STATE BANK of PAKISTAN ANNUAL PERFORMANCE REVIEW 2008-09 (Volume-II)

STATE BANK OF PAKISTAN ANNUAL PERFORMANCE REVIEW 2008-09 (Volume-II)

Our Vision Our Mission To transform SBP into a modern and dynamic To promote monetary and financial stability central bank, highly professional and efficient, fully and foster a sound and dynamic financial equipped to play a meaningful role, on sustainable system, so as to achieve sustained and basis, in the economic and social development of equitable economic growth and prosperity in Pakistan. Pakistan.

LETTER OF TRANSMITTAL

State Bank of Pakistan Karachi November 23, 2009

Dear Mr. Tarin,

In accordance with Section 40(2) of the State Bank of Pakistan Act, 1956, the Balance Sheet of the Bank as on June 30, 2009 and the Profit & Loss Account for the year 2008-2009 duly signed by me, Deputy Governor, Comptroller Finance and certified by the Bank’s Auditors were transmitted to the Government on October 31, 2009. In continuation thereof, I submit herewith the Annual Report (Volume-II) of the Central Board of Directors on the working of the Bank for the year ended June 30, 2009. With best personal regards,

Yours sincerely,

Sd/- (SYED SALIM RAZA) Governor

Mr. Shaukat Tarin Federal Minister for Finance, Revenue, Economic Affairs & Statistics Government of Pakistan Islamabad

Contents

Governor’s Message 1 Governance Structure of State Bank of Pakistan 5

Strategic Objectives of SBP

1. Maintaining Price Stability with Growth 15 1.1 Overview 15 1.2 Monetary Policy Statement 15 1.3 Conduct of Monetary Policy and Credit Policy 16 1.3.1 Open Market Operations (OMOs) 16 1.3.2 Discount Window Operations 17 1.3.3 Statutory Liquidity Requirement (SLR) and Cash Reserve 17 Requirement (CLR) 1.4 Interest Rate Trends / Yield Curve 18 1.5 Segregation of Debt and Monetary Management 19 1.6 Government Bonds Market 19 1.7 Strengthening the Process of Monetary Policy Formulation and Implementation 20 1.8 Macro Modeling and Forecasting 21 1.9 Strengthening of Research Functions 22 1.9.1 SBP Working Paper series 22 1.9.2 SBP Research Bulletin 22 1.9.3 SBP International Conferences and Seminars 22 1.9.4 Disseminating SBP Analysis in National Language 23 1.9.5 SBP Annual/Quarterly Reports 23 1.9.6 Inflation Monitor 23 1.9.7 Inflation Snapshot 23 1.9.8 Publications from Statistics and Data Warehouse Department 23 1.10 Library Services 24

2. Broadening Access to Financial Sector 27 2.1 Overview 27 2.2 SME 27 2.2.1 SME Credit Profile 27 2.2.2 SBP Initiatives for Growth of SME Finance 28 2.2.3 Financing under Export Finance Scheme 29 2.3 Microfinance 31 2.3.1 Progress on Microfinance Programs 33 2.4 Housing and Infrastructure Finance 35 2.4.1 Housing Finance Market in Pakistan 35 2.4.2 Infrastructure Finance Market 36 2.4.3 SBP Initiatives to Promote Housing and Infrastructure Financing 37 2.5 Agricultural Credit Targets for FY09 38 2.5.1 SBP’s Initiatives for Promotions of Agricultural Credit 39

3. Ensuring Soundness of Financial Sector 43 3.1 Overview 43 3.2 Ensuring Stability of Banking System 44 3.2.1 Changes in CRR/SLR and Changes in CRR/SLR on F.E. 25 44 3.2.2 Consolidated Supervision: Needs and SBP Efforts 44 3.2.3 Strengthening of Capital Adequacy Regime 45 3.2.4 Developments in Implementation of Basel-II 46 3.2.5 Stress Testing 47 3.2.6 Risk Management 47 3.3 Strengthening Legal Framework 48 3.3.1 Anti-money laundering Evaluation 48 3.3.2 Enhanced Focus on Corporate Governance 48 3.3.3 Restructuring / Privatization of Banks / DFIs 49 3.3.4 Mergers and Acquisitions in the Banking Sector 49 3.3.5 Strengthening Overseas Operations of Pakistani Banks 50 3.3.6 Enhancing the Outreach of Bank Services 50 3.3.7 New Bank Licenses 51 3.3.8 Fair Debt Collection Guidelines 51 3.4 Status of Islamic Banking in Pakistan 51 3.4.1 Initiatives Taken by SBP to Promote Islamic Banking 52 3.5 Vigilant Supervisory System 54 3.5.1 Online Submission of Returns 54 3.5.2 Automated Quarterly NPLs Reports 54 3.5.3 Liquidity Management Post September 2008 54 3.5.4 Framework for Problem Bank Management and Contingency Plan 55 3.5.5 Problem Banks Resolution 55 3.6 Proactive Inspection 55 3.6.1 Restructuring the Department 56 3.6.2 Inspection of Information System 56 3.6.3 Basel-II Implementation 56 3.6.4 Development of Inspection Manual and IT Tools for Evaluation of 56 Consumer Finance Portfolio 3.7 Consumer Protection 56

4. Exchange Rate and Reserve Management 57 4.1 Overview 57 4.2 Interbank Market 57 4.3 Regional Perspective 59 4.4 Support for POL Payments 59 4.5 Foreign Exchange Reserve Management 59 4.6 Home Remittances 60 4.7 Exchange Companies 61

5. Strengthening Payment Systems 63 5.1 Overview 63 5.2 Real Time Gross Settlement (RTGS) 63 5.2.1 PRISM Payment Statistics 64 5.3 Branchless / Electronic Banking 64 5.4 The Retail Payments through Branchless Banking / Electronic Banking 65 5.4.1 Branchless / E-Banking Composition 65 5.5 Branchless / E-Banking Infrastructure in Pakistan 65 5.5.1 Online Branch Network and Automated Teller Machines (ATMs) 65 5.5.2 Number of Cards (Credit/Debit/ATM) 66 5.6 E-Banking (Cash Based - Online Banking & ATM) 66 5.6.1 Real Time Online Banking (RTOB) Transactions 66 5.6.2 Transactions through ATM 67 5.7 Branchless Banking / E- Banking (Virtual /Plastic Money) 67

5.7.1 POS (Point of Sale) Transactions 67 5.7.2 Call Centre Banking 67 5.7.3 Internet Banking 68 5.7.4 Mobile Banking 68 5.7.5 Internet Merchant Banking 68 5.8 Cross Border Transactions through E-Banking 68 5.9 Non-financial E-Banking Transactions 69 5.10 The Retail Payments through Paper Based Instruments 69 5.11 Transition to E-Banking 70

Management Strategy of SBP

6. Human Resource Developments 73 6.1 Overview 73 6.2 HR Profile 73 6.2.1 Reorganization of Departments & Functions 74 6.2.2 Change in Leadership 74 6.2.3 HR Policies 74 6.2.4 HRD Activities in FY09 76 6.3 Training & Development 77 6.3.1 In-house and Domestic Training 78 6.3.2 Foreign Training 78 6.3.3 Internship Programs 78 6.3.4 International Internship Program 78 6.3.5 Visit Programs 78 6.4 Business Support Services Department Achievements 79

7. Information Technology Developments 81 7.1 Overview 81 7.2 Globus Banking and Currency Solutions 81 7.3 Oracle ERP 81 7.4 Data Warehouse 82 7.5 Web 82 7.6 Infrastructure 82 7.7 Disaster Recovery Setup 83 7.8 IT Security 83 7.9 Trainings 83

SBP Subsidiaries

8. SBP Banking Services Corporation (SBP BSC) 87 8.1 Overview 87 8.2 Currency Management 87 8.3 Banking Services to the Government 89 8.4 Payment System 90 8.5 Foreign Exchange Operations and Adjudication 90 8.6 Development Finance Support Services 91 8.7 Internal Audit and Controls 93 8.8 Human Resource Management 93 8.9 Organizational Development/Change Management Project 95 8.10 Training & Development 96

9. National Institute of Banking & Finance (NIBAF) 97 9.1 Overview 97 9.2 Composition of Trainings and Development 98 9.3 Training Delivery and Participation 98 9.3.1 State Bank of Pakistan 98 9.3.2 SBP BSC (Bank) 100 9.3.3 International Training 101 9.4 Priority Sectors-Certification 102 9.4.1 Rural Finance Resource Centre (RFRC) 102 9.4.2 Mortgage Training Program on Housing Finance 103 9.4.3 Islamic Banking Certificate Course 103 9.4.4 Other activities in Islamic Banking 103 9.5 Other Training Programs/Services 103 9.6 Public Sector Capacity Development Program 104 9.7 NIBAF Linkages with other Institutions 104 9.8 Evening Talks/Lectures Series Program 104 9.9 Outsourced Training Programs and Activities at NIBAF 105

Finances of SBP and Subsidiaries

10. Annual Budget Review 2008-09 109 10.1 Overview 109 10.2 Corporate Expenses 109 10.3 Establishment Expenses 110 10.4 Operating Expenses 110 10.5 Provisions 110

11. Annual Financial Performance Review 2008-09 111 11.1 Overview 111 11.1.1 Summary of Profit and Loss Account 111 11.2 Income 111 11.2.1 Net Discount/Interest/Markup and/or Return Income 111 11.2.2 Discount, Interest/Markup and/or Return Earned 112 11.2.3 Interest/Markup Expense 112 11.2.4 Commission Income 113 11.2.5 Exchange Gain/(Loss) – Net 113 11.2.6 Dividend Income 113 11.2.7 Other Operating Income – net 113 11.2.8 Other Income – net 114 11.3 Expenditure 114 11.3.1 Bank Notes Printing Charges 114 11.3.2 Agency Commission 114 11.3.3 General Administrative and Other expenses 114 11.3.4 Provisions 114 11.4 Distribution of Profit 115

12. Consolidated Financial Statement of SBP and its subsidiaries 117

13. Financial Statement of SBP 159

14. Financial Statement of SBP-BSC (Bank) 197

15. Financial Statement of NIBAF 217

Annexure:

A Chronology of Policy Announcements 3 A-1 Banking Policy & Regulation Group 3 A-2 Development Finance Group 11 A-3 Financial Market/Reserve Management Group 20 A-4 Payment System 25

B-1 Central Board – Decisions and Deliberations during 2008-09 27 B-2 Business Continuation Management 30 B-3 Risk Based Audit Approach 32 B-4 General ‘Counsel’s’ Office 33

C Organizational Chart 35

D Management Directory 37

E External Relation Department’s Achievements 41

The Team

Mr. Umar Siddique Editor [email protected] Mr. Imran Naveed Khan Formatting [email protected]

Governor’s Message

As the global financial system grappled with the resurgence of the financial markets turmoil in September 2008, when the collapse of one of the world renowned financial institutions gave fresh impetus for panic, Pakistan’s economy faced its own challenges in an increasingly difficult operating environment, emanating from a confluence of both external and domestic factors. Growing macroeconomic imbalances, which had been persistently building up since FY05, finally manifested themselves in the form of rapidly deteriorating economic and financial fundamentals. Inflationary pressures continued unabated, the fiscal deficit grew rapidly, current account deficit reached a record high, the stock market was virtually closed for over four months, and foreign investment flows dried up. The only redeeming features were the consistently strong home remittances and the resilience shown by the banking sector, albeit under the strains of rising NPLs emanating from the downturn in economic activities. It was in the face of the rapid deterioration in the economy that led the economic authorities to formulate a home-grown macroeconomic stabilization program, started in November 2008 with the support of the IMF Stand-By Arrangement (SBA).

Focused on its core mandate, SBP strived to maintain a balance between price stability and growth. But notably, continued to remain more concerned about inflationary pressures given the established fact that economic growth cannot be nurtured in an era of high inflation. At the same time, SBP continued to ensure and safeguard the stability of the financial system by proactively responding to emerging risks and challenges to the banking system, and taking appropriate corrective measures timely.

The implementation of the macroeconomic stabilization program was primarily driven by tightening monetary and fiscal conditions to facilitate the resolution of structural problems. These measures yielded results in subsequent months: fiscal deficit was substantially contained, from Rs777.2 billion in FY08 to Rs680.4 billion in FY09, at 5.2 percent of GDP (down from 7.4 percent in FY08), on the back of elimination of subsidies as well as a cut in development expenditure. Monetary tightening, on the other hand, had a visible impact on CPI inflation which fell from its peak of 25.3 percent in August FY09 to 13.1 percent by June FY09; giving SBP the much needed breathing space to switch the direction of its policy stance. Furthermore, after unabated expansion in the last four years, the current account deficit contracted considerably to 5.3 percent of GDP during FY09, from 8.4 percent in FY08. These positive developments need to be viewed with caution, however, given that the economy continues to be fragile, and an assessment of the balance of risks continues to present a mixed picture.

In response to the changing economic and business cycle, the central bank also stepped in to facilitate the banking sector by rationalizing the minimum capital requirements to Rs10 billion, to be implemented in a phased manner by December 2010, and allowing the use of 30 percent of the Forced-Sale Value (FSV) of collateral in calculating provisioning requirements for the rising base of NPLs. In view of the complex regulatory requirements of large financial conglomerates, SBP also signed a Memorandum of Understanding (MoU) with the SECP to undertake consolidated supervision. At the same time, progress on modernization of the legislative framework including the

1 State Bank of Pakistan Annual Report 2008-2009 revamping of SBP Act, 1956, and the Banking Companies’ Ordinance 1962 is underway, while efforts are underway to introduce a Deposit Protection Scheme and a Consumer Protection Act.

Price Stability. Given the easing inflationary pressures, SBP reduced its policy rate by 100 bps each in April FY09 and August FY10, to 13 percent. Notably, it was the consistent approach to curbing excessive demand pressures which helped subdue inflation. SBP, however, has to tread with caution given the lagged impact of the phased out subsidies on expected inflation in the coming months and other macroeconomic vulnerabilities. In FY09, SBP issued three monetary policy statements (MPS), i.e., for the first half and then one each for the last two quarters of the year. In November FY09, SBP also announced interim monetary policy measures. Cognizant of the uncertain and rapidly changing macroeconomic environment, and to enhance the effectiveness of monetary policy, SBP decided in January FY09 to increase the frequency of its monetary policy statements first to quarterly basis, and from August FY10, the frequency was further increased to six times in a fiscal year. Henceforth, monetary policy decisions will be announced in the last weeks of July, September, November, January, March, and May. To further enhance the transparency and credibility of the monetary policy formulation process, SBP has constituted an independent Monetary Policy Committee (MPC) consisting of both internal and external members, which will start its deliberations from November FY10.

With the objective of strengthening the monetary policy framework, segregation of debt and monetary management was the highlight of FY09. In January FY09, the responsibility of deciding the cut-off yields in the primary auctions of Treasury Bills (T-bills) and Pakistan Investment Bonds (PIBs) was shifted to the Ministry of Finance, while SBP’s role was to manage the operational aspect of the auctions. This measure was taken to communicate that changes in the cut-off rate are not reflective of the monetary policy stance, while allowing SBP to focus on liquidity management consistent with the requirements of monetary policy implementation.

Reserves Management. The first half of FY09 was characterized by a continuation of pressures in the foreign exchange market. During Jul-Oct FY09, the trend deterioration in current account deficit seen in FY08 accelerated further, mainly owing to higher import prices and a sharp fall in financial inflows. This led to a rapid depletion of foreign exchange reserves along with substantial pressure on the exchange rate. The fall in reserves severely impaired the country’s ability to meet its external obligations and the global markets turmoil rendered the economic managers unable to access international capital markets. The subsequent implementation of a macroeconomic stabilization program led to a marked improvement in the external account position in the ensuing months. This also helped SBP build up foreign exchange reserves which had dropped to US$ 6.7 billion in October FY09, back to the almost end June FY08 level of US$ 11.4 billion.

In continuation of SBP’s efforts to strengthen its reserve management capabilities, substantial value was added to its profitability through active management of the investment portfolio in FY09. On gross return basis, SBP managed to earn a return of 2.31 percent, which while less than the 4.9 percent return in FY08, is still significant given the situation in the global financial markets.

Financial System Stability. The mandate for maintaining financial stability in Pakistan rests with the State Bank of Pakistan (SBP) in its capacity as the central bank and the regulator of the banking sector.1 State Bank of Pakistan views its objective of safeguarding financial stability in the context of smooth and efficient financial intermediation, encompassing financial institutions, financial markets and the financial infrastructure, such that the process can withstand disruptions caused by internal and external events, and potential threats and risks are managed with the objective of minimizing systemic risk.

1 SBP also regulates and supervises Development Finance Institutions and Foreign Exchange Companies 2 Governor’s Message

SBP’s formal review of financial stability is now in its third year and carries rich analysis of developments in both the domestic and international financial sectors. In addition to the ongoing monitoring and assessment of the banking sector, SBP undertakes, as part of its financial stability assessment mechanism, an independent review of the Non-Bank Financial Companies (NBFCs), the Insurance sector, Pension Funds, and Capital Markets, though these segments of the financial sector are under the oversight of the Securities and Exchange Commission of Pakistan (SECP).

The recently established Financial Stability Department (part of the Monetary Policy and Research group) is mandated to independently assess financial stability from a policy-formulation and research perspective, and is also responsible for preparing the annual Financial Stability Review (FSR) and for developing a macro-prudential framework for financial stability. The Financial Stability Department has initiated work on devising a Financial Stability Framework for SBP and initiated the first phase of Macro Stress Testing of the banking sector.

Access to Financial Services. One of the major objectives of financial sector reforms in Pakistan was to broaden the outreach of financial services to the under-served areas. For this purpose, SBP had established the Development Finance Group in 2006 which has taken several initiatives to broaden access to financial services to the marginalized sectors of the economy.

In July FY09, SBP in partnership with the UK Department for International Development (DFID) launched the Financial Inclusion Program. The Financial Inclusion Program worth UK £ 50 million is to be implemented by the State Bank of Pakistan. The program was designed and developed through broader consultations with the stakeholders and will help SBP implement Pakistan’s Microfinance Strategy which was approved by the Prime Minister in 2007. The program aims to develop microfinance sector’s capacity to reach out to 3.0 million microfinance users by the end of 2010, and 5.0 million borrowers by 2015. The program is designed to manage sector transformation from a subsidy-based informal institutional setting to a market-based regulated institutional system. In addition, the program also aims to support financial inclusion through improved remittance systems, branchless banking, expansion of SME and rural financing.

The FIP is targeted at delivering access to financial services, and using market based principles to poor and marginalized groups. Under the Financial Inclusion Program, delivering sustainable financial services to micro, small and rural enterprises is a key priority, for which specialized facilities have been launched. The program has made substantial progress during its first year which was considered to be an inception phase. SBP’s Microfinance Department (MFD) has successfully launched three of the program’s most important interventions namely the Microfinance Credit Guarantee Scheme (MCGF) (£10m), the Institutional Strengthening Fund (ISF) (£10m) and the Technical Assistance components. In addition, given FIP’s focus on the microfinance sector, the FIP office has now been merged with the Microfinance Department. A motivated team of professionals with gender balance, and an established structure necessary for the two components, i.e. ISF and MCGF, is in place. In the second phase the program will focus on launching a Financial Innovation Fund (£10m), Small and Rural Financing Guarantee (£10m) and projects on remittances, branchless banking and financial literacy. A multi-donor Credit Enhancement Fund is also being developed.

Consolidated Banking Sector Regulation and Supervision. In Pakistan, financial markets and institutions have witnessed significant changes during the last few years in terms of consolidation as well as diversification. Since 2000, more than 40 transactions of mergers and acquisitions have been executed within banks and between banks and non-bank finance companies. On the other hand, a number of banks/ DFIs as well as their holding groups have expanded their activities into the areas where the banks hitherto were either not allowed or not interested. These include insurance, asset management, brokerage, leasing and other non-banking finance services essentially through separate

3 State Bank of Pakistan Annual Report 2008-2009 entities. Along with financial services, various groups that control different banks have also stakes in non-financial / real sector of economy. These stakes in financial and non-financial sectors also cross over to and from foreign jurisdictions. This gives quite a diversified spectrum of activities that a bank is involved in and has related relationship with, which raises various supervisory concerns for the State Bank of Pakistan.

Cognizant of the challenges posed by the complex and dynamic environment and to ensure compliance with the core principles of effective banking supervision, SBP initiated a project for formulating a framework for consolidated supervision of the banking system. Initially a framework was drafted by SBP in FY08 and extensively discussed at different forums within the bank. The framework, along with proposed amendments in legislations, has been shared with the Ministry of Finance and Securities & Exchange Commission of Pakistan (SECP) and is under consultation between SBP and SECP for enhancing its effectiveness. SBP and SECP are deliberating upon the features of the framework and necessary amendments in legislations and related rules and regulations.

Strengthening of Payment Systems. The Payment system infrastructure in Pakistan has gradually evolved from the traditional cash and paper-based modes of payment to a more sophisticated technologically driven system. A key development in this process of evolution was the launch of Pakistan’s Real Time Interbank Settlement Mechanism (PRISM) for the settlement of large value transactions, with effect from July 1, 2008. To facilitate its operations, SBP issued PRISM Operating Rules for the convenience and guidance of the participants.

Major services offered by PRISM include the real time settlement of cash payments and payments related to government securities. The system also allows online trading of government securities among the direct participants. The real time execution of these transactions requires sufficient balances in participants’ settlement accounts. To address this issue, the system offers two major options to the participants. First, the payment can be queued for settlement at a later time when sufficient funds become available. Participants can manage their own queues by changing their priority levels. Alternatively, the participant can avail the collateralized Intra-day Liquidity Facility (ILF) offered by SBP.

Information Technology and Supportive Infrastructure. Core IT Systems implemented at SBP have matured into a sophisticated platform now, adding high value to SBP operations. This platform has been made more robust incorporating low risk features by the introduction of backups and eliminating redundancies in the areas of Power & environment, network connectivity, and Disaster Recovery Setup. IT Security has been tightened and operational risks mitigated. There have also been substantive additions of new functionalities in the main applications during the last year. State Bank is also now well placed to leverage its IT platform for strategic advances in automation.

Management of Human Resource. In FY09, the Human Resources Department continued to implement policies aimed at strengthening and motivating its human resource base. Major policy reviews have been made in the areas of recruitment, employee orientation, Performance Measurement & Improvement System (PMIS) and promotions.

In conclusion, I acknowledge the support of the SBP Central Board of Directors in discharging my statutory responsibilities in challenging economic times. Backed by dedicated and competent staff, SBP continues to deliver its mandate and support to the Government.

Syed Salim Raza Governor, State Bank of Pakistan

4 Governance Structure of State Bank of Pakistan

The governance framework of State Bank of Pakistan (SBP) is specified in the State Bank of Pakistan Act, 1956. Under the provisions of SBP Act, 1956, the general superintendence, direction of the affairs, and business of the bank rests with the Central Board of Directors. The Governor is the chairman of the Central Board and manages the affairs of the Bank on its behalf. Except for the Governor, all directors of the Central Board are non-executive members. To assist the Central Board, various committees of the Central Board have been constituted comprising non-executive directors, representatives from the management, and independent experts as required. These committees review and analyze various proposals before these are placed before the Central Board. To further improve the governance and legal framework of the Bank, major work has been completed, for the consideration of the legislator, on SBP Act and Banking Act. The Corporate Management Team (CMT) headed by the Governor and having senior executives of the Bank as members is the principal forum for debates and decisions on critical operational issues.

Authority and Accountability The State Bank of Pakistan Act, 1956, empowers SBP as central bank of the country. The Bank is owned by the government to the extent of 99.9 percent. The Central Board of the Bank submits a quarterly report to the Parliament on the state of economy with special reference to economic growth, money supply, credit, balance of payments, and price developments. The Bank also release annual audited accounts, and report on working of the Bank, to the public and federal government.

Central Board of Directors The State Bank of Pakistan Act, 1956, provides for an independent Central Board of Directors, comprising the Governor, Secretary Finance, and seven non-executive directors nominated by the federal government. The directors, one from each province, bring a wide range of experience from agriculture, banking, and industrial sectors to the deliberations of the Board. The collective wisdom, an appropriate balance of expertise and views, steer well the strategic direction of SBP. The directors of the Central Board hold office for three years, and are eligible for re-nomination on completion of term.

The Central Board of Directors is the apex decision making body of the Bank. The decisions are taken by majority of the members present voting with the provision that in the event of equal votes, the Governor may exercise a vote. Eleven meetings of the Central Board were held during FY 2008-09, and various decisions were taken including approval of Annual Report on the State of Economy, Monetary Policy Statements, Financial Stability Review, Review of Banking System, Annual Performance Review, Financial Statements of SBP and its Subsidiaries, Annual Budget, Corporate Governance and HR Policies. A list of decisions is attached at annexure B-1. .

5 State Bank of Pakistan Annual Report 2008-2009

Central Board of Directors

Syed Salim Raza, Governor/Chairman

Mr. Salman Siddique1 Mr. Abdul Razak Dawood Mr. Mohsin Aziz Mr. Kamran Y. Mirza

Mr. Iftikhar A. Allawala Mr. Zaffar A. Khan Mr. Tariq Sayeed Saigol Mirza Qamar Beg2

The Governor The Governor of the State Bank of Pakistan is appointed by the president of Pakistan for a term of three years and may be re-appointed for another term. The present Governor, Syed Salim Raza assumed the office on January 2, 2009 after completion of a term by Dr. Shamshad Akhtar. The departing governor presented the Progress and Performance Report (Jan 2006–Dec 2008) to the Central Board.

Corporate Secretary The Corporate Secretary organizes meetings of the Central Board and provides timely information to all directors for review before meetings. Corporate Secretary records important discussions and reports to the Board regarding implementation of decisions. Corporate Secretary also keeps interfacing with the federal government regarding parliamentary and other queries. He also facilitates the Board’s constituted committees and assists the Governor in exercising good governance in the institution including coordination of the business plan of the Bank.

1 Mr. Salman Siddique was preceded by Dr. Waqar Masood and Mr. Furrukkh Qayyum, both served as Secretary Finance up to February 2, 2009 and August 31, 2009. 2 Mirza Qamar Beg was designated as Director Central Board, SBP on May 27, 2009 in place of Sardar Muhammad Ali Jogezi. 6 Governance Structure of State Bank of Pakistan

Committees of the Central Board The Central Board oversees the functioning of the Bank through its committees. These include members of the Central Board, representatives of the management, and independent experts, where appropriate. The functions and composition of the committees are as under:

Committee on Audit

The committee assists the Central Board in reviewing SBP’s financial statements, auditing, accounting and relating reporting processes, the systems of internal controls, governance, business practices, and conduct established by the management and the Central Board.

The committee comprises three voting members, including two directors of the Central Board and one independent reputable and qualified accounting expert nominated by the Governor. Executive Director, Internal Audit & Compliance Department is a non- voting member of the committee whereas Corporate Secretary acts as secretary to the committee. The committee met 11 times during the year and has these members:

Mr. Kamran Y. Mirza Chairman Mr. Iftikhar A. Allawala Member Syed Mohammad Shabbar Zaidi Member (independent accounting expert) ED3, Internal Audit & Compliance Member (non-voting)

Committee on Investment

The committee assists the Central Board in management of foreign exchange reserves. The mandate of the committee includes recommending, for Board’s approval, the strategy and policy for investment and foreign exchange regarding management of foreign exchange reserves and approving operational guidelines for the investment of the reserves. The committee also reviews the performance of the reserves managed in-house and externally, and also approves appointment of asset managers, custodians, investment consultants and broad risk tolerance within which the Bank should operate in the area of investments. Similarly the committee review appropriateness of the approved investment policy, its benchmarks, and guidelines, on an annual basis.

The committee has Secretary Finance as its Chairman. Two other members of the Central Board, Executive Director Financial Markets and Reserve Management (FMRM), and Director International Markets & Investments (IMID) are its members. The Corporate Secretary is secretary to the committee. The committee met two times and its composition is as follows:

Secretary Finance Chairman Mr. Abdul Razak Dawood Member4 Mr. Iftikhar A. Allawala Member Executive Director (FMRM) Member Director (IMID) Member

3 ED=Executive Director 4 Mr. Abdul Razaq Dawood will retire on August 20, 2009.

7 State Bank of Pakistan Annual Report 2008-2009

Committee on Monetary and Credit Policies

The committee assists the Central Board in reviewing monetary and credit policies. It reviews Monetary Policy Statements (MPS) before approval of the Central Board.

The committee includes three members of the Central Board, including Chairman of the subcommittee. Economic Adviser and Director MPD are also its members. Corporate Secretary plays secretary to the committee. The committee met three times in FY09. Following are its members:

Mr. Abdul Razak Dawood Chairman5 Mr. Iftikhar A. Allawala Member Mr. Kamran Y. Mirza Member Economic Adviser Member Director Monetary Policy Department Member

The Central Board in its meeting held on May 21, 2009 approved to expand the committee to include two external economic experts. Mirza Qamar Beg has been nominated as Chairman of the committee after retirement of Mr. Abdul Razak Dawood on August 20, 2009. Mr. Tariq Sayeed Saigol has also been nominated as member from July 25, 2009. He has replaced Mr. Iftikhar A. Allawala.

Committee on Human Resources

The committee assists the Central Board in management of human resources. It reviews all the proposals requiring the approval of the Central Board regarding revision, modification or interpretation of human resource policies, and accordingly submits its recommendations to the Central Board.

The committee has three members of the Central Board. Deputy Governor Corporate services (CS) is its member and Corporate Secretary remains secretary to the committee. The committee met seven times and has this composition:

Mr. Zaffar A. Khan Chairman Secretary Finance Member Mr. Kamran Y. Mirza Member Deputy Governor (CS) Member

Committee on Building Projects

The committee assists the Central Board in matters relating to monetary approvals for construction of Bank’s buildings, their maintenance, and matters pertaining to acquisition/disposal of assets, both movable and immovable. The committee has two members of the Central Board, including the chairman of the subcommittee. The Deputy Governor (CS), Managing Director SBP-BSC, and Director Engineering SBP-BSC are its members. Corporate Secretary works as secretary to the committee. The committee met five times and has the following members:

Mr. Mohsin Aziz Chairman Mr. Iftikhar A. Allawala Member6 Deputy Governor (CS) Member

5 Mr. Abdul Razaq Dawood will retire on August 20, 2009. 6 Mr. Iftikhar A. Allawala replaced Sardar Muhammad Ali Jogezi as member of the committee on July 25, 2009 . 8 Governance Structure of State Bank of Pakistan

Managing Director (SBP-BSC) Member Director Engineering Member

Committee on Information Technology

The Central Board in its meeting held on July 25, 2009, decided to form a committee on Information Technology to assist the Board in information systems and technology area. The committee comprises two members of the Central Board including its chairman, a co-opted external information technology expert, and a non-voting member from the management, if required. Current membership of the committee is:

Mr. Iftikhar A. Allawala Chairman Mr. Mohsin Aziz Member

Management Structure The Governor is the chief executive officer, and on behalf of the Central Board directs and controls the affairs of the Bank on day-to-day basis. The Governor has the authority to conduct the business, control the functions, and manage the affairs of the bank except in matters required to be looked into specifically by the Central Board. The Governor is assisted by two Deputy Governors (DGs) and Executive Directors / Economic Adviser. The Governor has constituted a Task Force to review the organizational structure and major human resource policies of the Bank to further enhance the organizational effectiveness of the Bank.

Corporate Management Team The Corporate Management Team (CMT) acts as principal forum for debates and decisions on critical operational issues affecting the quality of work at institutional level. CMT is headed by the Governor and presently consists of Deputy Governors, Executive Directors, Economic Adviser, Managing Director SBP - Banking Services Corporation, Head HRD and Corporate Secretary.

Other Major Committees The following management committees assist the Governor in making decisions, and in formulation of various policies:

1. Monetary Policy Committee 2. Banking Policy Committee 3. BCP Committee 4. Investment Committee 5. HR-Task Force 6. Enterprise Risk Management Committee

9 State Bank of Pakistan Annual Report 2008-2009

Corporate Management Team

Syed Salim Raza, Governor

Mr. Yaseen Anwar Mr. Muhammad Kamran Shehzad7, DG-(BS&CS) DG-(BPR&DF)

Mr. Riaz Riazuddin Mr. Jameel Ahmad8 Mr. Aftab Mustafa Khan, Mr. Amer Aziz Economic Adviser ED (BPR&DF) Corporate Secretary ED (BS&HR)

Mr. Asad Qureshi Mr. Syed Wasimuddin9 Mr. Zafar Iqbal10 ED (FMRM) Chief Spokesman Head HRD

SBP Subsidiaries There are two subsidiaries of SBP, namely State Bank of Pakistan-Banking Services Corporation (SBP-BSC), and National Institute of Banking and Finance (NIBAF), both owned by the Bank. SBP-

7 Mr. Muhammad Kamran Shehzad was appointed as Deputy Governor in March 2009 on the completion of term of Mr. Mansur-ur-Rehman as Deputy Governor. 8 Mr. Jameel Ahmed ED-(BPR&DF) is presently on deputation with Saudi Arabian Monetary Agency (SAMA) from July 2009. 9 Syed Wasimuddin, Chief Spokesman was appointed as member of CMT in April 2009. 10 Mr. Zafar Iqbal, Head HRD was appointed member CMT in June 2009 in place of Mr. Ahsan Kamal, Director HRD on his transfer as Director Training & Development Department. 10 Governance Structure of State Bank of Pakistan

BSC is the operational arm of SBP for currency and credit management, facilitating inter-bank settlement system, dealing in savings instruments of the government, collecting revenue and making payments for and on behalf of the government and operational work relating to development finance, management of debt and foreign exchange. SBP-BSC Board comprises all the members from the Central Board of SBP and the Managing Director of SBP-BSC. On the other hand, NIBAF is the training arm, and is responsible for design, development, delivery, and evaluation of trainings. The Governor SBP is chairperson of Boards for both the subsidiaries.

11 Strategic Objectives of SBP

1. Maintaining Price Stability with Growth 2. Broadening Access to Financial Sector 3. Ensuring Soundness of Financial Sector 4. Exchange Rate and Reserve Management 5. Strengthening Payment Systems

1Maintaining Price Stability with Growth

1.1 Overview FY09 was a challenging year for SBP in terms of achieving its prime objective of price stability. Due to the deteriorating domestic macroeconomic imbalances, worsening global economy, and rising international commodity prices, inflation rose to its historic high levels. Bringing inflation down was an uphill task given the rising expenditures on account of domestic political situation and meager domestic resources. Availability of foreign resources was uncertain due to the global downturn and subdued foreign investors‟ interest. The weakening of the economic conditions also led to turbulence in the financial markets resulting in severe liquidity shortages in both the money and foreign exchange markets. In these circumstances, SBP endeavored to contain inflation more aggressively with policy rate hikes and took corrective actions to ease the liquidity conditions in the financial markets. Moreover, SBP decided for more frequent reviews of the economy.

Later on, when towards the end to the first half of FY09, the economy stared to pick a positive turn and the outlook of the economy appeared encouraging, SBP reviewed its policy and decided not to continue with the further tightening of monetary policy. By the end of third quarter of FY09, the macroeconomic situation improved further and allowed the SBP to initiate an easing of monetary policy. The year culminated with a significant improvement in the fiscal deficit and external current account deficit and a substantial reduction in inflation. Foreign exchange reserves have once again reached to a decent level and confidence in the economy appears to be improving.

