Wajid Saeed Final

State Bank of Pakistan
STATE BANK OF PAKISTAN

(Head Office)
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State Bank Of Pakistan
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INTERNSHIP REPORT ON
KARACHI
BY
Wajid Saeed
ROLL NO: 21272
BBA (Finance)
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DEPARTMENT OF MANAGEMENT SCIENCES

HAZARA UNIVERSITY MANSEHRA
SESSION 2010-2014
This Internship Report is submitted to the Department of Management Sciences

In Partial Fulfillment of the Requirements for the Degree of
Bachelor of Business Administration.
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Department of Management Sciences

Hazara University Mansehra
SESSION 2010-2014
APPROVAL SHEET
Internal Supervisor:
Name:
Mr. Haseeb Hassan
Signature:
Designation:
Lecturer
External Examiner:
Signature:
________________________
Chairman:
Signature:
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_________________________
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DEDICATION
This Report is Dedicated to my loving Parents, Sisters, Teachers &

Friends who always supported, encouraged and helped me to complete
my education without any reluctant.
May they all live long?
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ACKNOWLEDGEMENT
Standing on a bank of river, a man cannot determine its depth unless and
until he sets foot in it. It has always been said that the best way to learn is
through experience.
First of all I would like to praise and thanks Almighty ALLAH, who gave me the
strength and will to complete this task that would not have been possible otherwise.
I am very grateful to the management of State Bank of Pakistan for offering the summer
internship program and providing me an opportunity to gain practical experience.
The completion of this report was a difficult task and it just became possible with the
cooperative & supportive staff of Risk management Department especially Mr. Mohsin
Rasheed (Director RMD), Mr. Qaimat Karim, Mr. Zohaib Pasha Khero and all the other
staff members of RMD. I am also very thankful to all my colleagues and friends whose
support & motivation help me in completing this report within the allocated time.
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PREFACE
This report encircles the basic framework of liquidity risk management in State Bank of
Pakistan and other financial institutions. This report is a result of my zealous efforts.
Though, I am professionally amateur but the continuous inspiration of my commendable
coordinator motivated me to make use of little talent that I had and come forth with this
report. I have, in this report concentrated on quality rather than blacking sheets with
worthless or irrelevant details.
All the crust matters have been discuss for the better understanding with the help of
data from authentic sources.
Data is acquired from the official website of SBP and from other websites. I am
amateur to make a practical analysis but I make our zealous efforts. This is only drawback
in our work. Yet I hope that whoever examines this project keep this factor in
concentration. I do hope in favorable anticipation that this project will be appreciated
keeping in view all the inherent discrepancies in its generation. (Thanks)
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Table of Contents
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Chapter No 1........................................................................................................................14
Introduction of the Internship Report...................................................................................14
1.2 Project Scope...................................................................................................... 14
1.3 Project Structure.................................................................................................. 14
1.4 Theme of the Study.............................................................................................. 15
Chapter No 2........................................................................................................................17
Introduction to the Banking System in Pakistan and Central Bank of Pakistan..................17
2.1 Banking..........................................................................................................................17
2.2 Banking System of Indo Pak before Partition.............................................................17
2.3 Banking in Pakistan.......................................................................................................19
2.4 BANKING SYSTEM IN PAKISTAN...........................................................................21
Introduction to State Bank of Pakistan................................................................................23
2.5 SBP Vision Statement........................................................................................... 23
2.6 SBP Mission Statement......................................................................................... 23
Figure 1 from SBP website.......................................................................................... 24
2.7 History of State Bank of Pakistan.............................................................................24
2.15 Risks in SBP and other Financial Institutions..............................................................32

2.15. Section A: Risk Management in SBP.........................................................................32
2.15.1 Risk.............................................................................................................. 32
2.15.2 Risks in State Bank of Pakistan............................................................................32
2.15.3 Risk Management Department............................................................................. 32
2.15.5 Key Functions of RMD...................................................................................... 33
2.15.6 Structure of RMD............................................................................................ 34
Figure 3 from Risk management department in SBP...........................................................34
2.15.7 Responsibilities of the RMD............................................................................... 34
2.15.8 Liquidity Risk:.........................................................................................................35

2.15.9 Risk Management............................................................................................ 35
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Figure 4 from Risk Management Department in SBP..........................................................36

2.15.10 Liquidity Risk Management.............................................................................. 36
2.15.11 Liquidity Risk management in a State Bank of Pakistan............................................37
Section B Risk Management in other Financial Institutions................................................41

2.15. B Liquidity Risk Management in Financial institutions................................................41
Requirements for Liquidity Risk Management..................................................................44
Chapter No 3 Financial Analysis of SBP.............................................................................45

Section A: Financial Analysis.............................................................................................45
3.1 Current Ratio...................................................................................................... 45
Interpretation........................................................................................................................45
3.2 Debt Ratio......................................................................................................................46
3.3 Interest Coverage Ratio..................................................................................................46
3.4 Operating Profit Margin.................................................................................................47
3.6 Return on Assets.............................................................................................................48
3.7.1Horizontal Analysis of Balance sheet of SBP..............................................................49
Balance sheet item...............................................................................................................49
State Bank Of Pakistan Issuing Department........................................................................49
Rupees in 000...................................................................................................................49
Horizontal analysis in % tage based on year 2011...............................................................49
Assets...................................................................................................................................49
2011......................................................................................................................................49
2012......................................................................................................................................49
2013......................................................................................................................................49
2012......................................................................................................................................49
2013......................................................................................................................................49
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State Bank of Pakistan Banking Department.......................................................................50
Rupees in 000...................................................................................................................50
Horizontal analysis in % tage based on year 2011...............................................................50
Assets...................................................................................................................................50
2011......................................................................................................................................50
2012......................................................................................................................................50
2013......................................................................................................................................50
2012......................................................................................................................................50
2013......................................................................................................................................50
3.7.2 Vertical Analysis of Balance Sheet of Issuing Department of SBP............................53
State Bank Of Pakistan Issuing Department........................................................................53
Rupees in 000...................................................................................................................53
Vertical analysis in % tage based on Total assets.................................................................53
2012......................................................................................................................................53
2013......................................................................................................................................53
2012......................................................................................................................................53
2013......................................................................................................................................53
State Bank Of Pakistan Banking Department......................................................................54
Rupees in 000...................................................................................................................54
Vertical analysis in % tage based on Total assets.................................................................54
Assets...................................................................................................................................54
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2012......................................................................................................................................54
2013......................................................................................................................................54
2012......................................................................................................................................54
2013......................................................................................................................................54
Chapter 4 SWOT Analysis.......................................................................................... 57
SWOT analysis of state bank of Pakistan....57

4.2 Strengths.
..57
1. Premier Institution..
.57
2. Agent to
Government.
.57
3. Reserve
Custodian
.57.
4. Employee Benefit.............................................................................................................58
5. Broad Network.................................................................................................................58
6. Strictly follows Rules & Regulations...............................................................................59
7. Professional Competence.................................................................................................59
8. Healthy Environment......................................................................................................59
9. Learning Resource Center................................................................................................59
10. Online Network..............................................................................................................59
11. Transparency and accountability.......................................................................................60
4.3 Weaknesses.....................................................................................................................60
1. Lack of Marketing Efforts................................................................................................60
2. Political Pressure..............................................................................................................60
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3. Favoritism and Nepotism.................................................................................................60

4. Uneven Work Distribution...............................................................................................60
4.4 Opportunities..................................................................................................................61
1.
Electronic Banking......................................................................................................61
2.
Micro Financing..........................................................................................................61
4.5 Threats............................................................................................................................61
1.
Political Pressure by Elected Government..................................................................61
2.
Data theft.....................................................................................................................61
3.
Customer Complaints..................................................................................................62
Chapter No
5
63
5.1 Recommendations and Conclusion................................................................................63

5.1.1 Recommendations.......................................................................................................63
5.2 Regulatory Guidelines for Banks...................................................................................64
5.3 Conclusion.....................................................................................................................64
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Chapter No 1
Introduction of the Internship Report
1.1 Introduction
SBP offered internship curriculum twice every year consisting summer internship and winter
internship for the students of B.B.A (Hons), M.B.A and economics of comparative departments
in different universities all over Pakistan. In 1st two weeks orientation sessions are conducted
for interns at Learning Resource Center (LRC) of SBP for introduction of the central bank of
Pakistan presented by diverse directors about their departments that how they are functioning
and what are their jobs and responsibilities. After this the interns are allocated to different
departments in the bank. I was detailed in Risk management Department where I have to work
on multiple types of risks and as well as Liquidity Risk management in central bank and other
institutions of the country.
1.2 Project Scope

This project intricate two interrelated issues, namely financial stability of the whole
financial system and the Liquidity risk management function in the Central Bank of Pakistan.
The project main objective is to provide a visible understanding of the specificities of the Central
Bank of Pakistan activities in the supply of liquidity to the financial sectors in the economy.
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1.3 Project Structure:

