formulating general risk control guidelines, which this
Group will address:

Operational risk:
Operational risk, also referred to as transactional risk is the most common form of risk
associated with i-banking. It takes the form of inaccurate processing of transactions, non


enforceability of contracts, compromises in data integrity, data privacy and confidentiality,

unauthorized access / intrusion to banks systems and transactions etc. Such risks can arise out of
weaknesses in design, implementation and monitoring of banks information system. Besides
inadequacies in technology, human factors like negligence by customers and employees,
fraudulent activity of employees and crackers / hackers etc. can become potential source of
operational risk. Often there is thin line of difference between operational risk and security risk
and both terminologies are used interchangeably.

Security risk:

1. Internet is a public network of computers which facilitates flow of data / information and to
which there is unrestricted access. Banks using this medium for financial transactions must,
therefore, have proper technology and systems in place to build a secured environment for such
2. Security risk arises on account of unauthorized access to a banks critical information stores
like accounting system, risk management system, portfolio management system, etc. A breach of
security could result in direct financial loss to the bank.

For example, hackers operating via the Internet, could access, retrieve and use confidential
customer information and also can implant virus. This may result in loss of data, theft of or
Tampering with customer information, disabling of a significant portion of banks internal
computer system thus denying service, cost of repairing these etc. Other related risks are loss of
reputation, infringing customers privacy and its legal implications etc.
Thus, access control is of paramount importance. Controlling access to banks system has
become more complex in the Internet environment which is a public domain and attempts at
unauthorized access could emanate from any source and from anywhere in the world with or
without criminal intent. Attackers could be hackers, unscrupulous vendors, disgruntled
employees or even pure thrill seekers. Also, in a network environment the security is limited to


its weakest link. It is therefore, necessary that banks critically assess all interrelated systems and
have access control measures in place in each of them.

3. In addition to external attacks banks are exposed to security risk from internal sources e.g.
employee fraud. Employees being familiar with different systems and their weaknesses become
potential security threats in a loosely controlled environment. They can manage to acquire the
authentication data in order to access the customer accounts causing losses to the bank.

4. Unless specifically protected, all data / information transfer over the Internet can be monitored
or read by unauthorized persons. There are programs such as sniffers which can be set up at
web servers or other critical locations to collect data like account numbers, passwords, account
and credit card numbers. Data privacy and confidentiality issues are relevant even when data is
not being transferred over the net. Data residing in web servers or even banks internal systems
are susceptible to corruption if not properly isolated through firewalls from Internet.

5. The risk of data alteration, intentionally or unintentionally, but unauthorized is real in a

Networked environment, both when data is being transmitted or stored. Proper access control
and technological tools to ensure data integrity is of utmost importance to banks. Another
important aspect is whether the systems are in place to quickly detect any such alteration and set
the alert.

6. Identity of the person making a request for a service or a transaction as a customer is crucial to
legal validity of a transaction and is a source of risk to a bank. A computer connected to Internet
is identified by its IP (Internet Protocol) address. There are methods available to masquerade one
computer as another, commonly known as IP Spoofing. Likewise user identity can be
misrepresented. Hence, authentication control is an essential security step in any e-banking

7. Non-repudiation involves creating a proof of communication between two parties, say the
bank and its customer, which neither can deny later. Banks system must be technologically
equipped to handle these aspects which are potential sources of risk.


System architecture and design

1. Appropriate system architecture and control is an important factor in managing various kinds
of operational and security risks. Banks face the risk of wrong choice of technology, improper
system design and inadequate control processes. For example, if access to a system is based on
only an IP address, any user can gain access by masquerading as a legitimate user by spoofing IP
address of a genuine user. Numerous protocols are used for communication across Internet. Each
protocol is designed for specific types of data transfer. A system allowing communication with
all protocols, say HTTP (Hyper Text Transfer Protocol), FTP (File Transfer Protocol), telnet etc.
is more prone to attack than one designed to permit say, only HTTP.

2. Choice of appropriate technology is a potential risk banks face. Technology which is outdated,
not scalable or not proven could land the bank in investment loss, a vulnerable system and
inefficient service with attendant operational and security risks and also risk of loss of business.

3. Many banks rely on outside service providers to implement, operate and maintain their
banking systems. Although this may be necessary when banks do not have the requisite
expertise, it adds to the operational risk. The service provider gains access to all critical business
information and technical systems of the bank.Thus making the system vulnerable. In such a
scenario, the choice of vendor, the contractual arrangement for providing the service etc.,
become critical components of banks security. Bank should educate its own staff and over
dependencies on these vendors should be avoided as far as possible.
4. Not updating banks system in keeping with the rapidly changing technology, increases
operational risk because it leaves holes in the security system of the bank. Also, staff may fail to
understand fully the nature of new technology employed. Further, if updating is left entirely at
customers end, it may not be updated as required by the bank. Thus education of the staff as
well as users plays an important role to avoid operational risk.