While addressing the economic issues, SBP also focused on improving its capacity to handle the ever changing economic environment and emerging policy challenges. In this regard, it took a number of steps during the year. First, to improve vigilance of the economy, SBP increased the frequency of issuing monetary policy statements from bi-annual to quarterly basis. Second, the decision making process was further streamlined by regular meetings of the Monetary Policy Committee. Third, decision making was made more prudent and forward looking by supporting it with improved information content, analysis of economic developments, and forecasts of key macroeconomic indicators.

Further, to improve the effectiveness of monetary policy, the decision making responsibility regarding the cut off rate for T-bills auction was transferred to the Ministry of Finance. This step allows a clear signaling of the monetary policy stance and communicates the market separation of its debt and monetary management functions. More recently, SBP has also introduced an interest rate corridor of 300 bps below the policy discount rate to make the transmission mechanism more effective.

In addition, to effectively communicate monetary policy to a wider audience, the monetary policy stance was explained through print and electronic media more frequently and its various publications are now also being released in Urdu.

1.2 Monetary Policy Statement In FY09, SBP issued three monetary policy statements (MPS), i.e., for the first half and then one each for the last two quarters of the year. In addition, in November 2008, the central bank also published a supplementary report to announce interim monetary policy measures. Two regular MPS in H2-FY09 was a new step and a deviation from SBP‟s past practice of issuing MPS on bi-annual basis. Given an uncertain and rapidly changing macroeconomic environment, and to enhance the effectiveness of monetary policy, SBP decided in January 2009 to announce its monetary policy decisions on quarterly basis. In August 2009 the frequency of monetary policy decisions was further increased from four to six times in a fiscal year. Henceforth, monetary policy decisions will be announced in the last week 15 State Bank of Pakistan Annual Report 2008-2009 of July, September, November, January, March, and May. Moreover, it is decided that the January and July policy announcements will be Figure 1.1: Open Market Operations accompanied with a detailed monetary policy Mop-up Injections statement and a press conference. On remaining four occasions monetary policy 1400 decisions will be communicated through a brief press release only. 1120 840 In the monetary policy statement for July- December 2008, considering the risks related 560 to rising external current account and fiscal billionrupee deficits, and worsening inflation outlook, SBP 280 decided to increase its policy rate by 100 bps to 13 percent effective July 30, 2008. Also, 0

considering the adverse impact of continued

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 borrowing by the government from SBP on FY01 inflation, the SBP Central Board of Directors resolved that government should retire Rs21 Table 1.1: Open Market Operations during FY09 billion in each quarter of FY09. Weighted average OMO (billion rupees) Notwithstanding these measures, additional O/N repo rates unanticipated developments emerged and the Mop up Injection Net mop up Average SD outcome during the first four months of FY09 Q1 436.1 254.6 181.4 11.0 1.6 deviated substantially from expectations. In particular, both the fiscal and external current Q2 384.3 237.9 146.4 9.0 2.2 account did not witness the expected Q3 392.3 60.0 332.3 11.0 1.6 improvement, and weakening financial Q4 155.0 679.5 -524.5 12.3 1.3 inflows resulted in a substantial drawdown of FY09 1367.7 1232.1 135.6 11.0 2.0 foreign exchange reserves and a sharp depreciation of Pak-rupee. This worsening macroeconomic situation forced the central bank to announce interim monetary policy measures in November 2008, which included a 200 bps increase in the policy rate to 15 percent effective from November 13, 2008.

By the end of FY 2009, it became quite clear that both, the fiscal and the external current account, deficits would be lower compared to their respective levels in FY08. However, not only the expected magnitudes of these deficits were still quite high but there were risks of slippages also. Similarly, the high expected inflation at that time and its persistence, reflected by core inflation measures, were clearly showing the risk on this front. To mitigate the implications of these risks and taking a precautionary approach, SBP left the policy rate unchanged at 15 percent in the MPS for Q3-FY09. As both fiscal and external current accounts continued to show improvement and inflation outlook started to improve, SBP announced a 100 bps cut in its policy rate to 14 percent on April 20, 2009 in the MPS for Q4-FY09 – the first cut in the policy rate in the last four years. As the economy stabilized further, and inflation came down quickly April 2009 onwards, in recently announced MPS in August 2009, SBP further lowered its policy rate to 13 percent. While easing monetary policy, SBP remains fully cognizant of risks associated with an uncertain global environment and domestic structural vulnerabilities. These could lead to deterioration in the country‟s balance of payments, fiscal position, and inflation outlook.

1.3 Conduct of Monetary Policy and Credit Policy 1.3.1 Open Market Operations (OMOs) FY09 was a challenging year in terms of liquidity management as it saw huge swings in interbank liquidity. Apart from changes in the discount rate, OMOs remained the major tool for monetary management during FY09, although measures such as changes in CRR and SLR were also taken to 16 Maintaining Price Stability with Growth inject permanent liquidity during Oct-Nov 2008. Liquidity situation remained under stress during most of H1-FY09 mainly due to depletion of net foreign assets (NFA) and unfounded market rumors about the stability of some of the local banks. In the first quarter weighted average rate anchored within 200bps wide implicit corridor, however, State Bank of Pakistan deliberately kept interbank money market liquid during the second and third quarters of FY09, to dilute the above liquidity concerns and to ensure adequate flow of funds to the private sector and GoP. For example, SBP injected Rs492.6 billion during H1 and Rs739.5 billion during H2-FY09 (see Figure 1.1 and Table 1.1) through OMOs besides permanently injecting around Rs270.0 billion by reducing CRR by 400 bps and abolishing SLR on Time Liabilities during H1-FY09. Moreover, banks availed Rs932.2 billion during FY09 using discount window facility to ease liquidity crunch to some extent.

Figure1.2: Weekly Weighted Average Overnight Rates (percent) Weighted Average rate Discount rate 15.5

13.3

11.1

8.9

6.7

4.5

08 09

09 09

08 08

- -

Jul

Jan

Jun

Oct

Jun

Sep Feb

Apr

Dec

Mar

Aug Nov

Aug

- -

May

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16 8

26 13

29 21

The Weighted Average O/N rate during FY09 remained at 11.00 percent consistent with the monetary policy stance. However, volatility of Weighted Average O/N rate increased considerably due to liquidity stress during FY09 and SBP‟s deliberate strategy to keep the interbank Figure 1.3: Discounting market liquid during second and third 2000 quarter of FY09 (see Figure 1.2).

1600 1.3.2 Discount Window Operations Along with other liquidity management measures, banks also accessed the discount 1200 window totaling Rs932.2 billion during the year (see Figure 1.3). The number of visits 800 at the discount window remained 123 in billionrupee FY09 as against 137 in FY08. The 400 quarterly break up of discounting data showed that 73.6 percent of the total 0

discounting was availed during the first

FY03 FY04 FY05 FY06 FY07 FY08 FY09 two quarters when interbank money FY02 market faced acute shortage of liquidity.

1.3.3 Statutory Liquidity Requirement (SLR) and Cash Reserve Requirement (CRR) The H1-FY09 (especially the 2nd Qtr) remained in the grip of liquidity crunch due to the depletion of NFA and negative sentiments arising out of unfounded rumors about few banks. Besides injection through OMOs and increase in banks‟ effective access to discount window, SBP took a series of steps to ease the liquidity situation and restore stability in the market. These are given as follows:

17 State Bank of Pakistan Annual Report 2008-2009

 During 11th October to 1st November 2008, SBP reduced the Cash Reserve Requirement (CRR) by 400 bps to 5 percent of the time and demand liabilities (TDL) in a phased manner: a reduction of 100 bps effective from 11th October; a 200 bps effective from 18th October; and another 100 bps effective from 1st November 2008.  Effective from 18th October 2008, SBP exempted the time deposits of one year and higher tenor from Statutory Liquidity requirements (SLR).  Effective from 13th October 2008, SBP allowed securities categorized as “Held-to-Maturity” for borrowing from SBP under SBP‟s 3-day repo facility/OMOs.  Effective from 18th October 2008, SBP increased the SLR eligibility limit of the PIBs from 5 percent to 10 percent of the TDL.

Above steps resulted in normalcy in the interbank market in short time. These actions resulted in permanently injecting liquidity of around Rs270.0 billion in the banking sector. The easing of the liquidity by the SBP in October 2008 has helped the market conditions considerably as reflected in an improved excess reserve position of the banks. In the third quarter of FY09, these excess reserves continued to increase on account of the slowdown in private sector credit. Excess reserves increased from a low of 2.1 percent (Rs79 billion) as on September 30, 2008 to 13.24 percent (Rs543.97 billion)

Figure 1.4: Bank Excess Liquidity in Government Securities Excess (billion rupees) Percent of DTL (RHS) 550 28

440 22

330 17

220 11

110 6

0 0

03 05 08 04 06 09

03 05 07 04 06 08

------

Jun Jun Jun Jun Jun Jun

Dec Dec Dec Dec Dec Dec of the TDL by Jun 09 (see Figure 1.4). (Excess Liquidity is defined as the surplus holdings of government securities / cash over and above the minimum CRR/SLR requirement). As a result of improved liquidity in the banking system, the liquidity spread (i.e., the difference between the clean interbank deposits rates and collateralized repo rates) has narrowed down considerably.

1.4 Interest Rate Trends /Yield Curve In continuation to tight monetary policy stance adopted by SBP since 2005, the discount rate was further raised twice during H1-FY09 by 100 and 200 bps in July and November 2008. These actions were undertaken to contain aggregate demand pressures. Cut-off yields on government securities for different maturities increased and the yield curve moved accordingly. However, after the decline of inflation numbers since February 2009, SBP reduced discount rate by 100 bps w.e.f. April 21, 2009 (see Figure 1.5). Market interest rates had already started to incorporate a reduction in the discount rate prior to the above reduction.

Movement in KIBOR for various tenors mirrored the liquidity situation and interest rate expectations during the year. For example, the 6-month KIBOR reached to its peak level of 15.76 percent on November 11, 2008 and hovered around that level till the end of H1-FY09. Similarly, KIBOR for 12- month remained in the vicinity of 16 percent during November 2008 to January 2009 (see Figure 18 Maintaining Price Stability with Growth

1.6). Results of liquidity management Figure 1.5: Yield Structure measures taken by SBP are visible from the 30-Jun-09 30-Jun-08 30-Jun-07 beginning of H2-FY09 as KIBOR started to 15 decline. Sharp decline was seen in 6 month KIBOR in March 2009 in the backdrop of 14 slowdown in private sector credit and expectations of an interest rate cut. 12

1.5 Segregation of Debt and Monetary 11 Management

To further strengthen and segregate the percentperannum 9 responsibilities of debt and monetary management, two landmark measures were 8 announced by State Bank of Pakistan in 3M 6M 12M 3Y 5Y 10Y 15Y 20Y 30Y January 2009: (I) prior announcement of the auction calendar for Treasury Bills (T-bills) and Pakistan Investment Bonds (PIBs) and a Figure 1.6: Trend in Market Interest Rate (percent) volume based approach to determine the 6-month PKRV 6-month KIBOR DR auction result. The measure was a significant 16 step towards development of the Government 15 Securities market in the country. (ii) Ministry of Finance would henceforth be responsible 14 for deciding the cut off yields in the primary 13 auctions of T-bills and PIBs. State Bank of 12 Pakistan however would continue to manage the operational aspect of the auctions and 11

there would be no change in the process from 10

08 09

08 08

the market‟s perspective. -

- -

Jul

Jan Jun

Oct

Sep Feb

Apr

Dec

Mar

Aug Nov

May

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2 2

2 2 1.6 Government Bonds Market 2

Table 1.2: Snapshot of PIB Maturities & Issuance during FY09 As on May 28, 2009

Face value amount issued Weighted average Percent share Tenors Maturity Total issued Variance 30-Aug-08 19-Feb-09 16-Apr-09 28-May-09 issuance issuance yield yield

3-years 14,088.0 187.5 3,977.5 3,071.5 2,866.5 10,103.0 -3,985.0 0.1 0.1 5-years 27,765.3 0.0 3,023.2 2,830.0 2,988.0 8,841.2 -18,924.1 0.1 0.1 7-years 0.0 200.0 2,735.0 2,592.0 1,800.0 7,327.0 7,327.0 0.1 0.1 10-years 0.0 688.3 7,821.0 14,156.0 12,365.5 35,030.8 35,030.8 0.1 0.5 15-years 0.0 56.0 1,180.0 63.4 103.0 1,402.4 1,402.4 0.2 0.0 20-years 0.0 0.0 1,500.0 200.0 200.0 1,900.0 1,900.0 0.2 0.0 30-years 0.0 2,500.0 2,000.0 100.0 2,000.0 6,600.0 6,600.0 0.1 0.1 Total 41,853.3 3,631.8 22,236.7 23,012.9 22,323.0 71,204.4 29,351.1 0.1 1.0 Pakistan Investment Bonds The PIB issuance in FY09 remained same as in FY08. State Bank of Pakistan continued with its strategy of reopening previous issues throughout the year to build liquidity and size in benchmark issues. Government of Pakistan introduced another tenor of 7 years in the PIB primary auctions.

19 State Bank of Pakistan Annual Report 2008-2009

Dissemination of advance PIB auction calendar not only assured market participants about the supply of bonds but also the desired maturity profile of the government borrowings. Banks showed keen interest in 10 year PIB, while insurance companies remained interested in longer tenors of PIB. At the end of FY09 outstanding stock of PIBs remained at Rs440.99 billion as against Rs411.63 billion at the end of FY08 (see Table 1.2).

Going forward, the strategy is to narrow the variety of debt instruments by consolidating and standardizing government issues with emphasize on size of specific issues. By concentrating government bond issues in a relatively limited number of popular standard maturities, enhanced liquidity in those securities can be ensured.

Market Treasury Bills On shorter end of yield curve, government raised net Rs304.3 billion in all three tenors of MTBs. Due to change in interest rate scenario in second half, 12-month MTB remained heavily subscribed. The

Table 1.3: Market Treasury Bills

Amount accepted Amount offered Quarter No. of Auctions 1 Target Maturity (face value) (Realized value) (Face value)

Q1 7 430,000 397,239 430,279 289,145 297,612 Q2 7 500,000 395,193 577,619 486,713 502,419 Q3 6 565,000 517,775 1,609,197 631,496 684,177 Q4 6 350,000 250,537 713,129 339,470 380,847 FY09 26 1,845,000 1,560,744 3,330,224 1,746,824 1,865,055 1:/ All auction on the basis of settlement dates. activities in MTB primary market were further Table 1.4: Detail of Ijara Sukuk Conducted during FY09 aided by the release of advance auction million rupees calendar which provided a clearer idea of the government borrowing needs. The cut-off Auction settlement Amount Margin (Bps) over yields remained consistent with the borrowing date accepted MTB requirement of the government as reflected in 26-Sep-08 6,522.5 +45.0 the auction calendar and the interest rate 29-Dec-08 6,000.0 +75.0 expectations (see Table 1.3). 11-Mar-09 15,325.0 +0.0 Total 27,847.5 Government Ijara Sukuk Another important landmark of FY09 is the issuance of government of Pakistan Ijara Sukuk. During FY09 the government has conducted three Sukuk auctions of 03 years tenor with total issued amount standing at Rs27.85 billion (see Table 1.4). The issuance of GoP Ijara Sukuk is a significant step towards the development of inter-bank Islamic money market as it also provides an investment alternative to both Islamic and conventional banks. This is a floating rate instrument with the 6 month rental benchmarked to the 6-Month Weighted Average MTB Auction rate.

1.7 Strengthening the Process of Monetary Policy Formulation and Implementation During FY09, SBP‟s internal Monetary Policy Committee (MPC), chaired by the Governor, met regularly to review macroeconomic developments, assess the need for policy changes, and approve monetary policy statements for submission to the SBP‟s Central Board of Directors. Minutes of all the meetings were prepared and later circulated to all the members of MPC. The information set provided to the internal MPC – the MPC Information Compendium – has also been substantially improved. It

20 Maintaining Price Stability with Growth not only summarizes the trends and developments of all the important macroeconomic variables using self explanatory tables and graphs but also provides detailed projections of key macroeconomic variables. The compendium is updated and circulated among MPC members on around 20th of every month, after which an MPC meeting is called within a week‟s time. In addition, a number of reports and brief policy notes are submitted to MPC members, which includes analysis of key monetary aggregates such as government borrowing and private sector credit, banking and financial sector developments, current monetary management procedures, and recommendations for further improvement in monetary policy formulation and implementation process, and current issues (such as commodity operations of the government, circular debt, etc.) concerning monetary policy for deeper understanding. To further enhance the transparency and credibility of monetary policy formulation process, SBP announced in its recent MPS, issued on August 15, 2009, that an independent Monetary Policy Committee (MPC) is being constituted that will have external experts as members in addition to SBP representatives.

In terms of monetary policy reforms and strengthening of the monetary policy framework, segregation of debt and monetary management was the highlight of FY09. Specifically, since January 2009, the responsibility of deciding the cut off yields of the primary auctions of Treasury Bills (T-bills) and Pakistan Investment Bonds (PIBs) was shifted to the Ministry of Finance, while SBP‟s role was confined to manage only the operational aspect of the auctions. This measure clarifies to the market that changes in cut off rate are not reflective of monetary policy stance and allows SBP to focus on liquidity management consistent with its monetary policy stance. In addition to segregating debt and monetary management, since December 2008, the Ministry of Finance had started making prior announcement of the quarterly auction calendar for T-bills and PIBs along with targets of individual auctions. They also adopted a volume based approach to determine the auction result. Moreover, the government borrowing from SBP was capped through quarterly ceilings targets under the ongoing Stand-By Arrangement (SBA) with the IMF. These measures brought clarity to the market regarding government‟s borrowing needs and thus bode well for effective liquidity management by SBP. Recently, in August 2009, SBP has adopted a new framework for its monetary operations by introducing a corridor for the money market overnight repo rate. While the SBP policy rate will continue to serve as a „ceiling‟, rate on the new overnight deposit facility, 300 bps below the SBP policy rate, will provide a binding „floor‟. The introduction of this framework is expected to improve liquidity management, enhance effectiveness of market signaling, and foster stability and transparency in the money market operations. It also bodes well for improving transmission of monetary policy signals, strengthening its role in fostering price stability.

Effective communication of monetary policy to the stakeholders and general public is crucial to achieve desired goals. For this purpose, to clarify the policy stance, SBP staff holds meetings with the financial sector analysts, write articles, and give interviews to the media. Further, SBP has started sending hard copies of MPS to major universities, financial institutions, and research outfits of the country.

1.8 Macro Modeling and Forecasting The effectiveness of monetary policy in modern day central banking is directly associated with the forward looking approach adopted in the policy formulation process. Continuous efforts have been made to enhance the forecasting capacity of SBP.

To have reliable forecasts, SBP has developed different modules that forecasts key macroeconomic indicators. Since expected path of inflation plays a critical role in the formulation of monetary policy, an inflation forecasting suite consisting of 14 structural and non-structural models has been prepared. Also, to predict the future path of exports, imports and worker remittances, structural and non- structural models on annual, quarterly, and monthly frequency have been designed. Forecast from these models are updated every month to analyze the inflation outlook and projections of external

21 State Bank of Pakistan Annual Report 2008-2009 sector. The later also helps in predicting the future path of monetary aggregates. Specifically, these forecasts are used in the Macroeconomic Framework based on Financial Programming Approach to do iterations to derive consistent forecasts for key macroeconomic variables. Using this framework, annual projections of key macroeconomic variables and medium-term projections/programs are being prepared. Annual projections are updated on monthly frequency, and reviewed by the SBP‟s internal MPC. This is an important input to form a more informed and forward looking policy decision. In addition, by applying IMF's Consultative Group on Exchange Rate (CGER) approaches, exchange rate misalignment is computed and submitted to MPC for review on quarterly basis.

To further strengthen the forward looking analysis of monetary policy formulation, SBP is in the process of developing a macroeconomic model that will produce behavioral forecasts of key economic variables while capturing the inter-sectoral and intra-sectoral linkages among the four main sectors – real, external, fiscal and monetary – of the economy. Moreover, a separate team is designing another macroeconomic model using an advanced technique termed as Dynamic Stochastic General Equilibrium (DSGE) modeling.

1.9 Strengthening of Research Functions Monetary Policy and Research Cluster (MPRC) is playing an important role not only in monetary policy formulation, but also in providing key inputs for broader economic and financial policy formulation through its economic reports, research work, analytical and financial reviews, and data compilation and dissemination. The MPR cluster consists of five departments, i.e., Research, Monetary Policy, Economic Analysis, Financial Stability, and Statistics and Data Warehouse. The MPR cluster continued its capacity building and skills enhancement during the year through trainings, exposure visits, induction of professionals, access to quality journals, research bulletins, and databases, etc.

1.9.1 SBP Working Paper Series The SBP Working Paper Series was started in September 2001 with the objectives of strengthening capabilities of the State Bank of Pakistan in applied research, and stimulating specialized discussions on macroeconomic issues. The officers of the State Bank submit their research papers for the series that are reviewed intensively by two peer reviewers and also presented in a seminar before release. The Economic Adviser, State Bank of Pakistan is the Editor of the SBP Working Paper Series. The Applied Economic division of the Research Department assists the Editor in managing series. During the year FY09, five working papers were released at the website of the Bank.

1.9.2 SBP Research Bulletin Research Department of SBP has established its mark as a major research institution that brings out a peer reviewed journal, SBP Research Bulletin, currently indexed in the Journal of Economic Literature of the American Economic Association. SBP Research Bulletin was first published during FY05 and by the end of FY09 seven issues have been published and are available on SBP website. Out of these, four cover the recent research work on important topics relating to Pakistan‟s economy while three are the proceedings of SBP international conferences covering the issues related to central banking. During FY09 one regular issue consisting of refereed articles and one special issue consisting of articles received for SBP conference1 were published.

1.9.3 SBP International Conferences and Seminars A conference on Inflation Targeting in Emerging Market Economies was planned during the year but due to some unavoidable reasons the proposed conference could not be held. However, a seminar was held on April 11, 2009 in which Professor Dr. Asad Zaman, an eminent economist with an

1Although the SBP conference could not be held during the year due to some irrepressible circumstances, the submissions for the conference were published along with two critical reviews in the special issue of the SBP Research Bulletin. 22 Maintaining Price Stability with Growth international repute for his work in the field of theoretical econometrics, delivered a lecture on the market economy and its limits. The seminar was attended by a large number of audiences.

1.9.4 Disseminating SBP Analysis in National Language The Translation Division of the Research Department continued to translate SBP reports in Urdu which were released simultaneously with original versions of the reports in English. During the year the following reports were translated:

Monetary Policy Statement, Jul-Dec 2008 Interim Monetary Policy Measures, November 2008 Monetary Policy Statement, Jan-Mar 2009 Monetary Policy Statement, Apr-Jun 2009 Annual Report Volume I & II, FY08 Financial Stability Review 2007-08 1st Quarterly Report FY09 2nd Quarterly Report FY09 3rd Quarterly Report FY09

1.9.5 SBP Annual/Quarterly Reports According to the SBP Act, the central bank is required to submit to the Parliament an appraisal of the state of the Pakistan economy on a quarterly basis. Thus, the SBP produce three quarterly reports and an Annual report, which are publicly disseminated after submission to the Parliament. These reports have extensive coverage of the developments in the domestic economy, including the impact of global developments that have significant bearing on domestic economic performance. Further, these publications review effects of policy measures undertaken by the central bank and the government, and highlight challenges faced by the country. The documents also provide a tool to SBP to create a better understanding of cross-linkages of various policies and economic issues. The increased public awareness in turn leads to more effective policies.

1.9.6 Inflation Monitor Since ensuring price stability is the key function of the central bank, SBP continuously observe and assess inflation trends. This function is formally translated into „Inflation Monitor‟ which is a monthly publication being issued since March 2005. This document provides an extensive review of price developments both in domestic and global economy. Further, the report contains various statistical tables which are helpful in better understanding the emerging trends in domestic inflation.

1.9.7 Inflation Snapshot Inflation Snapshot provides basic statistics on inflation released by FBS, and computed by SBP. This document is released on SBP Web site (www.sbp.org.pk) with one day lag following the release of FBS data on prices. Different measures of core inflation are reported in this document. Inflation is also reported for various time frames: year-on-year, period averages (or year-to-date), annualized (12 month moving average) as well as month-over month basis.

1.9.8 Publications from Statistics and Data Warehouse Department Timely availability of quality economic data is the pre-requisite for research and policy formulation. To keep stakeholders updated on latest developments in various segments of the economy, State Bank of Pakistan produces several reports and statistical publications. The Statistics and Data Warehouse Department compiles and publishes authenticated and reliable statistics on a wide range of economic variables for usage in various SBP reports and publications with different frequency (daily, weekly, monthly, biannual and annual). These publications are also placed at SBP website for easy access. The Statistics and Data Warehouse Department is a primary source of data on money and banking, Balance of Payments (BoP) statistics and International Investment of Pakistan (IIP). The department

23 State Bank of Pakistan Annual Report 2008-2009 also carries out analysis for assessing Figure 1.7: Book Acquisitions performance of financial and non-financial 2500 sectors through annual financial statements of individual company/institution. The analysis is published in annual publications. 2000

1.10 Library Services 1500

The State Bank of Pakistan‟s library caters to numbers the information and research needs of the 1000 SBP, and banking and business community in Pakistan. Rated among the most referred 500 libraries of the country, it serves over 5000 registered members representing SBP, 0 commercial banks, public and private firms, FY06 FY07 FY08 FY09 insurance companies, brokerage houses, media, and numerous business schools. Figure 1.8: Indexing & Cataloguing Work The strategic goal of the library for FY 2008- Articles indexed Books catalogued

09 was: to improve support to research and 8,543 FY09 scholarship by providing enhanced access to 2,352 quality information resources, and first-class learning and research infrastructure. This goal 8,773 FY08 became more viable with the administrative 2,314 autonomy given to the library on August 28, 9,168 2008, when it was dissociated from Training FY07 & Development Department and placed in 1,846 MPR cluster as an entity directly reporting to 8,085 FY06 Economic Adviser. Some achievements of the 1,143 library during FY 2008-09 are listed below: numbers Collection Development. To support continued and fresh research at SBP, collection development continued. E-collections comprising e- books, e-journals, and online statistical databases needs special mention. Access to Ebrary – an electronic book database containing over 41,800 full-text books and Chicago Journals covering 54 journals published by University of Chicago Press, were arranged freely through Higher Education Commission. Similarly, International Monetary Fund‟s eLibrary and online statistical databases including Balance of Payment Statistics (BoP), Direction of Trade Statistics (DoT), Government Finance Statistics (GFS), and International Financial Statistics (IFS) were subscribed free. Taking advantage of reduced subscription rates of JSTOR journal archives for the developing countries, complete archives of JSTOR covering over 1000 journals under nine different categories were subscribed. The online journals of American Economic Association (AEA), Organization of Economic Cooperation and Development (OECD), and Western Economic Association (WEAI) were added to our digital collection. Islamic Finance Information Service – a portal of online information sources on Islamic banking and finance was subscribed to meet the growing research needs of Islamic banking community. In print collections, around 2,300 new books were added to the collection (see Figure 1.7) out of which 514 were arranged on complimentary basis. Twenty four new journals (including nine local and fifteen foreign journals) were added to the subscription list, whilst there is a long list of publications of various companies, central banks, commercial banks, and DFIs that were added to library collection during the review period free or on exchange basis.

Bibliographic and Reference Services. For promoting effective usage of library resources, posting of monthly bulletins of Fresh Arrivals and Content Alerts on SBP Web site and electronic board as 24 Maintaining Price Stability with Growth well as their bank-wide broadcast through email remained a regular feature of Library. Figure 1.9: Book Loaned All items acquired were properly catalogued / 24 indexed and made available for browsing through library portal in real time (see Figure 1.8). Officials at the reference desk 21 responded to countless reference queries and proactively provided personal assistance in 18 literature search and library usage.

Orientation tours for the new inductees, thousandnumbers internees and occasional visitors were 15 arranged throughout the year. Over 500 requisitions for articles were entertained through library‟s Online Document Delivery 12 Service. FY06 FY07 FY08 FY09

Lending Services. With the implementation of bar code technology, circulation operations became more efficient. Library lent 22,473 books to members as compared to previous year‟s 17,105 showing a 30 per cent increase in book lending (see Figure 1.9). Out of the total, 3084 books were loaned to outsiders. Members were kept posted with the renewal reminders / overdue notices on daily basis. Book reservation / hold services also remained available for members throughout the year. All out efforts were made to meet members‟ demand through inter-library loan with local libraries when not satisfied through own resources.

Figure 1.10: Membership and Visitation Trend Membership and Visitation Library registered 283 new members during 2008-09 31 400 that included 115 SBP employees, 66 internees, and 102 outsiders (see Figure 27 370 1.10). Compared with the previous years, the rate of increase in membership fell down 23

slightly. On the contrary, an increasing trend 340 numbers in library visitation was witnessed in 2008-09 18 during which 30,239 people visited the library thousandnumbers compared with 21,044 in the previous year. 310 14

Special Development Projects Two development projects aimed at increasing 10 280 access to library resources were undertook FY06 FY07 FY08 FY09 and successfully completed during the review period. Those were:

Application of Printed Spine Labels: To improve stack-displays, printed labels were generated through the system and applied on the spines of all library holdings. The standard-sized printed labels were more durable and visible as compared to hand-written labels. Resultantly, it became much easier for library staff to maintain accurate shelf arrangement. Similarly, library users could browse the stacks with much more independence and comfort.

Upgrading / Strengthening Library Information and Management System. The design and functioning of the whole system was critically reviewed. After analysis, many flaws/bugs were reported to ISTD for rectification. A number of new forms, reports, and auto-notices were incorporated into the system that made it more resourceful and user-friendly.

25 State Bank of Pakistan Annual Report 2008-2009

Overall, the FY09 ended up successfully for the library in terms of its goals attainment laid down in the annual business plan. A comparative summary of library progress during the last four years is presented in Table 1.5:

Library is striving hard in serving its patrons in the best possible way. It would remain committed to development of an informed society through provision of quality information services to its patrons in the years to come.

Table 1.5: Four Year Comparison of Library Services Operational areas FY06 FY07 FY08 FY09 Purchased 640 1,232 1875 1785 Books Procurement Donated 540 541 367 514 Periodical issues 4,386 4,303 4516 5696 Books catalogued 1,143 1,846 2314 2352 Technical processing Articles indexed 8,085 9,168 8773 8543 Circulation SBP employees 10733 13765 14475 19219 (No. of books loaned) Outsiders 2470 3012 2630 3254 Membership SBP employees 109 155 140 115 (No of new registrants) Outsiders 285 219 181 168 Visitation SBP employees 5137 12242 10571 15010 (No. of visitors recorded) Outsiders 5401 10572 10473 15229

26 2 Broadening Access to Financial Sector

2.1 Overview One of the major objectives of financial sector reforms in Pakistan was to enable banks to direct funds to sectors, which have greater significance in terms of economic and social growth and that have so far largely been under-served. To achieve this objective, State Bank of Pakistan has undertaken several initiatives to broaden financial services access to underserved and marginalized sectors of the economy. The Development Finance Group (DFG) at SBP is taking steps to develop capacities to better understand new niche areas such as Infrastructure and Housing Finance, SME and Microfinance, Agriculture and Rural Finance which have not yet been developed to their true potential. SBP also endeavors to build and strengthen an inclusive financial system, supported by effective regulatory measures, aimed at integrating these niche areas in the mainstream banking sector, on a fast track basis. SME Finance Department undertook many initiatives to increase outreach and quantum of SME credit. The department played active role in arranging timely provision of credit from banking sector for wheat procurement purposes. To boost exports and provide relief to exporters in meeting their export orders, State Bank took a number of steps to facilitate exporters during FY09. SBP reverted to providing 100 percent refinance under the Export Finance Scheme (EFS) and Long Term Financing Facility (LTFF), and also allowed a longer repayment period of financing under Part I of EFS. To mitigate the risk of banks and farming community against losses, caused by natural calamities, SBP also developed and launched a market based Crop Loan Insurance Scheme (CLIS) during the year and made the scheme initially mandatory for five major crops. Similarly for the growth and development of microfinance sector, important initiatives like; i) Microfinance Credit Guarantee Facility; ii) Institutional Strengthening Fund; and iii) Improving Access to Finance Services Fund, were also launched during 2008-09.

2.2 SME Like many other developing countries, in Pakistan too, the SMEs sector is the mainstay of the economy. SMEs play a catalytic role in low cost employment generation, poverty alleviation, and economic development. SBP realizes the importance of SMEs for providing forward and backward linkages among social and economic activities of the economy, encouraging an entrepreneurial culture, and boosting Pakistan’s foreign exchange earnings.

2.2.1 SME Credit Profile SME sector finance occupies second place in terms of total finance from formal sector (10 Figure 2.1: Advances to SME Sector percent) after Corporate Finance. At the end June 2009 June 2008 of June 2009, total outstanding loans to the 400 SME sector stood at Rs345.1 billion compared to Rs393.6 billion in June 2008. 320 The decline in SME credit was mainly due to power outages leading to reduced production 240 activity, liquidity squeeze as well as more cautious SME lending approach by the banks. billionsrupees 160 Adverse law and order situation in the 80 country coupled with global recession also had negative impact on Pakistan economy. A 0 break up of the SME loans reveal that out of Fixed Working Trade finance Total the total SME portfolio of Rs345.1 billion, investments capital around 76 percent were disbursed for working capital, followed by 13 percent for trade 27 State Bank of Pakistan Annual Report 2008-2009 finance and 11 percent for fixed investment finance as shown in Figure 2.1.

The number of SME borrowers also witnessed a decrease of 2 percent during FY 09. The total numbers of SME borrowers were 219,062 at the end of June 2009 as compared to 223,675 at end June 2008 (Figure 2.2). However, further fall in SME credit has been arrested due to close follow up of SME Finance Department with commercial banks as well as prudent macroeconomic measures by the government.

2.2.2 SBP initiatives for growth of SME Finance SME Finance Department, realizing the importance of SME sector as engine of Figure 2.2: SME Number Borrowers June 2009 June 2008 economic growth and employment provider to vast population in non-agri sector has taken 2500 many initiatives to ensure that the financing needs of SMEs are met by the banking sector. 2000

1500 SME Credit Guarantee Scheme Credit Guarantee Schemes are programs that 1000

insure the repayment of a loan, in part or full, 000borrowers Number of to motivate lenders to lend to groups which 500 would not have access to credit under normal circumstances. Credit Guarantee Programs 0 seek to help overcome the problem of loan Fixed Working Trade Total applicants who have good projects, and are in investments capital finance every respect credit worthy, but cannot offer adequate collateral to satisfy the normal requirements of a lending bank. SME Finance Department is making efforts to introduce a credit guarantee scheme with the support of UK’s DFID under Financial Inclusion Program (FIP). The launch of the scheme is expected to create significant demonstration effect whereby banks will be encouraged to seize business opportunities in those segments where they normally hesitate to lend due to the borrowers’ inability to offer collateral but have credible cash flows. The concept of the scheme has been in principle, approved internally and will soon be launched.

Indicative Lending Targets for Banks State Bank of Pakistan has established a high level SME Credit Advisory Committee (SMECAC) with the objective to review the existing SME lending and make suggestions to improve the flow of financing to SMEs. The committee has also decided to assign indicative targets for SME Finance to the banks. These indicative targets work as an important benchmark to measure the banks’ performance in terms of increased SME exposure through suitable alignment of their plans and strategies.