The structure of my report consists of two parts. First, the function of the Central Bank
of Pakistan as liquidity providers and lenders of last resort to all commercial banks in search to
defend financial stability of the economy. Holding and investment of Foreign exchange reserves
in such a way that will be favorable for upcoming recessions and inauspicious events later in the
coming years. This role will in turn explain why the Central Bank of Pakistan has expanded their
balance sheets during the crisis.
Second, to intricate on Liquidity risk management in the Central Bank of Pakistan ,
explaining how this differs from risk management practices in other public or private financial
institutions in the country and also about the risk management framework and how this
contributes to the policy goals and objectives , among other things, by ensuring the institutions
financial protection.
1.4 Theme of the Study
Management and Liquidity risk in any organization is a tough challenge as well as an

opportunity for financial institutions as they broaden their playing field. Beyond the goal of
regulatory compliance, banks are working to establish liquidity risk and management. Risk
management and specially the Liquidity risk management underscores the actuality that the
survival of an organization depends heavily on its capabilities to predict and get ready for the
change rather than just waiting for the change and react to it.
The objective of Liquidity risk management is not to prohibit or prevent or avoid risk taking
activity, but to make sure that the risks are knowingly taken with full knowledge, purpose and
clear understanding so that it can be evaluated , measured and mitigated. It also prevents an
institution from suffering undesirable or un foreseen loss that causing an institution to suffer or
materially damage its competitive position. Functions of Liquidity risk management actually be
bank specific dictated by the size and quality of balance sheet, complexity of functions,
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technical/ professional manpower and the status of Management Information System existed in
that bank.
By better monitoring the liquidity of their products, counterparties and the market as a
whole, bank can be able to successfully focus their attention on the most liquidity-efficient
actions and make decisions in accordance with their level of liquidity risk appetite. The Basel III
principled helps all the banks to improve their risk management framework to deliver successful
liquidity risk management and build up their competitive performance.
The 2nd Chapter of this report comprises of Introduction of the banking system in
Pakistan and Introduction to the central bank of Pakistan as well as Risk management
Department located at the 9th floor of the state bank where I worked on different types of risks
mainly Liquidity risk management in the Central bank and other financial Institutions of the
economy that how to handle these risks and mitigate them.
3rd Chapter of my report is on financial analysis consisting multiple types of ratios and
also including horizontal and vertical analysis of statements of position of Issuing and banking
Departments as well as profit and loss accounts of the central bank of Pakistan.
4th Chapter consists of SWOT analysis of the bank to put into practice their strategies
well as much as necessary and to convert their weaknesses to strengths to prevail over the
deficiencies and to take benefit from new opportunities in the market and become attentive of all
the threats in the financial systems and the economy.
5th Chapter comprises on recommendations and conclusion I concluded after assessing
and evaluating different types of ratios and also providing some of the regulatory guidelines and
suggestions to the central bank as well as other financial institutions in the financial systems and
the economy.
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Chapter No 2
Introduction to the Banking System in Pakistan and Central Bank
of Pakistan
Introduction
This Chapter of the report comprises of Introduction of the banking system in Pakistan and
Introduction to the central bank of Pakistan as well as Risk management Department of the state
bank where I worked on different types of risks specifically Liquidity risk management in the
Central Bank and other financial Institutions of the financial system that how to deal with these
risks and diminish them.
2.1 Banking
The 1962 ordinance of banking companies define banking as:
Banking means accommodating or accepting of multiple types of deposits of money for the
function of lending or investing from individuals, households and repayable on demand or else
and withdrawal by cheques, drafts, order, or else.
2.2 Banking System of Indo Pak before Partition

Ever since, money became the standard of exchange in different societies, banks existed
in multiple forms, and though in previous years their principle was primarily to lend money to
the public and the kings. In the words of R.C. Dutt: Loans and usury were well understood in
those days and Rishis bewail their state of indebtedness with the ease of primitive times
The Vedic Epic cleared about lending and taking of credit and also mentioned about contracts
of debts at dicing. Later on, Manu in his Sammurti cleared those transactions by mentioning,
a rational man should deposit his money with an individual of good family, of good behavior,
well-known with the laws rules and regulations having many relatives prosperous and
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respectable. Manu has also prescribed the rules to govern the policies of loans and rates of
interest.
In 5th century common peoples were familiar to use hundies as a credit instrument. The
land income was collected generally in different kinds, while the services were salaried mostly in
cash. Consequently, bankers assistance in these matters and other financial matters of State was
very much obligatory and having of great significance. The bankers enjoyed better standings, and
the people deposited their ornaments, stuff, Embroidery and cash holdings with them for safe
supervision. Different types of loans were lend to the people against delicate and other securities
such as ornaments, goods and immovable properties like land buildings and the banker and
customer had very cordial associations.
The Muslim rules and regulations also provided considerable support to the farmers by
giving them soft interest-free loans and grants in cash. They also permitted them to pay the land
proceeds in cash or other kind. This helps the farmers fairly enough and this agricultural finance
resulted in quantitative food production, which had a great surplus after utilization at home.
Therefore, it was being exported beside pure gold in different foreign countries.
Other developments like manufacturing development were also not ignored at all. Smallscale units as well as industries were functioning effectively and efficiently under the backing.
Loans were also lend for growing the production through the parentage and motivation of the
King and the State. These industries thus created enough for home consumption and left other
considerable quantities for exports to overseas countries against pure gold. Yard goods, dyeing,
ceramic objects, china-ware, indigo, opium, metal work, paper, leather and sugar and surgical
instruments at that time were being exported to foreign countries like China, East Indian nations
and Pacific Islands to acquire pure gold thus the port towns in India and East Bengal become the
centers of the earth trade where numerous overseas buyers used to come for purchasing different
types of Indian possessions.
Muslim historians of the 12th century also operate as agents to the administration to collect
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regulated financial institutions with ideal management having professional knowledge

concerning banking and monetary system. Muhammad Tughlaq was the foremost who
introduced coupon exchange in India. He issued metal coins as well as paper currency from the
Royal Mints in his period.
After this ShershahSuri and then Mughal emperors additionally advance this structure.
Akbar also makes efforts in the country to prepare and issue money. Royal treasuries were also
recognized at that time that performs for the entire country under a well conceived arrangement
so that they could function as the offices of Central Bank of the time and due to improvements
and affluence of Indian society of that time, the Royal mints and Treasuries did perform as
agencies for moving of money as well as for custody of valuables.
2.3 Banking in Pakistan

At the time of separation the areas now which represent Pakistan, were producing
different food grains and agricultural raw objects for the complete living beings of the
subcontinent. There were industries and doesn't matter what raw material was produced was
being exported from Pakistan. However, commercial Banking conveniences were provided
reasonably well here.
Before 14th August 1947 the complete banking system was in the control of non-Muslims.
When Hindus capitalists become convinced of division of sub-continent, they transferred their
resources to India in secure custodies. Pakistan was affirmed as an independent state after which
most of the Non-Muslims initiate immigration from Pakistan to India. The large scale movement
of Non-Muslims from Pakistan to India caused the cutback in banking deposits. So scheduled
bank branches were condensed from 619 to 213 and the numbers of non-scheduled bank
branches was condensed from 411 to 106. The independent sate of Pakistan had no central bank
of its own at time of separation.
Without possessions it was very difficult for a new state like Pakistan to run its
individual banking system instantly and effortlessly. Therefore, in agreement with the provision
of Indian independence Act of 1947, an Expert Committee was allotted to study the vital issue.
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The Committee accomplished that time observance in view the troubles facing after partition that
the Reserve bank of India should prolong to function in Pakistan until 30th September 1948, so
that problems of maturity of different liabilities and demand liability, coinage, currencies,
exchange etc. are settled between India and Pakistan. It is important to enlist the important
events in the history of banking in Pakistan.
The first imperative event before partition was establishment of Habib Bank Limited, on 25th
of August, 1941 at Bombay. This was the foremost bank in Indian sub-continent, which was
operated by Muslims. Habib bank Limited transferred its Registered (Cranium) Head Office to
Karachi located on I.H Chandigarh road on August 07, 1947 which played an enormous role in
the next forty year of financial progress in the country.
The 2nd important occasion in the history of Banking in Pakistan is the establishment of
Australasia Bank Limited, at Lahore on 3rd December 1942. Its name was altered to Allied Bank
of Pakistan Limited, on 1st July 1974. After nationalization of the Banking Industry on 1st
January, 1974 three other banks were amalgamated in to it.
The other important date is 9th July 1947; when the Muslim Commercial Bank Limited was
registered and integrated at Calcutta. Its registered Head Office was transferred to Dacca on 17
August 1948. Consequently its registered Head Office moved to Karachi on 23rd August 1956.
The most important day was 01 July 1948, when the State Bank of Pakistan was
inaugurated at Karachi as the central Bank of the Islamic Republic of Pakistan. Central bank
addressed itself with the vital task of creating a national banking arrangement as well as
functioning as regulatory and supervisory authority for banks from the time when it came into
being. In order to accomplish this target it provided every assistance and inspiration to Habib
Bank to expand its network of branches, and also suggested to Government the establishment of
a new bank which could serve as an representative of State Bank. As a result, The National Bank
of Pakistan came into existence on 09 November 1949 and by 1952 it became muscular enough
to take over the agency function from the Imperial Bank of India. This was the first Commercial
Bank in the public sector of Pakistan. At the closing stages of June 1999, the number of
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scheduled Banks in Pakistan was 52 with 7,950 branches. Out of these there are 25 Pakistani
bank with 7,779 branches and 27 foreign banks with 171 branches.
On 1st January 1947 the government of Pakistan decided to nationalized the Pakistani
scheduled banks and promulgated the bank (Nationalization) Act, 1974, with the following main
objectives:
To flat the progress of the government to use the capital for the raid economic
augmentation of the country and the more urgent social welfare projects.
To allocate equality bank credit to diverse classes, Sectors and regions.
To synchronize the banking procedure in a variety of areas of practicable joint activity
without eliminating vigorous competition among the banks.
The Act additionally mentioned for the setting up of the Pakistan Banking Council all
Nationalized commercial Banks, consisting of the following members.
The government of Pakistan from different economic actions, business plans and patterns in
the earlier two decades has realized that the national economy which was subjugated by public
sector and production, trade and finance were over regulated. This resulted not only in chronic
budget deficit, leaving not much for social and physical infrastructure.
The government of Pakistan introduced concise economic reforms designed at liberalization
and deregulation of trade, commerce, industry, banking and finance, dropping the role of public
sector to increase social sector actions. In order to deregulate the financial sector, various
governing laws were amended in 1990.
Banks (Nationalized Second Amendment) Ordinance, 1991 was also promulgated the way
for privatization of banking in Pakistan. Muslim Commercial Bank, Allied Bank of Pakistan and
First Women Bank were disinvested. It is expected that this new policy and practice of
disinvestments and privation of banking and financial sector would assist in bringing an
innovative period of financial development.
2.4 BANKING SYSTEM IN PAKISTAN