Reputational risk
1. Reputational risk is the risk of getting significant negative public opinion, which may result in
a critical loss of funding or customers. Such risks arise from actions which cause major loss of
the public confidence in the banks' ability to perform critical functions or impair bank-customer
relationship. It may be due to banks own action or due to third party action.

2. The main reasons for this risk may be system or product not working to the expectations of the
customers, significant system deficiencies, significant security breach (both due to internal and
external attack), inadequate information to customers about product use and problem resolution
procedures, significant problems with communication networks that impair customers access to
their funds or account information especially if there are no alternative means of account access.
Such situation may cause customer-discontinuing use of product or the service. Directly
Affected customers may leave the bank and others may follow if the problem is publicized.

3. Other reasons include losses to similar institution offering same type of services causing
customer to view other banks also with suspicion, targeted attacks on a bank like hacker
spreading inaccurate information about bank products, a virus disturbing banks system causing
system and data integrity problems etc.

4. Possible measures to avoid this risk are to test the system before implementation, backup
facilities, contingency plans including plans to address customer problems during system
disruptions, deploying virus checking, deployment of ethical hackers for plugging the loopholes
and other security measures.

5. It is significant not only for a single bank but also for the system as a whole. Under extreme
circumstances, such a situation might lead to systemic disruptions in the banking system as a
whole. Thus the role of the regulator becomes even more important as not even a single bank can
be allowed to fail.


Legal risk
1. Legal risk arises from violation of, or non-conformance with laws, rules, regulations, or
prescribed practices, or when the legal rights and obligations of parties to a transaction are not
well established.

2. Given the relatively new nature of Internet banking, rights and obligations in some cases are
uncertain and applicability of laws and rules is uncertain or ambiguous, thus causing legal risk.

3. Other reasons for legal risks are uncertainty about the validity of some agreements formed via
electronic media and law regarding customer disclosures and privacy protection. A customer,
inadequately informed about his rights and obligations, may not take proper precautions in using
Internet banking products or services, leading to disputed transactions, unwanted suits against the
bank or other regulatory sanctions.

4. In the enthusiasm of enhancing customer service, bank may link their Internet site to other
sites also. This may cause legal risk. Further, a hacker may use the linked site to defraud a bank

5. If banks are allowed to play a role in authentication of systems such as acting as certification
Authority, it will bring additional risks. A digital certificate is intended to ensure that a given
signature is, in fact, generated by a given signer. Because of this, the certifying bank may
become liable for the financial losses incurred by the party relying on the digital certificate.
Money laundering risk

1. As Internet banking transactions are conducted remotely banks may find it difficult to apply
traditional method for detecting and preventing undesirable criminal activities. Application of
money laundering rules may also be inappropriate for some forms of Electronic payments. Thus
banks expose themselves to the money laundering risk. This may result in legal sanctions for
non-compliance with know your customer laws.


2. To avoid this, banks need to design proper customer identification and screening techniques,
develop audit trails, conduct periodic compliance reviews, frame policies and procedures to spot
and report suspicious activities in Internet transactions.

Cross border risks

1. Internet banking is based on technology that, by its very nature, is designed to extend the
geographic reach of banks and customers. Such market expansion can extend beyond national
borders. This causes various risks.

2. It includes legal and regulatory risks, as there may be uncertainty about legal requirements in
some countries and jurisdiction ambiguities with respect to the responsibilities of different
national authorities. Such considerations may expose banks to legal risks associated with noncompliance of different national laws and regulations, including consumer protection laws,
record-keeping and reporting requirements, privacy rules and money laundering laws.

3. If a bank uses a service provider located in another country, it will be more difficult to monitor
it thus, causing operational risk. Also, the foreign-based service provider or foreign participants
in Internet banking are sources of country risk to the extent that foreign parties become unable to
fulfil their obligations due to economic, social or political factors.

4. Cross border transaction accentuates credit risk, since it is difficult to appraise an application
for a loan from a customer in another country compared to a customer from a familiar customer
base. Banks accepting foreign currencies in payment for electronic money may be subjected to
market risk because of movements in foreign exchange rates.

Strategic Risk

1. This risk is associated with the introduction of a new product or service. Degree of this risk
depends upon how well the institution has addressed the various issues related to development of


a business plan, availability of sufficient resources to support this plan, credibility of the vendor
(if outsourced) and level of the technology used in comparison to the available technology etc.

2. For reducing such risk, banks need to conduct proper survey, consult experts from various
fields, establish achievable goals and monitor performance. Also they need to analyze the
availability and cost of additional resources, provision of adequate supporting staff, proper
training of staff and adequate insurance coverage. Due diligence needs to be observed in
selection of vendors, audit of their performance and establishing alternative arrangements for
possible inability of a vendor to fulfill its obligation . Besides this, periodic evaluations of new
technologies and appropriate consideration for the costs of technological up gradation are

Other risks

1. Traditional banking risks such as credit risk, liquidity risk, interest rate risk and market risk
are also present in Internet banking. These risks get intensified due to the very nature of Internet
banking on account of use of electronic channels as well as absence of geographical limits.
However, their practical consequences may be of a different magnitude for banks and
supervisors than operational, reputational and legal risks. This may be particularly true for banks
that engage in a variety of banking activities, as compared to banks or bank subsidiaries that
specialize in Internet banking.