SME Finance Cluster Training Program Lending to SMEs require special set of skills to be developed by the lending staff in different commercial banks. These skills are required in the area of product development, credit risk management; cash flow based lending, and product sale and marketing. To improve capacity of the bankers in these important areas, SBP conducted training program during the year 2008-09 in Lahore, Rawalpindi, Sialkot, Gujranwala, Peshawar, and Quetta with greater participation from regional SME bankers.

Development Finance Quarterly Review During the year, SBP initiated preparing DFG Quarterly Review at the end of each quarter containing analysis of flow of credit to sectors of economic importance falling under the purview of DFG 28 Broadening Access of Financial Services including SME, Microfinance, Agriculture, Infrastructure and Housing. DFG Quarterly Review helps in taking necessary steps to improve the flow of credit to these sectors.

Establishing Mechanism for SME Credit Rating Service Despite rapid growth of SME sector in recent years, authentic and independent credit research in this sector has so far been minimal. With many private and public sector banks directing resources and focus towards SME lending, the need has arisen for independent credit opinions. SBP realizing the importance of SME Credit Rating service has initiated efforts for starting SME Rating Service in Pakistan. In this regard, SBP has coordinated with relevant stakeholders including existing Credit Rating Agencies. Modalities for launching of SME Rating service have been finalized and the SME Rating service would be launched soon.

2.2.3 Financing under Export Finance Scheme In view of the global financial crisis, economic slowdown in the country and liquidity squeeze faced by banks, SBP took a number of steps to facilitate exporters during FY09. SBP reverted to providing 100 percent refinance under the Export Finance Scheme (EFS) and Long Term Financing Facility (LTFF), allowed a longer repayment period of financing under Part I of EFS. Further, a new mechanism of performance based mark up rates was introduced under the scheme to encourage high performers. Similarly under LTFF), SBP allowed one year deferment of principal amounts repayments, enhanced the scope of the scheme by including ethanol, pharmaceuticals, furniture, value added sectors of spinning and second hand machinery. SBP also allowed one time facility to refinance commercial long term loans disbursed during the period January 1, 2005 to March 31, 2009 against eligible sectors/machinery.

During FY 09, Rs437.810 billion was disbursed under EFS Scheme by various offices of SBP-BSC (Bank). Outstanding position of financing under EFS was Rs177.375 billion as of June 30, 2009 showing over all flow of Rs34.558 billion during July-June 2008-09. A comparative position of export refinance outstanding as of June 30, 09 and disbursements during FY 09 under the scheme is given in Table 2.1.

Sector-wise Financing under EFS Sector-wise position reveals that the highest amount (about Rs112.6 billion) was outstanding for textile sector. Within the textile sector, readymade garments had highest outstanding amount (Rs30.7

Table 2.1 Export Finance Scheme million rupees Outstanding Disbursements

Outstanding as June Refinance provided during

FY08 FY09 Absolute change FY08 FY09 Part-I 34,296 49,545 15,249 94,633 123,371 Part-II 108,521 127,829 19,308 252,473 314,439 Total 142,817 177,374 34,557 347,106 437,810 billion). Under edible goods, the highest amount was against rice (Rs16.8 billion). The overall sector- wise break up is given in Figure 2.3.

29 State Bank of Pakistan Annual Report 2008-2009

Figure 2.3: Sector-wise Break-up of the Refinance Outstanding during FY09

Leather goods Metal products Machinery 6% 1% 1%

Mis. commodities 17%

Edible goods Textile 12% 63%

Long Term Financing Facility Outstanding position of funds disbursed under Long Term Financing Facility (LTFF) as of June 30, 2009 was Rs5, 603 million against 88 borrowers while textile sector share was Rs3,962 (71 percent)

Table 2.2 Sector wise Outstanding Position of Funds under LTFF million rupees Sectors Number of borrowers Outstanding Textile 71 3,962 Engineering goods 6 1,200 Rice processing 6 191 Leather products 1 21 Fisheries 2 14 Others 2 213 Total 88 5,603 against 71 borrowers. Overall sector wise position is given in Table 2.2.

Long Term Financing – Export Oriented Project (LTF-EOP) Outstanding position under LTF-EOP (defunct) shows repayments of Rs6, 241 million during the year and outstanding level of financing as of June 30, 2009 was Rs32, 389 million.

Policy Changes and Incentive to Exporters Export Finance Scheme  To meet the growing working capital financing requirements of exporters and providing more liquidity to banks, SBP started 100 percent refinancing under EFS.  Performance-Based Rates mechanism was introduced under EFS Part II to give incentive to well performing exporters.  Period of refinancing under EFS Part I was extended to 270 days.  Waiver up to end- December 31, 2009 was allowed to exporters having overdue proceeds.  Performance requirement for hand knotted carpets against financing facilities availed under Part II of EFS during FY 2008-09 was reduced from 2.0 times to 1.50 times.  Shipment period under EFS Part-I was extended to further 180 days for exporters with shipment falling due in FY09.

30 Broadening Access of Financial Services

Long Term Financing Facility  Grace period of one-year was allowed in repayment of principal amounts on the outstanding financing under SBP’s long term financing schemes.  The scope of LTFF was expanded by allowing refinance facility against; (i) import/purchase of used machinery; and (ii) by including Ethanol, Furniture, Pharmaceutical and sub-sectors (Doubling, Twisting, Combing, Slubbing, Lycra, and Yarn Dyeing) of Spinning Sector in the scheme.  One-time opportunity was allowed to the value added non-textile sectors to Refinance 50 percent outstanding long-term loans availed from banks/DFI since January 1, 2005 to March 30, 2009 for import/purchase of plant and machinery.

2.3 Microfinance Microfinance is in the early stages of development within the financial sector of Pakistan. Currently, there are eight licensed Microfinance Banks (MFBs), out of which six operate at the national level, and two at the district level. In addition to MFBs, numerous Microfinance Institutions (MFIs), Non Governmental Organizations (NGOs) and Rural Support Programs (RSPs) are providing microfinance services in the country.

The microfinance industry has remarkably spread out to 1.8 million active borrowers from almost negligible base in 2003, out of which about 50 percent are female clients. Despite this significant growth in microfinance in recent years, financial exclusion is still considerably high in Pakistan as only 12 percent of the adult population has access to formal financial services, according to the Access to Finance Survey of 2008 sponsored by the World Bank. Furthermore, the same survey suggests that 56 percent of the adult population is completely financially excluded from access to financial services.

Microfinance has seen mixed signs of growth during 2008. And for the first time in more than 3 years, a negative trend in microcredit growth has been observed in the last quarter of 2008. However, the first quarter of 2009 ended up with slight positive growth. Outreach of Microfinance sector in term of borrowers has seen a positive growth rate of about 36 percent during 2008 compared to the annual average growth rate of 40 percent during 2003-2007.

Apart from microcredit, microfinance banks have experienced growth in all other areas, namely, enabling policy environment, supporting infrastructure, institutional development, promotion of alternate delivery channels, human resource, use of technology, increased outreach in the form of number of microfinance banks, and increase in service outlets. The commitment of the Figure 2.4: Microfinance Outreach government and the State Bank of Pakistan Loan portfolio No.of active borrowers (RHS) facilitated in laying down the foundation of 20 2.0 the sector that holds key to broadening access to financial services and expanding associated 17 1.7 business opportunities for commercial/social investors. 14 1.4

In February 2007, State Bank, in consultation 12 1.2 billionrupee with local stakeholders, developed a national millionin strategy for Microfinance namely ‘Expanding 9 0.9 Microfinance Outreach’ (EMO) strategy. The strategy presents a diagnostic assessment of 6 0.6 the sector, identifies critical factors limiting Jan. 2007 Jan. 2008 Mar. 2009 desired level of growth, envision outreach

31 State Bank of Pakistan Annual Report 2008-2009 goals, and recommends steps/initiatives for strengthening the sector’s capacity to achieve scalability and sustainability. The performance of microfinance outreach since the implementation of EMO strategy is presented in Figure 2.4.

During 2008, SBP had taken several initiatives in microfinance policy and development programs to promote microfinance and achieve its strategic goals of increased outreach of microfinance banks through ‘Expanding Microfinance Outreach Strategy’. Key initiatives along with other developments in the sector are as under:

Pakistan Post and FMFB Partnership The EMO strategy encouraged MFBs to find innovative solutions to promote growth in the sector. One of the key initiatives indentified in the strategy is for MFBs to utilize the vast network of Pakistan Post (PP) to reach out to rural and remote areas in cost effective manner. The First Microfinance Bank (FMFB) has successfully completed its collaborative pilot test with the Pakistan Post (PP) to deliver financial services through an alternative delivery channel. As a result of this partnership, FMFB has seen cost-effective growth, with a cost per borrower at the sub office (PP branches) being at just 37 percent of the total cost per borrower at a regular bank branch in the same area.

MF Exclusive CIB Given the envisaged growth targets of three million borrowers by 2010, and growing competition among MFBs / MFIs in big cities, it was vital to have a dedicated MF-CIB in Pakistan for smooth functioning of MF markets. Thus establishment of MF exclusive CIB has been made part of EMO strategy. Based on the study recommendations done by an international consultant, commissioned by SBP, Pakistan Microfinance Network (PMN) in consultation with its members has initiated a pilot CIB project in Lahore. To facilitate the project, State Bank has allowed MFBs to share customer data with this pilot/private CIB(s) subject to development of comprehensive customer protection and confidentiality guidelines, approved by their Board of Directors, taking customers’ consent.

Licenses to New Microfinance Banks EMO Strategy also envisages institutional development through transformation of stronger MFIs/RSPs into regulated MFBs. As part of this initiative, SBP has issued license to KASHF microfinance bank (June, 2008), and NRSP Microfinance Bank Limited (February, 2009), transformed into banks from KASHF Foundation and NRSP. KASHF has planned to reach out to over one million savers and 350,000 borrowers through a network of 100 nationwide branches by 2012. The NRSP microfinance bank has yet to start its operations.

Branchless Banking Project by Tameer Microfinance Bank One of the strategic objectives of EMO strategy is to encourage MFBs to adopt new technologies to reach poor and remote communities in a cost-effective manner. After issuing license by SBP under Branchless Banking Regulations, Tameer MF Bank, in collaboration with Telenor, has initiated a pilot branchless banking (agent based) project in 2008. Significant work has been done, and the bank will soon launch its first product. Recently, SBP has also signed a MoU with Tameer under which SBP will provide Rs82 million to Tameer, through Institutional Strengthening Fund (ISF), to facilitate this initiative of Branchless Banking delivery channel.

International Alliances We have also facilitated international alliances for development of domestic microfinance market. As a result, internationally recognized organizations such as ASA and BRAC of Bangladesh, incorporated as International NGOs, have commenced operations in Pakistan.

32 Broadening Access of Financial Services

Savings and Credit Unions (CUs) Revitalization of SCUs sector in Pakistan is also a strategic goal of EMO Strategy. SCUs work as member based financial institutions for deposit mobilization and catering financial needs of the people at gross root level. SBP is working to revitalize the SCUs sector in the country. In this connection, a delegation of World Council of Credit Union (WOCCU) will visit Pakistan in September 2009 to assess technical assistance needs of the sector.

Updation/Revision in Policy and Regulatory Framework As the sector has taken various innovations / initiatives such as MF-specific CIB, branchless banking, certain changes/additions/ revisions are necessary in the regulatory framework. For this purpose, SBP has entered into a dialogue with the microfinance industry stakeholders to update/revise the PR, and develop proposals for amendments in Microfinance Institutions Ordinance 2001. A comprehensive review of the MFIs Ordinance and PRs has been conducted in consultation with internal and external stakeholders. As a result, a proposal of necessary amendments has been drafted, incorporating the dynamic needs of the sectors for enabling regulatory environment. The work on the revision of PRs and amendments in the MFI ordinance is in final stage.

2.3.1 Progress on Microfinance Programs The Microfinance Department is currently managing various government and donor funded programs as part of its mandate to develop microfinance sector in Pakistan. During 2008-09, MFD made considerable progress on program implementation and took a number of initiatives to launch key interventions. Some of the programs launched are as follows:

Financial Inclusion Program According to the Access to Finance Survey conducted in 2008, only 14 percent of the adult population in Pakistan uses formal financial services, some utilize informal financial services, and most have no access at all. Thus the economy of Pakistan is largely financially under penetrated, which also hinders economic growth. A well-developed financial system can assist in mobilizing savings, investments and redistribute risks. According to Michael Spence and other renowned economists in a recent publication by the World Bank, The Growth Report, a financial system that excludes a significant proportion of the population has deep ramification on the growth of the economy. Consequently, household savings are stunted. People need a secure, accessible vehicle for storing their wealth. If the banks do not provide it, people will save less, or store their money in less liquid forms that do not serve the wider economy well. The absence of savings channels is inequitable as well as inefficient. The same can be said of the uneven provision of other types of financial services, including credit and secure transactions at reasonable cost.

In July 2008, SBP in partnership with the UK Department for International Development (DFID) launched Financial Inclusion Program. The Financial Inclusion Program is worth UK £ 50 million to be implemented by State Bank of Pakistan. The program was designed and developed in 2008 through broader consultations with the stakeholders and will help SBP implement Pakistan’s Microfinance Strategy which was approved by the prime minister in 2007. The program aims to develop microfinance sector’s capacity to reach out to 3.0 million microfinance users by the end of 2010 and 5.0 million borrowers by 2015. The program is designed to manage sector transformation from a subsidy based informal institutional setting to a market-based regulated institutional system. In addition, the program also aims to support financial inclusion through improved remittance systems, branchless banking, expansion of SME and rural financing.

The FIP is targeted at access to financial services, using market based principles, to poor and marginalized groups. Under the Financial Inclusion Program, delivering sustainable financial services to micro, small and rural enterprises is key priority, for which specialized facilities have been launched. The program has made substantial progress during its first year which was considered to be

33 State Bank of Pakistan Annual Report 2008-2009 an inception phase. The Microfinance Department (MFD) has successfully launched three of the program’s most important interventions namely the Microfinance Credit Guarantee Scheme (MCGF) (£10m), the Institutional Strengthening Fund (ISF) (£10m) and the Technical Assistance components. In addition, given the FIP priority on microfinance sector, the FIP office has now been merged with the Microfinance Department. A motivated team of professionals with gender balance, and an established structure necessary for the two components; ISF and MCGF is in place. In the second phase the program will focus on launching a Financial Innovation Fund (£10m), Small and Rural Financing Guarantee (£10m) and projects on remittances, branchless banking and financial literacy. A multi-donor Credit Enhancement Fund is also being developed. The details and progress of FIP facilities launched is as follows:

Microfinance Credit Guarantee Facility (MCGF) The MCGF was launched as a response to the recent financial sector crisis and to mitigate the perceived risks of commercial lenders about the microfinance sector. Under the facility SBP issued a £10m guarantee to cover partial risks against the loans extended by commercial banks. The facility is expected to facilitate banks/DFIs to play a leading role in easing credit constraints of MFBs/ MFls in their efforts to maximize outreach by extending credit facilities to them. The facility is expected to achieve the following objectives:  The guarantees are expected to help building links between micro borrowers and formal financial institutions. The familiarization of the bank with the client should eventually lead to the ‘graduation’ of the borrower.  Under the facility, the SBP BSC shall provide Partial Guarantees (pari passu) to cover the principal amount in default or First Loss Default Guarantees to cover the first loss, limited to a certain percentage on the principal amount only to banks/DFIs, to minimize the perceived risk premium by covering part of the losses incurred on funds made available to MFBs/MFIs with the advantage of leveraging the guarantee fund a number of times while keeping the incentive for banks/DFIs to collect the loan.  Banks/DFIs will evaluate the prospective recipient MFBs/MFIs according to the well defined due diligence criteria. This way the credit enhancement facility will serve the banks/DFIs to develop their own sense of the risks involved in microfinance.  The guarantee will facilitate resolution of regulatory issues that limit unsecured lending by banks/DFIs and would bring the loans to MFBs/MFIs under compliance with banking regulations. Two large transactions have materialized under this guarantee in the first year.

Institutional Strengthening Fund (ISF) In December 2008, the Institutional Strengthening Fund (ISF) worth UK £10 million was launched for microfinance sector. ISF aims to strengthen the human resource base, improve governance mechanisms, introduce new products and delivery systems hinging on technology and refining strategic direction of microfinance organizations. The fund will directly make microfinance institutions in Pakistan more competitive, moving them away from donor support and indirectly add to the depth and breadth of microfinance services in Pakistan. Thus far Rs297 million has been approved as grants under the ISF to the Pakistan Microfinance Network (PMN), Tameer Bank and the National Rural Support Program (NRSP). PMN will use the grant for capacity building and transparency of the microfinance sector, Tameer for developing branchless banking capacity and NRSP for developing Management and Information Systems. ISF grants will be used to cover one- time costs or investments along with a proportion of investment from partner institutions to ensure long-term sustainability of these projects.

Besides MCG and ISF, other facilities under FIP will be made operational in 2009. These include the Financial Innovation Challenge Fund, Small and Rural Credit Guarantee Facility, and the technical assistance for the financial sector especially in the areas of remittances and technology. These components will be available to a variety of private sector players including microfinance institutions 34 Broadening Access of Financial Services and commercial banks. The rationale behind involvement of private sector is to build on their strengths and ability to innovate by providing technical assistance, which may not be available to these players otherwise. Innovations, funding, and assistance will reduce some of the barriers to access including access points and an enabling environment.

Improving Access to Financial Services Fund In December 2008, Improving Access to Financial Services (endowment) Fund – IAFSF worth US$ 20 million was launched by SBP for a period of 20 years under ADB sponsored Improving Access to Financial Services Program – IAFSP. This facility is in addition to the ISF launched under the FIP. The IAFSF grants are available to support institutional capacity building initiatives of the stakeholders and basic and financial literacy of end users detailed as under:  capacity building and training of financial services providers to promote expansion into rural areas; product and service innovation, including savings, remittances and Islamic financial services; adoption and integration of new technologies and applications for improving access to financial services;  capacity building and training of government and regulatory authorities to support development of an inclusive financial sector and implementation of measures under the program; and  Literacy programs (financial and basic) conducted by or on behalf of financial services providers for clients and potential clients to improve access to financial services and the utilization of finance.

2.4. Housing and Infrastructure Finance According to the UN-Habitat, half of humanity lives in cities today, and that the urban population will increase to 60 percent within the next two decades. Developing world with highest growth rate of urban population absorbs on an average about 5 million new urban residents every month and thus accounts for 95 per cent of the world’s urban population growth. Urban growth is a result of a combination of factors namely; geographical location, natural population growth, rural-to-urban migration, infrastructure development, national policies, corporate strategies, and other major political, social and economic forces.

Infrastructure and housing sectors are key forces driving an economy towards sustained growth that help keep pace with rapid urbanization. Therefore, the government and financial institutions are required to respond adequately and timely to this resultant increase. The ability of financial institutions to meet this demand in turn hinges on the country’s overall institutional and regulatory framework for infrastructure and housing finance.

2.4.1 Housing Finance Market in Pakistan Though the mortgage market in Pakistan is moving in the right direction and efforts are afoot to promote housing finance activities, a large part of the population continues to be unable to obtain a mortgage loan due to high cost of borrowing and lack of an enabling legal framework (including land titling issues). The total housing finance portfolio reported by banks and Development Finance institutions (DFIs) on March 31, 2009 was Rs80.87 billion (see Figure 2.5); reporting a slight decline of 1.78 percent since June 2008.

Of the total outstanding, HBFC constitutes 20 percent of the portfolio while commercial banks and other DFIs constitute 80 percent. The total number of outstanding borrowers also decreased from 125,149 to 121,368 over nine months. Of the total borrowers, HBFC has 76 percent and commercial banks 24 percent

35 State Bank of Pakistan Annual Report 2008-2009

As more banks have entered the mortgage Figure 2.5: Housing Portfolio market, the share of HBFC in terms of value has reduced over the time. But 85 remains the only institution that caters mainly to the middle and lower-middle 68 groups, and enjoys the largest customer base. This is evident from the fact that the 51 average loan size of HBFC is reported to be Rs1.08 million where as the average loan 34 size of commercial banks is reported at billionrupee Rs2.52 million (as on March 31, 2009). 17 Average loan sizes, however, have slightly increased for HBFC and decreased for 0 banks since June 2008. June 06 June 07 June 08 March 09

NPLs have increased from Rs9.8 billion (June 2008) to Rs13.09 billion (March 2009); a 33.6 percent increase during the nine months. However, this rise in NPLs is not specific to housing finance and is only depicting the overall increase in NPLs of all sectors witnessed in the banking industry during the reporting months. HBFC’s NPLs as a percent share in total outstanding are the greatest; a 39 percent of its total outstanding. NPLs for all banks and other DFIs constitute 10.37 percent of its respective total outstanding.

Approximately 5,964 borrowers were served during the nine months (June 2008 to March 2009) and over Rs13 billion were disbursed. Weak property rights and an embryonic property development framework continue to constrain the financial sector from achieving its full potential in the housing finance sector.

Average interest rate for the quarter ended March 2009 is reported to be 15.42 percent; an increase of approximately 2 percentage points compared to June 2008. Average interest rate reported by HBFC is 11.88 percent; a decrease of 1.83 percentage points compared to the quarter ended June 2008. Banks and other DFIs (except HBFC) reported 15.6 percent; a 2.31 percentage point increase over the nine months. Average maturity periods have slightly declined from 12.92 years (June 2008) to 12.5 years (March 2009). The LTV ratios for housing finance fell from 58.1 percent during June 2008 to 52.8 percent during March 2009.

The nine month reporting period shows signs of cautious lending from banks amid decreased affordability of the borrowers and unfavorable macroeconomic conditions. Signs of cautious lending include fall in LTVs (with the exception of HBFC) and a slight decline in average loan size. It is due to the small size of the housing finance portfolio that financial institutions are currently managing housing-related risk. However, absence of a secondary mortgage market is still an obstacle in the development of overall housing finance sector.

2.4.2 Infrastructure Finance Market The stock of infrastructure Finance has grown from Rs206.25 billion in June 2008 to Rs259.25 billion in June 2009 (see Figure 2.6). There is 25.7 percent increase in outstanding stock of infrastructure financing during the last twelve months which signifies that financing landscape in infrastructure sector is still thriving in the face of economic gloom. The increasing energy demand in the country has shoved the power generation sector to increase its generation capacity, with a corresponding increase in lending demand. The outstanding stock of power generation sector rose from Rs53 billion in June 2008 to Rs115 billion in June 2009. This 116 percent increase in outstanding volume of power generation reflects the robustness of banking sector, and favorable policy of government in allowing

36 Broadening Access of Financial Services sovereign guarantees to power projects, Figure 2.6: Infrastructure Lending (Stock) which acts as an incentive to banking sector, 270 in financing power projects. Apart from growth in infrastructure stock, there is need to increase and diversify the financing 216 portfolio in other important infrastructure sectors like, water and sanitation, road, 162 bridge, flyover construction, and mass transportation. The share of DFIs in billionrupee 108 infrastructure lending needs to be enhanced. 54 Sectoral Share The analysis shows that more than 90 percent infrastructure lending is consumed 0 by four key sectors (see Figure 2.7) which June 07 June 08 June 09 points to an important factor that a facilitating government policy is essential in creating an enabling environment where banks can finance other risky projects which they otherwise feel reluctant to finance in absence of a clear government risk sharing.

2.4.3 SBP Initiatives to Promote Housing and Infrastructure Financing Infrastructure Finance Appreciating the critical role of infrastructure sector in propelling the domestic economy, SBP has taken the following initiatives to further develop market based mechanisms and enhance the flow of credit to this priority sector. Figure 2.7: Share in Outstanding Dissemination of Infrastructure Task Force Telecom Power generation Power transmission Report Petroleum Others The SBP constituted a task force on 50 Infrastructure Finance, and delegated it with a mandate to identify institutional bottlenecks 40 and recommend an institutional mechanism 30 for risk management of project financing. A set of recommendations aimed at enhancing percentin 20 flow of credit to project financing have been made by the task force. One of the key 10 recommendations focuses on development of long-term funding mechanism through 0 establishment of dedicated Infrastructure FY09 FY08 Lending Organization, which is under consideration. Numbers of recommendations of the infrastructure task force were disseminated to several ministries with a view that the issues identified would be taken care of by the concerned ministries which in turn will lead to enhanced public-private partnership initiatives for development of infrastructure services.

Capacity building Program In addition to initiatives taken to institutionalize project financing, SBP realizes that a simultaneous development of human capital will play a critical role in ensuring sustainability of project financing. In this regard a training program titled ‘Frontiers in Infrastructure Financing’ is planned in partnership with World Bank.

37 State Bank of Pakistan Annual Report 2008-2009

Revised Guidelines for Infrastructure Project Finance The existing guidelines for infrastructure project finance were revisited to incorporate current market requirements and international best practices which can further facilitate project financing. The revised guidelines are expected to be available in first quarter of 2009-10.

Housing Finance Dissemination of the Housing Advisory Group (HAG) Recommendations SBP established a Housing Advisory Group (HAG) to conduct a thorough analysis on the existing regulatory and policy framework affecting housing finance. The HAG made number of recommendations to enhance access of financial services for the development of housing sector. SBP has already disseminated the recommendations to the concerned stakeholders and is working closely with some of them to ensure its implementation.

Establishment of Mortgage Refinance Company SBP is in the process of initiating measures for the establishment of a Mortgage Refinance Company (MRC); a common agenda of SBP and the World Bank. Work on the business model and the financial feasibility of the company is underway. The MRC will explore fixed rate or hybrid models of mortgages, improve liquidity of the financial system and enable banks and housing finance companies to prudently address/reduce the mismatching of maturity profile of their assets and liabilities.

Housing Observatory Establishment of a housing observatory is under consideration with the financial and technical support of the World Bank. The observatory for real estate market aims at minimizing information asymmetries and providing a platform for reliable and updated information for players in housing and housing finance markets.

Capacity building Program Realizing the importance of strengthening the housing finance institutions, simultaneous efforts to develop human capital is also being ensured. A cooperation agreement was signed between International Finance Corporation (IFC) and SBP to launch a housing finance training program in Pakistan, conducted by Canada Mortgage and Housing Corporation (CMHC). The first session was conducted by experts from CMHC. Two subsequent sessions were then conducted by SBP through local experts in Pakistan. The training covered all aspects of housing finance from product development, loan marketing/distribution and origination to loan underwriting, servicing and risk management. Till date, approximately 200 bankers from over 20 banks have received training in the mortgage business.

2.5 Agricultural Credit Targets for FY09 SBP had set agricultural credit target of Rs250 billion for 2008-09, 25 percent higher than the previous year’s target. This was also 18.1 percent higher than the disbursements of Rs211.6 billion

Table 2.3: Agricultural Credit Disbursements against Targets (billion rupees) FY07 FY08 FY09

Banks Target Disbursement Target Disbursement Target Disbursement 5 Big Comm. Banks 80 80.4 96.5 94.7 119.5 110.7 ZTBL 48 56.5 60 67 72 75.1 DPCBs 23 23.9 35.5 44 52.5 41.6 PPCBL 9 8 8 5.9 6 5.6 Total 160 168.8 200 211.6 250 233

38 Broadening Access of Financial Services last year. Despite difficult economic and financial conditions, banks achieved 93 percent of the annual target of 2008-09 and disbursed Rs233.0 billion (see Table 2.3). The disbursement was higher by 10 percent or Rs21.4 billion compared with Rs211.6 billion last year. Bank-wise break up of agri. credit disbursement reveals that five major banks, as a group, disbursed Rs110.7 billion or 92.6 percent of the whole year targets, compared with Rs94.7 billion or 98.2 percent of the targets disbursed in 2007- 08. ZTBL disbursed Rs75.1 billion or 104.4 percent of the target against disbursement of Rs66.9 billion last year. PPCBL disbursed Rs5.6 billion against Rs5.9 billion last year and DPBs disbursed Rs41.6 billion or 79.3 percent of the target as against Rs43.9 billion or 123.8 percent of the target last year.

The major portion of agricultural credit that is Rs196.1 billion was disbursed in Punjab during FY09, followed by Rs27.6 billion in Sindh. An amount of Rs7.9 billion was disbursed in NWFP, Rs0.6 billion in Balochistan, and Rs0.8 billion in AJK& NAs. Percentage share of Punjab and Sindh in total disbursement showed improvement, whereas the share of NWFP and Balochistan declined, mainly due to law & order situation and low absorption capacity in these provinces. Details of province-wise disbursements vis-à-vis targets achieved during FY 2007-08 and FY 2008-09 are given in Table 2.4.

Table 2.4: Province-wise Agricultural Credit Targets and Disbursements value in billion rupees and share in percent 2008-09 2007-08 Province Targets Disbursement Share in total Targets Disbursement Share in total Punjab 195 196.1 84.2 156 176.4 83.4 Sindh 35 27.6 11.85 28 24.7 11.6 NWFP 15 7.9 3.4 12 9.1 4.3 Baluchistan 3.75 0.6 0.26 3 0.7 0.3 AJK/NAs 1.25 0.8 0.34 1 0.7 0.3 Total 250 233 100 200 211.6 100

2.5.1 SBP’s Initiatives for Promotion of Agricultural Credit Owing to increased activities in the agriculture sector and expanding demand for credit in the sector, SBP has taken the following steps for the promotion of agri/ rural finance during 2008-09:

Development and implementation of Crop Loan Insurance Scheme Non availability of crop loan insurance was a major reason in non-repayments by the farmers/borrowers in case of losses due to natural calamities. Therefore, to mitigate the risk of banks and farming community against losses caused by natural calamities, SBP developed a market based Crop Loan Insurance Scheme (CLIS), in consultation with stakeholders. The scheme was made mandatory by the government for five major crops namely wheat, rice, sugarcane, cotton and maize from Rabi Crop 2008-09. The government is bearing the cost of premium on account of subsistence farmers up to a maximum of 2 percent per crop. The scheme has been extended to MFBs from Rabi crop 2009-10. This scheme will not only safeguard the interests of banks and farmers, but will also save huge amount of funds spent by the Government of Pakistan in the shape of frequent write off / waivers of agri. loans of ZTBL’s borrowers.

Guidelines on Islamic Financing for Agriculture Keeping in view the rising demand for Islamic banking products for Agriculture, the Guidelines on Islamic Financing for Agriculture were issued to facilitate banks in developing Shariah compliant products for agriculture financing.

39 State Bank of Pakistan Annual Report 2008-2009

Revision of Report on Agri. Credit Estimation Methodology Since the last revision of the report, various changes have taken place in agri. Credit, and prices of inputs have also increased enormously, thereby resulting in high production cost to the farmers. Therefore, SBP revised the Report on Estimation of Agri. Credit Requirements in December, 2008 in consultation with stakeholders in terms of around 70 percent increase in per acre credit limits of major and minor crops to cope with the increase in prices of farm inputs like seed, fertilizer and pesticides; enlarged list of crops, orchards & forestry; list of eligible items. Besides, year-wise per acre indicative credit limits for growing of orchards namely mango, citrus, apple, banana, coconut, dates and agro forestry namely acacia, shesham, bamboo have also been provided. The report is aimed at facilitating banks in assessing the credit requirement of the farmers and farming community in getting loans for growing of crops, orchards, agro forestry, etc.

Crash Training Program To facilitate banks in capacity building and training of their agri. credit officers, SBP launched one week Crash Training Program in consultation with banks and Development Finance Support Department, SBP-BSC. More than 600 Agri. field officers of banks, SBP and SBP-BSC were trained in 20 sessions throughout the country during 2008-09. The program covered major dimensions of agri. financing including SBP’s policies and schemes, agri. financing tools and techniques, security and loan documentations, loan monitoring and recovery mechanism, agri. credit risk management, group based lending to farmers, agri. loan marketing & sales system, etc.

Handbook on Best Practices in Agri/ Rural Finance For the awareness of banks, farming community, researchers and other stakeholders regarding international best practices vis-à-vis Pakistan’s experience in agri/rural finance, Handbook on Best Practices in Agri/ rural Finance was compiled. The handbook provides an overview of the policies and strategies of the successful Agri/ rural financial institutions in improving access to finance to the rural/ farming community. It also highlights their key achievements in terms of outreach, rate of recovery, lending methodology, sustainability, profitability and the level of confidence of their clients in these institutions, depicted in their vertical and horizontal expansion. The handbook will help banks to revise and devise their lending strategies to grasp the vast untapped agri/ rural market.

APRACA FinPower Knowledge Sharing Program on Rural Finance State Bank of Pakistan arranged a two-day knowledge sharing program on rural finance with Central Bank of Sri Lanka in December 2008 at Karachi under IFAD funded, Asia Pacific Rural & Agricultural Credit Association’s (APRACA) FinPower Program of twinning sharing of policy & regulatory environment in rural finance. Around 200 policy makers and practitioners from commercial banks, Microfinance institutions, NGO-MFIs, Pakistan Microfinance Network (PMN), Pakistan Poverty Alleviation Fund (PPAF) and SBP participated in the program. The program provided opportunity to learn from the experience and practices of central bank of Sri Lanka in agri/rural finance.

Induction of MFBs into Agri. Financing To increase the outreach of agriculture finance and meet the requirements of farming community, SBP has inducted Microfinance Banks in the Agriculture Finance Network. A proper database on agri. microfinance is being developed for this purpose. Moreover, the Mandatory Crop Loan Insurance Scheme has also been extended to MFBs to cover their risks.

Increasing Agri. Credit on Fast Track Basis For deepening the outreach of agri. credit on fast track basis in the underserved districts, a pilot project was launched in seven agri. intensive districts of Sindh namely Hyderabad, Tando Allahyar, Benazirabad (old Nawabshsh), Sanghar, Khairpur, Mirpur Khas and Larkana from Kharif Season 2009. Under the pilot project, banks disbursed agri. loans of Rs3.9 billion against the target of Rs5.2 40 Broadening Access of Financial Services billion achieving 75 percent of the disbursements targets and 13,000 new farmers have been provided agri. loans. The project has provided learning opportunities to banks to align their lending policies/practices according to the local culture, repayment behavior, crops/farming practices, etc. of the farmers. After successful implementation of the pilot project, it is being replicated in other underserved agri. intensive districts of Punjab, Sindh, NWFP and Baluchistan.

One Window Operation in Sindh To address issues of delays in issuance of passbook and timely completion of revenue formalities, a framework for ‘One Window Operation in Sindh’ was developed and introduced in collaboration with the Sindh Board of Revenue in the pilot districts for two days a week. The Operation has facilitated banks and farming community in timely completion of revenue formalities and to obtain access to finance on a fast track basis.

Development of Benazir Zarai Credit Card Scheme To improve farmers’ access to institutional credit Benazir Zarai Card Scheme (BZCS) has been developed under the existing Revolving Credit Scheme being offered by banks for agricultural production loans. The scheme is being test launched by NBP and ZTBL in one of district each of the four provinces, on pilot basis, before expanding its coverage. The scheme will facilitate farmers in getting quality inputs at reasonable prices on credit through vendors/sellers in the pilot districts..

Awareness Meetings/Agri-Melas To enhance farmers’ and other stakeholders’ awareness and understanding about SBP and financial sector initiatives for increasing flow of funds to the agriculture sector, field units of Developemnt Finance Support Department, SBP-BSC arranged 10 Agrifinance Melas during 2008-09. These Melas attracted large number of farmers and got significant media coverage and have been quite successful in creating awareness about banking products among the target stakeholders.