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The banking arrangement of a country by the banking institutions is recognized through

the association between the central bank and the other banks working in the economy of the
country. It embodies the principles and practices relating to the banking transactions prevalent in
the country.
In Pakistan there is a central banking system monitored by the central bank, the State bank of
Pakistan. The central bank (SBP) directs and monitors the actions of all other banks running in
the economy. It guides commercial banks through the monetary dealings, which are
cooperatively favorable for the economic development of the country.
At the time of separation, there were 631 offices of the scheduled banks. West Pakistan
contained 487 and East Pakistan (Bangladesh) having 144 such offices. There were only two
Pakistani banks namely Habib Bank and Australasia Bank transformed to Allied bank with their
head offices in Pakistan.
The Central Bank of the state (SBP) was inaugurated in July 1948. It suggested to the
government to establish a new bank as an representative of the Central Bank as well as forefront
of its credit policy. The government accepted the suggestion f SBP and National Bank of
Pakistan came into existence on 15th September 1949. This bank also helped Habib Bank to
enlarge its organization all over the country. From here onwards quick development took place in
the banking system of the country. Currency notes having the value of Rs.5, Rs.10, and 100 were
issued by the State Bank for the first time in October 1948 and by August 1949 all currency notes
issued by the Reserve Bank of India worth Rs.12, 000 million were withdrawn and replaced with
Pakistani currency.
Under the banks Nationalization Act of 1974 the commercial banks were nationalized in
January 1974. The public banks included Habib Bank, Allied Bank, Muslim Commercial Bank
and National bank besides these Nationalized Commercial banks (NCBs) and other commercial
banks in the private sector, there are certain foreign bar operating in Pakistan like Citibank,
standard chartered and Grind lays Bank etc. The foreign banks are under the administrative
control of State Bank being the central Bank of the country.
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The national Government also setup the Pakistan Banking Council (PBC) on 21st March 1974
underneath the banks nationalized Act of 1974. It reports directly to the Ministry of Finance and
provides support and guidance to the State Bank. Its responsibilities include.
Evaluate performance of (NCBs) according to criteria laid down by the PBC and socio
economic objective lay down by the Central Bank of Pakistan.

Policy recommendations to the administration of the state.
Policy procedures to the nationalized commercial banks of the country.
Appointment of superior staff and guidance within the (NCBs).
Magnificent approval to (NCBs) to write off loans beyond Rs.25, 000, 00.
Supervise performance of (NCBs) counting overseas branches and
Yearly Inspections of (NCBs).
Vital steps were also taken to put into practice a more adequate and flat form of banking and
financial system in harmony with the injunctions of fundamental principles of Islamic Banking
System. The major acceptable modes of National Islamic Banking finances are:
Musharikaha
Mudaribaha
Salam and Istisna.
Introduction to State Bank of Pakistan
2.5 SBP Vision Statement
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Renovate State Bank of Pakistan into modern and self-motivated State Bank of Pakistan, highly
specialized and well-organized, fully prepared to play an evocative role, on sustainable basis, in
the economic and social enlargement of Pakistan.
2.6 SBP Mission Statement

Endorse monetary and financial stability and foster a sound and self-motivated financial
system, so as to accomplish continuous reasonable economic growth and prosperity in Pakistan.
Figure 1 from SBP website
2.7 History of State Bank of Pakistan

Reserve Bank of India was the central bank Before 14 August 1947, for both India and
Pakistan. On 30 December 1948 Reserve Bank of India reserves were dispersed among Pakistan
and India -30 percent (750 M gold) for Pakistan and 70 percent for India. In July 1, 1948
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Muhammad Ali Jinnah inaugurate the State Bank of Pakistan under the SBP order 1948, with the
responsibility to control the other banks, issuing of currency notes and maintenance of reserves
for securing monetary stability in Pakistan and commonly to operate the currency and credit
system of the country.
State bank's duties were widened when the State Bank of Pakistan Act 1956 was
introduced. Which help the state bank to regulate the monetary and credit system of Pakistan and
to improve its growth in the best national interest with the purpose of securing monetary stability
and fuller utilization of the Pakistan productive possessions? In 1974 SBP was fully nationalize
beneath Government of Pakistan in the period of Zulfikar Bhutto but In February 1994, the State
Bank has given full sovereignty and On January 21, 1997, sovereignty of SBP was further
strengthened when the Government of Pakistan issued three Amendments in Ordinances
(approved by the Parliament in May 1997). Which includes the State Bank of Pakistan Act 1956,
Banking Companies Ordinance, 1962 and Banks Nationalization Act, 1974? By these changes,
SBP was given complete and special authority to control the banking sector, for the conduct of an
independent monetary policy and to set perimeter on government borrowings from the SBP.
2.8 Functions of State Bank of Pakistan

2.8.1 Primary Functions of state bank of Pakistan
1. Monetary Policy Management
Control the monetary and credit circumstances to achieve inflation target, while keeping in view
the financial growth scenarios intact.
Instruments
Discount Rate or Interest rate.
Operations of Open Market
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Legislative Liquidity Requirements (CRR, SLR)

2.
Regulation & Supervision of Banking System
Ensuring the financial stability of Banks and financial Institutions

On-site and off-site monitoring
CAMELS and IRAF
Split Prudential Regulations for Corporate Consumer, SMEs, Microfinance, Agriculture
and Islamic Banking Sectors.
3.
Sole Authority to issue Currency Notes
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4. Lender of Last Resort

The Central Bank lends Short Term Loans to scheduled banks in times of their need
against securities.
5. Payment System
Monitoring and controlling the payment and settlement system
Real-time on line settlement systems and
Facilitating electronic banking products, services and information technology
infrastructure
2.8.2 Secondary Functions of State bank of Pakistan

1. Public Debt Management
Subscribing government securities at the time of their issue
Sale/purchase of short term securities
Responsibility of sale/purchase of prize bonds
2. Management of Foreign Exchange
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Exchange Rate is identified according to market conditions with limited involvement by

the SBP
Managing Foreign Exchange reserves.
3. Advisor to Government
Suggest the state concerning monetary and economic issues
Monetary and Fiscal Coordination Board
Information and reports on the State of the financial system
Maintaining good associations with International monetary Institutions
4. Bankers Bank
Commercial banks keep their deposits as legislative reserves
The Central Bank endow with concessional remittance facilities
Facilitating cheque clearance facility through NIFT
5. Banker to Government
Allow the deposits of cash and drafts
Undertakes gathering of cheques
The Central Bank can advance loans to government on certain stipulations and
conditions.
2.8.3 Developmental Functions of SBP