2. Credit risk:
Credit risk is the risk that a counter party will not settle an obligation for full value, either when
due or at any time thereafter. Banks may not be able to properly evaluate the credit worthiness of
the customer while extending credit through remote banking procedures, which could enhance
the credit risk. Presently, banks generally deal with more familiar customer base. Facility of
electronic bill payment in Internet banking may cause credit risk if a third party intermediary
fails to carry out its obligations with respect to payment. Proper evaluation of the
creditworthiness of a customer and audit of lending process are a must to avoid such risk.


3. Another facility of Internet banking is electronic money. It brings various types of risks
associated with it. If a bank purchases e-money from an issuer in order to resell it to a customer,
it exposes itself to credit risk in the event of the issuer defaulting on its obligation to redeem
electronic money,.

4. Liquidity Risk:
Such type of risk arises out of a banks inability to meet its obligations when they
become due without incurring unacceptable losses, even though the bank may ultimately be able
to meet its obligations. It is important for a bank engaged in electronic money transfer activities
that it ensures that funds are adequate to cover redemption and settlement demands at any
particular time. Failure to do so, besides exposing the bank to liquidity risk, may even give rise
to legal action and reputational risk.

5. Interest risk:
Similarly banks dealing in electronic money face interest rate risk because of adverse
movements in interest rates causing decrease in the value of assets relative to outstanding
electronic money liabilities. Banks also face market risk because of losses in on-and-off balance
sheet positions arising out of movements in market prices including foreign exchange rates.
Banks accepting foreign currency in payment for electronic money are subject to this type of

6. Risk of unfair competition:

Internet banking is going to intensify the competition among various banks. The open
nature of Internet may induce a few banks to use unfair practices to take advantage over rivals.
Any leaks at network connection or operating system etc., may allow them to interfere in a rival
banks system

Thus one can find that along with the benefits, Internet banking carries various risks for bank
itself as well as banking system as a whole. The rapid pace of technological innovation is likely
to keep changing the nature and scope of risks banks face. These risks must be balanced against
the benefits.


Supervisory and regulatory authorities are required to develop methods for identifying new risks,
assessing risks, managing risks and controlling risk exposure. But authorities need to keep in
consideration that the development and use of Internet banking are still in their early stages, and
policies that hamper useful innovation and experimentation should be avoided.

Thus authorities need to encourage banks to develop a risk management process rigorous and
comprehensive enough to deal with known risks and flexible enough to accommodate changes in
the type and intensity of the risks.


8. Suggestions and Recommendations

It was observed that the major bottleneck in payment system is the physical movement of the
instruments. The circulation of money is one of the major function of SBP-BSC is operated by
CMU through NBP chests. The existing system of flow of work is Ill organized but it should be
more efficient and more effective to compete other central banks of the world. I have some
suggestions which may assist the policy makers of state bank.
8.1 Monitoring and Checks
The monitoring can be increased by using the biometric devices like thumb impression for the
record of entry and leaving time of the employees instead using the older register method which
only marks attendance and no time and hence puts no check on the entry and exit of the
employees in the organization.
8.2 Removing communication gap
The communication gap betaken the Lori grade employees and higher ranked officers of
SBPBSC should be reduced to make sure that the employees can communicate their problems as
Ill as suggestions about ongoing policies more easily, to the higher authorities.
Periodic meetings should be conducted with employees to get more and more feedback about the
current processes and procedures and also to make necessary improvements if any.

Hire new staff

The overburden of work on the existing staff seems to be an obstacle in the flow of work. The
SBP should hire new staff and make sure the availability of backup staff.
8.5 Internship Facilities
The state bank of Pakistan has offered internships to 3 students from a single university, so it is
recommended that it should be exceeded at least to 5 students and the current duration is 6 weeks
which should be also be increased.


8.6 Access to all units of Bank

During my internship, we visited all units except the Currency vaults units. The
internees are not allowed to visit this unit of bank so I suggest that with the
supervision of a bank employee or our training co coordinator, the internees should
be give access to all units in order to proper understand the working of these units.


State bank of Pakistan provides a large number of services. In public account department they
receive cash or cheque and also make payments on the behalf of government and they also clear
cheques. In DFU unit they provide export financing money to exporters. In prize bond
department they provide prize bonds and also conduct draws on the behalf of govt. DAU deals
with commercial banks whereas The CMU deals with the management of currency and this is the
unit which plays key role in the circulation of money through NBP chests.
The NBP plays vital role in circulation of money. There are many chests operating in the KPK
and one treasury office. In case where there is no NBP chest, The Treasury office works as agent
on behalf of SBP. The roles of these chests are to deal with the circulation of currency in the



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