Focus Group on Agri. Finance A focus group comprising of agricultural experts, progressive farmers and leading agri. finance banks has been constituted for delibrating on the issues in agri. finacncing and making recommendations in this regard to ACAC for policy formulation. In addition, regional focus groups on agriculture finance have been formed at field offices of SBP-BSC having representation of banks’ regional chiefs, agri associations, relevant government departments, NGOs, etc. The members meet on a quarterly basis to discuss issues, developments, etc. in their respective sectors. In addition to being an effective forum for dissemination of SBP policies, the groups are also an important source of grassroots level feedback on SBP policies and initiatives regarding Agri. Finance.

Inter Provincial Workshops on Agri. Finance SBP and SBP-BSC maintains close coordination and liason with provincial agricultural, livestock and revenue departments to share and disseminate the provincial governments’ initiatives and best practices for facilitating the farming community. In this respect, interprovincial agricultural workshops were arranged by the Developmet Finance Support Department at Karachi and Lahore in June 2008 and May 2009 to bring banks and the relevant government departments closer to each other and share their observations/concerns, experiences and plans.

Agricultural Surveys Agricultural surveys of Sukkur and Gujranwala districts were carried out to explore the components of rural economies of these districts, the demand for financial services, and issues faced by the rural population in accessing institutional finance. The survey findings have been placed on the SBP website for wider dissemination.

41 State Bank of Pakistan Annual Report 2008-2009

Way Forward Going forward, SBP is working on the development of a National Crop Insurance Scheme, launching a pilot project for deepening of agri. loans, credit guarantee scheme for small farmers, capacity building of banks, awareness of farming community, simplification of agri. lending procedures, group based lending for small farmers, implementation of Benazir Zarai Card Scheme, introduction of shariah compliant agri. credit products through Islamic banks, etc.

42 3 Ensuring Soundness of Financial Sector 3.1 Overview The mandate for maintaining financial stability in Pakistan rests with the State Bank of Pakistan (SBP) in its capacity as the central bank and the regulator of the banking sector.1 State Bank of Pakistan views its objective of safeguarding financial stability in the context of smooth and efficient financial intermediation, encompassing financial institutions, financial markets and the financial infrastructure, such that the process can withstand disruptions caused by internal and external events, and potential threats and risks are managed with the objective of minimizing systemic risk.

Recent and recurrent episodes of financial crisis have magnified the significance of financial stability and its dimensions. Every crisis – be it economic, currency, banking or, more recently, liquidity – has resulted in huge financial and banking losses and adverse economic consequences that transcend national boundaries. Keeping in view these considerations, most countries have developed elaborate frameworks designed to measure, monitor and safeguard financial stability. It is prudent to assess macroeconomic and financial sector vulnerabilities and to judge the implications of these two so that appropriate corrective actions and policies may be put into place to prevent a crisis. A number of advanced countries have adopted sophisticated models to conduct macroeconomic and financial sector surveillance. However, other developing countries, given the data limitations and size of the financial sector, have adopted simpler frameworks for assessment of financial stability.

In addition to the ongoing monitoring and assessment of the banking sector, SBP undertakes, as part of its financial stability assessment mechanism, an independent review of the Non-Bank Financial Companies (NBFCs), the Insurance sector, Pension Funds, and Capital Markets, though these segments of the financial sector are under the oversight of the Securities and Exchange Commission of Pakistan (SECP).

Given this division of regulatory responsibilities, SBP’s existing framework for financial stability assessment is primarily focused on the stability of the banking system. In terms of organization, the assessment is undertaken as a shared responsibility within the central bank: the Banking Policy and Regulation (BPR) group undertakes policy formulation on the basis of the off-site surveillance of the banking sector in monitoring developments and keeping an active dialogue with banks. The Banking Supervision group, on the other hand, undertakes both off-site enforcement and on-site inspection. The newly established Financial Stability Department (part of the Monetary Policy and Research group) is mandated to independently assess financial stability from a policy-formulation and research perspective, and is also responsible for preparing the annual Financial Stability Review (FSR) and for developing a macro-prudential framework for financial stability.

While the financial sector continues to make advancements in response to ongoing implementation of financial sector reforms, SBP in its capacity as the leading regulator of the financial sector strives to play a facilitating role in enhancing its growth. The confidence of economic agents in the financial sector’s ability to meet their financial needs in a convenient and secure manner has an important role in maintaining and promoting financial stability.

With this overview, the rest of the chapter is dedicated to discussing the regulatory measures taken by the SBP during FY09 to ensure the stability of the banking sector.

1 SBP also regulates and supervises Development Finance Institutions and Foreign Exchange Companies. 43 State Bank of Pakistan Annual Report 2008-2009

3.2 Ensuring Stability of the Banking System 3.2.1 Changes in CRR/SLR and Changes in CRR/SLR on F.E. 25 Cash Reserve Requirement (CRR) and Statutory Liquidity Requirement (SLR) are used as tools of monetary policy. State Bank of Pakistan revised the definition of Time and Demand Liabilities in August 2007, to exclude deposits with tenor of less than one year from time liabilities and included the same in demand liabilities. This step was taken considering the overall liquidity situation of the banks and DFIs, and to promote monetary stability by providing incentive of zero CRR to banks on deposits / liabilities which were long term in nature and hence less volatile.

To facilitate Islamic banking, the Islamic banks and branches were allowed to include their cash in hand and balance with National Bank of Pakistan held in current account towards SLR. To further encourage the Islamic Financial Products, GoP announced the Sukuks issued by Karachi Shipyard and Engineering Works (KSEW), WAPDA, Lahore Electricity Supply Corporation (LESCO) and National Industrial Parks Management Company as SLR eligible.

As the economy of Pakistan experienced inflationary pressures in 2005 – 2008, SBP raised the CRR from 5 percent to 9 percent. However, in later half of 2008 to ease out the liquidity stress SBP reduced the CRR from 9 percent to 5 percent.

Presently the required CRR level for all banks including Islamic banks / branches is:  Weekly average of 5 percent (subject to daily minimum of 4 percent) of total Demand Liabilities (including Time Deposits with tenor of less than 1 year).  Time Liabilities with tenor of 1 year and above does not require any cash reserve.

SLR for commercial banks is 19 percent (excluding CRR) of total time and demand liabilities and Islamic banks/branches are required to maintain SLR at 9 percent of their time and demand liabilities.

Moreover, Special Cash Reserve Requirements (SCRR) against FE-25 deposits, maintainable against US dollar equivalent amount, was lowered from 15 percent to 5 percent for commercial banks and for Islamic banks/branches the same was dropped from 6 percent to 2 percent. In June 2008, however, with overall improvement in foreign exchange market liquidity, threshold for SCRR against FE-25 deposits was raised to its original position. In addition to SCRR, all banks are required to maintain cash reserve against their FE-25 deposits in US dollar equivalent amount at the rate of 5 percent.

3.2.2 Consolidated Supervision: Needs and SBP Efforts In Pakistan, financial markets and institutions have witnessed significant changes during the last few years in terms of consolidation as well as diversification. Since 2000, more than 40 transactions of mergers and acquisitions have been executed within banks and between banks and non-bank finance companies. On the other hand, a number of banks/ DFIs as well as their holding groups have expanded their activities into the areas where the banks hitherto were either not allowed or not interested. These include insurance, asset management, brokerage, leasing and other non-banking finance services essentially through separate entities. Along with financial services, various groups that control different banks have also stakes in non-financial / real sector of economy. These stakes in financial and non-financial sectors also cross over to and from foreign jurisdictions. This gives quite a diversified spectrum of activities that a bank is involved in and has related relationship with, which raises various supervisory concerns for the State Bank of Pakistan, including the following:

 Any trouble in another group entity could affect the stability of the bank/DFI. Such other group entity could be a subsidiary of the bank (i.e., downstream of risk) or parent of the bank or affiliate under the control of parent (i.e., upstream risk).  Bank/DFI together with other group entities under its control could take exposures on single borrower, borrowing group, or sector that are beyond prudential limits. 44 Ensuring Soundness of Financial Sector

 Increasing complexities in the ownership and managerial structure of a group can make the supervision of financial institutions in the group difficult.  Possibilities of regulatory arbitrage and non-arm length dealings in intra group transactions.

Cognizant of the challenges posed by the complex and dynamic environment and to ensure compliance with the core principle on Effective Banking Supervision (Principle No. 24 – Consolidated Supervision), the State Bank initiated a project for formulating a framework for consolidated supervision of the banking system. Initially a framework was internally drafted by SBP in 2007-08 and was extensively discussed at different forums within the bank. The framework along with proposed amendments in legislations has been shared with Ministry of Finance and Securities & Exchange Commission of Pakistan (SECP) and is under consultation between SBP and SECP for enhancing its effectiveness. SBP and SECP are deliberating upon the features of the framework and necessary amendments in legislations and related rules and regulations. To ensure that the framework fulfills the intended objectives in line with the established standards and core principles, the services of a renowned consultant have also been acquired. Once this joint consultation process is finalized and the required legal and regulatory changes are enacted, SBP would be able to implement the consolidated supervision framework in line with the principles of effective banking supervision. In the meanwhile, SBP has entered into MoU with SECP for, inter alia, sharing information and regulatory expertise. Besides, a dedicated joint task force has been established for specifically monitoring and managing the risks posed by conglomeration in the financial sector. The task force aims to monitor the financial groups on regular basis and initiate joint dialogue and regulatory actions as soon as any major trigger point is observed in any strategically important financial conglomerate.

3.2.3 Strengthening of Capital Adequacy Regime In August 2005, SBP rolled out instructions for enhancement of Minimum Capital Requirements (MCR) and the banks/DFIs were advised to increase their paid-up capital (net of losses) to Rs6 billion by the end of 2009, in a phased manner. To enforce prudent compliance by the banks/DFIs and to ensure timely follow up by the institutions anticipating a shortfall in MCR compliance, SBP issued instructions that the banks/DFIs should develop realistic plans accordingly to meet the prescribed MCR and submit a copy of such plan, approved by their Board of Directors to SBP by April 30, of every year. On receipt of the plans, the same were examined by SBP and followed up so as to prod the banks/DFIs towards meeting the requirement. As a result, the banks/DFIs have been meeting their respective paid-up capital requirements and presently most of the banks/DFI, with the exception of few banks, are meeting Rs5 billion paid-up capital requirement as of end 2008. Banks are on their way to meet the capital requirement of Rs6 billion by the end of 2009.

Recently, SBP has further enhanced the MCR requirements and the locally incorporated banks/DFIs are now required to enhance their paid-up capital (net of losses) to Rs10 billion by end of 2013 in a phased manner. The MCR requirement for foreign banks has also been raised to Rs10 billion to be achieved in the same phased manner. However, those FBs, whose head offices hold paid-up capital (free of losses) of at least equivalent to US$ 300 million and have a CAR of at least 8 percent or minimum prescribed by their home regulator, whichever is higher, will be allowed with the prior approval of the State Bank to maintain the following MCR:  FBs, operating with upto 5 branches are required to raise their assigned capital to Rs3 billion latest by December31, 2010.  FBs operating/desirous of operating with 6 to 50 branches are required to raise their assigned capital to Rs6 billion by December 31, 2010.

However, the MCR requirements for DFIs has been kept same as previously instructed and accordingly the DFIs will raise their paid up capital (free of losses) to Rs6 billion by December 2009. The increase in the paid-up capital was aimed at catalyzing mergers and acquisitions in the industry

45 State Bank of Pakistan Annual Report 2008-2009 with the aim to promote presence of strong and well-established institutions in the market. Resultantly, some mergers have already taken place while some middle tier banks have initiated mergers process. Apart from enhancement in the MCR requirements, the absolute minimum CAR to be maintained by the institutions has been revised to 10 percent on both standalone and consolidated basis, effective from December 31, 2009. Previously, majority of the institutions were maintaining CAR slightly above the minimum 8 percent requirement. The new CAR requirements have a two- pronged effect.

3.2.4 Developments in Implementation of Basel-II Implementation of Basel-II has been an active liaison area for SBP. Not only instructions/guidelines have been issued to banks/DFIs on frequent basis but kept active interactions with different stakeholders. In addition to general interaction, meetings on more specific issues have been held with individual banks, PBA and SECP. Furthermore, various capacity building initiatives have been carried out by holding trainings.

Detailed guidelines on Basel II implementation were issued in June 2006. The banks/DFIs were given timeline for adoption of the Basel II Accord and the available methodologies. In terms of the directives, the banks/DFIs were required to initiate parallel run for Standardized Approach from July 1, 2006 and go live from January 1, 2008. Furthermore, the banks/DFIs were to initiate parallel run for Advanced Approaches from January 1, 2008 and go live from January 1, 2010.

A major policy decision was made in June 2008 when it was decided that the transition to the advanced approaches of Basel-II be made discretionary for the banks/DFIs. However, the transition would be subject to approval by SBP after evaluation of the readiness of the institution and the efficacy of its systems. Similarly, the institutions desirous of making a transition to the advanced approaches within the next five years were required to submit their action plans for adoption of the advanced approaches.

The reporting formats covering the Standardized Approaches for Credit & Market risk and Basic Indicator and Standardized approaches for Operational risk were promulgated in March 2007. The banks/DFIs were accordingly advised to submit their Basel-II capital adequacy returns on quarterly basis on both standalone and consolidated basis along with a parallel submission of the Basel-I based returns.

Instructions have also been issued regarding two support areas for effective implementation of Basel- II. First, the banks/DFIs are required to put in place Internal Credit Risk Rating Systems which are a prerequisite for the advanced approaches of Basel-II. The systems are meant to provide two dimensional ratings on both obligor and facility. Second, a guideline for Internal Capital Adequacy Assessment Process (ICAAP) has been issued to supplement the detailed guidelines on Basel-II, and for facilitating the banks/DFIs on the same. The banks/DFIs are free to adopt any methodology for the Internal Rating System and ICAAP. However, they are to ensure that the methodology is commensurate with their operations.

Progress has been made in many significant areas which would culminate in smooth and effective implementation of Basel-II. Notably, meetings with many individual banks have been carried out so as to ascertain their comprehension of and involvement in Basel-II implementation. Action plans regarding the future vision of the institutions were sought and stock taking exercises were conducted. Wherever it was ascertained that the banks are lagging or their progress is not satisfactory, the officials were advised to take remedial steps. The constant and vigilant supervision ensured all the banks/DFIs transition to the standardized approaches of Basel-II. Most of the banks have already credit risk rated all their corporate clients and are reporting the same to the SBP, whereas the process of rating consumer loans is at advanced stages. 46 Ensuring Soundness of Financial Sector

As the Standardized Approach for Basel-II relies heavily on credit ratings issued by the recognized rating agencies, steps have been taken to promote the rating culture in Pakistan. Not only the banks have been advised to educate their customers on the subject, liaison is also being carried out with SECP so as to consider mandating credit rating for at least the listed corporate institutions. In the same connection, the credit rating agencies are actively scrutinized on their annual re-recognition for the purpose of Basel-II. Previously they have not only been advised to make certain improvements/refinements in their methodologies, but also to strengthen their human resource. Accordingly, the rating agencies have enhanced their capacity.

The annual reporting formats and other requirements have considerably increased the disclosures of the institutions from the perspective of both SBP and market participants. SBP can gauge the performance and viability of the institution at a deeper level and has been doing so. All in all, Basel-II is a broad scoped process and significant improvements have been made in this regard.

3.2.5 Stress Testing Although, SBP started working on stress testing during early 2000s, the work on stress testing got momentum after first FSAP of Pakistan in 2004. The focus on stress testing remained on simple sensitivity analysis which does not cover scenario analysis and macro-economic model based approaches. In year 2007, a separate division called ‘Risk Analysis Division (RAD)’ was established at Banking Surveillance Department with the objective to develop and implement ‘Model Based Approaches to Stress Testing’. To achieve the objective, a comprehensive methodology paper was prepared which sets forth a framework for stress testing. Further, as and initiative towards capacity building of SBP officers in the area of stress testing, a number of training workshops on Stress Testing were also conducted.

To enhance the capacity in risk assessment and stress testing, a project named ‘Banking Supervision Risk Assessment Model (BSRAM) ‘was initiated. The BSRAM has three modules, market risk, credit risk and operational risk module. Market risk and credit risk module have already been completed and are at User Acceptance Test (UAT) phase. Once implemented, it will improve the capacity to effectively monitor and manage the risk and facilitate in planned decision making on the basis of BSRAM results.

3.2.6 Risk Management To establish a strong and comprehensive risk management framework in banks, State Bank of Pakistan took various policy measures: a) New disclosure Requirements and internal controls on financial reporting To align the disclosure of banks with the changing risk environment, the disclosure requirements for banks were revised in February 2006. The new disclosure requirements provide for more transparency, while fulfilling the requirements of Basel II. Further, keeping in view the importance of policy framework and to bring clarity, the banks were formally advised to formulate and regularly update policies in the areas of Risk Management, Credit, Treasury & Investment, Internal Control System and Audit, IT Security, Human Resources, Expenditure and Accounting & Disclosure.

Effective from December 31,2009, the statutory auditor(s) of a bank / DFI are required to give their opinion and report on Board’s endorsement regarding efficacy of bank / DFI’s internal controls over financial reporting (ICFR) following the best international practices to discharge this responsibility.

b) Strengthening the Provisioning Requirements To enhance the resilience of the banking system, State Bank of Pakistan has further strengthened the loan classification and provisioning requirements. Though a number of changes have been made to align the provisioning requirements with the international best practices, the key change remained the

47 State Bank of Pakistan Annual Report 2008-2009 gradual withdrawal of the benefit of forced sale value (FSV) of collateral. As a first step, in 2005, the benefit of FSV of collateral in provisioning against NPLs was withdrawn against the financing facilities of less than Rs5 million. As a second step, which was taken after a time lag of one year, the benefit was withdrawn on financing facilities of less than Rs10 million. In 2007, the benefit of FSV in provisioning was completely withdrawn on other than housing finance loans, which were given relaxation of two years. The very aim of withdrawal was to address the risk of any adverse shocks to the asset prices of the loan collateral. Lately in January 2009, keeping in view the changing market dynamics, the banks were allowed to avail the FSV benefit of collateral to the extent of 30 percent of the FSV of residential and commercial mortgage and pledge.

c) Deposit Protection Scheme Denationalization of state owned banks coupled with entry of new private institutions has left the safety of deposits in case of a bank failure to an arbitrary and implicit deposit protection mechanism, as the Bank Nationalization Act, 1974 covers only depositors of nationalized banks. Accordingly, need has been felt to set up a formal system of explicit deposit protection during the second half of 2008. A number of steps were taken. A ‘concept paper’ on the subject was developed, and the scheme was prepared after consultation with the stakeholders.

Additionally, a draft Act for establishment of deposit protection fund was prepared and sent to the Ministry of Finance for approval. Once the Act is enacted, its formal launch will explicitly cover large number of eligible/small depositors of the banking system. Further, the system will remove the burden of a bailout package, in case of a bank’s failure, on tax payers as participating banks will contribute towards the fund through regular premium payments.

3.3 Strengthening Legal Framework 3.3.1 Anti-money laundering Evaluation Asia Pacific Group on Money laundering (APGML) and World Bank have jointly conducted mutual evaluation of Pakistan’s anti-money laundering regime during January- February 2009. Mutual Evaluation is one of the important events of APG of which Pakistan is member since 2001. Since banking sector forms main chunk of the financial sector in the country, it was crucial for State Bank to properly prepare banks for the evaluation. To this end, SBP conducted three educational workshops for compliance officers in the first instance and then held meetings with senior executives to groom them for the event. SBP coordinated and held meetings with relevant quarters as well as with the visiting team. The final report as adopted in the Annual meeting of the body shows mixed results for the whole financial sector because separate rating for different sectors is not allowed. However, the report acknowledged, the measures taken by SBP to improve compliance level in phased manner. The evaluation team especially appreciated the set of instructions issued vide circular No. 7 dated March 9, 2009. These instructions have greatly improved regulatory regime and took Pakistani banks closer to international standards.

3.3.2 Enhanced Focus on Corporate Governance To cope with the changing pace of banking business and recent corporate governance scams throughout the world, SBP has been striving hard to strengthen its corporate governance regime by broadening the scope of its Fit and Proper Test (FPT). Sponsor shareholders/directors have been clearly defined. They were required to transfer their shares in a Blocked Account with CDC by July 31, 2008 to ensure continued stake/ownership in banks and to avoid use of sponsor shares as collaterals for financing. Thorough exercises have also been conducted for the compliance of CDC blocked shares status of every bank with respect to SBP’s instructions. Similarly, Microfinance banks have also been required to deposit the sponsor shares in blocked accounts with CDC.

Key executives for overseas operations of Pakistani banks have been required to meet Fit and Proper Test (FPT) criteria and prior clearance from SBP. The due diligence procedure for foreign national 48 Ensuring Soundness of Financial Sector appointees have also been focused and being practiced in coordination with other central banks/monetary authorities. Moreover, banks have also been provided flexibility regarding payment of remuneration to directors for attending board and its committees’ meetings. For ensuring smooth transition, CEO and Board of every bank/DFI and MFB is required to submit two-months prior notice to SBP regarding removal or resignation of the CEO.

3.3.3 Restructuring/Privatization of Banks/DFIs To turn around the financially distressed and inadequately capitalized financial institutions, SBP has been working on restructuring/ recapitalization of number of banks. SBP has been actively coordinating with the Privatization Commission (PC) to finalize the privatization transaction of SME Bank. After completing the due diligence process and related legalities by the financial advisers, PC called for Expression of Interest (EOI) from interested strategic investors and due diligence process of the interested parties was completed. However, the transaction could not be continued because of diminishing interest of selected parties due to global economic turmoil. SBP is again coordinating with PC to take up the matter on priority basis.

SBP is also working on the recapitalization of First Women Bank Limited (FWBL). SBP, in consultation with the Ministry of Finance (MoF), engaged a consultant to conduct a study on FWBL, and formulate a roadmap, containing various options and steps to be taken by the Board and Management of the bank, to attract potential investment in FWBL. After thorough deliberations, MoF delegated SBP to take necessary steps to restructure and privatize FWBL. SBP initiated the process of recapitalization of FWBL in the light of the consultant’s recommendation and is now coordinating with MoF as well as with major shareholders for early resolution of the ‘Capital’ issue of the bank.

The restructuring process of IDBP is also under active consideration of the SBP and Ministry of Finance (MoF). SBP has forwarded a complete financial restructuring plan for IDBP to the federal government. An independent valuation of the bank has been carried out and SBP is coordinating with the federal government for the best option. Khushhali Bank Limited has been successfully restructured by changing its legal structure. SBP is also endeavoring for restructuring/privatization of HBFC for its revival. Through a series of processes by the SBP, the corporation has already been corporatized through vesting order issued by the Finance Division. According to this order all the assets and liabilities of HBFC were transferred and vested in House Building Finance Corporation Limited (HBFCL).

3.3.4 Mergers and Acquisitions in the Banking Sector In the backdrop of financial sector reforms, changes in the ownership structure of banking system in Pakistan and enhancement of Minimum Capital Requirements (MCR), financial sector in the country is being consolidated through mergers and acquisitions. Despite economic slowdown in domestic and international economies, mergers and acquisitions (M&A) is still the main feature of the financial landscape in Pakistan and is receiving greater attention. In the recent past, SBP has processed a large number of mergers/acquisition transactions. The activity is more prominent in the banking sector, involving M&A activity among banks as well across financial sector. SBP being the sole supervisory and regulatory authority of Commercial banks, Islamic Commercial banks, DFIs, Micro Finance banks and Exchange companies in the country is the sanctioning authority of amalgamation among banking companies. Any amalgamation which involves amalgamation of NBFC(s) with a banking company is also approved by SBP.

During the last 8 years, SBP has processed 11 acquisitions and 41merger transactions. Most of the transactions were merger of investment banks with commercial banks and banks with other banks while other transactions involved merger of DFIs/leasing companies with commercial banks. The exercise, so far, has had a mixed color with both local and foreign stakeholders taking ownership of the banks. During the period under consideration number of banks and NBFCs approached SBP for

49 State Bank of Pakistan Annual Report 2008-2009 potential mergers, however, in most of the cases the mergers could not materialize due to one reason or the other on the part of the amalgamating entities. Among the recent transactions, Telenor Pakistan has acquired majority shareholding of Tameer Microfinance Bank Limited. KASB Capital Limited & Network Leasing Corporation Limited was merged into KASB Bank Limited.

Though the prevailing laws, rules/regulations provide the basic legal/regulatory framework for merger/amalgamation/acquisition transaction, however, to facilitate and streamline the processing of merger/amalgamation/acquisition transactions, a comprehensive set of guidelines have been developed. These guidelines provide a step by step guidance to prospective acquirers/amalgamating entities for smooth processing of the transaction as well as providing self assessment criteria before approaching SBP. These guidelines have been divided into two parts. Part I deals with the acquisition of more than 5 percent shareholding/strategic stake in banks while Part II covers the amalgamation of banking companies. Since acquisition often precedes amalgamation, Part I and Part II of these guidelines should not be viewed in isolation, instead these guidelines are interconnected and reinforcing each other.

3.3.5 Strengthening Overseas Operations of Pakistani Banks To strengthen overseas operations of the banks incorporated in Pakistan, an Overseas Branch Licensing Policy was issued in March, 2009. Under the new policy, various executives involved in overseas operations are included in the category of ‘Key Executives’ for assessment of their ‘fitness and propriety’ under SBP prescribed criteria. Banks are also required to plough back at least 34 percent of their overseas annual profit after tax to their respective head offices in Pakistan on yearly basis

3.3.6 Enhancing the Outreach of Banking Services State Bank of Pakistan Act, 1956 and the Banking Companies Ordinance, 1962 provide legal frame work for licensing of bank branches. Under Section 28 of the Banking Companies Ordinance 1962, State Bank of Pakistan has introduced a comprehensive branch licensing policy (BLP) for allowing the banks to independently make their branch location decisions within broad parameters. The main stay of BLP is to increase the level of outreach of branches in rural/underserved areas by making it mandatory for all conventional and Islamic banks to open at least 20 percent of their planned branches in such areas.

During the period under review total number of conventional bank branches increased from 8141 to 8729 showing a growth of 7.22 percent. In the same period total number of Islamic bank branches increased from 334 to 528 showing a growth of 58.08 percent. The total number of microfinance bank branches increased from 245 to 268 showing a growth of 9.39 percent.

Branchless Banking (BB) is a significantly cheaper alternative to conventional branch-based banking. BB allows financial institutions and other commercial players to offer financial services outside traditional bank premises by using delivery channels like retail agents, mobile phone, etc. BB can be used to substantially increase the financial services outreach to the un-banked communities. SBP issued Branchless Banking Regulations after exhaustive deliberations with all stake holders and consultants around the world. BB is a recent innovation and is expected to shift and change the mindsets of masses from traditional branch banking to the new way of doing business. SBP has allowed two banks (one commercial bank and the other microfinance bank) to pilot launch their BB initiative in partnership with renowned mobile network operators. Several banks are in the process of approvals/early discussions on Branchless Banking. Moreover, to enhance outreach of financial service at a mass scale, SBP has allowed number of banks to offer mobile banking services to their customers. SBP has also allowed five banks to offer Mobilink Genie (mobile banking service) to their

50 Ensuring Soundness of Financial Sector existing customer base. A number of banks are also having initial discussions with SBP on launching the mobile phone enabled banking services.

3.3.7 New Bank Licenses Section 27 of the Banking Companies Ordinance, 1962 and Section 12 & 13 of MFIs Ordinance, 2001 authorizes State Bank of Pakistan to issue new banking licenses. In this year one new Islamic bank license was issued to Albaraka Islamic Bank (presently operating as branch operations of Albaraka Bank Bahrain) while two microfinance banking licenses were issued to Kashf Microfinance Bank and NRSP Microfinance Bank. Kashf Microfinance Bank has started its operations all over the country.

3.3.8 Fair Debt Collection Guidelines State Bank of Pakistan in its endeavor to further streamline the procedure of collection/recovery of debt has formulated guidelines on debt collection to set the minimum standards to be observed by Banks/DFIs to address the grievances of customers/borrowers. These guidelines are applicable to various types of consumer financing facilities including Credit Cards, Housing Loans, Auto and Personal Loans, etc.

3.4 Status of Islamic Banking in Pakistan Over the last few years, the Islamic finance Table 3.1: Trends in Islamic Banking in Pakistan industry is reportedly growing at around 15 billion rupees; growth in percent percent, globally. Considered a niche Financing & Deposits Total assets market—catering to financial needs of the invest. Muslims—few years back, the Islamic finance (IF) has grown into a full-fledged financial Jun-04 13.2 13.1 18.8 market. Interestingly, the financial solutions Jun-05 37.8 37.2 54 provided by Islamic finance both on the asset Growth ( percent) 188 184 187 and liability side are such that can reside on Jun-06 59.7 57.9 87.6 balance sheets of Islamic and conventional Growth ( percent) 58 56 62 banks alike. The public and private sectors Jun-07 107.4 89.2 157.9 and regional and global financial hubs are collaborating effectively to make investments, Growth ( percent) 80 54 80 build partnerships and alliances, and promote Jun-08 163.1 163.4 229.6 transfer of capital flow and knowledge- Growth ( percent) 52 83 45 sharing. p Jun-09 238 194 313

In Pakistan, total assets of Islamic banking Growth ( percent) 46 19 36 industry reached Rs313 billion as at end of P: Provisional data June 2009 compared with Rs230 billion on June, 30 2008 (see Table 3.1). Similarly financing and investment portfolio of Islamic banks reached Rs194 billion at end June 2009 compared with Rs163 billion on June, 30 2008.

In terms of market share, total assets, financing & investment and deposits reached to 5.2 percent and 4.2 percent and 5.2 percent at end June 2009. Moreover, branch network of 6 full fledged Islamic banks and 12 conventional banks (having dedicated Islamic banking branches—IBBs) increased to 528 branches in June 2009 compared with around 326 branches in June 2008 (see Table 3.2).

51 State Bank of Pakistan Annual Report 2008-2009

Table 3.2: Islamic Banking Players (End-June) (in number) 2003 2004 2005 2006 2007 2008 2009 Islamic banks (operating) 1 1 2 4 6 6 6 a) Branches of Islamic banks 8 10 32 48 122 223 389* Conventional banks operating Islamic banking branches 0 5 9 11 13 12 12 b) Total standalone Islamic banking branches of conventional banks 0 10 30 39 61 103 139** Total Islamic banking branches (a+b) 8 20 62 87 183 326 528@ * Including 76 sub branches, ** Including 2 sub branches, @ Including 78 sub branches To promote IF in Pakistan, SBP has formulated a comprehensive strategic plan for Islamic banking industry. Accordingly, IBIs are envisioned to expand their existing business and explore some new sectors like SME, Microfinance, and Agriculture. Further strengthening of the regulatory and Shariah compliance regime is also planned, primarily through adaptation of standards developed by international Islamic standard setting bodies like Islamic Financial Services Board (IFSB) & Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). The aim is to align the industry with the international best practices so as to enhance the credibility and international stakeholders’ confidence in Islamic Banking efforts of SBP. It pleases to mention that SBP was ranked 2nd internationally for its efforts to promote Islamic finance in Islamic Finance news Poll 2008.

3.4.1 Initiatives Taken by SBP to Promote Islamic Banking During the year under review SBP took major initiatives for promotion and development of the Islamic banking industry including:

Strengthening the Shariah Compliance Mechanism SBP has put in place a comprehensive Shariah compliance framework for Islamic banking institutions, for its further strengthening; the following initiatives have been taken:  Phase wise adaptation of Shariah Standards of Accounting and Auditing Organization for the Islamic Financial Institutions (AAOIFI) is already underway. In the first phase, AAOIFI’s Shariah Standard No.03 (Default in Payment by a Debtor), Shariah Standard No. 08 (Murabaha to the Purchase Order), Shariah Standard No.09 (Ijara & Ijara Muntahia Bittamleek) and Shariah Standard No.13 (Mudaraba), have been evaluated by SBP Shariah Board with a view to tailor them to the needs of local environment. The finalized Standards will be issued in due course.  Considering the need and potential of Islamic banking industry, Shariah Standard on Sharikat ul-Milk has been prepared and evaluated by SBP Shariah Board. This Standard is applicable to all forms of joint ownerships, structured on the basis of Sharikat ul-Milk of asset or property excluding receivables and cash and cash equivalent. This Standard shall also be applicable to a Diminishing Musharakah based on Sharikat ul-Milk.  A Shariah Advisory Forum (SAF)—comprising Shariah Advisers IBIs is working to resolve various Shariah concerns related to Islamic banking industry. Accordingly, different SAF Sub-committees have been formed for the purpose of evaluating the current practices such as those of Commodity Murabaha/Tawarruq, utilization of charity and its related issues in IBIs, practice of Hiba, etc.  Also, in second phase of adaptation of AAOIFI Shariah Standards, SAF sub-committees for AAOIFI’s Shariah Standard No.05 (Guarantees), AAOIFI’s Shariah Standard No.06 (Conversion of a Conventional Bank to an Islamic Bank), AAOIFI’s Shariah Standard No.10 (Salam & Parallel Salam) & AAOIFI’s Shariah Standard No.11 (Istisna’a & Parallel Istisna’a) have been formed.

52 Ensuring Soundness of Financial Sector

Islamic Financial Services Board Standards  The Islamic Financial Services Board (IFSB), based in Malaysia, is an international standard setting body which aims at promoting the international Islamic financial industry through the issuance of Prudential Standards and Guidelines. Contributing towards the stability, transparency and a vibrant Islamic financial structure at international level, IFSB has issued Standards/Guidelines on various subjects, keeping in view the best international practices and Shariah compliance. SBP provided extensive support to IFSB’s initiatives through participation in its various working groups and technical committees. The governor, SBP also held the position of chairperson of the council of IFSB in 2008.  To strengthen risk management framework for IBIs, SBP has issued Risk Management Guidelines for Islamic Banking Institutions (IBIs) after customizing IFSB Standard—these guidelines are in addition to the risk management guidelines already issued for all banking institutions). These guidelines highlight the peculiar risks faced by the IBIs and recommends adequate risk management techniques. Similarly an impact study has been completed to facilitate the adaptation of IFSB Standard on Capital Adequacy. Moreover, SBP is also in the process of adapting IFSB Standard on ‘Corporate Governance’ in the light of feedback received from various stakeholders and available corporate governance structure.  For adapting the IFSB Standard on ‘Transparency and Market Discipline’, a general recommendation report has been prepared keeping in view the current disclosure requirements. The report will be finalized in the light of feedback received from relevant SBP internal stakeholders. The guidance note on Key Elements of Supervisory Review Process issued by IFSB is also under study and a status report is being prepared to earmark the possible areas which may require regulatory focus

Issuance of SLR Eligible Sukuk  In September, 2008 GoP issued its Ijarah Sukuk worth of Rs6.5 billion. This issuance has given Islamic banking industry a major boost by providing a risk free SLR eligible investment avenue. The step will go a long way in developing a well functioning Islamic capital market and Islamic money market. All Islamic banking institutions are eligible to participate in auctions.

Accounting and Taxation Issues  For development of Accounting Standards for Islamic Modes of Financing, a Committee was constituted at Institute of Chartered Accountants Pakistan (ICAP), in which SBP is also represented. The committee is reviewing the accounting standards prepared by AAOIFI with a view to adapt them in Pakistan. The committee has already prepared standards on Murabaha and Ijara.  Keeping in view the representation of PBA subcommittee on Islamic banking regarding practical issues in implementation of Islamic Financial Accounting Standard for Ijarah (IFAS 2), all IBIs—through IBD Circular No. 1 of January, 2009—were asked to implement the said standard w.e.f January 1, 2009.