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Expansion of financial framework
Providing credit to priority sectors / specialized monetary institutions
Growth in different sectors including:
Farming sector
Islamic Banking System
Micro Finance
Small & Medium Enterprises (SMEs)
Accommodation and Infrastructure
2.9 Powers, Functions & Operations in SBP are governed by:

State Bank of Pakistan Order 1948
State Bank of Pakistan Act 1956
Nationalization Act 1974
Autonomy of State Bank of Pakistan in 1997
Banking Companies Ordinance 1962
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2.10 Organogram of SBP
Figure 2 from the Official website of SBP

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2. 11 Organizational Structure of SBP

Governor State Bank of Pakistan.
Deputy Governor Banking Department SBP
Deputy Governor Operations Department SBP
Deputy Governor Islamic Banking department and Special Initiatives
2.12 ORGANIZATION AND STRUCTURE

SBP is a sovereign organization having three entities including
State Bank of Pakistan (The Head Office) Karachi
SBP Banking Services Corporation(BSC) Karachi
National Institute of Banking & Finance(NIBAF) Islamabad
2.13 SBP Core Values

1. Courage
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To construct and own decisions, give and accept suggestions openly without favor or
fear
2. Commitment to Excellence
Doing the best under the specified circumstances and looking beyond the observable.
3. Problem solving approach

To have optimistic approach to issues, with commitment to total resolution. Be part of
the solution, not the problem
2.14 Departments in State Bank of Pakistan
Agricultural Credit & Microfinance Department.

Banking Inspection (On-Site) Department.
Banking Policy & Regulations Department (BPRD).
Banking Surveillance Department.
Consumer Protection Department (CPD).
DFIs & Exchange Companies Inspection (On-Site) Department.
Domestic Market & Monetary Management Department.
Exchange Policy Department (EPD).
Economic Policy Review Department.
External Relations Department.
Finance Department..
Human Resource Department (HRD).
Information Systems & Technology Department.
Infrastructure, Housing & SMEs Finance Department.
Internal Audit & Compliance Department.
International Markets & Investments Department.
Islamic Banking Department.
Museum & Art Gallery Department.
Office of the Corporate Secretary.
Off-site Supervision & Enforcement Department.
Payment Systems Department.
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Research Department.
Statistics and Data Warehouse Department.
Treasury Operations (Back Office) Department and
Risk Management department.
After 1st two weeks of Internship all the interns are detailed to different departments to work
within the surroundings of SBP with extremely experienced employs of SBP to make the most of
their majors in practical. I was detailed in Risk management department where I have assigned
the project of liquidity risk management in central bank as well as other financial institutions of
the economy
2.15 Risks in SBP and other Financial Institutions

2.15. Section A: Risk Management in SBP
2.15.1 Risk:
The possibility of happening of unfavorable occurrence is called Risk or chance of encountering
destruction or failure, hazard, or a chance of injury or loss is called Risk.
Banks for International Settlement (BIS) define risk as- Risk is the danger that an
incident or action will negatively affect an organizations ability to accomplish its
objectives/goals and lucratively carry out its strategies.
2.15.2 Risks in State Bank of Pakistan:

Strategic Risk, Regulatory Risk, Technological Risk, sovereign Risk, Innovative Risk,
Political Risk, Liquidity Risk, Foreign Exchange Risk, Credit Risk, operational risk, Cultural
Risk, Market Risk etc. As all risks have its own magnitude but we will focus our attention on
Liquidity Risk and managing it.
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2.15.3 Risk Management Department

In extension of the Banks restructuring plan, in August 2007 Risk Management Cell was
transformed to Risk Management & Compliance Department headed by the Chief Risk Officer.
In 2009 it yet again became a unite but in 2014, observance in view the most up-to-date
development in banking sector and bringing the clearness and accuracy in operation of the SBP,
the board of directors decided again to renovate this Risk Management & Compliance unite into
full fledge department named Risk Management Department
2.15.4 Mission Statement

Exists to diminish financial loss, include risk culture, and creates principles of risk
management in the entity.
2.15.5 Key Functions of RMD

Key functions of Risk Management Department are:
Build up and execute Bank wide Risk Management approach.
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Recommend the Governor on the different risk related issues.

Build up and continue risk exposure measurement and compliance framework and
provide suitable level of risk reporting.
Suggest risk appetite to the senior management.
Compel the risk committees to generate risk inventory and gaps and engage in
organization wide risk issues on a sensible basis.
Create oversight mechanism for determining risks in the Banks subsidiaries and
associated entities.
Publicity of different risks i.e. Financial Risks, Operational Risk, Strategic, Policy,
and Other Risks.
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2.15.6 Structure of RMD
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Figure 3 from Risk management department in SBP
2.15.7 Responsibilities of the RMD

The farm duties of the risk management department are as under:
Ensuring each internal/external risk of the State Bank of Pakistan and to discover,
assess, report and monitor and assisting the risk with the aim of controlling and
mitigating those risks;
Suggesting the board of directors on the risk management policy and process and any
deviations from the risk management policy;
Exposure on any significant risk event to the board of directors in an appropriate
manner; executing the risk management system approved by the board of directors;
Recording the risk records and risk register;
Preparing reports to the board of directors as per their requirements.
Communicating the risk management policy, process and roles and farm duties relating
to bank.
Providing guidance, support and prop up different department in the area of risk
management to overcome their department risks to mitigate problems
Preparing the essential information available to the internal audit gathering to facilitate
independent assessment of the risk management Process/system; and
Supporting the board of directors in promoting a culture of risk awareness, determining
and managing at each and every stage within departments of the SBP.
2.15.8 Liquidity Risk:

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A liquid market is a market where participant can rapidly execute large volume
transactions with a small impact on prices (BIS)
The risk that a sudden surge in liability withdrawals may leave a Financial
Institution in a position of having to liquidate assets in a very short period of time
and at low prices.
Liquidity risk is the risk to a banks earnings and capital arising from its inability
to timely meet obligations when they come due without incurring unacceptable
losses.
2.15.9 Risk Management:

Risk Management is a designed technique of dealing with the possible loss or damage. It
is an ongoing procedure of risk assessment through various methods and tools which
continuously
Evaluate what could go wrong
Find out which risks are vital to deal with and
Execute strategies to treat with those risks
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Figure 4 from Risk Management Department in SBP
2.15.10 Liquidity Risk Management

Liquidity risk management is a vital banking function and an integral part of the asset and
liability management process. The primary role of banks is the maturity transformation of shortterm deposits (liabilities) into long-term loans (assets) and makes banks inherently susceptible to
liquidity risk. The renovation process creates asset and liability maturity mismatches on a banks
balance sheet that must be aggressively managed with available liquidity. This entire procedure
is known as liquidity risk management. The availability of liquidity either internally or externally
is dominant in the management of these maturity mismatches. The successful management of
liquidity allows a bank to fund increases in its assets (loans and investments) and to meet
obligations as they come due (withdrawal of deposits). A collapse in liquidity risk management
results in a bank becoming not capable to meet its obligations. This circumstances if played out
could easily cause a bank to be unsuccessful. A bank can continue to meet its uncertain cash flow
obligations and stay in good physical shape by managing liquidity risk carefully.
2.15.11 Liquidity Risk management in a State Bank of Pakistan

The Central Bank of Pakistan has preferences and constraints that differ from those of
private banks. The objectives of State Bank of Pakistan are defined in their statutes, i.e. the
protection of financial stability of whole financial system in Pakistan as their primary mandate. It
is necessary For State Bank of Pakistan to create such policies which become flourishing in long
run otherwise whole financial system will be decomposed.
SBP have no liquidity risk in home market as it has the authority and right to print and
issue currency notes in Pakistan. But as for as liquidity risk in global prospective concern , State
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bank of Pakistan has liquidity risk adjacent to its investments and receivables or assets. It needs
to remain credible by making sure that at least two conditions are met.
First, State Bank of Pakistan adequately capitalized and runs in such a way that it
remains financially independent. Financial independence helps to keep external parties from
unduly interfering in the conduct of monetary policy.
Second, the long-term satiability of a State Bank of Pakistan needs to be ensured or very
essential, so that the banks reaction to specific economic circumstances is not influenced by
considerations of the short-term financial impact of such policies on its profit and loss accounts
along with its global trading account.
In normal market operations or in lending operations, the Liquidity risk control structure
applied in bank to plan according to four basic principles: protection, consistency, simplicity
and transparency. Protection is considering the main objective of the risk control framework,
while consistency, simplicity and transparency are needed for the framework to work in an
efficient, accountable and conventional manner.
Risks taken in State Bank of Pakistan actions are examine in a holistic manner, bearing in
mind the interaction of different portfolios that it had made in Foreign exchange and operations.
For that reason, a state-of-the-art comprehensive risk monitoring and reporting framework is
done within Risk Management Department, for capable of providing decision-making bodies
with appropriate liquidity risk management input. As a vital element of the risk management
purpose at a State Bank of Pakistan, the uppermost governance principles are practiced, both in
terms of the reporting lines and organizing the risk management meaning within department.
In boom period or in ordinary times, State Banks has to retain its balance sheet in
contraction way in terms of risk-taking capacity. And in recession or in critical time SBP has to
expand balance sheet and taking more risks in situations where other market participants are
deleveraging and dropping their risks. The main determinants of the risk profile, especially on
the asset side of a State Banks balance sheet by considering the applicable risk mitigation
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measures are done as well. The extent to which State Bank of Pakistan hold Foreign exchange
risk in their balance sheets differs considerably from the typically much lower Foreign exchange
exposures of private organizations.
Limit/Exposure Type
Amount ( US $ Million)
Total Counterparty Current Limit
4770
In-House counterparty MM Exposure
3272
In-House FX Credit Exposure
59
Nostro Account Balance
491
Overnight EUR Placement with NBP

Federal Reserve NY & DBB RA
0
3026
Position
Fixed Income in Chinese Bonds
1053
Total In-house Exposure
7901
SBP Net Exposure
8650
State Bank of Pakistan has exposure to exchange rate (or FX) risk. SBP has $ 8.65
Billion in-house reserves and details are as follows;
In the same way the credit exposure of out-source reserves of SBP is as under with the splendid
total of $1.95 billion
Credit Exposure SBP (US $ Millions) on June 2014
Region
Total
Asia Pacific
164.61
Europe
482.56
North America
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Supranational
28.25
Grand total
1,947.69
On June 2014 Regions and Rating Bonds details of SBP Foreign Exchange Reserves;
Regions
LT Ratings
Asia Pacific
27.21
AAA
56.81
North America
38.93
AA
15.68
Western Europe
27.9
27.51
Middle East
5.96
BBB
The foreign currency positions regularly listed in the management reports which point out
that SBP has implemented a system for evaluating, monitoring and controlling its liquidity
positions of FX in all foreign locations which are supportive to covers significant foreign
currency positions.
These foreign exchange reserves display the soundness of any country. These foreign
exchange reserves are so important for import base countries like Pakistan which have almost
trade deficit from its sovereignty. Similarly the holding and investment of existing reserves are
major concern for State Bank of Pakistan in term of return as well as its liquidity. The SBP also
use foreign reserves for intervention purposes, State Bank of Pakistan use to intervene in the
markets by selling foreign currency if a sudden appreciation of those currencies impairs price
stability or financial stability directly or indirectly. In a sense, the need to intervene represents a
contingent policy liability on SBP, and by taking such an FX risk, are effectively hedging or
matching such contingent liability.
Gold price movements are also considerably important in State Bank of Pakistan than in
private banks. State bank of Pakistan has holdings of gold, amount to just about
246,096,839,000, according to annual report of 2013. The holdings are on this scale not only for
historical reasons, but also for risk management reasons, as gold is use to safe from upcoming
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adverse times. In times of financial suffering or recession time, gold indeed helps State Bank of
Pakistan to maintain a frozen financial position.
Another prominent difference of State Bank of Pakistan exposures compared with those of
private institutions is to be originating in their investment portfolios. State Bank of Pakistan is
typically managed with a very high degree of prudence. Investment is made in only AAA, AA, A
rating countries and companies. From the above matrix it can be seen that SBP has not only
invested in well rating companies but also in well reputed countries as well. Almost 57%
investment is made in AAA companies and By this way risks are kept to least levels that ensure
the financial buffers of the institution remain free to meet policy needs accordingly, while at the
same time attempting to achieve sufficient income to cover inflationary effect or operating
expenses along with to ensure long-term profitability. The regular fixed-income portfolios of the
SBP, as an example, are managed against internally derived benchmark portfolios which serve as
a key for performance and risk measurement. The management of these real portfolios beside
with those of benchmarks is constrained by a number of characteristic risk control measures,
such as relative value-at-risk limits and caps imposed on credit and liquidity risk exposures.
Section B Risk Management in other Financial Institutions
2.15. B Liquidity Risk Management in Financial institutions

A banks liquidity risk management standards are set down undoubtedly and
communicated to key decision makers in the bank. Unlike other risks that intimidate the very
solvency of a Financial Institution, liquidity risk is a normal aspect of the daily management of a
Financial Institution.
Depository Institutions complimentary handle liquidity so they are able to pay out cash as
deposit holders request withdrawals of their funds.
Only in extreme cases liquidity risk creates problems develop into solvency risk problems.
2.15 C Levels of Liquidity risk in Financial Institutions.
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Depository Institutions having soaring exposure

Life Insurance Companies having moderate Exposure
Mutual funds, hedge funds, pension funds, and property or Casualty
insurance companies: having low exposure typically low, which does not
mean zero:
September 2006, Amaranth Advisors, a hedge fund forced to shut down
Causes of liquidity risk
Seriously Reliance on demand deposits

Core deposits of FIs
Depository Institutions need the capacity to forecast the distribution of net
deposit drains.
Seasonality effects in net withdrawal patterns from banks.
Early 2000s difficulty with low rates in financial sector: Financial
Institution doings suitable investment opportunities for the large inflows
Methods use by FIs for managing its Liquidity Risk.

Liquidity Risk in Liability side
1. Purchased Liquidity Management 2. Stored Liquidity Management
Liquidity Risk in Assets side
1. Purchased Liquidity Management 2. Stored Liquidity Management
Traditionally, FI managers have seriously relied on stored liquidity management as most
important method for liquidity management. But today, many financial Institutions particularly
the largest banks with entrance to the money market and other non deposit markets for funds are
relying on purchased liquidity (or liability) management i.e. borrowing from interbank market or
using discount window to deal with the risk of cash shortfalls.
Bank Deposits generally have a much shorter contractual maturity than loans and
liquidity management needs to provide a cushion to cover anticipated deposit withdrawals from
banks. Liquidity is the ability to efficiently hold deposit of banks as also reduction in liabilities
and to fund the loan growth and possible funding of the banks off-balance sheet claims. These
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cash flows are placed in different time buckets based on expectations on the basis of behavior of
assets, liabilities and off-balance sheet items. Liquidity risk consists of Funding Risk, Time Risk
& Call Risk.
Funding Risk: It is the need to restore net out flows due to unexpected withdrawal
/nonrenewal of deposit from banks.
Time risk: It is the need to pay off for non receipt of expected inflows of funds from banks,
i.e. performing assets turning into nonperforming assets.
Call risk: Call risk will happen on account of crystallization of contingent liabilities and
inability to undertake profitable business opportunities when desired.
From 1st January 2014, SBP has made regulations for all banks operating in Pakistan to
adopt Basel III. In financial crisis the inability of banks to roll over their short-term financing,
Basel III introduces two new ratios: the Liquidity Coverage Ratio (LCR) and the Net Stable
Funding Ratio (NSFR), with the objective of to improve the banks short-term (LCR) and longterm (NSFR) balance sheet resilience.
The Liquidity Coverage Ratio (LCR)

Stock of high-quality liquid assets
Total net cash outflows over the next 30 calendar days
Characteristics of high-quality liquid assets

(a) Fundamental characteristics
Low credit and market risk:
Ease and sureness of valuation:
Low correspondence with risky assets:
Listed on a developed and predictable exchange market:
(b) Market-related characteristics
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Energetic and sizable market:

Occurrence of committed market makers:
Low market concentration:
Flight to quality:
The Net Stable Funding Ratio (NSFR)
Available amount of stable funding > or = 100%

Required amount of stable funding
By adopting these new ratios, banks are able to achieve the following goals:
Promote short-term resilience of banks liquidity risk profile.
Enhance the banking sectors ability to suck up shocks arising from financial and
economic stress.
Provide a sustainable maturity arrangement for assets and liabilities.
Encourage banks to fund their actions with additional stable sources of funding.
Requirements for Liquidity Risk Management

The risk management process should make up the following broad lowest requirements.
The risk must be managed within a definite Liquidity risk management plan (decisionmaking)
A clear liquidity risk management and funding approach must be approved at an
executive and non-executive board altitude
Operating restrictions to liquidity risk exposures must be set and adhered to.
Procedures for liquidity planning under substitute scenarios must be agreed, Including
crisis situations
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Some common failures have been recognized in banks liquidity risk management
processes, which have contributed to severe sustainability issues.
A weak liquidity risk management structure that did not account for the risks posed by
products and business lines
Business incentives that were uneven with the risk tolerance level of the bank
Misjudging unforeseen contingent obligations and the liquidity that would be necessary
for the bank to meet these obligations
The belief that prolonged liquidity disruptions as practiced during the financial market
crisis, were improbable
Stress tests that abortive to account for possible market wide global strain or the severity
and duration of disruptions.
Chapter No 3 Financial Analysis of SBP

Introduction
This Chapter of my report is on financial analysis consisting multiple type of ratios as
well as horizontal and vertical analysis of statements of position of Issuing and banking
Departments of SBP as well as profit and loss accounts of SBP.
Section A: Financial Analysis