Capacity Building Initiatives  Islamic Banking Department (IBD) aims at developing and promoting the Islamic banking industry as a parallel and compatible banking system in the country. Besides focusing on the introduction of Shariah compliant regulatory and supervisory framework, it gives due importance to the promotion of this growing industry through providing capacity building opportunities like intellectual sessions, knowledge sharing and awareness programs.  Seminar on Risk Management. A seminar on risk management guidelines (based on Risk Management Standard issued by the Islamic Financial Services Board) was organized by

53 State Bank of Pakistan Annual Report 2008-2009

IBD at Learning Resource Centre, on September 1, 2008.The seminar was held to discuss various issues in implementation of these guidelines.  Lecture (on Takaful) for SBP officials. Takaful is an emerging field in Pakistan; however it is relatively new concept for many people. On October 28, 2008 Islamic Banking Department conducted a half-day program for SBP employees, on 'Takaful’ at LRC to create better understanding of the subject.  Islamic Banking Awareness program. An awareness/ training program for officers of various departments of SBP was arranged from April 13-18, 2009. Various leading experts from SBP and the industry made presentations on various aspects of Islamic Banking.  Facilitation Workshops on IFSB Standards. Islamic Banking Department arranged a three- day work shop on IFSB Standards in collaboration with Islamic Financial Services Board (IFSB). The workshop was held at Learning Resource Centre (LRC) from February 23 to 25, 2009 attended by large number of industry practitioners and representatives from SBP.  Lecture Session on ‘Riba’. Elimination of interest/Riba is central to the Islamic banking and finance. A lecture on Riba was arranged wherein distinguished Shariah scholar Justice (retired) Khalil ur Rahman shared his knowledge and understanding of Riba.  Standardized curriculum for various academic programs. IBD has taken the initiative to develop a model course outline for Islamic banking and finance for educational institutions that are either offering or planning to offer Islamic banking and finance course at various levels like certificate, diploma, etc. The course out line has been sent to Higher Education Commission for their consideration and circulating the same to member institutions.  To address the queries raised by various stakeholders. A document on Frequently Asked Questions (FAQs) on Islamic Banking was released in December 2008. The document answers various questions on Islamic finance. SBP officials are also conducting training sessions on Islamic finance at various forums across the country.

3.5 Vigilant Supervisory System 3.5.1 Online Submission of Returns State Bank of Pakistan continued to bring improvement in its various supervisory processes in place for financial institutions under its purview. As a further development, the Quarterly Data File Structure (DFS) for Micro Finance Banks (MFBs) have been designed and deployed on portal which covers both hard copies of Quarterly Report of Condition and e- Quarterly Report of Condition prescribed for MFBs on quarterly frequency. MFBs have started parallel reporting on data acquisition gateway (DAG) Portal, which after parallel run will help discontinue submission of hard copy, required quarterly regulatory returns, by Sep-09. This will relieve the paper based reporting presently being made by MFBs and would save considerable time of both reporting institutions and SBP officials.

3.5.2 Automated Quarterly NPLs Reports To bring improvement in NPLs data compilation, analysis and dissemination among stakeholders, SBP has automated MIS reports relating to Non-Performing Loans creating a link with the Quarterly Report of Condition (QRC) uploaded by reporting institutions (RIs) on DAG Portal. This will help reduce the time in preparation and dissemination of information on NPLs and the required corrective measures in this regard.

3.5.3 Liquidity Management Post September 2008 In early October 2008, the financial sector in Pakistan witnessed liquidity pressures as deposits from some of the banks were withdrawn beyond the normal historical trend, which is associated with the Ramadan and post Ramadan cash utilization. In the ensuing weeks some of the smaller banks came under liquidity stress and could not maintain their statutory liquidity requirements. Working vigilantly during this period, SBP assessed the position of individual banks on daily basis and besides providing

54 Ensuring Soundness of Financial Sector input for various policy measures, including changes in Cash Reserve Requirement and Statutory Liquidity Requirement regime, engaged the management and board of the institutions, which were under pressure, for improving their situation. To this end other market participants were encouraged to ease out funding. Accessibility of the market participants to normal discount window of State Bank was improved and a lender of last resort facility, duly supported by the government of Pakistan, was instituted for smaller banks. Thus the timely and effective actions and policy initiatives resulted in improvement of the situation over next couple of quarters, and by the end of March 2009 all banks were comfortably compliant with statutory liquidity requirements.

3.5.4 Framework for Problem Bank Management and Contingency Plan Learning from the financial stress witnessed in autumn 2008, the State Bank of Pakistan improved its internal processes for dealing with such situations. In this context based upon the already approved Problem Bank Management Manual, a framework for Problem Bank Management and Contingency Plan was prepared. The framework, in addition to the problem bank management policy, identification mechanism and supervisory responses, also incorporates the processes for emergency financing facility under lender of last resort, prompt corrective actions regime, and procedures for closure and liquidation of a bank. Bank take over procedures, sources and structure of information required during the crisis and host of other templates and checklists have been incorporated to facilitate the supervisory actions. It is expected that this experience would allow SBP’s supervisory team to better manage any stress situation in future.

3.5.5 Problem Banks Resolution Over the period, SBP has strengthened its supervisory capacities and has put in place an overarching supervisory framework to closely and actively monitor the financial performance and health of financial institutions. Notwithstanding, there do occur episodes of mild to serious supervisory challenges testing the strength and effectiveness of the supervisory framework. The financial distress faced by The Bank of Punjab was one such episode during the year warranting urgent and timely intervention by SBP.

To rescue the bank, SBP initiated a comprehensive resolution process by fully engaging all stakeholders including the government of Punjab (GOPb) and the federal government because of the public sector status of the bank. Recognizing the weaknesses, GOPb changed the management and the Board of Directors of the bank. To recoup the financial health of the bank, SBP played its role in encouraging the government of Punjab, being the major shareholder, to inject a fresh capital of Rs10 billion.

3.6 Proactive Inspection Banking Inspection (on-site) Department (BID) is striving to secure stability of the financial system and safeguard the interests of stakeholders through proactive on-site inspections of financial institutions, i.e., commercial and Islamic banks, Development Finance Institutions (DFIs), Microfinance Institutions (MFIs) and Exchange Companies under the jurisdiction of SBP. BID also prepares special reports on cases of written-off loans, advances and other special investigations based on requests from internal and external stakeholders. Another important role of the department is to provide policy input to policy-making departments regarding issues encountered during the course of on-site inspections.

During 2008-09, the department conducted full scope inspections of 35 banks/DFIs and 42 exchange companies (both A and B categories). In addition to the full scope inspection, the department has undertaken 3 IS inspections, 25 special inspections of banks/DFIs/exchange companies and handled numerous complaints. To improve and strengthen its capabilities, and to meet the emerging supervisory challenges, BID undertook some major initiatives as detailed below:

55 State Bank of Pakistan Annual Report 2008-2009

3.6.1 Restructuring the Department BID has been restructured to meet its objectives, i.e., to perform effectively under the given mandate, to better utilize the human resources, and to effectively oversee the level of emerging risks. The redefined structure of BID entails identifying and developing a resource pool in various specialized areas like Basel-II implementation, Sharia compliance, consumer banking and anti-money laundering. Dedicated teams have been constituted for conducting inspections of Islamic banks, Microfinance Institutions, Information System Audit and Treasury and Forex related assignments. Besides, the Department also provides assistance to Consumer Protection Department and other departments by investigating complaints through a special division.

3.6.2 Inspection of Information System Increasing use of technology and systems in the regulated institutions has added a new dimension to the banking business. A manual for conducting IS related inspections has recently been developed in- house to ensure accuracy, integrity and adequacy of the systems used by the banks and DFIs.

3.6.3 Basel-II Implementation The Basel-II Capital Accord provides a comprehensive and more risk sensitive capital allocation methodology. Its implementation poses tremendous challenges not only in Pakistan but also throughout the world. A group of officers was constituted to develop in- house expertise, who could conduct on-site inspection to assess the Basel-II implementation at banks/DFIs in line with SBP instructions.

3.6.4 Development of Inspection Manual and IT Tools for Evaluation of Consumer Finance Portfolio BID has recently devised IT tools for assessing consumer finance portfolio of the banks, primarily to validate consumer loan classification process, identification of refinanced loans and multiple loans to a single borrower. These tools would further strengthen the inspection process and help in identifying the gaps/ deficiencies which exist in the control environment / systems of commercial banks. In addition, a manual has been developed for conducting inspection of consumer finance portfolio to streamline the inspection process.

3.7 Consumer Protection Consumer Protection Department (CPD) has been established in 2008 to deal effectively with public grievances against banks/DFIs, and to prepare and review consumer protection policies and guidelines. The creation of CPD is a mandate of SBP to create/promote culture of social responsibility in financial institutions for amicably resolving disputes, thereby protecting the right of customers. During the period, the department handled about 8,000 complaints. Fair debt collection guidelines were issued in collaboration with BPRD.

The role of CPD is also important in sharing credit data with financial institutions through Electronic Credit Information Bureau (e-CIB). Online collection and dissemination of credit data from and to banks and financial institutions is meant to promote a sound credit culture, prudence and professionalism among financial institutions, adoption of best business practices and making informed and responsible lending decisions in timely manner. The rejuvenated e-CIB is practicing matching standards being pursued in more advanced financial centers around the world. The e-CIB database has now been capturing more than 5 million borrowers’ records of more than 100 member financial institutions. Besides, an exclusive web enabled e-CIB help desk provides facilities to general public as well as financial institutions to lodge their complaints online. Host of new functions offered by the e- CIB help users get information in a variety of ways depending upon their specific needs. During the last year this department also arranged about 40 trainings for financial institutions about Credit Information Bureau.

56 4 Exchange Rate and Reserve Management

Table 4.1: Daily Arabian Light Crude Closing Prices 4.1 Overview The first two quarters of FY09 saw internal in US dollar, change in percent and external shocks carrying-over from FY08, ARL-OSP- Highest Lowest Average YoY A quote quote Quote daily close change* complicating market & reserve management. State Bank of Pakistan, cognizant of these FY03 33.1 22.6 27.2 - multifaceted challenges introduced a number FY04 37.7 24.9 30.2 11.0 of measures to cope with the rapidly changing FY05 55 32.5 41.2 36.4 market situation, and to ensure smooth FY06 69.9 49.9 58.7 42.5 functioning of the financial markets. These FY07 73.8 48.5 61.2 4.3 measures helped strengthen the market mechanism, curtailed excessive short-term FY08 140.6 66.1 92.6 51.3 volatility and calmed down the turbulent FY09 143.6 32.7 67.1 -27.5 sentiments, making sailing a bit smooth *=YoY change in average close prices through these testing times. Table 4.2: Percent Change in PKR/USD Parity in FY09 change in percent The most disturbing factor during the year Monthly Month end Closing rate Change since Jun 08 was the steep rise in international oil prices change reaching unprecedented levels (see Table 4.1), and putting immense pressure on the Jul 71.46 -4.48 -4.48 country’s foreign exchange reserves. The Aug 76.48 -7.02 -11.82 deteriorating external account triggered Sep 78.16 -2.20 -14.27 excessive volatility in the FX market during Oct 81.47 -4.23 -19.11 the first quarter of the year (see Figure 4.1 Nov 78.83 3.24 -15.25 and Table 4.2). SBP took a number of Dec 79.10 -0.34 -15.65 proactive measures in the first quarter to curb undesirable excessive short term Jan 79.10 0.00 -15.65 volatility. At the same time, SBP continued Feb 80.00 -1.14 -16.96 its efforts to complement the governments’ Mar 80.51 -0.64 -17.71 strategy to shore up country’s FX Reserves. Apr 80.53 -0.02 -17.74 The success of this strategy culminated in May 81.17 -0.79 -18.67 the resumption of the IMF program which Jun 81.46 -0.36 -19.10 provided the much needed support to the country’s Foreign Exchange Reserves. The Figure 4.1 USD/PKR Exchange Rate Movement during FY09 subsequent turnaround in international oil prices also helped in restoring market’s confidence to a large extent. Thus after observing a volatile period during Jul-Oct08 the market gradually normalized, and the rest of the year witnessed gradual weakening of the rupee with healthy volatility.

4.2 Interbank Market As the year started, current account balance further deteriorated and the decline in rupee’s value kept gathering pace. To encourage foreign exchange inflows and calm down market sentiments, SBP took a number of

57 State Bank of Pakistan Annual Report 2008-2009 measures early in FY09. These included suspension of forward booking of foreign exchange against imports, SBP support for all types of POL payments, reduction in trading time for interbank foreign exchange transactions, Cash Margin on LC’s, and reduction in advance payments against imports from 50 percent to 25 percent. Moreover, SBP issued instructions for exporters to submit their overdue export proceeds. As a result of the campaign for realization of overdue export bills, stock of outstanding export bills held by exporters declined significantly during Jul-Nov08. With sharp decline in international oil prices and Pakistan’s entry into the IMF program, the situation in the FX market improved. The investigations into operations of exchange companies, involved in illegal transfers of foreign currencies, also helped curbing the speculative tendencies and reducing the Table 4.3: Exchange Rate Trend pressure on rupee. volatility and change in percent

Avera Year High Low Close Volty C/C change On yearly basis, the USD/PKR exchange rate ge incurred depreciation of approximately 19 FY05 61.60 57.55 59.64 59.35 2.6 -3.2 percent during FY09 compared with 13 percent in FY08 (see Table 4.3). The FY06 60.45 59.57 60.22 59.87 0.9 -1.0 depreciation FY07 61.01 60.18 60.37 60.65 1.0 -0.3 was more pronounced during the Jul-Oct FY08 69.75 60.30 68.40 62.68 4.0 -13.3 period when the Exchange Rate showed an FY09 84.08 68.47 81.46 78.65 6.8 -19.1 average monthly depreciation of 4.8 percent. Source: DMMD Transactional Reporting & Reuters However, after the announcement of IMF program in Nov08, rupee recovered some of its earlier losses and posted a recovery of 3.2 percent. For the rest of FY09, exchange rate remained relatively stable while registering gradual depreciation reflecting the demand and supply conditions in the market. The average interbank USD/PKR exchange rate during the year remained PKR 78.65 with high and low levels of Rs84.08 and Rs68.47 which were traded during the months of July-Oct 2008.

One major development during the year was the gradual transfer of POL payments back to the interbank market. A phased program has been announced to the market according to which SBP will cease to provide foreign exchange for oil imports by December 2009. As a first step of this phased strategy, SBP allowed banks to cover Furnace oil and specific ‘M’ form payments from the interbank market in Feb 2009. Unlike the past experience, the transition was successful as the banks comfortably covered these outflows without any excessive movements in the exchange rate. The remaining categories of POL payments are scheduled to be diverted to interbank market in Aug09 and Dec09.

While diverting the POL payments back to the market, SBP took the initiative of enhancing the market’s capacity to handle large volume transactions on its own. SBP increased the Foreign Exchange Exposure Limits (FEEL) of the Banks from 15 percent of their Paid-up Capital to 20 percent of Paid-up Capital (Free of Losses) in Jun09. This measure increased the market’s overall FEEL by 26 percent from approximately US$297million to US$374 million.. The determination process of FEEL allocation was also improved with incentivizing banks that utilize their FEEL limits more effectively.

As the foreign exchange market stabilized, SBP removed the restrictions on the trading hours for customer and interbank foreign exchange transactions. Also the margin restrictions on Import letters of Credit have also been removed.

58 Exchange Rates and Reserve Management

4.3 Regional Perspective The global economic slowdown had its toll on many other regional currencies which showed declining trend in their value against the US dollar. However, the most significant depreciation was witnessed in Pak rupee and Indian rupee which depreciated by about 19.1 percent and 11.3 percent (see Figure 4.2). Malaysian ringgit and Lankan rupee also faced depreciating pressure to the tune of 7.6 percent and 6.7 percent. On the other hand, depreciation was relatively low in Thai baht and Bangladesh taka. The Chinese currency was perhaps the only exception in the region that showed slight improvement against the US dollar.

Figure 4.2: Regional Currencies Performance Against UD$ during FY09

PAKISTAN, -19.1%

CHINA, 0.4%

THAILAND, -1.8%

MALAYSIA, -7.6%

SRI LANKA, -6.7%

BANGLADESH, -0.4%

INDIA, -11.3%

-25% -20% -15% -10% -5% 0% 5%

4.4 Support for POL Payments Table 4.4: POL Payments during FY08-FY09 Unprecedented increase in oil prices in million US dollar international market at the end of FY08 kept FY09 FY08 upward pressure on oil bill at the start of FY SBP’s Banks’ SBP’s Banks’ Month share share Total Month share share Total 09. Oil bill for the first quarter of the year remained significantly higher as payments Jul-08 1,141 105 1,246 Jul-07 786 66 852 made during this period accounted for 42 Aug-08 1,498 0 1,498 Aug-07 480 139 619 percent of the total oil bill of FY09. Impact of Sep-08 1,554 0 1,554 Sep-07 425 141 566 decline in oil prices became visible only after Oct-09 1,170 0 1,170 Oct-07 512 159 671 the end of the first quarter. Nov-08 740 0 740 Nov-07 702 215 917 Dec-08 690 0 690 Dec-07 824 109 933 During F09, SBP provided a total of $9,233 Jan-09 503 0 503 Jan-08 602 260 862 million to banks for POL payments which Feb-09 328 133 461 Feb-08 728 132 860 were about 90 percent of the total oil bill. This Mar-09 294 182 476 Mar-08 740 154 894 amount was $281 million higher than the Apr-09 368 179 547 Apr-08 924 301 1225 support provided in FY08 which was May-09 366 167 533 May-08 1,266 195 1461 approximately $8,952 million (see Table 4.4). Jun-09 581 233 814 Jun-08 963 211 1174 Total 9,233 999 10,232 Total 8,952 2,082 11,034 4.5 Foreign Exchange Reserve Management The financial turbulence that first surfaced in August 2007, reached full swing in March 2008, and was going strong at the onset of FY09. The precipitous fall in housing markets led to drying up of liquidity in that market leading to severe decline in prices of related assets and mortgaged backed securities. With ABS and MBS markets freezing up, asset prices declined and financial institutions, primarily in the West, underwent declining profitability and received sizeable knocks to their balance sheets. This subsequently led to a bout of bankruptcies and ensuing tightening of the lending

59 State Bank of Pakistan Annual Report 2008-2009 standards – initiating a secondary phase of activity slowdown. The programs initiated by central banks, globally, to ease the credit markets and return liquidity to the financial markets became one of the most expansive and synchronized effort globally to beat a global activity downturn. The actions of the Federal Reserve, European Central Bank, the Bank of England, and Bank of Japan were particularly important. These included aggressive easing of policy rates, asset purchase programs and fiscal stimulus packages to ease credit markets and to re-invigorate consumption which had been severely impacted from the wealth destruction in home and capital markets.

At the onset of FY09, the challenges that the State Bank of Pakistan encountered included the high import bill. Oil prices had peaked in July and remained above $100 benchmark, throughout Q1 F- Y09. Given the slowdown in home remittances, dwindling exports, coupled with high import obligation in shape of POL support, took a heavy toll on the current account deficit and the balance of payments. The reserves reached a low of $6 billion in Q1 FY09. In response to need for liquid currency for balance of payments needs and cash flow management in a highly stressed market, a decision was made to partially disinvest Externally Managed Fixed Income Portfolio. In Q2 FY09, a portion of the reserves was disinvested from External Fixed Income Portfolio to cash in the Q2 FY09. The initial cost was anticipated to the tune of 3.0 percent+ due to financial market turmoil and overall liquidity conditions, however, it was brought down to 2.1 percent through active management of the disinvestment process. This in itself is a commendable achievement considering the global financial conditions and credit spreads prevailing towards end of Q1 FY09. In late November 2008, the IMF provided support in shape of a Stand-By Arrangement for Pakistan which resulted in additional cash inflow of $3.1 billion to help bolster the reserves to $9.1 billion by 2008 year end. In Q2 FY09 oil prices dropped from $100 and were expected to stabilize at a lower range given the weakening global economy providing hope for the restoration of the Bank’s foreign reserves.

Despite the global financial turmoil and depleting reserves, the capacity building measures continued at departmental and cluster levels, with skill enhancements through arranging web-based fixed income training modules, self-study and encouraging individuals to take-up professional certifications relevant to the business. Resultantly 90 percent of staff members have registered for professional certifications of international repute including CFA and FRM. Additionally, sourcing competent professionals at junior level was also carried out to fill open slots for these extremely specialized functions.

Substantial value was added to the Bank’s profitability through active management of investment portfolio in FY09. The gross return in FY09 on the overall reserves was 2.31 percent, slightly better than its benchmark. While, return was lower than 4.9 percent in FY08, considering zero interest rate environments prevailing globally in FY09, the returns earned are a significant achievement and were only possible due to enhanced team capabilities achieved through Cluster based structure. Given the inflow of foreign currency through multinational programs, and a moderation in POL support payments, the central bank foreign reserves should see growth in the upcoming year. With the reserve position stabilizing, the strategic allocation of assets will be re-evaluated internally through Cluster resources and optimally re-positioned taking into account global conditions to improve returns while managing an appropriate risk profile.

4.6 Home Remittances The efforts undertaken by SBP in consultation with other stakeholders have resulted in total remittances to reach historic high level of USD 7.8 billion in FY09, registering a growth of 21 percent over FY08.

Another breakthrough related to the remittances was launching of the historic Pakistan Remittance Initiative (PRI) by the federal government and the State Bank of Pakistan. This will hopefully bring a fundamental change in country’s remittance regime to boost and facilitate the flow of remittances sent 60 Exchange Rates and Reserve Management home by non-resident Pakistanis. The insufficient presence of Pakistani banks in overseas jurisdictions and lack of marketing efforts are some of the major impediments to the flow of remittances. In this backdrop, a financial incentive scheme is being launched for overseas entities whereby they will be supported in their marketing efforts. The scheme is performance based and rests on the basic premise of offering financial incentives against mobilization of additional remittances. Such incentives shall start from bringing at least US$ 100 million from one particular jurisdiction in one year. To provide for a remittance structure whereby ownership of remittance to Pakistan could be placed, PRI is established wherein:  State Bank of Pakistan shall deploy a team of senior officials and other support required to implement and execute the objective.  Ministry of Finance through SBP will make available the requisite funds required to enable the Pakistan Remittance Initiative to commence its operations and take all necessary actions to enhance the flow of remittances.  There will be an Advisory Group which will, in consultation with other stake holders, formulate the strategy to achieve the objective of Pakistan Remittance Initiative.  An independent organization shall be established which will take the initiative and continue the work which the Pakistan Remittance Initiative would have already undertaken.

To provide a reliable and immediate contact, 24 hours 7 days a week, call centre has been established which is now operational. All overseas Pakistanis and their families can inquire about the remittance services of banks and lodge their complaints with the call centre. PRI is working to provide such services toll free for overseas Pakistanis living in various regions of the world. However, at the moment, toll free services are currently available to Pakistanis living in North America. In addition, a comprehensive website, i.e., www.pri.gov.pk has been established to provide maximum information about the processes involved in the remittance transactions. Further, to facilitate the remitters in identifying the places near to them to route remittances through banking channels, a locator has been placed.

In the initial phase, PRI formed a focused group of five large banks and these banks in consultation with SBP have finalized all related arrangements to instantly credit the bank account of the beneficiary once they receive the funds. Similarly these banks have completed their arrangements for instant payments of cash over the counter.

Similarly, to address the issue of delay in interbank settlement of remittance transactions, SBP has put in place a mechanism whereby banks would inform twice a day each other about the bank accounts to be credited with the remittances received while the funds shall route through RTGS simultaneously with the exchange of information.

SBP has also introduced a mechanism for compensation to remittance beneficiaries for delay by the banks and a comprehensive ‘Complaint Handling Mechanism’ has also been put in place. Similarly, SBP is encouraging the enhanced role of technology in offering remittance services.

4.7 Exchange Companies In FY09, to initiate action against Hundi/Hawala operators and people involved in illegal foreign exchange business, State Bank of Pakistan requested Ministry of Interior to take law enforcement action against illegal operators. Accordingly, FIA launched a special campaign and apprehended a number of foreign exchange operators involved in illegal activities. While analyzing the results of FIA action, the data reveals that remittances earlier being transmitted through undocumented channels had started to divert to formal channels. During FY09, SBP took the following measures:

Reemphasized to Maintain AML / KYC Standards and Proper Documentation. SBP reemphasized to the Exchange Companies, the importance of documentation and exercising utmost

61 State Bank of Pakistan Annual Report 2008-2009 diligence while dealing with their customers in terms of maintaining KYC standards, establishing bonafides and satisfying themselves with the beneficial ownership of transactions routed through them. It was also reiterated that in case any Exchange Company was found involved in violation of any SBP Rules & Regulations in general and any undocumented transactions in particular, strict action leading towards suspension or cancellation of the license would be taken against the company involved.

Certificates regarding Compliance Status of each Business Location. Exchange Companies were advised to revisit the compliance status of each of its business location including branches, CEBs, franchises, payment booths with respect to documentation of transactions and adherence to SBP rules and regulations through all available means including on-site visits of business locations. The Exchange Companies were advised to submit certificates to this effect by October 31, 2008, signed by CEO and all Directors of the company.

Additional Requirements w.r.t. Export of Permissible FCYs. Exchange Companies were advised that; (I) all the currency carriers must be employees of the Exchange Company; and (ii) it would be compulsory for ECs to finalize the deal with overseas entity before the shipment of each export consignment. The system generated deal ticket (specifying consignee name, address, contract details, amount, exchange rate, etc.) must be accompanied with each request for exporting permissible FCYs.

Changes in Foreign Exchange Regime taken place during the year FY09 Advance Payments against imports on L/C Basis. The facility of 100 percent advance payment against irrevocable L/Cs and firm registered contracts was restricted to 50 percent. The advance payment facility against imports has been further reduced to 25 percent of the FOB or CFR value of the goods against letters of credit only. Forward Cover Facility. Authorized Dealers were permitted to provide forward cover for a period of not less than one month and up to a maximum period of one year on a roll over basis. The said facility for all types of imports has been temporarily suspended since July 2008. Payments against POL Products. Authorized Dealers were allowed to make all purchases of foreign exchange from interbank market related to the import of Furnace Oil and remittances against which specific approvals were granted by the Exchange Policy Department, SBP. Effective August 1, 2009, in addition to the above, all purchases of foreign exchange related to import of Diesel and other refined products are being made by the banks from the interbank market. SBP will, however, continue to provide foreign exchange to the banks for import of crude oil only. Enhancement in the Limit of Retention of Export Proceeds for Exporters of Pharmaceutical Products. The limit of retention of export proceeds for exports of Pharmaceutical products has been enhanced from 10 to 15 percent. Asian Clearing Union (ACU) Mechanism. ACU Euro has been included as the second ACU currency along with ACU dollar w.e.f. January1, 2009. The ACU Euro would be equivalent in value to one Euro. Accordingly, transactions under ACU Mechanism, in addition to ACU dollar (ACUD), may also be denominated and settled in ACU Euro (ACUE) effective January1, 2009. Further, to encourage the banks to maintain reasonable/sufficient balances in their accounts to ensure timely payments, the Authorized Dealers have been permitted to pay/receive interest, at their discretion, on ACUD and ACUE accounts as per mutually agreed terms and conditions.

62 5 Strengthening Payment Systems

5.1 Overview Sound and efficient payment systems contribute towards the growth of an economy, stability of financial system, and smooth functioning of financial market. The Payment Systems Department has a key role to play in overseeing these payment systems to ensure their robustness. E-Banking in Pakistan has witnessed a substantive growth over the last 5 years. Its popularity among the masses was however boosted by the introduction of Plastic Money, which provided customers the facility of accessing their accounts 24/7/365. Here the introduction of Master and VISA Cards also played a key role in the growth of plastic money, but the complex nature of the product coupled with lack of awareness resulted in rising number of complaints and disputes.

To improve the functioning of ATMs, provide secured environment for 24/7 banking on ATMs, and to ensure safety and privacy of ATM customers, PSD in its various meetings with Commercial Banks emphasized the importance of the compliance of its ATM security related measures. EMV cards are considered as more secure against card fraud than cards that rely only on data encoded in a magnetic stripe on the back of the card, since EMV cards are based on chip card technology. In order to issue EMV compliant cards in Pakistan, Payment Systems Department held discussions with stakeholders wherein, it was agreed that by end 2010 all banks will issue EMV compliant cards. However, to ensure the availability of proper infrastructure for supporting EMV cards in Pakistan, all POS network acquiring banks were advised to convert POS machines to EMV compliant and the same was accomplished in December 2008.

Protecting cardholder’s data is a requirement of Payment Card Industry Data Security Standards (PCI DSS), an organization founded by American Express, Discover Financial Services, JCB International, MasterCard international, and Visa. For protection of cardholder’s data PCI DSS requires financial institutes to mask Primary Account Number (PAN) for card transactions. In this reference, Payment Systems Department initiated the project of transforming POS machines for PAN masking with an objective to prevent the misuse of cardholder personal information and to follow the international best practices. Previously transaction slips generated through POS machines contained Cardholders’ personal information such as his/her name, complete card number, date of expiry, etc. which could easily be used for fraudulent purposes.

5.2 Real Time Gross Settlement (RTGS) RTGS is a payment mechanism that settles inter-bank and other time critical payments in real time, item by item across the participants’ current account held with the central bank. Pakistan’s Real Time Gross Settlement System is named PRISM. Pakistan’s Real Time Interbank Settlement Mechanism was launched on July 1, 2008 and since then has been successfully providing online real-time settlement services to the 40 participating institutions. All Commercial banks in Pakistan and three Development Finance Institutions (DFIs) are direct members of this system.

PRISM offers the following main services to its participants:  Real time settlement of cash and government securities related payments. Multilateral net settlement of the cheque clearing is also done via PRISM system.  Settlement of government securities trades on Delivery versus Payment (DVP) basis.  In case, sufficient cash is not available in a participant’s account, the payment can be queued for settlement at a later time as and when the cash becomes available. The participant has the full capability of managing their own queues.  Participants also have the option of availing collateralized Intraday Liquidity Facility (ILF)

63 State Bank of Pakistan Annual Report 2008-2009

 Online position monitoring of cash and securities balances is also available to the participants.  SBP also manages a functioning help desk for the participants and addresses their complaints immediately.

The overall launch of the system was done in phases to enable the participants to gradually adapt to the system with minimum inconvenience. SBP was also able to effectively handle any support issues during the initial days of launch. Similarly, SBP fully facilitated the system participants in gradually moving from the cheque based payment mechanism to the new online real time system. SBP also released comprehensive ‘Rules & Regulations ‘for PRISM operations, prepared after extensive deliberations with all the participants and internal departments.

5.2.1 PRISM Payment Statistics From July 2008 till June 2009, the PRISM system settled payments of around Rs59 trillion with a

Figure 5.1: PRISM Payments Statistics

total volume of more than 220,000 payments (see Figure 5.1). On an average the system settled around 750 daily payments valuing around Rs200 billion.

5.3 Branchless / Electronic Banking Branchless / Electronic Banking systems are money transmission / delivery mechanism. These systems are cash based and virtual payments. During FY09 the volume of total retail payment transactions registered a growth of 7.9 percent against 8.3 percent increase in the previous year and

Figure 5.2A: Number of Transactions Figure 5.2B: Amount of Transactions e-Banking Paper based Paper based e-banking (RHS) 145 15 400

320 116 12

240 87 9

160 millionrupees 58 6

billionrupees number(million)

80 29 3

0 0 0 FY05 FY 06 FY 07 FY 08 FY 09 FY05 FY 06 FY 07 FY 08 FY 09

64 Strengthening Payment Systems value of total retail payment transactions registered an increase of 2.7 percent against 21.8 percent increase last year. The trend of paper and electronic based transactions and value since FY05 is given in Figure 5.2A –B.

5.4 The Retail Payments through Branchless Banking / Electronic Banking In terms of volume, the electronic banking has recorded 159.8 million transactions showing 28.4 percent increase against increase of 25.2 percent recorded in the previous year. In terms of value, it reached Rs14.4 trillion showing an increase of 3.5 percent against 32.4 percent increase last year (see Figure 5.2A-B).

5.4.1 Branchless / E-Banking Composition ATMs are commonly used for frequent but small value cash withdrawals, therefore, its share in total number of electronic transactions was recorded to be the highest, i.e., 57 percent. During FY 09 the average size of ATM transactions1 was recorded at Rs7, 336 compared to Rs6,670 recorded during last year. The share of Real Time Online Banking (RTOB) and POS in the total e-Banking was 30 percent and 11 percent. Call Centre, Internet Banking and Mobile Banking, however, had comparatively low share in the total e-Banking business (Figure 5.3A). In terms of value, the RTOB

Mobile Figure 5.3A: Share in e-Banking Total Numbers Mobile Figure 5.3B: Share in e-Banking Total Amount banking banking 0.0% POS ATMs 0.0% Call centre Call centre 0.6% 4.7% 0.6% 0.1% Internet Internet Banking Banking 0% RTOB 1% 29.6%

RTOB POS ATMs 94.2% 11.4% 57.0% contribution was 94 percent, since this channel is mostly used for B2B transactions. ATM transactions contributed five percent in the value of transactions. The share in value of POS, Internet, Mobile banking and Call Center banking was very nominal (Figure 5.3B).

5.5 Branchless / E-Banking Infrastructure in Pakistan 5.5.1 Online Branch Network and Automated Teller Machines (ATMs) During FY 09, banks have expanded their online branch network from 5,282 to 6,040, showing a growth of 14 percent compared to 26 percent growth recorded last year. The share of online branches in the total branch network has increased from 64 percent to 68 percent. Similarly, during FY 09, banks have added 878 new ATMs in their network, bringing the total number of ATMs in the country to 3,999 registering a growth of 28.1 percent compared to 36.1 percent growth recorded last year (Fig. 5.4).

1 The average size of ATM Transactions = Total Amount /Total number of transactions. Here the total numbers of ATM transactions include cash withdrawal, cash deposit, IBFT, utility bills payment, and deposit of Payment instruments.

65 State Bank of Pakistan Annual Report 2008-2009

5.5.2 Number of Cards Figure 5.4: Number of ATMs and Online Branches (Credit/Debit/ATM) ATMs RTOB As of June 30, 2009, total cards in circulation 6500 were 8.9 million compared to 7.5 million recorded last year, showing growth of 20 5200 percent (Fig. 5.5).

3900 Credit Cards The total number of credit cards decreased 2600 from 1.8 million to 1.7 million in FY 09, showing decrease of 6 percent compared to 5 1300 percent increase recorded last year. Islamic credit cards were 2,468. 0

FY05 FY06 FY07 FY08 FY09 Debit Cards Total number of debit cards has increased Figure 5.5: Share in card Activity from 4.9 million to 6.4 million in FY 09, showing growth of 30 percent compared to 23 ATM cards Credit percent decrease recorded last year. 9.9% cards 18.6%

ATM Cards During FY 09, total ATM cards in circulation were 0.881 million as against 0.789 million cards reported during last year, showing an increase of 12 percent.

Smart Cards Smart cards are chip based cards with enhanced memory and security features. Out of 8.9 million cards, 0.434 million or 5 percent were chip based cards. During FY 09, Debit card however, the total number of chip based cards 71.5% increased by 11 percent.