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3.1 Current Ratio

Current ratio = (Current Assets / Current Liabilities)*100
Rupees in 000
Years
2012
2013
Current Assets
212566111
470360068
Current Liabilities
81176181
71152175
Current Ratio
2:61
2:98
Interpretation
This ratio is one of the most significant ratios that evaluate the solvency of an organization
and the aptitude of that fastidious organization to pay the short term obligations. As shown in the
table above in 2012 the bank has 2:61 ratio which means that if it has two rupees it has to pay 61
paisa as liability that is extremely good ratio in banking sector. If we look at the 2013 the ratio
has increased to 2:98 means for every two rupees it has to pay 98 paisa liability because of the
liabilities that have increased due to IMF loan and other conditional foreign loans.
3.2 Debt Ratio

Debt Ratio = (Total Liabilities / Total Assets)*100
Rupees in 000
Years
Total Liabilities
Total Assets
2012
803915612
1126761585
71:34%
2013
979089234
1377964974
71:05%
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Debt Ratio
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4
Interpretation
The debt ratio assesses the percentage of assets financed by the money borrowed or rented.
The enlarged value in this ratio tells about the higher amount of other peoples money being
used to engender (increase) the revenue. The bank has approximately same ratio in
both the years that shows its assets are financed up to 71% by the borrowed money
that is a bad symptom because it reduces the confidence level of investors and this
particular ratio is satisfactory up to 50% only. This ratio tells about the bank took
loans from outsiders to run its affairs.
3.3 Interest Coverage Ratio
Times interest earning ratio = (Operating income / interest expense)
Rupees in 000
Year
Operating Income
Interest expense
Interest Coverage ratio
2013
165235507
3748759
44.07
This ratio evaluates about an organization aptitude to meet its

c o n t r a c t u a l i n t e r e s t p a y m e n t s . The upper value indicates that the organization having
higher ability to make its contractual interest payments. The central bank has a definite figure
that shows it can easily meet its interest obligations in 2013. On the other hand the bank also has
a good current ratio that illustrate that it is able to meet its contractual obligations.
3.4 Operating Profit Margin
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Operating Profit margin = operating Profit / Revenue (Interest)

Rupees in 000
Years
Operating Profit
Revenue
Operating Profit Margin
2013
165235507
180054065
91.76%
Interpretation
This ratio shows the proportion of each rupee remain as profit after the presumption of
expenses and all the other costs apart from finance cost and taxes. The 91.76% shows that
bank is earning almost 92 paisa and 8 paisa is going under the head of expenses. The
higher ratio tells that the organization earnings are better.
3.5 Net profit margin Ratio

Net profit margin Ratio = (Net profit / Revenue) *100
Rupees in 000
Years
2012
2013
Net profit
164793359
204212004
Revenue
180054065
222428693
Net profit margin

91.52%
91.81%
Interpretation
The net profit margin shows the proportion of each rupee remain as profit after the presumption
of costs and all expenses counting finance cost and taxes. Higher net profit margin is
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preferable. The State bank net profit margin has increased in 2013 as compared to
2012 that shows the higher amount of return in the year 2013.
3.6 Return on Assets

Return on assets = (Net Profit / Total assets)*100
Rupees in 000
Years
Net Profit
Total assets
Return on assets
2012
164793359
1126761585
14.62%
2013
204212004
1377964974
14.81%
Interpretation
This ratio evaluates the efficacy of management that how it utilizes the accessible assets to
generate profits. Higher the ratio better is the position of the firm. In case of State
Bank of Pakistan it is also increased from 14.62 % to 14.81% in the year of 2013 which shows
the good display of bank performance and utilizing banks assets in a superior and proper way.
3.7.1Horizontal Analysis of Balance sheet of SBP

State Bank Of Pakistan Issuing Department
Balance sheet item
Rupees in 000
Horizontal analysis in %
tage based on year 2011
Assets
Gold reserves held by
the bank
Foreign Currency
Page 51 of 72
2011
2012
2013
2012
2013
81277106
1309705
157545
61.14
93.84
68546858
52
4391047
51
378121392
-35.94
-44.48

reserves
Special drawing Rights
7
12383051
assets receivable from
69
1163221
5
of IMF
Notes and coins
India notes representing
201
4
Investment
-6.06
-48.96
638249
683678
727665
7.12
14.01
3012270
2718036
249623
-9.77
-17.13
-6.82
-11.69
321.08
520.61
the reserve Bank of

India
Total notes
631815
3650519
10883031
1
3401714
322390
4582597
1
675410375
65
Commercial paper held

in Bangladesh (former
east Pakistan)
Asset held with the
78500
78500
78500
0.00
0.00
1740325
2591897
302174
48.93
73.63
17.08
36.97
17.08
36.97
reserve bank of India

Total assets
89342839
1046039412
3
122371761
Liability bank note
9
89342839
1046039412
2
122371761
issue
Balance sheet item
Horizontal analysis in %
State Bank of Pakistan Banking Department
Page 52 of 72
tage based on year 2011
201
4
Rupees in 000
Assets
Local currency
2011
2012
2013
135646
181913
196449
34.11
44.82
430086636
21.12
164.16
952112
339594
-98.32
-40.24
418534
3137123
61
611752
649.55
1361.6
22019148
2014773
2
470360068
-8.50
5
113.61
5
10881
13
13286
22.10
38.30
-100.00
reserves
Foreign Currency
16281511
reserves
Earmarked foreign
7
56822188
1972006165
currency balances
Special drawing
Rights of IMF
Reserve tranche
15048
2012
2013
with the IMF under

quota arrangement
Securities
33715973
purchased under
100.00
agreement to resale
Current account
of govt of Punjab
Current account
409158
1390879
3
518564
37306680
6357398
495348215
of govt of Baluchistan
Current account
of govt of AJK
Investment
6
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60
712773
4820407
65
188.54
47.87
70.14
32.78
201
4
Loan advances
28809146
2428804
331853796
and bill of exchange

Balance due from
0
4677500
10
5033592
541613
govt of India and
-15.69
15.19
7.61
15.79
Bangladesh (former
east Pakistan)
Property and
19019433
1852228
180737
-2.68
-4.97
equipments
Intangible assets
163769
4
120923
33
116393
-26.16
-28.93
Other assets
15433411
1760545
863007
14.07
-44.08
Total assets
95919112
0
1135820480
7
137796497
18.41
73.66
114.09
-50.19
44.73
-53.15
-89.07
Liabilities
Bill payable
Current account
of Govt
Current account
571942
14219755
8
with SBP banking
1224446
7082334
8
2369636
Services corporation
827785
666218
68
370252
2
a subsidiary
Securities sold
under agreement to
61816757
6758751
repurchase
Deposits of banks
100.00
and other financial
30516857
4245493
273739781
39.12
61.12
institution
Other deposits
6
10413599
82
1456010
167779189
39.82
61.12
and accounts
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201
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Payable to IMF
85063742
9126368
490030
7.29
92.58
Other liabilities
72229063
6
6027983
41
430168
-16.54
-40.44
77118363
7
8005004
15
974691
3.80
26.39
4
11484789
76
1218399
00
420468
6.09
-63.39
0.00
Deferred liability
staff retirements
benefits
Capital grant rural
finance resource
1
59431594
30
center
Deferred liability
100.00
3939778
staff retirements
340845
206244
Total liability
78306869
8129501
Net assets
9
17612242
41
3228703
6
100000
39
100000
1525958
1525958
Share capital
Allocation of
special drawing
rights of IMF
Reserves
Unappropriate
profit
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420468
4
benefits
Deferred income
Represented by
193549
-39.49
-43.21
979089234
3.82
25.03
398875740
83.32
126.48
100000
0.00
0.00
152595
0.00
0.00
8
67138769
7628853
172704657
13.63
157.24
9139871
3
9644049
49025682
955.16
436.39
Unrealized
77904598
1743549
223356297
79440921
82
1297683
156774
appreciation on gold
reserves
Surplus on
201
4
43
18747014
1874704
revaluation of
123.81
186.70
63.35
97.34
0.00
0.00
-100.00
29
187470
14
property and
equipments
Minority interest
29893
17612242
6
3228703
398875740
83.32
39
In the above Horizontal analysis of balance sheet and Income statement I have used 2011 as base
year and different heads of balance sheet and income statement are compared to know the
performance of current year as compared to the base year. As in balance sheet the gold reserves
are increasing from 2011 to 2013, but the currency reserves are continuously decreasing. Total
assets are also increasing in issuing department .The total assets of banking department
increasing in fact because of better performance. Overall performance of the bank is
continuously becoming better of restructuring of bank in 2002. If I talk about the Income
statement the interest income is increasing but the interest expense is negative in 2012 but it
reaches almost to 52% in 2013 because of foreign loans from IMF and other loans that
government taken. Profit of the bank also shows the positive trend and reaches to the level of 2.4
Trillion rupees which is almost higher than 2011.
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100.00
126.48
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4
3.7.2 Vertical Analysis of Balance Sheet of Issuing Department of SBP
Balance sheet item
State Bank Of Pakistan Issuing Department
Vertical analysis in %
tage based on Total assets
Rupees in 000
Assets
2012
Gold reserves held
by the bank
Foreign Currency
reserves
Special drawing
2012
2013
130970552
15754551
2013
12.52
12.87
439104769
378121392
41.98
30.90
11632215
6318150
1.11
0.52
683678
727665
0.07
0.06
2718036
2496236
0.26
0.20
3401714
3223901
0.33
0.26
458259765
675410375
43.81
55.19
78500
78500
0.01
0.01
Rights of IMF
Notes and coins
India notes
representing
assets
receivable from the
reserve Bank of
India coins
Total notes
Investment
Commercial
paper held in
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Bangladesh (former
east Pakistan)
Asset held with
2591897
3021743
0.25
0.25
1046039412
1223717612
100.00
100.00
1046039412
1223717612
100.00
100.00
the reserve bank of