5.6 E-Banking (Cash Based - Online Banking & ATM) Figure 5.6: RTOB Transactions 5.6.1 Real Time Online Banking (RTOB) Transactions Amount (RHS) Transactions 480 15 During FY 09, the total number of RTOB transactions increased by 28.3 percent 384 12 compared to 19.9 percent increase recorded last year. In terms of value, the amount 288 9 increased by 1.7 percent compared to 32 192 6 percent last year (see Figure 5.6). Banks use billionrupees RTOB channel for conducting various millionnumber transactions which constitute 94 percent of 96 3 total e-Banking transactions value in the country. 0 0 FY05 FY06 FY07 FY08 FY09

66 Strengthening Payment Systems

5.6.2 Transactions through ATM Figure 5.7: ATM Transactions ATMs transactions during FY 09 registered Transactions Amount (RHS) an increase of 34 percent compared to 32 95 700 percent last year (see Figure 5.7). The amount of ATM transactions increased by 48 80 580 percent compared to 43 percent last year. Apart from cash withdrawal, ATMs are also 65 460 used for inter/intra bank funds transfer, cash deposits, payment of utility bills, etc. In

50 340 billionrupees Pakistan, on average, 62 transactions were millionnumber executed per day per ATM during the year. 35 220 The size of average transaction was Rs7, 336/.

Fund Transfers 20 100 During FY 09, funds transfer transactions FY05 FY 06 FY 07 FY 08 FY 09 made through ATMs were recorded at 1.8 million showing an increase of 139 percent compared to 163 percent last year. The value of such funds transfer was Rs86.96 billion, depicting an increase of 121 percent compared to 221 percent last year. Funds transfer through ATMs mostly included intra-bank transfer and small portion of interbank funds transfers.

Cash Deposits Quite a few banks are providing the facility of cash deposit through ATMs. The mechanism for cash deposit is either through single/bunch note acceptor or envelope based. During FY 09 only 21 thousand transactions of cash deposit through ATMs were reported, showing increase of 99 percent compared to 39 percent increase recorded last year. In terms of value, the amount increased from 119 million to 235 million for the fiscal year under review showing an increase of 97 percent compared to 30 percent last year.

Utility Bills Payment During FY 09, the utility bills payment transactions through ATMs reported 44,807 transactions, showing increase of 69 percent compared to 5 percent decrease last year. In value terms, the banks reported Rs80 million compared to 33 million recorded last year, showing 144 percent increase compared to 3 percent decrease last year.

5.7 Branchless Banking / E- Banking (Virtual /Plastic Money) 5.7.1 Point of Sale ( POS) Transactions The total number of POS machines/terminals Figure 5.8: POS Transactions has reached 49,715, placed across the country Transactions Amount (RHS) on different merchant locations compared to 20 95 43,903 machines recorded last year which shows an increase of 13 percent. The number 18 82 of POS transactions recorded 18.3 million showing an increase of 4.5 percent compared 16 69 to 12.2 percent increase recorded last year.

The amount of such transactions was Rs89.6 14 56 billionrupees billion registering an increase of 30 percent as millionnumber against 28.3 percent last year (See Figure 12 43 5.8). 10 30 5.7.2 Call Centre Banking FY05 FY 06 FY 07 FY 08 FY 09 Banking through Call Centre/Interactive

67 State Bank of Pakistan Annual Report 2008-2009

Voice Response (IVR) is also included in the electronic banking channels. The number of transactions through such channels reported by the banks for FY 09 were 0.93 million, involving an amount of Rs8.5 billion. This shows an increase of 13 percent in volume and 15 percent decrease in value compared to 28 percent increase in volume and 4 percent increase in value recorded last year.

5.7.3 Internet Banking Internet banking includes payments and electronic funds transfer (EFT). The funds transfer, however, is presently limited to intra bank account to account funds transfer except for a bank which offers interbank funds transfer facility through internet. Internet banking in Pakistan is growing slowly but at a steady pace. During FY09, banks reported 2.1 million transactions involving an amount of Rs68.4 billion. This shows an increase of 59 percent in numbers and 56 percent in amount compared to increase of 49 percent in value and 58 percent in amount recorded last year. Figure 5.9: Mobile Banking Transactions Transactions Amount (RHS) 5.7.4 Mobile Banking 75 16 There are few banks which offer transactions through mobile. These transactions include 60 13 payment through mobile (excluding utility bills payment), utility bills payment, A/C to 45 10 A/c funds transfer and third party A/c to A/C funds transfer. The number of transactions 30 6

were 71,240 for fiscal year 09 shows an

thousandnumber millionrupees increase of 46 percent in number of mobile 15 3 transactions. In terms of value, it reached Rs16 million registering an increase of 30 0 0 percent (see Figure 5.9). FY07 FY08 FY09

5.7.5 Internet Merchant Banking Transactions done through internet merchant account are part of Internet Merchant (IM) Banking. There were a total of 19 internet merchant accounts in FY09. Mostly service sector/NGOs are IM account holders. The number as well as amount of transactions done through internet merchant accounts is not consistent as transactions done are of seasonal nature and covers activities like air fares, college fee payments, etc. Fiscal year 09 registered a decrease of 20 percent in number against 16 percent increase last year. In terms of value, there was decrease of 42 percent as Figure 5.10: Internet Merchant Account Transactions against 57 percent increase last year (See Transactions Amount (RHS) Figure5.10). 70 620 5.8 Cross Border Transactions through E- 59 Banking 490 Cross border transactions include only those 48 transactions which were executed using either 360 an ATM / POS machine or Internet. ATM 37

transactions include cash withdrawal through thousandnumber 230 millionrupees ATMs; the inflow of such transactions has 26 increased by 7 percent compared to 0.4 percent increase last year whereas out flow 15 100 increased by 30 percent compared to 22 FY06 FY07 FY08 FY09 percent increase last year. The POS transactions include purchases of goods and services by the customers. The inflow of POS transactions increased by 48 percent compared to 12 percent increase last year while the outflow increased by 37 percent compared to 17 percent increase 68 Strengthening Payment Systems in the previous year. The internet transactions include purchase of goods and services using foreign/local internet merchants. The inflow of internet transactions increased by 26 percent compared to 17 percent increase last year where as the out flow increased by 19 percent compared to 47 percent increase last year. The foreign merchants include names like eBay, Amazon, Google, etc. Internet transactions also include payment of fee to foreign universities and online courses like ACCA, CIMA, etc.

Table 5.1: Comparison of Cross Border Payment Transactions Million rupees Inflow of money Outflow of money Means of transaction Net (Inward remittance) (Outward remittance) FY 08 FY 09 FY 08 FY 09 FY 08 FY 09 ATM 8,277 8,818 (1,293) (1,678) 6,983 7,139 POS 10,289 15,253 (7,462) (10,231) 2,827 5,023 INTERNET 200 252 (939) (1,116) (739) (864) Total 18,765 24,323 (9,694) (13,025) 9,072 11,298

The comparison of cross border transactions, showing inflow and outflow of money through e- banking, is given in Table 5.1, which indicates that the volume of cross border e-banking transactions (net inflow) increased by 25 percent compared to 5 percent decrease reported last year. Figure 5.11: Non-Financial Transactions (million number) Internet Mobile Call cen./IVR 5.9 Non-financial E-Banking Transactions ATM (RHS) Total (RHS) Channels of e-banking are also used for non- 9 48 financial transactions like balance inquiry, account statements, etc. The total number of 7 40 non-financial transactions reported during the fiscal year was 46.97 million against 35.04 6 33 million last year, as shown in Figure 5.11. 4 25 5.10 The Retail Payments through Paper Based Instruments 3 18 FY09 witnessed a growth of 0.3 percent in numbers compared with 3.1 percent increase in 1 10 the previous fiscal year (see Table 5.2). The FY06 FY07 FY08 FY09 value of transactions increased by 2.6 percent as against 20.9 percent last year. While looking at the composition of the paper based instruments, the Table 5.2: Paper Based Instruments Amount in trillion rupees, number in million FY09 FY08 Instruments Number Amount Number Amount Cash – cheques 156.0 71.8 157.5 71.0

Transfer - cheques 93.1 35.7 98.8 35.9 Clearing - cheques 60.7 17.9 58.3 20.4 Pay orders 11.2 5.0 8.1 4.9 Demand drafts 6.5 1.5 6.3 1.8 Tele. transfers 2.1 3.1 1.2 2.9 Others 4.8 2.4 4.9 4.0 TOTAL 334.4 137.4 335.3 141.0 cheques (such as cash, clearing, transfer) carry a major share, i.e., 94 percent in volume and 92

69 State Bank of Pakistan Annual Report 2008-2009 percent in value. Here the cash cheques have been the most widely used paper based instrument with 47 percent share in volume and 50 percent share in value. The respective percentage share of all

Figure 5.12A: Share in Paper Based Transaction-Volume Figure 5.12B: Share in Paper Based Transaction-Value

Tele. Demand transfers Tele. drafts 0.4% Demand transfers 1.9% drafts 2.1% Others 1.3% Others 1.5% Pay orders 2.8% 2.4% Pay orders 3.5%

Clearing cheques Clearing 17.4% cheques 14.5%

Cash cheques Transfer 47.0% Transfer Cash cheques cheques cheques 29.5% 25.5% 50.4% instruments is shown in Figure 5.12A-B.

5.11 Transition to E-Banking During the last six years the transition from manual (paper based) banking to e-banking has been gradual, yet consistent, in terms of both volume and value of transactions. The composition (in percentage) of electronic transaction increased to 32.3 percent of the total number of transactions compared to 27.1 percent recorded last year. In terms of value, the same was to be 9.25 percent compared to 9.18 percent last year (see Figure 5.13A-B).

Figure 5.13A: Composition of Volume of Retail Transactions Figure 5.13B:Composition of Value of Retail Transactions Electronic based Paper based Electronic based Paper based 100% 100%

80% 80%

60% 60%

40% 40%

20% 20%

0% 0% FY05 FY06 FY07 FY08 FY09 FY05 FY06 FY07 FY08 FY09

70 Management Strategy of SBP

6. Human Resource Developments 7. Information Technology Developments 6 Human Resource Developments

6.1 Overview Human Resources Department remained focused on nursing the concerns of SBP employees thus supporting the strategic objectives of the Bank. FY09 had hard economic challenges for the world, and Pakistan was no exception. Increase in oil and food prices in the international market resulted in high inflation in the country that had negative effects on the economy and the people. The impact on the ordinary man, the low and fixed income groups, was more severe. To extenuate its effects on our employees and to protect the interests of the Bank in such a scenario, HRD took immediate measures in areas that were highly vulnerable to such inflationary pressures.

6.2 HR Profile Table 6.1 SBP Human Resources Profile During the year under review, the working strength of SBP increased by 2.92 percent. Grade FY08 FY09 Grade-wise comparison of headcount for the SG-1 3 3 years 2007-2008 and 2008-2009 is depicted in OG-8 8 8 Table 6.1. OG-7 30 32 OG-6 40 40 Employees on entry-level positions were OG-5 104 96 inducted through State Bank Officers Training OG-4 171 171 Scheme (SBOTS), Statistical Officers OG-3 417 408 Training Program (SOTP) and Analyst OG-2 206 293 Training Program (ATP). Appointments on OG-1 191 150 different contractual positions (i.e., security Support Staff 175 174 officers, cricketers) were also made. Contractual Employees 59 70

Representation of women in the Bank’s Total 1404 1445 workforce has improved this year from 8 to 9 percent, of which 41 percent are at entry-level positions. Gender-wise count of each grade is graphically indicated in Figure 6.1.

Figure 6.1: State Bank of Pakistan Gender-wise Workforce (in number) Males Females (RHS) 1400 140

1120 112

840 84

560 56

280 28

0 0

8 7 6 5 4 3 2 1

------

SG1

OG OG OG OG OG OG OG OG

SS=Support staff, CS=Contract staff TOTAL

Employee Turnover rates in FY09 dropped significantly amid economic downturn. Only 24 resignations were received during the year. The resignation rate which was 4.48 percent during FY08 declined to 1.66 percent of total workforce in FY09. Table 6.2 represents the voluntary and

73 State Bank of Pakistan Annual Report 2008-2009 involuntary employee separations witnessed by the Bank in last three fiscal years whereas Table 6.2: Trend in Employees Separations a trend of last seven years has been Involuntary Voluntary Total graphically represented in Figure 6.2. turnover1 turnover2 FY07 30 87 117 The trend of employee turnover suggests a FY08 13 75 88 slight increase in involuntary turnover from FY09 20 32 52 last year due to increased retirements on superannuation and expiries of contract Figure 6.2: Employee Turnover during the period. Involuntary turnover Voluntary turnover Total 6.2.1 Reorganization of Departments and 120 Functions 96 To streamline the operations of certain clusters and departments, reorganization took 72 place where the functions and units were r either transferred or merged to ensure more 48 efficiency and efficacy, as enumerated below: numbe 24  The function of Economic Modeling was transferred from Monetary 0

Policy Department to Research

FY04 FY05 FY06 FY07 FY08 FY09 Department. FY03

 Development Finance Group was restructured. The function of Refinance Division was transferred from Microfinance Department (MFD) to SMED to constitute SME Finance Department. The Financial Inclusion Program Office (FIPO) was merged with the rest of MFD to constitute MFD.

 Some new functions were included in Business Support Service Department. Others enhanced and thinly spread services were consolidated.

 Library was transferred from Corporate Services Cluster to Monetary Policy & Research Cluster.

6.2.2 Change in Leadership The year 2008-09 saw some major changes in the leardership roles of the Bank. Syed Salim Raza took over the charge as Governor of the State Bank of Pakistan. Accordingly, the new leadership philosophy and values cascaded down the overall organizational hierarchy. The areas of responsibilities of key managerial positions were re-shuffled. The leadership role of Human Resources Department was also repositioned.

6.2.3 HR Policies Human Resources Department continued to review the policies that aim to provide benefit to our stakeholders and to ensure a more uplifted involvement of its human capital every time. Major policy reviews have been made in the areas of recruitment, employee orientation, Performance Measurement & Improvement System (PMIS), promotions and educational expenses of children of employees in clerical/ non-clerical categories.

1 Includes Retired, Contract expired, Dismissed and Expired Employees 2 Includes Resigned and Early Retired Employees 74 Human Resources Developments

Recruitment In the perspective of new management philosophy, recruitment activity was significantly reduced to ensure fruits of change management. Previously HRD was plugging the skill and HR gap through lateral entries. In current fiscal year, the management focused only on entry-level Table 6.3: Number of Recruitments recruitment through SBOTS, SOTP and ATP FY08 FY09 to provide stability and growth to the OG-2 workforce. Henceforth, HRD plans to cater Professional 22 11 the HR gap at the upper levels in hierarchy Analyst 17 17 through Career Development, which in turn Statistical officer 16 16 will provide a career ladder to our existing SBOTS 59 18 workforce. OG-3 21 3 OG-4 15 4 During the year 2008-09, total 94 graduates OG-5 08 0 and professionals were recruited. OG-6 06 1 Additionally, 20 professionals were hired in OG-7 02 2 various managerial and non-managerial Contractual 20 capacities on contractual basis to meet the Term assignment 2 short-term needs of the Bank in specialized Total 166 94 areas. A consolidated position of grade-wise recruitments being made in last two years is given in Table 6.3

Employee Orientation Employee Orientation Program aspires to help new inductees acclimate themselves to the new organization’s culture and working environment. They are provided with all the information about the organization that helps them integrate quickly into their new organization and their new roles; and consequently become more productive members of the teams.

Before 2008, HRD was only catering to the batch recruitment, i.e., SBOTS, SOTP and ATP and was focusing to give a one-day orientation to such batches. The new Orientation Policy focuses on an overall familiarization, socialization and awareness of the infrastructure, environment, systems and processes for all types of recruitment by giving a three-step orientation process: general orientation, departmental orientation and organizational orientation. All new employees recruited in 2008-2009 were comprehensively oriented, based on the new Orientation Policy.

 Orientation Kit. To substantiate the objective of complete familiarization, socialization and awareness of the infrastructure, environment, systems and processes, an orientation kit has been designed. It is a compilation of welcome note by the HRD head, organizational structure of the Bank and the department of posting, job description of the new role, location and map of departments in the main building, vision and core values, important telephone numbers and brochures on history, leadership and benefits of SBP. It is distributed to all new employees.

 SBP (flash animated) movie. To project the SBP image, its history, significance and evolution into a modern-day corporate emblem, an SBP flash animated movie was also developed. It is used both in orienting the new employees and also during the employer branding campaign in business schools and universities.

Performance Measurement and Improvement System (PMIS) The PMIS was introduced in 2002 as a paper-based system and since then the system has evolved into its current shape of paperless and fully online system enabling each employee to submit their planning, performance/achievements and appeal requests online. Continuous efforts are being made to

75 State Bank of Pakistan Annual Report 2008-2009 improve the Performance Measurement & Improvement System (PMIS) based on the Table 6.4: Bell Curve Ratings feedback of all stakeholders. in percent Category Bell Curve Distribution Accordingly, the Bell Curve category ratings A 15 were revised as provided in Table 6.4. As for B+ 25 Annual Merit Increase (AMI), the B 50 management maintained its stance to C 10 encourage pay for performance and increased the budget of AMI by 7 percent for OG-2 and Table 6.5: Promotions above and by 4 percent for OG-1 and below Promotion in FY08 FY09 employees. During the period, a number of improvements were implemented in the areas OG-2 1 39 concerning PMIS of retirees, PAs, OG-3 46 8 deputationists and those on leave OG-4 36 4 (Medical/Iddat/Maternity Leave, Study Leave, OG-5 19 and Long Leave with/without salary). It was OG-6 10 2 also decided that the mandated bell curve OG-7 6 1 quota allotted to each category will not be OG-8 1 1 adjusted against any other category. Total 119 55 Promotions at SBP To optimally utilize the potential of employees, the promotion policy has been re-oriented and linked to strategic objectives of the Bank by determining the eligibility of employees for promotion only on the basis of performance. During the year 2008-09, a total of 55 officers (See Table 6.5) were allowed structured promotion to the next higher grades.

Educational Expenses of Children of Employees in Clerical/ Non-Clerical categories Along with policies applicable to officers of the Bank, the policy for providing reimbursement to clerical and non-clerical employees against educational expenses of their children was also reviewed which was static since 1998. The rates were revised upward for allowing reimbursement of cost of books/ stationary and cost of uniform to the children of clerical and non-clerical employees (including drivers and Gestetner operators).

6.2.4 HRD Activities in FY09 In addition to the contributions made under policy areas, HRD unremittingly made efforts to further improve its scheduled activities and service standards. Two surveys were initiated this year, results of which will form the basis of future HRD developments and policies. The activities that were initiated during the last fiscal year were also continued to produce results throughout the year.

Employer Branding Campaign Employer Branding Campaign for the State Bank of Pakistan was initiated last year with the objective of introducing SBP as a brand name and to draw positive attention of fresh graduates in reputable institutions across the country with a two-prong strategy:  First to promote SBP as an Employer of Choice and to attract an educated and quality breed of talent from top business and economic schools across the country.  Second to create awareness about the role, functioning and significance of SBP in the economic standing of the country.

After visiting a number of business schools and universities in Lahore last year, a team comprising Director HRD, Director Research Department and other members from HRD visited the institutions of Rawalpindi, Islamabad and Azad Jammu & Kashmir this year. The team visited International 76 Human Resources Developments

Islamic University, National University of Science & Technology, Ripha University, Fatima Jinnah Women University, Pakistan Institute of Development Economics, National University of Modern Languages, and Azad Jammu & Kashmir University Muzaffarabad. The team members made the participants aware of the functioning of SBP as a central bank, issues related to monetary policy and career opportunities at the Bank.

Employee Engagement Survey Employee Engagement Survey was conducted by an external consultancy firm to understand the internal state of SBP employees that induces them to engage in particular behaviors, or as a set of factors that cause them to behave in certain ways. The survey focused on various aspects like employee morale, motivation, satisfaction, commitment, team building, involvement, participation, and to find out what SBP employees value, in terms of personal interests and incentives. The objective of the survey was to identify broadly the following areas:  Current level of employees’ Motivation (with factors of Engagement and Satisfaction) at SBP.  Various employee motivating factors.  Strengths and weaknesses of policies related to employees.

The survey findings, ranged 45 to 51 percent suggest that the primary areas of concern for employees are compensation, benefits, rewards, career development, succession planning and PMIS. The results also revealed a comparatively high level of satisfaction ratings, i.e., 68 to 70 percent against job responsibilities and employee involvement.

Reward Management To counter the deep effects of inflation, cost of living adjustment was given to all SBP employees w.e.f. July 1, 2008 @ 17 percent based on the monetized salary as on June 30, 2008. The overtime allowance was enhanced by 20 percent so as to adjust these rates in line with the inflationary pressures. In continuation of SBP endeavors to ease the strain on its pensioners, across-the-board 15 percent pension increase was also allowed. The facility of maximum 180 days leave encashment to the credit of deceased employees was also allowed. Compensation and Benefits survey is also underway, the outcome of which will form an important factor for reviewing the salary structure of SBP employees.

6.3 Training & Development Training and Development Department assess Table 6.6: Training Participants training needs of the SBP employees, and number liaison with reputable domestic and Training area FY 08 FY 09 international institutions for arrangements, to Central banking & function 772 620 address these. In-house training programs are specific also arranged, inviting expert resource Management 579 337 personnel in the emerging areas of central Total 1,351 957 banking, function specific (technical skills) and management (soft skills) for skill up gradation. In-house training supports SBP at lowering travel cost, minimizing displacement risk from work stations, enabling maximum participation, and a very good evaluation (feedback). In FY09, a total of 89 officers have received foreign training and 245 officers benefitted from prestigious local training institutions.

In FY09, T&DD arranged central banking trainings on important subjects like ‘Developing & Testing Internal Credit Risk Models for Basel II’ by M/s DC Gardner UK, ‘Anti Money Laundering & Anti Terrorist Financing’ and a foundation course for promoted officers at SBP LRC. In function specific areas five courses for ‘Audit Command Language’ were delivered by M/s. Komtas Turkey an ACL channel partner. MS. Excel courses were held at SBP LRC. SWIFT Treasury Operations Training was

77 State Bank of Pakistan Annual Report 2008-2009 also held in LRC. T&DD coordinated with NIBAF to deliver 21 courses for 260 participants, while at LRC T&DD arranged 19 courses receiving 363 participants. In FY09, a total of 957 participants have been trained in relevant and need based training areas. A summary position of the participation in training is given in Table 6.6. Under the SBP internship program, 205 interns from within the country and three interns from foreign institutions benefited from the program.

6.3.1 In-house and Domestic Training Table 6.7: Domestic & In-house Training In accordance with SBP convention, priority Participation was given to in-house training programs at in central Participation in banking & NIBAF, LRC, and other local reputable S. No. Institution management Programs function training training institutions. Table 6.7 has the details specific of institutions and courses attended. training 1 T&DD-LRC 263 100 19 6.3.2 Foreign Training 2 NIBAF 135 125 21 The Bank is placing special emphasis on 3 Others 133 112 211 professional training of officers to enable Total 531 337 251 them to acquire latest trends in central banking. During 2009 a total of 89 officers attended various training courses, workshops, seminars, meetings, attachment programs, etc. pertaining to core functions of SBP. The training received augmented the officers’ Table 6.8: Internship Programs specialized knowledge, and operational S. No. Particulars Duration Participants capacity on the subject. The programs were 1 Summer Internship Program 6 Weeks 107 held at prominent international financial institutions. 2 Winter Internship Program 6 Weeks 43 Business School Internship 3 6 Weeks 45 Program 6.3.3 Internship Programs 3 Months - 4 Others As one of its corporate and social 6 Weeks 10 responsibilities, State Bank of Pakistan, every Total 205 year, offers three internship programs to top students of reputable universities throughout Pakistan: Summer Internship Program, Winter Internship Program, and Business Schools Internship (for details see Table 6.8).

6.3.4 International Internship Program Table 6.9: International Internship Programs The objective of the program is to offer S. No. University Program internship to students from foreign 1 Boston College, USA Ph.D. Economics universities, providing them opportunity to do The London School of 2 MRES/Ph.D. empirical research on economic and financial Economics Wharton University of 3 BFC Finance Management matters, with special reference to Pakistan Pennsylvania using their contemporary knowledge on the subject. While selecting the topics for Table 6.10: Category & Participation wise Attachment Programs research, the interns’ own preferences and S. No. Category Programs Participants competencies are considered. The duration of 1 Government officials 3 157 the program Is flexible and depends upon the capabilities 2 Students 6 1 of interns to complete their projects. Three Total 9 158 students joined the program during 2009 (See Table 6.9).

6.3.5 Visit Programs Visit programs were arranged for delegates who were briefed about the Bank’s operations and they practically observed functioning of various departments (for details see Table 6.10). 78 Human Resources Developments

6.4 Business Support Services Department’s Achievements A proactive and forward looking stance of central banking has helped service support to completely map this onward march, and position itself into an optimum strategic underpinning. Business Support Services Department is a warp and weft of services woven into a monolithic fabric (provides counterpart funding in kind through integrative coordination of its Divisions).

The Department evolved into a one-stop service provider as a result of restructuring of State Bank of Pakistan; undertaken in September 2006 with a view to consolidate the thinly spread services into one platform. This consolidated service structure is fully aligned with similar services structures in many central banks.

BSSD has completed over two years of its operations. As a result of the confidence reposed by Management in the efficiency and effectiveness of this Department, more functions, i.e., Employees Fund Management, BCP Division, asset operational management with its related activities and coordination, have been assigned.

Business Support Services Department has been able to render major contributions to achieve the strategic objectives of the Bank. The Procurement Division functioned effectively as centralized procurement hub for all categories of assets for SBP and SBP-BSC. It coordinated procurement as per Public Procurement Rules 2004 adopted by SBP. It is continually improving its existing operations and has managed to earn approval of reputable international development institutes, e.g., World Bank DFID, etc. regarding efficacy of its procurement structure.

The division helped establishing the critically required Disaster Recovery Site and Network Operating Centre. This is in addition to the large quantum of procurements of office equipment, IT, furniture, and consulting services. Procurement Division achieved two strategic milestones by reengineering the ‘works’ area and introducing novel approaches in IT procurement. Another key achievement has been finalization of an ambitious three years training program whereby high number of nationally and internationally renowned trainers has been hired. Engagement of internationally acclaimed resource on Flow of Funds is yet another key achievement.

To ensure business continuity during crisis, disaster or emergency situations, it has made adequate facilities available and accessible to house critical staff of any department required to continue SBP activities / business. While accommodation at SBP day care can be availed during an emergent situation, an exclusive credit facility contract has been signed with Beach Luxury Hotel, through which five rooms shall be available to SBP staff on short notice. A full-dress BCP rehearsal was undertaken on May 11, 2009 whereby over 70 personnel of SBP and SBP-BSC stayed on SBP campus. Assigning of BCP functions to BSSD can be aptly proffered as an acknowledgement of performance.

The Employees Benefits Division, through its various units, facilitated all internal and external stakeholders making swift and prompt payments, and maintaining accounts pertaining to employees’ benefits. Development of policy for payment of Rest and Recreation allowance to the family of a deceased employee is one of the recent achievements of this Division. Through this policy recreation allowance (half monetized salary) not availed by a deceased employee for the year preceding his death has been made admissible to his family.

Under NCBS two new retirement benefit schemes were introduced by the Bank effective from June 1, 2007, e.g., ECPF and EGF. BSSD has been assigned with the responsibility to act as Secretariat for both the funds. It may be underscored that establishment and operating of these funds was fraught

79 State Bank of Pakistan Annual Report 2008-2009 with legacy and allied issues, legal and accounting issues, which have been largely surmounted and both of these funds stand operational.

Self addressed envelopes have been dispatched to all pensioners/ beneficiaries of SBP, to enable them to reaffirm their earlier nominations or send fresh nominations, if any for collections of pensions / funds, etc. This has enabled BSSD to bring their records up to date for authenticated payments.

Leasing, disposal, and insurance of SBP properties, together with development and implementation of relevant guidelines, in line with the decision of building subcommittee of SBP Central Board, remained the major pursuits of Property Management Division. The division also undertook re- evaluation of SBP property, examined leases and rent agreements, and identified impact of sale/rent of SBP property. Ensuring optimal utilization of the staff colony in Islamabad, this Division has recently developed allotment rules, specific to the staff colony for the residents of Islamabad. A key breakthrough this year has been leasing of Sialkot property, an issue that dodged resolution for over 20 years, and receipt of licensing fee from Supreme Court of Pakistan for first time since its leasing.

The state-of-the- art Learning Resource Centre (LRC) is another major division of BSSD. The purpose-built, tastefully decorated, and fully equipped centre support teaching, learning, and information needs of the Bank’s community by providing an appropriate range of good quality, well- managed services and resources, supported by a well trained, pro-active and responsive team. While several spacious conference rooms equipped with sophisticated audio / visual presentation systems ensured a convenient, interactive, and enjoyable learning process, the availability of video conferencing facility added a new dimension to seminars, trainings, and presentations. With the availability of this facility, a large number of organizational requirements for interactive training sessions had been fulfilled.

LRC continued to be the knowledge hub of training and development activities at the SBP. Its facilities are widely used by different departments of the State Bank, and its subsidiary SBP-BSC for their capacity building programs. LRC remained a much sought-after rendezvous for holding world class conferences, and a place to meet and learn.

80 7 Information Technology Developments

7.1 Overview Core IT Systems, implemented in the State Bank of Pakistan have matured into a sophisticated platform now, adding high value to SBP operations. This platform has been made more robust incorporating low risk features by the introduction of backups and redundancies in the areas of Power & environment, network connectivity, and Disaster Recovery Setup. IT Security has been tightened and operational risks mitigated. There have also been substantive additions of new functionalities in the main applications during the last year. We are now in the process of upgrading our main systems in a phased manner to maintain high availability and service levels, while meeting increasing demand. State Bank is also now well placed to leverage its IT platform for strategic advances in automation. Specific developments during 2008-09 are given below:

7.2 Globus Banking and Currency Solutions This was the fourth successive year of annual closing of accounts at SBP and BSC through the Globus Banking application. This not only shows reliance of SBP business processes on IT Systems, but also reflects the trust of business users on automated systems.

Globus functionality was enhanced to incorporate the ‘Sukkuk’ bond, launched by SBP, and its auctions, subsequent secondary market trading and coupon payments. Maturity operations are also carried out through Globus.

Foreign Exchange back office was rolled-out on Globus, and all types of foreign exchange transactions are now captured through Globus. Their Market to Market revaluation and final maturity is now taken care of by the system without any human intervention. This functionality has increased the efficiency of the Treasury Department’s front and back offices in managing their Foreign Exchange reserves, and will now provide a reliable and timely MIS through Globus.

Globus team also achieved a target to roll out the currency issue system to 16 BSC offices after incorporation of new aluminum coins, Benazir Bhutto commemorative coin of Rs10 in currency issue system within target deadlines. This was fourth enhancement in currency issue system since its live operations started in year 2005.

The Globus team has also added new functionalities in Globus system: Reverse Repo module for DMMD and Finance Department, MIS for Gold reserves, interface with ERP Accounts Payable module for direct payments to vendors through their accounts maintained in commercial banks, and MIS for management of Assets and Liabilities of Issue Department. These functionalities have resulted in a reliable and accurate MIS through Globus. In addition to these major rollouts and functionalities, various new reports and customization were done during 2008-09 to keep enhancing the utility of Globus System for users of the system throughout the country.

7.3 Oracle ERP ISTD completed several projects as per the business requirements during fiscal year 09. One of the strategic objectives was the ‘Direct Payment to Supplier’s Bank Account’. Direct payments from BSC head office to vendors or employees through bank accounts are now operational.

Credit Extension to Public Sector Enterprises was upgraded to meet the new BPRD policy changes. Further integration to Off-site Supervision Ratios System and the Institutional Risk Assessment Framework system successfully completed.

81 State Bank of Pakistan Annual Report 2008-2009

Another automation objective Foreign Exchange Returns Litigation System was completed for FEOD. This system has full-fledged complaint tracking and integrating with export overdue cases database. To Eliminate Paisas from Payments has been successfully completed and implemented. All payments are now automatically rounded including ‘Vendor Payments’, ‘Normal WHT Payments’ and ‘Withholding on GST Payments’. In addition ISTD enabled Oracle ERP based end-to-end procurement process incorporating new Expenditure Regulations. Library Management Information System has been optimized and improved with new features, reports and forms.

7.4 Data Warehouse ISTD took-up high impact initiatives to upgrade the capability of the central bank to collect statistical and regulatory compliance data from financial institutions, and other agencies. At the same time, the capability to disseminate the collected data to internal SBP users was upgraded as well. Development of the two systems has been completed, and the systems are ready for deployment. These upgrades will increase the capacity to collect and disseminate data in more effective ways for better business analysis and decision making.

ISTD also completed several projects including development of reporting systems to capture rate of returns on loans & deposits, loans to Textile Sector, Balance Sheet analysis of financial institutions for Statistics & DW Department, implementation of Reporting Chart of Account (RCOA), weekly data acquisition at month-end, RCOA quarterly reporting for Micro Finance Institutions, and RCOA integration with BASEL-II supportive systems such as IRAF for Off-site Supervision & Enforcement Department. Annexure A-7 (Classification of Deposits by Borrowers) was also upgraded for Statistics & DWH Department whereas a new reporting system to capture district-wise SME financing for SMEF Department was also completed. Utilization of ERP General Ledger data to generate Earning Analysis reports has been implemented for the Finance Department. This system allows the users the ability to drill-down to individual ERP-GL accounts over various dimensions including SBP-BSC office, accounts and time.

7.5 Web SBP external website continues to serve as a source of information for the public while the internal website (Electronic Notice Board) is serving SBP and BSC employees. Data Center monitoring system is based on SMS alerts. It provides monitoring facility with SMS alerts to concerned ISTD teams & sends SMS alerts for UPS failure, Server Room Temperature Devices, ICMP Servers, and call logging alerts. It also monitors SBP website, Database Servers and other SBP intranet websites on 24/7 basis. Another project completed by ISTD is the capability to assess performance of IT Help Desks. In this regard, a web based Application has been developed that would gather information from the existing helpdesks of ERP, data warehouse, and customer support teams, and display the analytical reports based on them. It will also show the current status of different ISTD cases, departmental budget tracking, and departmental projects progress.

7.6 Infrastructure On the data communication side, ISTD completed the SWIFT hardware upgrade and Application Migration projects. To strengthen the uninterrupted electrical supply to entire IT setup UPS cluster and alternate power backbone project has been completed in which two clusters at ground floor and 6th floor have been established and now are in operations. Intranet Bandwidths between all SBP BSC offices to main data center are further being upgraded to meet capacity demand. Implementation of network operation center project that will provide a central Management and Monitoring platform for the entire IT setup has started. Similarly private VSAT based network project for all countrywide SBP offices has been initiated. Several LAN requirements coming from different SBP departments and BSC head office have also been fulfilled. Video conferencing setup is being extensively used by SBP officials to conduct international meetings and conferences thus saving a considerable cost and time. Wireless LAN pilot project has been implemented in ISTD 6th floor. 82 Information Technology Developments

Focusing on disaster recovery and high availability of IT services, Windows System Administration team completed various projects including e-mail high availability in Karachi. The e-mail setup in SBP has been upgraded, reducing service recovery from more than 8 hours to less than 15 minutes along with 3 to 4 times increase in email storage quota per user. The upgrade has also provided the technical foundation to setup e-mail at DR site. DR Setup has been completed for Windows Systems Area on Blade Servers with centralized storage and acquiring Replication and Remote Backup technologies. This setup covers DR for all critical user services like Active Directory, e-mail; file sharing, internet and essential infrastructure components of Windows systems which include DNS, antivirus and data backup. Internet proxy servers clustering was completed in SBP with the features of load balancing, and auto switching on any available server.