India
Total assets
Liability bank
note issue
State Bank Of Pakistan Banking Department
Vertical analysis in
% tage based on
Balance sheet item
Rupees in 000
Assets
Local currency reserves
2012
181913
Foreign Currency reserves

Earmarked foreign
Total assets
2013
2012
2013
196449
0.02
0.01
1972006165
430086636
17.36
31.2
952112
33959461
0.08
1
2.46
3137123
6117522
0.28
0.44
201477313
470360068
17.74
34.1
13286
15048
0.00
3
0.00
currency balances
Special drawing Rights
of IMF
Reserve tranche with

the IMF under quota
arrangement
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Securities purchased
0.00
under agreement to resale

Current account of govt
40915860
of panjab
13908793
7127734
of Baluchistan
518564
of AJK
Investment
635739865
242880410
Loan advances and bill

of exchange
Balance due from govt
1.22
0.52
495348215
55.97
35.9
331853796
21.38
5
24.0
5033592
5416132
0.44
8
0.39
(former east Pakistan)

Property and
18522284
18073733
1.63
1.31
equipments
Intangible assets
120923
116393
0.01
0.01
Other assets
17605450
8630077
1.55
0.63
Total assets
1135820480
1377964974
100.00
100.
of India and Bangladesh
00
Liabilities
Bill payable
Current account of Govt
1224446
70823348
827785
66621868
2369636
3702522
0.11
6.24
0.06
4.83
0.60
0.00
Current account with

SBP banking Services
corporation a subsidiary
Securities sold under
agreement to repurchase
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Deposits of banks and

other financial institution
424549382
273739781
37.38
19.8
Other deposits and
145601026
167779189
12.82
7
12.1
91263686
49003041
8.04
8
30.4
accounts
Payable to IMF
Other liabilities
Deferred liability staff
60279837
43016815
5.31
1
3.17
800500476
97469100
70.48
70.7
12183991
4204684
1.07
3
0.31
0.01
0.00
retirements benefits
Capital grant rural
59430
finance resource center

Deferred liability staff
3939778
4204684
0.35
retirements benefits
Deferred income
206244
193549
0.02
0.01
Total liability
812950141
979089234
71.57
71.0
Net assets
322870339
398875740
28.43
5
28.9
Represented by Share
100000
100000
0.01
5
0.01
capital
Allocation of special
1525958
1525958
0.13
0.11
drawing rights of IMF

Reserves
76288533
172704657
6.72
12.5
96440491
49025682
8.49
3
3.56
174354982
223356297
15.35
16.2
Unappropriate profit
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1
Unrealized appreciation
on gold reserves
Surplus on revaluation
129768343
15677429
11.43
11.3
1874704
18747014
1.35
8
1.36
0.00
0.00
28.43
28.9
of property and
equipments
Minority interest
322870339
398875740
In vertical analysis I use the total assets as base to know the performance of different heads of
balance sheet and I use only one base to know the overall assets and liabilities performance. In
profit and loss account interest income is used as base to evaluate the performance of different
expenses. All the expenses heads and other heads are compared to the interest revenue. Assets
and liabilities are depicted in the bar chart that shows the liabilities are less than the assets that
means the assets are financed with debts are lees and bank is in the position of solvency. The
main reason behind the greater return is investment that the bank has in its major currencies and
deposits of foreign currencies and deposits of foreign countries. The good profit also shows the
outstanding performance of the bank fund managers even then they have no latitude to deviate
from bench mark. I think if they were allowed to deviate from bench mark they can perform
better.
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Chapter No 4 SWOT Analysis

Introduction
This Chapter consists of SWOT analysis of the bank to execute their strategies well as much as
necessary and to convert their weaknesses to strengths to prevail over the deficiencies and to take
advantage from new opportunities in the market and become observant of all the threats in the
economy.
4.1 SWOT Analysis of State Bank of Pakistan

SWOT analysis stands for strengths, weaknesses, opportunities and threats. This analysis is
the careful assessment of the firms internal strengths and weaknesses as well as external
opportunities and threats. The overall assessment of the firms strengths, weaknesses,
opportunities and threats is called SWOT analysis. In SWOT analysis the best strategies carry
out the firms mission by:
Identifying new opportunities by utilizing strengths
Neutralizing its threats and
Avoiding or correcting its deficiencies
SWOT analysis is one of the critical steps in strategy formulating using the firms mission
as context.
Managers assess internal strengths distinctive competencies and weaknesses and
environmental opportunities and threats. Thus the main objective is to develop smart strategies to
take advantage of strengths and opportunities and by avoiding threats and weaknesses.
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4.2 Strengths
1 Premier institution
SBP is one of the foremost bank of Pakistan that is accountable for regulations and supervision
of banking developing and monetary policies of Pakistan since its inauguration. It provides
guidelines time to time for appropriate working of monetary and financial system in Pakistan.
2. Agent to Government:
The State Bank Pakistan performs additional services for government by providing loans
and supervising the government accounts as well as of other banks.
3. Reserve custodian
SBP is honored to hold the reserves of the entire economy as no other bank is authorized to
hold the reserves apart from they can deal in reserves but the definitive holder is SBP. The bank
is also responsible to look after and organize the exchange rate in the country.
4. Employee Benefit
The employers at SBP are accessible to reasonable monetary benefit. Normally bonuses are
given. Employees also have the benefit of the interest free loans free medical care of family
and insurance of life. These hand out as a benefit and competency for the bank and a
source of enthusiasm for the employees.
5. Broad Network
The bank has another competency i.e. it has two subsidiaries one is the NIBAF and second
one is the BBP-Banking Services Corporation. SBP has 33 departments that are performing their
own separate functions.
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6. Strictly follows Rules & Regulations

The employees at SBP are stringent followers of rules and regulations obligatory on them by
bank. The regimented environment at SBP bolsters its representation and
also enhances the overall output of the organization which finally has a positive effect on SBP
goals.
7. Professional Competence
The employs at the SBP here have a fine hold on their depiction, as they are extremely
accomplished professionals with better training programs in business administration,
banking, economics etc. These professional competencies facilitate the employees to
understand and perform the function and operation in better way.
8. Healthy Environment
The working situation in the SBP Karachi is very good as each and every employee has its
personal cabin to work with dedication without any annoyance and its office environment can be
compared to any multinational organization. There is a cafeteria for employees that cover a large
area having fresh and healthy items for employs to eat.
9. Learning Resource Center

SBP has its own training department known as Learning Resource Center (LRC) where all
the training programs are held, even the international seminars and meetings conducted over
there. The orientation session of the interns are also held in LRC for 1st two weeks and the final
group presentations by interns are also delivered in LRC.
10. Online Network
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SBP has the potential of being powered by the network of computers, which have saved time,
energy and would have lessened the mental stress the employees have. Thats why added to the
strength that is powered by network of computers.
11. Transparency and accountability

The central bank publishes arithmetical information on its reserves and foreign currency
transactions in its monthly announcements. Also, since 1992, the SBP has provided an overview
of reserves management operations and return relative to benchmark in its Annual
financial Reports.
4.3 Weaknesses
1. Lack of Marketing Efforts
The bank doesnt its strategic and corporate image, services, etc on a competitive way. Hence
lacks far behind in their marketing efforts. A need for forceful marketing are required in SBP as
in the present period marketing is now the part of every organization.
2. Political Pressure
The strong political hold of some parties, Government, the recent political issues and their
domination in bank internal issues affecting the bank in a negative way. They sometime have to
grant loan under the pressure of government, which leads to irregular and adjusted
feeling in the bank employees.
3. Favoritism and Nepotism

The promotions and appraisal bonuses etc in the bank are often powered by seniors
preferences or depends upon their wills and decisions. This adds to the negative factors, which
denominate the employs thus resulting in affecting their performance negatively which is not a
fine sign for the bank in achieving its targets
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4. Uneven Work Distribution