Digital certificates have been acquired for e-mail security enhancement to provide enhancement in confidentiality and authenticity of e-mails thereby increasing security of e-mail services. At present the scope has been kept to cover critical officials of the bank and future enhancement will be reviewed after a pilot run for one year. Windows Operating System rebuild on Desktop and Laptop computers from a centralized system has been provided to IT Support Team that has reduced the PC rebuild time to less than 30 minutes with enforcement of standard configurations that is compliant with the windows system policies in place.

7.7 Disaster Recovery Setup Disaster Recovery site has been established at SBP BSC Office. All the hardware relating to DR have been successfully installed and implemented. Replication of data for all critical applications has been started at DR site. Connectivity between the DR site and other remote offices of SBP BSC has established and tested. In this regard, ISTD is in a position to shift its operation to DR site in the event of any disaster scenario.

7.8 IT Security ISTD realized the IT security challenges prevailing in the digital age and took various initiatives. Keeping in view the importance of critical corporate data on mobile computers, the Proof of Concept for Laptop Encryption has been completed. Once implemented, as planned in 2009-10, this project will ensure security of SBP’s corporate data residing in laptops computers in case of loss or theft. ISTD was also able to develop an automated vulnerability management system for automated scanning and reporting of weaknesses, and vulnerabilities in the systems and devices, and their timely fixing. The intrusion detection and prevention systems was updated and re-commissioned to strengthen defense against intruders while several policies were developed and implemented to ensure a control environment for SBP information assets.

7.9 Trainings ISTD ensured technical development of its officers through local as well as foreign trainings in various technological areas. Focus was kept on trainings with direct relevance to systems being upgraded and implemented to leverage optimized use of technology in areas including Disaster Recovery Setup, Video Conferencing, IT Security, automated monitoring and control and Infrastructure Management.

83 SBP Subsidiaries

8. State Bank of Pakistan Banking Services Corporation (Bank) 9. National Institute of Banking & Finance (NIBAF)

8 SBP Banking Services Corporation (SBP BSC)

8.1 Overview During FY09, the BSC continued to pursue the change management plans to transform the organization into a modern professional corporation to deliver its mandate more effectively. The four pronged strategy namely; a) promoting and inculcating performance and merit based culture by adopting appropriate HR policies; b) restructuring and reorganizing business processes to eliminate redundancies and promote cross functional synergies; c) improving IT systems utilization and mechanization of routine operations; and d) providing congenial working and physical environment, has started bearing fruits. The restructuring and realignment of functions has allowed BSC to achieve cross functional synergies by capitalizing on core competency in each function, provided focus in improving service standards, and act efficiently as an operational arm of State Bank of Pakistan. Similarly creation of new departments has helped develop close network with key stakeholders; enhance the outreach and awareness of SBP and BSC policies and programs, improve reputational capital of SBP and BSC by proactively taking remedial measures in the delivery of services in existing and new areas of operations like currency management, development finance, banking services, etc.

8.2 Currency Management The BSC, during the year, continued its efforts to ensure availability of adequate amount of good quality currency notes and coins across the country. A number of initiatives were taken during the year to improve efficiency in handling of receipt, supply and exchange of banknotes and coins. A Master Circular was issued covering revised and updated instructions on; a) note exchange facility; b) annual verification of currency notes; c) destruction of soiled notes under normal/ special procedure; d) inspection of NBP chests/ sub-chests; and e) operations of verification branch, examination halls and special procedure examination hall. A Task Force comprising officials from Police, FIA, NAB, SBP and SBP BSC was also constituted during the year to check counterfeiting of currency notes and develop mechanism for expeditious settlement of large number of cases pending in different courts. The process of issuance of new series of bank notes of eight denominations (Rs5/-, Rs10/-, Rs20/, Rs50/- , Rs100/-, Rs500/-, Rs1000/- and Rs5000/-), started in 2005, was completed during the year with the re-launching of Rs5/- new note. A commemorative coin of Rs10 bearing portrait of Mohtarma Benazir Bhutto Shaheed was also issued on December 26, 20081, on the eve of first death anniversary of Mohtarma; by June30, 2009 a total of 380,034 coins were purchased by general public from all offices of BSC.

The Currency Management Department also arrange training and capacity building programs for banks, business community, law enforcement agencies, general public, and BSC officials to create awareness about security features of Currency Notes and thus improve the system capacity to check counterfeiting of currency notes. A number of such trainings/ programs were arranged during the year for BSC officials; besides 229 special outreach programs arranged for banks, business community and general public. Besides above, the following initiatives were also undertaken during the year to improve the overall currency management function:

Fresh Currency Notes Issuance The BSC makes special arrangements in collaboration with commercial banks for issuance of fresh notes especially of smaller denominations to general public during the month of Ramadan and on the eve of Eid-Ul-Azha when the demand for fresh notes increases manifolds. Under the arrangement general public is allowed to take fresh notes of Rs5 and Rs10 (one packet each) submitting a copy of

1 In pursuance of decision of the government of Pakistan. 87 State Bank of Pakistan Annual Report 2008-2009

CNIC, from BSC counters as well as commercial banks’ branches. As a result, over three hundred thousand people obtained fresh notes (one packet each of Rs5 and Rs10) from BSC counters in 16 field offices during the month of Ramadan 20082. Whereas during FY09, around 1,656 million pieces of fresh banknotes of various denominations valuing Rs306 billion were issued from the BSC counters across Pakistan to different stakeholders, mainly banks. Table 8.1 gives denomination wise breakup of fresh currency notes issued during FY09 and FY08.

Likewise, a total of 228.5 million coins of Rs1, Rs2 and Rs5 valuing Rs523.3 million were issued during FY 09 as against 367 million coins valuing Rs798.8 million issued during FY 08. The reduction is attributable to re-launching of Rs5/- bank note in July 2008 which dented the demand for Rs5 coin by almost 30 percent. At end -June 2009, coins, including decimal coins valuing Rs5,657 million were in circulation as against Rs5,432 million on end June 2008.

Table 8.1: Issuance of Fresh Banknotes during FY09 and FY08 million rupees Denomination Year Total 5 10 20 50 100 500 1000 5000 FY09 454 437 160 170 194 98 124 19 1,656 Value 2,270 4,370 3,200 8,500 19,400 49,000 124,000 95,000 305,740 FY08 - 640 159 13 310 121 143 20 1,406 Value - 6400 3,180 650 31,000 60,500 143,000 100,000 344,730

Mechanization of Currency Operations The Clean Note Policy (CNP) being propagated by BSC since last 4-5 years requires regular injection of fresh notes in and lifting of soiled notes from the market. This is however not possible without optimum use of technology and mechanization of currency operations. Encouragingly ever since the introduction of CNP, the BSC has largely been able to promote mechanization of currency operations particularly in the banks of domestic origin; the branches of international banks operating in Pakistan were by and large already having mechanized currency operations. Efforts have also been made to mechanize the currency operations within BSC by introducing modern technology based solutions for currency counting, banding, shredding, etc. The process of destruction of cancelled notes has also been mechanized at the field offices, where verification process exists, besides strengthening and reinforcing the internal controls.

Monitoring NBP Chest Branches To provide and manage general banking business of federal, provincial and local governments, 226 branches of National Bank of Pakistan at different places across the country have been designated as chests/ sub-chests branches. The BSC field offices supply fresh/ re-issuable banknotes to the chests/ sub-chest on periodic basis and withdraw soiled and defective notes for destruction. The activities of the chests/ sub-chests are monitored on daily basis through Issue Circles of BSC established at all provincial head quarters as per agreement between SBP and NBP. During the year under review, the BSC field offices carried out on-site examination of 38 chests/ sub-chests in the area of their jurisdiction, and punitive actions were taken where irregularities were found.

CNP Implementation To check implementation of CNP by commercial banks in its true spirit, the BSC has been monitoring issuance of fresh/ good quality currency notes to general public/ account holders. The banks monitoring is intensified during the month of Ramadan. During FY09 the cash monitoring teams of the field offices conducted on-site examination of 5,670 branches of commercial banks as compared to 3,620 branches in the preceding year, and imposed/ recovered penalties amounting to

2 And many time more from commercial banks. 88 SBP Banking Services Corporation

Rs3,885,000/- on account of violation of various instructions as compared to fine of Rs2,395,500/- recovered during the preceding year.

Prize Bond and NSS Schemes Under an agency arrangement with Central Directorate of National Savings (CDNS), the government of Pakistan, BSC also manages sale, purchase and draws etc of prize bonds on behalf of CDNS. During the year under review, the aggregate sale and encashment of National Prize Bonds was Rs105.891 billion and Rs91.241 billion as compared to Rs106.699 billion and Rs98.422 billion in FY08. The total value of the prize bonds by investors as on June 30, 2009 was Rs196.585 billion as compared to Rs181.935 billion as on June 30, 2008 showing an increase of 8 percent. During FY 09, the field offices of BSC settled 979,413 cases of prize money and paid prizes of Rs14.016 billion as compared to 830,146 cases involving prize money of Rs10.820 billion processed during FY08.

Besides National Prize Bonds, the BSC is also engaged in sale, encashment and profit payment of other national savings instruments namely SSCs and DSCs. A total of 135,000 cases relating to sale, encashment and profit payment of Special Savings Certificates and Defense Savings Certificates were handled by BSC field offices during FY09. Further, following headways were also achieved in management of National Saving Schemes during the year:  To get maximum utility of automation and business processing, daily manual reporting by offices to the respective Public Debt Office (PDO) at SBP BSC Karachi and Lahore has since been replaced with the system based access to the respective PDOs.

 Sixteen new hand operated draw machines have been manufactured from Heavy Mechanical Complex Taxila, a state owned enterprise and supplied to the respective offices to ensure smooth and uninterrupted continuity of draw process.

 To provide improved and timely Table 8.2: Time Line for Prize Money Claims same day (30th draw services to the general public, time Prize money up to Rs18,500/- line for settlement of prize money onwards) claims has been revised as given in Prize money up to Rs185,000/- 10 working days Table 8.2. Prize money up to Rs500,000/- 15 working days Prize money of above Rs500,000/- 20 working days 8.3 Banking Services to the Government As a banker to the government, the BSC is extending banking services through its 16 field offices to the federal, provincial and local governments across the country. It includes revenue collection and expenditure payments on behalf of government departments. Further, agency agreement has also been signed (by Finance Department SBP) with NBP to work as agent to facilitate government departments in collection of different levies, payment of expenditure and obtaining other banking facilities. The consolidation and reporting of federal, provincial and district governments including Zakat accounts are one of the core function of BSC Accounts Department. The data pertaining to Government transactions carried in various Accounts is reported to Accountant General of provinces, Accountant General Pakistan Revenue, Pakistan Railways and other departments on daily/ periodic basis. The daily position of Government balances are also provided to the Finance Department SBP for onward submission to other stakeholders.

During FY 09, the BSC offices handled 2.75 million transactions pertaining to government receipts and 3.28 million transactions pertaining to government payments as compared to 3.19 million transactions in the same period last year. Maintenance of Zakat account, its collection, disbursement, consolidation, and reporting to concerned quarters are also the responsibilities of BSC. During the year total Zakat collection was Rs5.54 billion as compared to Rs4.9 billion collected last year.

89 State Bank of Pakistan Annual Report 2008-2009

The tax revenue collected by SBP BSC offices and the network of NBP branches on behalf of the government is credited to the relevant accounts and reported on a daily basis to FBR. During the year, as part of the Collection Automation Project (CAP), this information was also communicated to FBR electronically on daily basis.

8.4 Payment System The BSC continued to assist SBP in maintaining a sound and efficient payment and settlement system through a network of its field offices. BSC offices oversee the automated processing of financial instruments carried out by the National Institutional Facilitation Technologies (NIFT) in their areas. NIFT has opened centers at 15 cities where BSC offices are located and five other major cities. Besides these cities NIFT is dealing with 164 satellite cities and providing services to 1,043 branches of commercial banks located in these satellite cities. More than 5,571 bank branches of 40 banks in 185 cities avail NIFT clearing services across the country. Besides NIFT, National Bank of Pakistan is also providing clearing and settlement services at all those places where neither BSC offices are located nor covered by NIFT. The clearing service provided by NIFT includes Overnight clearing, same day - high value clearing, intercity clearing and local US dollar clearing. After discontinuation of manual clearing, the instruments are required to be standardized. For this purpose NIFT has established image based clearing systems by introducing high speed MICR Reader/ Sorter equipment from NCR, for efficient electronic clearing. In first phase all instruments relating to commercial banks and other financial institutions are being standardized and made machine readable. Whereas in the second phase government departments would be pursued to standardize their payment instruments, the process has already started. During FY09 the total number of instruments cleared through NIFT was 73,604,570. The BSC offices are also playing a proactive role in strengthening of Real Time Gross Settlement (RTGS) system by deputing a number of experienced officers with the project team to provide logistic support and relevant information besides providing inter-bank settlement facilities to financial institutions through their current accounts maintained at each office.

8.5 Foreign Exchange Operations and Adjudication The Foreign Exchange Operations Department (FEOD) of BSC, during the year, continued to facilitate and serve its stakeholders in managing foreign exchange operations. It remained actively engaged in routing commercial and private remittances, project payments, travel permits, etc. It also handled payment of various subsidies to different sectors like textile/ PTA/ Fertilizer/ Motorcycle industry.

FY09 remained a turbulent period with regard to R&D support for textile and other sectors mainly due to budgetary sanction and constraints at government level. A series of meetings were held at Ministry of Finance to discuss the issues like validity of SROs, time barred cases and quantum of eligible cases. The issue finally resolved in February, 2009 when the Federal Cabinet decided to release Rs4 billion to pay the R&D claims of textile exporters. Since February 2009 to June 2009, about 42,642 R & D claims were received from banks in different BSC offices, out of which 40,138 were found eligible and a disbursement of Rs2.3 billion was made.

In March, 2008 the exporters of motorcycle industry were also allowed to avail R&D support at the rate of US$ 50 (in PKR) for every completely build up unit of motorcycle exported. Despite late release of Budget, i.e., in May 2009, the FEOD disbursed Rs24 million against 43 out of 44 cases during the year under review.

During FY09, the disbursement of compensatory support @ 7.5 percent to Pure Terephthalic Acid (PTA) users also remained a vital area for FEOD. The disbursement of freight subsidy on import of fertilizer was another regular business at FEOD during FY09. A total amount of Rs7,622.6 million was disbursed to the importers as freight subsidy on import of fertilizer during the year under review. Office-wise breakup of the payments made during the year under review is given in Table 8.3. 90 SBP Banking Services Corporation

During FY09, Foreign Exchange Adjudication Department (FEAD) continued its drive for realization of the overdue export proceeds. The department received 694 cases in respect of delinquent exporters on a country wide basis during the year as compared to 905 cases received in the preceding year. It disposed of 804 cases including those of previous years. Despite numerous difficulties and economic slowdown, the department managed realization of sizeable overdue export proceeds equivalent to US$ 12.22 million as compared to US$ 12.32 million in the preceding year, showing a negligible decrease of US$ 0.1 million or 0.8 percent. The details of amount realized by the Adjudicating Courts at Karachi, Lahore, Sialkot, Faisalabad and Multan, are given in Table 8.4.

The department also arranged one week training program at Federal Judicial Academy, Table 8.3: Disbursement of Freight Subsidy on Import of Fertilizer Islamabad for the officials engaged in foreign weight in million Kg, amount in million rupees exchange operations and adjudication to Office Weight Amount familiarize them with the overall adjudication Karachi 293.3 6,482.5 Lahore 25.9 1,140.2 process. Further, to strengthen the system of Total 319.2 7,622.7 inflow of complaints, the Office of Administrative Office (Courts) has been Table 8.4: Amount Realized by the Adjudication Courts established initially at HOK level. The office repatriation in million US dollar, change in percent would ensure that all the pre-adjudication Adjudication courts Amount realized formalities have been fulfilled by the Location Number FY08 FY09 Change complainant and thus would help in timely Karachi 3 5.5 5.4 -1.6 disposal of the cases. Lahore 2 3.5 1.6 -53.2

8.6 Development Finance Support Services Faisalabad 1 2.4 3.5 49.0 The establishment of Development Finance Multan 1 0.4 0.2 -43.6 Support Department (DFSD) and its 13 field Sialkot 2 0.6 1.5 129.6 units (DFSUs) are aimed at providing field Total 9 12.3 12.2 -0.8 presence to DFG of SBP for dissemination and implementation of its policies and initiatives at grassroots level and collection of feedback on the policies and initiatives.

During FY09, the DFSD continued its efforts to support DFG-SBP in dissemination and implementation of its policies. Major initiatives taken during the year included; holding Focus Groups meetings, arranging awareness programs, organizing agriculture/SME/Microfinance Melas in different regions, conducting Agricultural and SME surveys, preparation of Development Finance Review and arranging capacity building programs for DFSUs’ staff and commercial bankers.

The Focus Group for Agri-finance, SME finance and Micro finance established in 13 field offices of BSC, meet on quarterly basis to discuss the issues faced by their respective sector and evolve local level operational strategies for addressing the issues and increasing the outreach of financial services in their respective sectors/regions. The groups have provided us a platform for dissemination of SBP and financial sector policies and receive feedback. They have also been instrumental in harnessing greater ownership of the policy initiatives being taken by SBP for broadening and deepening of the financial system. A total of 114 Focus Group meetings including 38 on Agri-finance, 39 on SME and 37 on Microfinance were held during FY09.

Further, to create mass awareness of SBP policies and banks’ products and services, 14 Agri, SME & MF Melas (Fairs) were arranged during the year in different regions across the country. The Melas being arranged by DFSUs in collaboration with banks have also been instrumental in promoting partnerships between stakeholders for taping synergies in their initiatives for the sector. Moreover,

91 State Bank of Pakistan Annual Report 2008-2009 eight workshops and seminars were organized in collaboration with local chambers and farmers and traders’ associations to discuss the issues faced by them. The recommendations of these seminars were forwarded to respective SBP Departments as feedback for policy review, etc. A number of training programs on Development Finance were arranged for the DFSUs and credit officers of Commercial banks during the year to enhance their understanding of the Agri/SME and Microfinance sectors.

The DFSD also continued its efforts to improve coordination with provincial agricultural, livestock and revenue departments with the objective of sharing and disseminating provincial governments’ initiatives for farming communities. In this regard, the second Interprovincial Agricultural Workshop was held in May 2009 that enabled the banks and the relevant government departments to better appreciate their stance and initiatives for the agriculture sector. The workshop concluded with the resolve to promote partnerships between banks and the agricultural/livestock departments for achieving sustained rise in flow of financial services to the agriculture and livestock sectors. The Punjab Livestock Department offered banks to use its network of about 3600 outlets across the province for extending financial services to livestock managers.

Lack of understanding of SME/Agri sectors’ dynamics among banks has also been a major reason for banks’ reluctance to enter the SME/agri market. To address the issue, the DFSD has initiated research studies and surveys to improve stakeholders’, particularly banks’ understanding of these sectors. During the year the agriculture and SME surveys of Sukkur and Gujranwala districts were prepared and disseminated to the stakeholders. The survey reports have also been placed on SBP website for wider dissemination. The survey of cotton belt in Southern Punjab was also initiated during the year to explore the rural markets and economy of the area. A comprehensive questionnaire was developed for the survey through extensive consultation with all key stakeholders including banks, agricultural departments, central cotton committee, the educational and research institutes, etc. Similarly the sample selection and survey teams’ formation and the information collection methodology were carefully designed to ensure quality of data collection. The field work for the survey has already been completed and the survey report is likely to be finalized during second quarter of FY10. These surveys are part of BSC’s efforts to explore the agricultural/ SME markets and thus facilitate the stakeholders, particularly the banks to have better understanding of the business dynamics of these markets. Such initiatives would enable the banks to comfortably enter the emerging DF markets and design market responsive products and services.

The preparation of industrial Cluster Studies is another initiative of the DF Units and so far nine industrial clusters have been identified, which would be studied during the current year. Moreover , as part of developing linkages and enhancing coordination with all key stakeholders, the DFSUs at most of the field offices completed development profiles of Commercial banks and database of key stakeholders in their respective regions during the reporting year.

To supplement the growth of development finance, adequate supply of trained and expert human resource is essential. The DFSD thus has given special emphasis on establishing linkages with educational institutions to orient the academia about the emerging DF market in the country. Some of the DF Field Units and CMs addressed seminars and workshops organized by educational institutions in their regions and also invited relevant faculty members in their meetings to update them about latest development in the sector. A total of 34 on-site visits/ meetings to/ with educational and vocational institutes were made by the DFSUs during the year.

The DFSD also compiled a comprehensive Development Finance Review (DFR) during the year that took stock of SBP and other financial sector participants’ initiatives for increasing the depth and breadth of financial system and their impact on the outreach levels. The DFR discussed the trends in

92 SBP Banking Services Corporation outreach levels, their regional dispersion and reasons for inter-provincial and intra-provincial disparities in the flow of financial services.

8.7 Internal Audit and Controls Internal audit and control is a critically important function for large and operations intensive organizations like BSC. It involves an objective and independent review of business processes, the control systems in place, and the compliance environment in various organs and departments of BSC. The BSC’s Internal Audit Department went through major restructuring exercise during the year. The Internal Audit Units (IAUs) operative at the BSC offices have been abolished as they had lost their effectiveness due to overlapping/ duplication of work between IMUs and IAUs, automation of business processes and administrative problems in supervision of IAUs at field offices. The IAUs have been replaced by two Audit Hubs at Lahore and Karachi. The Audit Hubs to be headed by an officer of not less than joint director level will functionally and administratively report to Director IAD of BSC. Each of the two Hubs has been allocated the departments of HOK and field offices as given in Table 8.5 to periodically carry out audit, enforcement, and other functions as assigned to them from time to time. The Audit Hubs are likely to improve efficacy of internal controls, remove duplications and increase administrative efficiency in the internal audit and control function of the BSC. Table 8.5: Location of Audit Hub with Allocated Departments/ Offices Risks Register for 22 business processes of S No. Location Allocation of departments/ offices field offices including Deposit Accounts, HOK Departments, Karachi, North Nazimabad, Hyderabad, Sukkur, Public Accounts, Export Refinance and 1 Audit Hub Karachi Quetta, Bahawalpur and Multan Treasury Cash Units were developed during Offices the year. The Risks Register will identify the Lahore, Faisalabad, Gujranwala, Sialkot, Rawalpindi, Islamabad, processes’ risks, their ranking as high, 2 Audit Hub Lahore Muzaffarabad, Peshawar and Dera medium or low risk and their mitigating Ismail Khan Offices controls. On operational side, annual financial/operational audit of 16 field offices and 4 HOK departments was carried out and the Audit Briefs containing major observations was submitted to Deputy Governor/ Managing Director. A compliance officer attached with each Audit Team ensures compliance of the Audit Reports and timely resolution of issues highlighted in Audit Briefs. IT Audit of 15 field offices of BSC was also carried out and the internal controls weaknesses in the system highlighted in the IT audit reports were sent to ISTD of SBP. Further, the system audit of Globus System, Oracle and HRIS was also conducted to assess the risk exposures and control weaknesses, etc. and the report was shared with ISTD.

The Off-site Surveillance Wing (OSW) of IAD monitors the adequacy and effectiveness of internal control systems, operational efficiency and adherence to relevant policies and procedures based on the reports/ monthly returns of IAUs. During FY09, 286 significant irregularities were reported by IAUs in their monthly returns. The OSW analyzed the irregularities in depth and categorized 188 of them as major irregularities. These irregularities along with the IAD’s recommendations were sent to respective chief manager and head of department for initiating necessary corrective and/or preventive measures.

The Audit Sub-committee of BSC Board also monitors the performance of IAD; the committee met twice during the year to discuss the management letter issued by the External Auditors, Business Plan of IAD and quarterly progress report on Audit Briefs of BSC.

8.8 Human Resource Management Human resources make things happen in organizations. Therefore maintaining a motivated and capable HR has remained a big challenge for the management during FY09. While on the forefront of change management, Personnel Management Department has continued to revamp existing HR

93 State Bank of Pakistan Annual Report 2008-2009 policies and programs and introduce new policies in line with international best practices and the management’s vision of becoming top- notch organization. The key initiatives implemented during the year under review were as follows:

Right sizing. As part of the strategic change management plan, the drive for rightsizing continued during the year in view of automation, business process reengineering and mechanization of currency operations. During the year under report, the working strength of BSC reduced from 4,666 on June 30, 2008 to 4,551 on June 30, 2009 (see Table 8.6) on account of regular retirements on

Table 8.6: Working Strength of SBP BSC As on end June Sr. No. Side FY08 FY09 HOK Field offices Total HOK Field offices Total 1 On secondment from SBP 25 11 36 30 21 51 On deputation to government 2 - 7 7 - 7 7 departments 3 General side 408 2,073 2,481 410 1,993 2,403 4 Cash side 0 1,739 1,739 0 1694 1694 5 Engineering side 86 90 176 82 90 172 6 Other technical/ex-cadre etc. 98 129 227 95 129 224 Total 617 4,049 4,666 617 3934 4551 superannuation, early retirement under Staff Regulation and resignation, etc.

Management Forums. The management forums like Heads of Departments (HODs) Forum and Chief Managers’ Conference were revamped and revived. The mandate of the HODs Forum was enlarged to deliberate upon policy matters and strategic issues affecting the organization. Similarly the forum of Chief Managers’ Conference was also made more strategic and policy oriented besides using it as a platform for seeking first hand feedback and input on various policies. With the regular assembly of these forums, the sense of belonging and participation, the quality of input in the decision making process and implementation of policies has improved significantly.

Performance Management and Improvement System. Effective from FY 2007-08, the competency based Performance Management and improvement System (PMIS) was implemented for middle managers (OG-4 & above). From FY 09, the employees up to Officers Grade 2 have been brought under the umbrella of new PMIS. Accordingly 37 performance planning and 42 performance appraisal workshops were conducted by a team of in-house trainers and facilitators across the country for the target audience. The focus of the workshops was the alignment of the performance goals with the overall strategic objectives of the organization widely reflected in the business plans, and to enable the officers to effectively plan and manage their performance. On-spot facilitation at field offices was provided through a dedicated team of PMS facilitators. Consequently the appraisal process under the system has been completed successfully.

Succession and Management Development. The succession and management development of existing talent to occupy senior positions has been the corner stone of human resource management of SBP BSC. During FY 09, the function specific and management training programs have been designed and delivered for target group of officers. Recently, two batches of newly promoted OG-4 and one batch of OG-3 have graduated comprehensive 20-days Middle Management Training Program at NIBAF Islamabad, the first of its kind in SBP-BSC history. The development program covered soft skills module and the core operational activities of Bank so as to sharpen their analytical, decision making capabilities, and leadership qualities.

94 SBP Banking Services Corporation

Likewise a formal job rotation policy is religiously followed to groom future managers in different capacities and assignments. Depending on performance, job enrichment and enlargement is tailored to suit high performing managers.

Continuous HR Policy Improvements. The creation of new position in the salary scale of Officer Grade -6 was a landmark in the history of SBP BSC. Not only did it open windows of opportunities for middle level managers in SBP BSC, but also allowed the management to build a pool of talented managers to rise to senior level of responsibility in future. Equally, the growth opportunities window has been provided to the treasury officers working on cash side to get their services transferred to general side through a competitive process. Six officers have availed this opportunity. Besides the career and talent development, the management has put in place the Cash Award policy to provide adequate incentives to the employees to acquire higher professional qualifications from the HEC recognized universities. Resultantly employees in different field offices and head office have graduated from business and management schools. Moreover, to brand SBP and SBP BSC as a prospective employer of choice and create awareness of their role in socio-economic development among university business students, the internship program of different duration has been introduced and being implemented at field offices across the country. A reasonable amount as a stipend is paid to internees.

The rates for performance based annual merit increase were enhanced. The improvements in compensation and employees benefits like hard area allowance, overtime and conveyance charges, salary of security guards on contract, extension of rest & recreation facility to support staff and leave encashment for dependents of employees died during service helped raise the motivation and performance of employees.

8.9 Organizational Development/ Change Management Project To provide impetus to the management’s efforts to transform SBP BSC, an Organizational Development/ Change Management process was initiated with the hiring of external consultants – Sidat Hyder Morshed Associates– to undertake a diagnostic study of the organization in the context of internal and external environments and suggest OD/Change management plan to bring cultural and attitudinal changes in the organization to make it a quality conscious service organization. The study has culminated in different tangible reports on existing state of affairs in the organization, future OD/Change management action plan, monitoring and evaluation mechanism and anticipated expenditures on implementation of proposed change management plan. The outcomes of this study will be presented to the Governor/Board soon.

Future Plans. The management plans to continue with existing HR and change management plan with necessary changes, if so necessitated. The Management Trainee Officers Scheme is planned to be launched in the near future to meet the organizational needs in existing and emerging business areas. The scheme would help fill the void arose for want of regular recruitment in the SBP BSC for the last decade. Besides regular hiring, cash officers will be hired on contract basis to meet organizational requirements in some of the field offices situated in the far flung areas.

The existing promotion policy is being revised to recognize and reward high performers on the basis of demonstrated performance and continuous professional development. The Change Management/Strategic Management Conference is expected to be convened in the coming months to formulate the change management plan in the light of Diagnostic Study conducted by Sidat Hyder Morshed Associates and also develop next 5 years strategic plan.

95 State Bank of Pakistan Annual Report 2008-2009

8.10 Training and Development Initiated in the backdrop of organizational development and change management program, this has been the second year of promoting structured training in SBP BSC. While underlying objective of the training is to bring overall improvement in the skills set of BSC’s human resources, special focus, during the year, remained on plugging the competency gaps particularly in customer services, conflict resolution, strategic thinking, and IT skills. The coverage and contents of the earlier training programs were also reviewed and revisions where necessary were made to align the training programs with the critical competency gaps. Moreover, management development programs were introduced at all important hierarchy levels.

The number of officers trained during FY09 were more than doubled, which is attributable to introduction of a number of new programs during the year including the Middle-level Management Training Program (MMTP), Skill Development Program (SDP), Customer Services module and TOT on Globus, Oracle and MS Office, PMS related training, etc.

While continuing the focus on ‘customer care’ and expanding the coverage of the above programs, new initiatives would be launched during FY10 to enhance ‘Desk-Top Efficiency’ through improvement in personnel management and ‘critical group’ function specific training. Soft-skills modules on ‘Motivation for Excellence in Performance’, ‘Problem Solving and Decision Making’, ‘Stress and Time Management’ will also be introduced to bring the critically needed attitudinal changes in BSC.

96 9 National Institute of Banking and Finance (NIBAF)

9.1 Overview National Institute of Banking and Finance functions as a specialized institute with focus on human resource development in the field of banking and finance. The very purpose of the institute is to train and develop human resources of State Bank of Pakistan and its subsidiaries. The institute also helps assist other national and international banks, financial institutions and governments in their training and capacity building endeavours. During FY09, while capitalizing on its strength of having state-of- the-art facilities and strong trainer-base, NIBAF continued to expand the horizon and scope of training and development activities. NIBAF outpaced the annual training targets, organizing various training programs for different levels. It conducted three post induction trainings, i.e., State Bank Officers Training Scheme (Batch -14), Analyst Training Program (Batch-5), Statistical Officers Training Program (Batch-3). As part of skill up gradation, some new programs in the areas of management, banking and economics were also launched. These included project management, the art of motivating and engaging people, leadership skills, negotiation skills, communication skills, problem solving, decision making, report writing, time and stress management, risk management, anti-money laundering, Basel II accord, financial derivatives, monetary management, treasury operations, customer services, and skill development programs.

NIBAF continued to strengthen its stakeholder base both locally and abroad. The institute continued to offer and host international trainings both in central and commercial banking in collaboration with State Bank of Pakistan and Ministry of Economic Affairs. The objective of the training under Pakistan Technical Assistance Program (PTAP) is to create and foster goodwill, strengthen bilateral relations, and to share expertise and knowledge in the field of banking and finance. For the last three decades the programs is in high demand. A large number of bankers, government functionaries and officials of almost 105 developing countries have benefited from this program.

The second international training program for securities’ ‘market managers and compliance officers’ was launched in collaboration with South Asian Federation of Exchanges (SAFE), and Futures and Options Association (FOA) of UK at NIBAF Islamabad. A 13-week general banking training program for the officers of Afghanistan International Bank was also organized. Figure -9.1 Training Coverage by Stakeholders during FY09

To encourage and facilitate intellectual SBP discussion, NIBAF coordinated holding 39.1% SBPBSC workshops, seminars, and evening talks on 31% different issues, jointly with some of the key stakeholders like IFC, HR Forum, LMDA, MFMI, HBL, and Shifa International Hospital. Eminent academicians, practitioners, central bankers, industry experts, donors, and community activists participated in these events. Such forums help not only build individual capacities to improve on job performance leading to Others change in mindset and professional 10.0% dynamism, but establish linkages and share Microfinanc Islamic Internationa knowledge across institutions. Moreover, e & housing banking l NIBAF also arranged customized trainings for 2.1% 7.0% 10.4%

97 State Bank of Pakistan Annual Report 2008-2009

Bank of Khyber, Allied Bank and Planning and Development Department, government of Baluchistan. The percentage share of the training shows that about 70 percent of the overall trainings were delivered to SBP and SBP BSC. This shows that trainings of SBP and SBP BSC officials remained central to the institute’s overall goal and strategy. While international training programs and training in Islamic banking had 11 percent and 7 percent of the training programs, microfinance and housing finance training programs were having 2 percent share. The remaining 10 percent was delivered to other financial institutions and public sector organizations as shown in Figure.9.1.

9.2 Composition of Trainings and Development As part of the business planning for FY09, 128 weeks of training were planned in consultation with key stakeholders, including training and development departments, to address specific needs and requirements of SBP and SBP BSC. During FY09 the overall training activities have been very encouraging; especially as against the targets of 128 weeks, 153.6 weeks training were delivered. The participation has also increased to 2690 participants compared to 1961 last year. Apart from three post induction trainings including SBOTS-14, ATP-5 and SOTP-3, the skill up gradation programs for drew a wide range of SBP and SBPBSC staff participation during FY09. Skills up gradation programs are mostly of short duration, designed for middle level and operational level employees.

9.3 Training Delivery and Participation 9.3.1 State Bank of Pakistan To prepare officers of SBP for effective role as central bankers, NIBAF continued to conduct post induction skills up gradation programs for them. NIBAF particularly focused on the training and development needs of State Bank of Pakistan to help strengthen its monetary management and regulatory capabilities besides improving managerial skills. In consultation with the Training and Development Department of SBP, 58 weeks of training were planned including 44 weeks for post induction and 14 weeks for skills up gradation during FY09. As against the target, 60 weeks were delivered including 52.8 weeks of post induction and 7.2 weeks of skills up gradation. NIBAF successfully delivered three post induction training programs for SBP, i.e., SBOT-14, ATP-5 and SOTP-3. Detail breakdown of the training weeks is given in Table 9.1(on the facing page). SBP trainings are categorized broadly into post induction and skill up gradation. The post induction program, spread on 22 weeks prepares fresh entrants for central bankers’ role. The trainees are tasked with different assignments, case studies, and exercises. Best and seasoned trainers/management experts and academicians are engaged to conduct training, and the sessions remain highly participative and interactive. Excursion trips for various groups are arranged to cultural and historic places.