The workload in SBP is not frequently distributed and the workload tends to be more on
some employees while others escape away from their responsibilities which serve as a
de motivation factor for employees performing above average work.
4.4 Opportunities
1. Electronic Banking
The world today has become a international village because of advancement in
t h e t e c h n o l o g i e s , p a r t i c u l a r l y i n c o m m u n i c a t i o n s e c t o r. M o r e e m p h a s i s i s
n o w given to avail the up to date technologies to enhanced the performances. SBP can utilize
the electronic banking opportunity to ensure on line banking 24 hours a day. This would give a
competitive edge over others.
2. Micro Financing
There are a number of opportunities for micro financing in the market. Now the time has
arrived when the State Bank must recognize it and on step to cater ongoing demand and the
micro finance department should device policies and regulations to make stronger the micro
finance network
4.5 Threats
1. Political Pressure by Elected Government
The ongoing shift in power in political arena in the country effects the performance of the
bank has to forward loans to politically powerful persons which create a sense of insecurity
and demoralization in the customer as well as employees.
2. Data theft
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The bank is currently dealing from data theft and the present technology in Pakistan is not
that much effective and others are very costly in providing a safe place
on internet away from domestic and international hacks which terrorize
o v e r a l l environment of the bank
3. Customer Complaints
There exists no usual and exact system of the removal of customer complaints. Now a day a
need for total customer satisfaction is emerging and in their demanding consequences customer's
complaints are ignored.
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Chapter No 5
Introduction
This Chapter comprises on recommendations and conclusion I concluded after assessing

multiple types of ratios and also providing some of the regulatory guidelines and suggestions to
the central bank as well as other financial institutions in the financial system.
5.1 Recommendations and Conclusion

5.1.1 Recommendations
To direct liquidity risk behavior & influence the outline of a liquidity risk profile and
management should use all available options. Using financial incentives and penalties
to influence liquidity risk taking behavior is effective management tool.
Sharing of information by keeping confidentiality intact is also supportive to find out
different ways for controlling the liquidity risk as valuable inputs may be received
through this sharing. Even information on creditworthiness of counterparties that are
known to take substantial liquidity risk can also help.
Diversification is extremely significant. As it lowers the variance in investor
portfolios, improves corporate ability to raise debt, reduces employment liquidity
risks, & heightens operating efficiency.
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Careful structuring of the alliance in advance of the deal and continual adjustment
thereafter help to build a constructive relationship.
One should not trust while in business. Personal chemistry is good but is no substitute
for monitoring mechanism, co-operation incentives, & organizational alignment.
Without support system within the organization itself, external alliances are doomed
to fail.
5.2 Regulatory Guidelines for Banks

The Basel Committee on Banking Supervision has identified Principles for Sound Liquidity
Risk Management and Supervision, by providing more guidance on the following.
Liquidity risk acceptance
Maintaining sufficient levels of liquidity
Allocating liquidity costs, benefits and risks to business
Identification and measurement of contingent liquidity risks
Design and use of severe stress test scenarios
A contingency funding plan
Intraday liquidity risk and collateral
Public disclosure in promoting market discipline
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Multiple principles are set out for guidance to bank regulators on best practice liquidity risk
management in banks. Because of the importance of managing liquidity risks in banks, these
principles are valuable and found useful.
5.3 Conclusion
After the world financial crisis, which scratch the world a lot, now innovative regulatory
changes has been made and rules has been drafted and put into action, and new techniques of
risk-taking and risk management have emerged. These are all important outcomes of any serve
crisis. Perhaps most significantly, the financial crisis verified that liquidity is the most vital
component of a properly running financial system-it is the crucial life blood banks and other
financial institutions and by direct expansion the essential lifeblood of all other parts of the
corporate and governmental world. The rapid disappearing of asset and funding liquidity during
the crisis was enormously damaging: for many weeks, and even months, many of the traditional
providers of liquidity were unable or unwilling to participate in their liquidity provision
functions, meaning that sovereign authorities primarily national central banks, were called on to
be the true liquidity providers of last resort it is mostly because of their actions that a true
financial collapse was avoided, but not before many large institution failed or had be rescued,
and not before many non-financial stakeholders were financially damaged. Indeed, the list of
liquidity-related casualties is nothing short of remarkable: Washington Mutual, Indy Mac,
countrywide, Lehman Brothers, bear Stearns, Wachovia, Merrill Lynch, Citigroup, AIG,
Northern Rock, RBS, Bradford and Bingley, Dexia, IKB and Sachsen Landes bank, to name but
a few all suffered from severe liquidity problems. Little wonder then that risk management has
re-entered the spotlight.
Given the transformational qualities of the most recent crises it seems timely and appropriate
to bring the original material in Liquidity Risk up to date and to further expand its scope. The
new enhancement in technology and improvement in current thinking and ideas has provides a
prepared roadmap on innovative rules regulations and governance progressions.
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References
Basel III: International framework for liquidity risk measurement, standards and
monitoring, Basel committee on Banking Supervision, December 2010
Basel III: A global regulatory framework for more resilient banks and banking
systems, Basel Committee on Banking Supervision, December 2010
www.sbp.org.pk
Liquidity Management Framework- Implementation challenges for banks,
Accenture, 2011
Adrian, T. and H. S. Shin (2007), .Money, Liquidity and Financial Cycles. Working
Paper, Princeton University.
Page 71 of 72
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Bindseil, U., B. Weller and F. Wuertz (2003), .Central banks and commercial banks.
liquidity risk management..Economic Notes, 32.1, 37-66
Ali, K., Akhtar, M. F., & Sadaqat, S. (2011). "Financial and Non-Financial Business
Risk Perspectives Empirical Evidence from Commercial Banks". Middle Eastern
Finance and Economics, 150-159.
Bank for International Settlements (BIS). 1999. Market Liquidity: Research
Findings and Selected Policy Implications. May.
Crockett, A. 2008. Market Liquidity and Financial Stability. Banque de France
Financial Stability ReviewSpecial Issue on Liquidity. No. 11 (February): 1317.
Adrian, T. and H. Shin. 2010. Liquidity and Leverage.Journal of Financial
Intermediation 19 (3): 41837.
Financial Institution Management-a risk management approach, chapter17,
Anthony saunder, 2008
Liquidity Risk-managing funding and asset risk, Palgrave Macmillan, 2014
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State Bank of Pakistan

STATE BANK OF PAKISTAN

State Bank Of Pakistan

State Bank Of Pakistan

DEPARTMENT OF MANAGEMENT SCIENCES

This Internship Report is submitted to the Department of Management Sciences

State Bank Of Pakistan

Department of Management Sciences

Mr. Haseeb Hassan

State Bank Of Pakistan

This Report is Dedicated to my loving Parents, Sisters, Teachers &

State Bank Of Pakistan

State Bank Of Pakistan

State Bank Of Pakistan

State Bank Of Pakistan

2.15 Risks in SBP and other Financial Institutions..............................................................32

2.15.8 Liquidity Risk:.........................................................................................................35

State Bank Of Pakistan

Figure 4 from Risk Management Department in SBP..........................................................36

Section B Risk Management in other Financial Institutions................................................41

Chapter No 3 Financial Analysis of SBP.............................................................................45

State Bank Of Pakistan

Balance sheet item...............................................................................................................50

State Bank Of Pakistan

SWOT analysis of state bank of Pakistan....57

State Bank Of Pakistan

3. Favoritism and Nepotism.................................................................................................60

Political Pressure by Elected Government..................................................................61

5.1 Recommendations and Conclusion................................................................................63

State Bank Of Pakistan

1.2 Project Scope

State Bank Of Pakistan

1.3 Project Structure:

1.4 Theme of the Study

Management and Liquidity risk in any organization is a tough challenge as well as an

State Bank Of Pakistan

State Bank Of Pakistan

2.2 Banking System of Indo Pak before Partition

State Bank Of Pakistan

State Bank Of Pakistan

regulated financial institutions with ideal management having professional knowledge

2.3 Banking in Pakistan

State Bank Of Pakistan

State Bank Of Pakistan

2.4 BANKING SYSTEM IN PAKISTAN

State Bank Of Pakistan

The banking arrangement of a country by the banking institutions is recognized through

State Bank Of Pakistan

economic objective lay down by the Central Bank of Pakistan.

Introduction to State Bank of Pakistan

STATE BANK OF PAKISTAN

2.5 SBP Vision Statement

State Bank Of Pakistan

2.6 SBP Mission Statement

Figure 1 from SBP website

2.7 History of State Bank of Pakistan

State Bank Of Pakistan

2.8 Functions of State Bank of Pakistan

State Bank Of Pakistan

Legislative Liquidity Requirements (CRR, SLR)

Regulation & Supervision of Banking System

Ensuring the financial stability of Banks and financial Institutions

Sole Authority to issue Currency Notes

State Bank Of Pakistan