Some new programs in the areas of management, banking and economics were also launched for SBP employees. These included project management, art of motivating and engaging people, risk management, and introductory econometrics. In addition, short duration programs delivered to SBP included anti-money laundering, Basel II accord, communication skills, financial derivatives, leadership skills, monetary management, negotiation skills, problem solving and decision making, report writing, and time and stress management. A program on treasury operations with broad objectives to enhance participants’ skills by equipping them with necessary tools and techniques was offered. Other programs included understanding financial derivatives and their relative leverage in eliminating the diversifiable risk, and exposure to econometric forecasting methods and analysis of time series data. The objective has also been to help inspire and keep employees motivated and encourage them to take new projects and assignments by applying the knowledge gained from these trainings.

98 National Institute of Banking & Finance

During FY09, a total of 244 officers from various cluster/departments of SBP were given skills up- gradation training. However, there was a shortfall of 6.8 week in skill up gradation training vis-a- vis the annual target of 14 week. This can be attributed mainly to the lack of nominations from SBP for some of the training programs. Resultantly some of the trainings were deferred. Figure 9.2 provides details on the actual training delivery against the target for the last few years. Other initiatives by NIBAF during FY09 included:

Business Planning Review meeting During FY09, NIBAF held business planning meeting/workshop. The business planning workshop focused mainly on soliciting inputs from SBP, SBP BSC (Bank), and other stakeholders on their annual training requirements. The meeting also reviewed performance on training targets of the last fiscal year. The workshop also deliberated on devising methods for further improvements in training standards and procedures to help streamline matters keeping in view SBP forward-looking strategies

Table-9.1: Training Delivery during FY09 (in weeks)

Planned Delivered Excess/shortfall Training programs Venue Total Venue Total Venue Total

ISD KHI weeks ISD KHI weeks ISD KHI weeks

A SBP (1+2) 48.0 10.0 58.0 52.8 7.2 60.0 4.8 (2.8) 2.0 1. Post induction (a+b) 44.0 - 44.0 52.8 - 52.8 8.8 - 8.8 a) SBOTS 22.0 - 22.0 16.4 - 16.4 (5.6) - (5.6) b) ATP/SOTP 22.0 - 22.0 36.4 - 36.4 14.4 - 14.4 2. Skill up gradation 4.0 10.0 14.0 - 7.2 7.2 (4.0) (2.8) (6.8) B SBPBSC(Bank) 14.8 18.2 33.0 31.6 16.6 48.2 16.8 (1.6) 15.2 C International 12.0 - 12.0 16.0 - 16.0 4.0 - 4.0 D Certificate programs (a+b+c+d) 10.0 9.0 19.0 9.4 4.6 14.0 (0.6) (4.4) (5.0) a) Rural finance/Microfinance/Agri 2.0 2.0 4.0 2.2 - 2.2 0.2 (2.0) (1.8) b) SME financing 3.0 1.0 4.0 - - - (3.0) (1.0) (4.0) c) Housing finance 2.0 - 2.0 - 1.0 1.0 (2.0) 1.0 (1.0) d) Islamic finance 3.0 6.0 9.0 7.2 3.6 10.8 4.2 (2.4) 1.8 E Misc events 1.4 1.4 2.8 1.4 1.4 2.8 F Other training programs 6.0 - 6.0 12.6 - 12.6 6.6 - 6.6 Total weeks (A+B+C+D+E) 90.8 37.2 128.0 123.8 29.8 153.6 33.0 (7.4) 25.6 ISD=Islamabad and KHI =Karachi on HR development and capacity building. Figure-9.2 Training Delivery Representative of T&DD SBP and T&DD Target Delivered SBPBSC along with NIBAF officials both 210 from Islamabad and Karachi campus participated in the workshops. The draft 168 business plan formulated in the workshop was circulated to all EDs and head of departments 126 in liaison with HR/T&DD SBP and T&DD SBPBSC (Bank) before submitting to Board 84 of Directors NIBAF for approval. weekstraining 42 DTCs Meeting A meeting was arranged at SBP Karachi with 0

departmental training coordinators (DTCs). It

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

99 State Bank of Pakistan Annual Report 2008-2009 helped strengthen the institutional mechanism and getting feedback on pre and post training events at NIBAF.

Workshop on Microfinance Product Innovations in Challenging Times NIBAF in collaboration with State Bank of Pakistan’s Microfinance Department organized a two-day workshop during FY09 at Islamabad. Drawing on the expertise of professionals from commercial banks, MF banks, and non-governmental organizations, the workshop mainly focused on ‘developing’ new microfinance services/products. Eminent experts, microfinance service providers as well as clients/community activists from different MFIs/ organizations also participated and shared their experiences and suggestions. About 30 participants representing mainly Tameer Micro Finance Bank, Institute of Management Sciences, NRSP, FMB, Department for International Development (DFID), Kashf Microfinance Bank, ASASAH, SAFWCO, and Centre for Women Cooperative Development, Khushali Bank, and donors benefitted from the proceedings through active participation and group work. With two days deliberations and discussions, and intense brainstorming sessions, the workshop made certain recommendations on new products which were reviewed and fine tuned by experts from the industry.

9.3.2 SBP BSC (Bank) NIBAF, as a training arm of SBP has been proactive in playing its role during the transformational process of change in SBP BSC. NIBAF also continued to cater to the specific needs and requirements of SBPBSC. During FY09, NIBAF delivered 48.2 training weeks against the target of 33.0 weeks. It conducted 241 training programs where 1726 officers from different offices and departments of SBP BSC were trained. A number of new courses were also conducted in FY09 including two programs on customer services for supervisors, documentation for international trade and finance, foreign exchange and financing of foreign trade, international trade and regulatory regimes in Pakistan, understanding statement of affairs-SBP balance sheet, internal auditing- process and procedure, adapting international accounting standards, information system audit and values and shared behavior.

NIBAF continued to focus on organizing and facilitating training programs for SBP BSC (Bank) under developmental initiatives during FY09. NIBAF and T&DD BSC while working very closely have conducted two ‘middle level management training program’ of three weeks duration each for OG-4 and 5 of SBP BSC. One training program titled ‘skill development program’ for newly promoted OG-3 was also conducted. It aimed at enabling the newly promoted officers to face the new challenges associated with higher responsibilities.

NIBAF and T&DD BSC initiated some new training programs besides strengthening the existing training arrangements. NIBAF effectively planned and implemented 22 training programs of soft skills like ‘customer services’ each of two day duration at selected SBPBSC field offices at Peshawar, Quetta, Multan, Lahore, Faisalabad, Bahawalpur, Hyderabad, Sukkur and NIBAF Islamabad. About 533 officers from BSC offices participated in the programs. There was a marked improvement in the perception of customer service among the trainees in post-training phase. Majority of the participants admitted that despite years of experience, they now stood better informed, educated and more aware of customer service protocols after receiving the training. This positive change was reflected in pre and post evaluation questionnaires. On aggregate the training base expanded for BSC substantially as its share increased from 26 percent to 31 percent in overall trainings. NIBAF also arranged two workshops on development finance at Islamabad campus during FY09 in collaboration with Development Finance Support Department, SBPBSC. The workshops were aimed at facilitating the development of an inclusive financial system in the country through effective monitoring of banks, awareness and information dissemination on the program, conducting targeted surveys and establishing linkages with key stakeholders including commercial banks, microfinance banks and public sector organizations. The main idea of holding the workshops was also 100 National Institute of Banking & Finance sharing experiences on the concepts and issues pertaining to financial inclusion in Pakistan and effective implementation of the operational strategy. While drawing mainly on the expertise of the subject specialists, seasoned bankers, various issues that hinder agriculture sector growth and financial outreach including SMEs finance models, pattern and growth of micro financing and Islamic banking were deliberated. Figure 9.3: Training Participation & Coverage

NIBAF also facilitated T&DD SBP BSC in Targets Actual effectively organizing other skills up- 3000 gradation programs in specialized areas like 2500 one-week TOT on ERP-Oracle, one-week ToT on MS Office, two-week ToT on Globus, 2000 one-day training on FBR tax collection 1500 Automation Project, one-week training course

for adjudication/foreign exchange officers at 1000 numbertrainees of Federal Judicial Academy, Islamabad, 500 business planning and budgeting meeting and hosting chief managers training conference. 0

Figure 9.3 shows total number of trainees

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 participated in various trainings. FY01

9.3.3 International Training Pakistan Technical Assistance Program NIBAF offers international trainings annually. These are jointly sponsored by the government of Pakistan and State Bank of Pakistan under the Pakistan Technical Assistance Program (PTAP). The training programs are fully funded and are available to the nominees of friendly developing countries. The objectives of the training program are to create and foster goodwill, strengthen bilateral relations, and to share expertise, knowledge in the field of banking and finance. For the last three decades the programs are in high demand and large number of bankers, government functionaries and officials of almost 105 developing countries have benefited from the program. Despite political turbulence NIBAF organized and hosted international trainings both in central and commercial banking each of four -week duration that were attended by 38 participants from about 19 developing countries. These countries included Bangladesh, Sri Lanka, Cambodia, Jordan, Nepal, Senegal, Thailand, Uzbekistan, Maldives, Sudan, Iran, Malawi, Myanmar, Senegal, Vietnam, Fiji, Afghanistan, Indonesia, and Pakistan. Due to increasing outreach of the program, and consequent demand for participation in the international training programs, the institute also accommodates participants on self-finance basis. Four participants from the central bank of Sri Lanka participated in 40th international banking program under self finance scheme. Three local commercial bankers from National Bank of Pakistan also participated in the 39th international commercial banking program through self finance scheme. The course mainly aims at providing a broad understanding of the macro economic framework, inter- sectoral linkages with prime focus on monetary and external sector management by the central bank besides developing the financial supervisory and regulatory skills of the central bankers through exchange of cross country experiences and expertise.

After completing three-week theoretical training at NIBAF, the course participants had a one- week study-cum observation tour to countryside where they availed opportunity of visiting chamber of commerce Sialkot, Gujranwala, Commercial banks, SBP and some export oriented industries of Pakistan. They also met some senior bankers and officials. A course on general banking was especially designed for bankers of Central Asian Republics (CAR) with focus on soft skills and business communication, however, that could not be held because of lack of nominations during FY09.

101 State Bank of Pakistan Annual Report 2008-2009

Second International Training program for Securities Market Managers and Compliance Officers During FY09, the second international training program for securities market managers and compliance officers was launched in collaboration with South Asian Federation of Exchanges (SAFE) and Futures and Options Association (FOA) of UK at NIBAF Islamabad. This week long international training mainly focused on international standards for the operation and management of securities and derivatives exchanges by covering in particular high level exchange management issues like conflict of interest management, trading practices and procedures, identification and prevention of market manipulation, market supervision and enforcement and clearing and settlement procedures. Wide range of delegates, both national and international, representing Bangladesh, Sri Lanka, Bhutan and Pakistan participated. Inaugural ceremony of the program was attended by UK Deputy High Commissioner to Pakistan, MD Karachi Stock Exchange. Lead Trainer Mr. Trevor Norwood, M/S FOA UK, conducted the training. The program also included a number of cultural and social trips to give the participants a complete country orientation to make the event memorable. The participants were taken to Taxila, Salt Mines Khewra and Murree hills. SAFE is an association of 13 securities exchanges and 6 securities depositories and clearing companies of South Asian countries including Bhutan, India, Maldives, Mauritius, Nepal, Pakistan, and Sri Lanka.

NIBAF also facilitated holding Financial Round Table Conference at its Islamabad campus, attended by the Boards of Directors of the three stock exchanges, i.e., Karachi Stock Exchange, Lahore Stock Exchange and Islamabad Stock Exchange, and FOA trainers and Secretary General South Asian Federation of Exchanges.

General Banking Training Program for Afghanistan International Bank (AIB) NIBAF designed and developed a customized training in general banking for AIB under self finance scheme. In this program 19 officers from AIB participated. The overall program was designed for 13 weeks with a focus on core banking activities with specific reference to general banking. It was modular based training encompassing areas like presentation and communication skills, business etiquettes and mannerism, financial management and accounting, general banking deposit mobilization, lending practices and methodologies, documentary credit, foreign exchange and treasury operation, consumer banking, risk management, regulatory and legal environment and development in Islamic banking and finance. Out of 13 weeks, 7 weeks were delivered during FY09 covering modules included interpersonal and communication skills, etiquettes and mannerism, customer services and financial accounting and financial management. A team of experts with substantially multi-disciplinary background like communication skills, report writing, accounting, banking, auditing with strong thinking, creativity and real world experiences was booked who conducted the training in an effective and practical manner by assigning exercises, role play and presentation. Such programs are to help promote long term relationship with external institutions, and are a good source of foreign exchanges/revenues for Pakistan. Another distinct aspect of such international training is the reporting assignment at the end that seeks and encourages creativity and promotes group dynamics, enhancing trainees’ presentation/communication skills. Further as part of trainees’ learning, visits to some places of cultural and historic importance were arranged.

9.4 Priority Sectors-Certification 9.4.1 Rural Finance Resource Centre (RFRC) A Rural Finance Resource Centre (RFRC) established under NIBAF is tasked with the responsibility of building capacity of the human resource of commercial banks/micro finance institutions, and to enhance their skills through trainings in rural finance and micro finance. This is to support State Bank of Pakistan’s efforts to expand outreach of microfinance, promote financial literacy, and help in capacity building of Microfinance service providers. The centre has been promoting awareness and commitment to Microfinance best practices in Pakistan by organizing various programs, seminars, workshops. And several such were held during FY09. RFRC NIBAF as part of Microfinance 102 National Institute of Banking & Finance

Management Institutes (MFMI) global network participated in three conferences that were held through Voice over Internet Protocol at NIBAF Islamabad. These mainly aimed at sharing experiences in the management, scheduling and marketing of microfinance training course through using the global network of microfinance services providers and academics.

Furthermore, RFRC NIBAF facilitated Centre of Excellence in Microfinance which is a specialized centre of the Institute of Management Sciences in research and development and capacity building in the field of microfinance. Under the arrangement, a three days training on financial management for microfinance practitioner was organized. Fifteen participants from different Microfinance institutions and banks attended the program.

9.4.2 Mortgage Training Program on Housing Finance NIBAF in collaboration with Infrastructure and Housing Finance Department of SBP organized one week SBP Mortgage Training Program on Housing Finance at NIBAF Karachi campus. The program mainly aimed at enhancing the lending skills of employees associated with mortgage lending institutions and other stakeholders of housing finance sector. The program received an overwhelming response as about 45 nominees representing various banks and financial institutions participated. Best trainers were engaged who conducted the program successfully.

9.4.3 Islamic Banking Certificate Course NIBAF arranged Islamic Banking Certificate course for 12th, 13th and 14th batches during FY09 in which 78 trainees of various banks participated. So far NIBAF has imparted training to about 524 industry professionals/bankers. The target groups were mostly the Islamic banks, Commercial banks with Islamic branches and other financial institutions. Individual/students, seeking career in Islamic banking, were also accommodated under self finance scheme.

NIBAF has also prepared some new courses of short duration on specific topics of Islamic banking in collaboration with International Islamic University Islamabad. A special course is being developed for Shariah advisers and coordinators to impart training on banking and accounting concepts that is planned to be rolled-out next year.

9.4.4 Other Activities in Islamic Banking During FY09, NIBAF continued to facilitate International Centre for Education in Islamic Finance (INCEIF) Malaysia by conducting the Certified Islamic Finance Professional Examination- Part I and Part II that were simultaneously held both at NIBAF Karachi and Islamabad.

9.5 Other Training Programs/Services Training Program for ABL Compliance Officers Based on earlier experience a four -day need based training program was delivered for the second Batch of ABL compliance officers under self finance scheme. Eighteen compliance officers representing ABL different regions participated. Eminent bankers/practitioners were engaged as trainers/resource persons who provided valuable insights.

Training Program for Bank of Khyber NIBAF also arranged a short duration customized training on Internal Audit and Compliance Mechanism for Bank of Khyber (BoK) during FY09. Nineteen officers representing BoK branch network and main office participated in the program. The program was very well received. This arrangement has to go along way as BoK has shown keen interest in other training programs also.

HBFCL and SME Bank also approached NIBAF seeking support for arranging training to their officers in the areas including Financial Accounting, Risk Management and Financial Management,

103 State Bank of Pakistan Annual Report 2008-2009

Auditing Documentation, Information Technology: MS-Office and Presentation Skills Interviewing, Skill-Workshops, MIS besides general banking for the officers of SME Bank. In this regard, proposal has been prepared and submitted to both the organizations.

A general aptitude test/quiz paper was prepared for Khushali bank seeking new recruitment at branch level.

9.6 Public Sector Capacity Development Program Planning and Development Department government of Baluchistan approached NIBAF for organizing training for various cadre/officers on self-finance basis in different areas like communication and presentation skills, project planning and management, Secretariat service and office management, Database Design and Administration Oracle 9i,Training on research techniques and tools using SPSS beside design of small dams and quantity survey, etc. About 110 officials representing different departments of the government of Baluchistan participated in these trainings held at NIBAF Islamabad and spreading over 1-2 week duration. Apart from concepts/theoretical understanding of the modules like Oracle, SPSS and project planning, IT softwares were arranged for hands-on/practical experience. Further, trainees were assigned different case studies including flow of funds account data, public sector employees data beside company-wise foreign trade data of balance of payment and understanding PC-1 to PC-5 formats. A number of working/field visits were also arranged to Planning Commission, government of Pakistan, PIDE, Federal Bureau of Statistics (FBS), Pakistan Planning and Management Institute, National Commission for Rural Development, irrigation department and also different sites.

9.7 NIBAF Linkages with Other Institutions NIBAF continued to establish and promote linkages in academic development and training with professional organizations. Some more institutions joined hands with NIBAF for collaborative arrangements including Leadership and Development Associates (LMDA), AIB Afghanistan, and NRSP to formally enter into partnership for sharing knowledge and expertise. Under collaborative arrangements with LMDA, a number of training programs were arranged that included work stress and its management, balance score card and project planning and management.

Detailed presentations to create awareness and highlight the role of State Bank of Pakistan and NIBAF were also arranged for various internees, students and faculty members of different academic organizations at Islamabad.

9.8 Evening Talks/Lectures Series Program Evening, dinner talks/programs on important issues/topics of vital interest continued to be the integral part of NIBAF’s activities. These programs were attended by the resident trainees/participants and local stakeholders. As part of developmental initiatives, a number of events were organized with detail as under:

Sensitization of Corporate Governance NIBAF in collaboration with the International Finance Corporation (IFC) arranged an evening talk on Sensitization of Corporate Governance at Islamabad that attracted large number of audience including participants of SBOTS-14, ATP-5, and SOTP-3. Faculty members and resident trainees, senior HR managers and Board members of some companies also attended. The audience benefitted from the presentation and discussion that mainly focused on concepts, significance, and basic tools of corporate governance beside exposure to the broad principles of corporate governance.

Mannerism and Professional Etiquettes NIBAF Islamabad arranged a special session on promoting mannerism and etiquettes targeting SBP inductees, i.e., SBOTS, ATP and SOTP and other resident trainees. 104 National Institute of Banking & Finance

HR Forum Meeting NIBAF continued to facilitate holding monthly meeting of the HR Forum at Islamabad campus. This provided an opportunity for HR professionals to liaise with others at different levels, disciplines and organizations dealing mainly with human resource development and capacity building. The forum brings together experiences, best practices, and resources wherein seasoned market experts are engaged who deliver presentation on different topics pertaining to organization and development, change management, etc. Large numbers of H R professionals representing various organizations attend these meetings.

9.9 Outsourced Training Programs and Activities at NIBAF NIBAF continued to provide support and cooperation by facilitating other institutions in their training and development endeavors. Under the arrangements during FY09, a number of training programs/events both at NIBAF Karachi and Islamabad campuses were held. NIBAF accommodated a number of financial institutions by hosting 105 training weeks during FY 09 with wide range of participation of about 5900 professionals in these trainings/events. The major stakeholders who availed NIBAF facilities during FY09 for different training purposes/activities included Askari bank, Khushali Bank, Meezan bank, NBP, HBL, UBL, M/S FINCON Inc., Bank Al Habib, IBP, LMDA, COMSATS, Finance Division Government of Pakistan, NTS, Asia Foundation, M/S Shifa College of Medicine, M/S Sidat Hyder Morshed Associates, M/S Event Management, Leadership and Management Development Associates, MDI and M/S Sycomp, etc. The network helps to strengthen mechanism for future collaborative programs of mutual gains and benefits including sharing of information on training design and delivery through access to trainers and training/academic materials, etc.

105 Finances of SBP and Subsidiaries

10. Annual Budget Review 2008-09 11. Annual Financial Performance Review 2008-09 12. Consolidated Financial Statement of SBP & its Subsidiaries 13. Financial Statement of SBP 14. Financial Statement of SBP-BCS(Bank) 15. Financial Statement of NIBAF

10 Annual Budget Review 2008-09

10.1 Overview Total expenditures of SBP and its subsidiaries Fig.10. 1 Budget vs Acutal Expenditure (million rupees) are classified into three broad categories, Budget Acutal namely corporate expenses, establishment 8,500 expenses, and operating expenses. A brief comparison of actual versus budgeted 6,800 expenditures of the SBP and its subsidiaries is given in Figure 10.1 and Table 10.1. 5,100

The relative size of each of these heads in total 3,400 expenditures is shown in Table 10.2.

1,700 The total consolidated expenditure of SBP and its subsidiaries amounted to Rs19, 084 million 0 against budget of Rs18,186 million; thus Corporate Establishment Operating Provisions showing negative variance of Rs898 million, i.e., 4.9 percent. The variance of actual results against budget, in terms of major heads is shown Table 10.1: SBP Annual Review for FY 2008-09 in Table 10.3. (Rs in million)

Consolidated Head of S.N. Account Variance 10.2 Corporate Expenses Budget Actual Variance % age Corporate expenses of the Bank comprise three components, namely agency commission to 1 Corporate 7,359 8,092 -733 -10.0 National Bank of Pakistan (NBP), currency 2 Establishment 5,403 5,203 200 3.7 notes printing charges, and charges on allocation of Special Drawing Rights (SDRs) of IMF. 3 Operating 2,837 2,587 250 8.8 Head- wise analysis of corporate expenses is 4 Provisions 2,587 3,202 -615 23.8 given as under: Grand Total 18,186 19,084 -898 -4.9

Table 10.2: Breakup of Revenue Expenditure during FY 08- Table 10.3: Head wise Variance of Actual from Budget 09 (percentage)

Description Budget Actual Description Budget

Corporate 40 42 Corporate (-) 10.0

Establishment 30 27 Establishment (+) 3.7 Operating 16 14 Operating (+) 8.8 Provisions 14 17 Provisions (-) 23.8 Total 100 100 Total (-) 4.9

1. Agency Commission Charges. Agency commission charges are paid to National Bank of Pakistan on account of government transactions and remittances on behalf of SBP as per agency agreement. Agency commission exhibits a negative variance of Rs864 million, i.e., 31.4 percent due to enhanced volume of government transactions.

109 State Bank of Pakistan Annual Report 2008-2009

2. Currency notes printing charges. Negative variance of Rs322 million, i.e., 8.3 percent has been witnessed in note printing charges, attributable to the price variances.

3. Charges on Allocation of SDRs. The charges on allocation of SDRs resulted in positive variance of Rs453 million, i.e., 61.4 percent, represents lower rate of SDR charges Rs467 million, which is partially offset by higher exchange rate (Rs14) million.

In corporate expenses, negative variance in ‘Note Printing Charges ‘ and ‘Agency Commission Charges’ were to a large extent offset by the positive variance in ‘Charges on Allocation of SDRs’. Consequently overall variance in ‘Corporate Expenses resulted in overall negative variance of Rs733 million, i.e., 10.0 percent.

10.3 Establishment Expenses Establishment expenses include employees’ salaries, benefits and training expenditures. The establishment expenditures showed positive variance of Rs200 million, i.e., 3.7 percent. The positive variance is mainly attributable to delay in recruitment of new employees.

10.4 Operating Expenses Operating expenses include rent, rates and taxes, legal and professional charges, stationery and publications, communication, traveling expenditure, repair and maintenance, depreciation, etc, including NIBAF. On overall basis, operating expenses have shown positive variance of Rs250 million, i.e., 8.8 percent owing primarily to lower expenses in depreciation, communication, repair and maintenance, traveling expenditures, computer consumables and misc expenses, as against the budgeted amount.

10.5 Provisions Provisions include allocations for staff retirement benefits, agriculture bonafied losses and other miscellaneous expenses. Actual provisions recorded against budgetary allocation have shown negative variance of Rs615 million, i.e., 23.8 percent owing primarily to staff retirement benefits. Provision for staff retirement benefits is based as per actuarial advice; however, negative variance is attributable to subsequent changes in the assumptions for calculation of the provision by the actuary.

110 11Annual Financial Performance Review

11.1 Overview The State Bank of Pakistan earned a landmark net profit of Rs204, 212 million posting a 24 percent significant rise over the previous year’s profit of Rs164, 793 million. The main factors contributing the increase in profitability include increase in discount rates on Market Treasury Bills (MTBs) with marginal increase in volumes of the MTBs. The Bank also witnessed increase in commission income and dividend income, however, exchange gains on foreign currency assets and liabilities declined as compared to the previous year.

11.1.1 Summary of Profit and Loss Account A summary of Bank’s annual profit and loss account is given in Table 11.1. A review of different elements of income and expenditure of the Bank is presented below:

Table 11.1: Summary Statement of Profit and Loss (million rupees) Description 2008-09 2007-08 Income Discount / interest /markup and/or return earned 183,112 104,883 Less: Interest/mark-up expense 8,085 3,749 Net discount / interest /markup and/or return income 175,027 101,134 Commission income 1,667 720 Exchange gain - net 34,725 61,973 Dividend Income 9,733 6,594 Other operating income - net 1,220 9,631 Gross income 222,372 180,052 Other income - net 56 -440 Total income 222,428 179,612 Expenditure Bank notes printing charges 4,193 3,098 Agency commission 3,614 2,710 General administrative and other expenses 10,897 8,888 Other charges Provisions -488 123 Total expenditure 18,216 14,819 Profit for the year 204,212 164,793

11.2 Income 11.2.1 Net Discount / Interest / Markup and/or Return Income The Bank earned a net discount / interest / markup and/or return income of Rs175,027 million which is 73 percent higher than the income of Rs101,134 million during the corresponding year. An analysis of above increase in net income, encompassing various factors responsible for the rise, is presented as under:

111 State Bank of Pakistan Annual Report 2008-2009

11.2.2 Discount, Interest/Markup and/or Return Earned The discount income of the Bank is derived from the holdings of Market Treasury Bills (MTBs) and the interest/markup, and return is earned on the foreign and domestic assets held by the Bank. During the current financial year, the gross income under the head showed a significant rise of Rs78,229 million which is 75 percent higher as compared to the income in the previous year. Analysis of components of income reveal that the interest/discount income on domestic assets increased by 152 percent which was offset by decrease in income on Bank’s foreign assets by 70 percent over the previous year (Table 11.2). Bank witnessed an increase of 26 percent in foreign currency reserves which stood at equivalent to Rs820,643 million as on June 30,2009 as against the balance equivalent to Rs651,080 million at June 30, 2008 (see Table 11.3).

The sharp rise in interest/discount income on domestic assets is mainly attributable to increase in average discount rates on Market Treasury Bills coupled with a marginal increase in Table 11.2: Interest/Discount/Return Income on Foreign and Domestic Assets volume of these MTBs. The discount rates on (million rupees) MTBs remained in the band of 11.47 percent to 14.01 percent as compared to the range of Description 2008-09 2007-08 Discount income on market treasury bills- 153,268 58,329 9.26 percent to 11.9 percent during the net previous financial year. The investment in Interest/discount income on foreign assets 10,786 36,491 government securities increased by 7 percent Interest/discount income on other domestic 19,058 10,063 and the loans and advances to banks and assets financial institutions rose by 33 percent during Total 183,112 104,883 the year (see Table 11.4). Table 11.3: Foreign Currency Reserves 11.2.3 Interest/Markup Expense (million rupees) Main elements of Bank’s interest/markup Description 2008-09 2007-08 expense include the interest on foreign Investments 138,835 241,921 currency deposits of commercial banks held under Cash Reserves Requirements (CRR), Deposit accounts 383,978 355,534 borrowings from International Monetary Current accounts 285,394 38,856 Fund, deposits of international organizations Special drawing rights with IMF 12,436 14,769 and foreign central banks. The interest Total 820,643 651,080 expense increased by Rs4, 336 million during the year which stood at Rs8, 085 million Table 11.4: Lending to Government, Banks and Financial compared to the expense of Rs3, 749 million Institutions during the previous year marking an increase (million rupees) of 116 percent over the previous year. The Description 2008-09 2007-08 increased interest expense is mainly attributable to increase in the volume of Government securities 1,150,918 1,074,618 foreign currency deposits of foreign central Overdraft to governments 25,861 22,609 Banks and financial banks and international organizations which 308,242 232,451 were offset by decline in rate of interest on institutions these deposits compared to the previous year. Total 1,485,021 1,329,678 Foreign currency deposits of foreign central Yield on treasury bills 11.47% to 14.01% 9.26% to 11.19% Markup on export banks and international organizations 6.50% 6.50% finance increased by 20 percent during the year. The rate of interest on foreign currency deposits was between 0.59 percent to 3.46 percent compared to the range of 1.46 percent to 4.72 percent during the previous financial year whereas the rate of interest on deposits of foreign central banks and international organizations ranged between 0.42 percent to 4.82 percent in the current financial year as against the range of 1.60 percent to 7.15 percent in the corresponding year.

112 Annual Financial Performance Review 2008-09

11.2.4 Commission Income The main components of Bank’s commission income include commission income from management of public debt, market treasury bills, prize bonds and national saving schemes, government securities as well as issuance of drafts and payment orders. The commission income during the year under review increased by 132 percent and stood at Rs1, 667 million compared to Rs720 million during the previous financial year.

11.2.5 Exchange Gain / (Loss) – Net Bank holds foreign currency assets and liabilities on its balance sheet. The sale/purchase and revaluation of these assets and liabilities result in exchange gain/ loss for the Bank. The Bank’s exchange gain / loss arise mainly due to appreciation/depreciation of PKR vis-à-vis foreign currencies particularly USD and SDR. The foreign currency asset side of the Bank is dominated by USD whereas the net liability exposure is denominated in SDR. In view of the above, the depreciation of PKR vis-à-vis USD results in exchange gain and vice versa while the depreciation of PKR vis-à-vis SDR results in exchange loss and vice versa to the Bank. Appreciation and depreciation of PKR against major currencies is presented in Table 11.5.

The income under the head declined by 44 percent over the previous year which Table 11.5: Exchange Gain/(Loss) – Net amounted to Rs34, 725 million during the Rupees per currency , appreciation/depreciation in percent year compared to the net gain of Rs61, 973 Exchange rate Appreciation /depreciation Currency million in the previous year. The decline in 30.06.2009 30.06.2008 2008-09 2007-08 exchange income is mainly attributable to the US Dollar 81.43 68.01 (16.48) (11.10) net exchange loss witnessed on liabilities Pound 134.33 135.1 0.57 (10.39) pertaining to ‘Payable to International Sterling Japanese Monetary Fund (IMF)’ and SDRs which 0.85 0.64 (24.70) (23.44) amounted to Rs33,376 million compared to Yen Rs14,379 million during the previous year, Euro 114.11 107.23 (6.03) (24.05) registering an increase in loss by 132 percent SDR 126.36 111.55 (11.72) (17.77) over the previous year. Moreover, the net Table 11.6: Breakup of the Exchange Account exchange gain on foreign currency placements, deposits and other accounts also (million rupees) declined by 11 percent during the current Description 2008-09 2007-08 financial year. A breakup of Bank’s net Gain / (loss) on: exchange gain is presented in Table 11.6. - Foreign currency placements, deposits and 68,365 76,483 other accounts - net - Open market operations (including currency -403 -226 11.2.6 Dividend Income swap arrangements) The Bank earns dividend income on its - Forward covers under exchange risk 139 95 holdings of equity investments in banks and coverage - Payable to the International Monetary Fund financial institutions. Bank’s listed and -33,376 -14,379 (IMF) and SDRs unlisted equity investments stood at Rs20, 087 Total 34,725 61,973 million as on June 30, 2009 compared to the investments of Rs19.589 billion as at June 30, 2008. The dividend income increased by Rs3, 139 million in current year, which is 48 percent higher than the income in previous financial year.

11.2.7 Other Operating Income - net Other operating income of the Bank is mainly derived from gain on sale of investments, penalties levied on banks and financial institutions, license / Credit Information Bureau fee recovered, profit on sale of securities, gain / (loss) on re-measurement of securities classified as held for trading, etc. The income under the head sharply declined by Rs8, 411 million during the year under review. The different factors leading to the decline in other operating income included decrease in gain on sale of investment by Rs21, 025 million which was offset by an increase of Rs3, 676 million in gain on

113 State Bank of Pakistan Annual Report 2008-2009 remeasurement of securities classified as held for trading. Moreover, income from penalties levied on banks and financial institutions, license / Credit Information Bureau fee and others also declined by Rs1,032 million.

11.2.8 Other Income - net The net income/(charges) under the head represents gain on disposal of property and equipment, net gain arising on liabilities and provisions written back, amortization of deferred income and income under other miscellaneous heads which are netted against other charges of the bank mainly comprising charges paid to International Monetary Fund on allocations of Special Drawing Rights. The net other income (charges) of the Bank increased by 496 million which amounted to net income of Rs56 million as compared to the net charges of Rs440 million previous year. The increase in net income is mainly attributable to decrease in charges on allocation of SDRs by Rs302 million and decrease of Rs132 million in provisions against reimbursement of agricultural losses during the current financial year.

11.3 Expenditure The total expenditure (including provisions against impaired assets) of the Bank is computed at Rs18, 216 million as against the expenditure of Rs14, 819 million during previous financial year resulting in an increase of 23 percent over the corresponding year. A review of the main components of the expenditure is presented as under:

11.3.1 Bank Notes Printing Charges Expenditure under the head represents the amount incurred on printing of fresh currency notes. During the period under review, the Bank’s expenditure on printing of currency notes amounted Rs4, 193 million compared to Rs3, 098 million during the previous financial year marking an increase of 35 percent.

11.3.2 Agency Commission The State Bank of Pakistan, under an agency agreement, pays agency commission charges to National Bank of Pakistan (NBP) on account of government transactions and remittances on behalf of SBP. Expenditure under the head increased by 33 percent, during the year, due to enhanced volume of government transactions handled by NBP.

11.3.3 General Administrative and Other Expenses

The head comprises various expenses Table 11.7: General Administrative and Other Expenses including employees’ salaries and other benefits, retirement benefits and employees' (million rupee) compensated absences, and other expenses Description 2008-09 2007-08 mainly including depreciation, electricity & Salaries and other benefits 4,785 4,007 Retirement benefits and employees' water charges, repairs and maintenance, legal 3,324 2,419 and professional charges, travelling, postage compensated absences and telephone charges, etc. A summary of the Other expenses 2,788 2,462 general administrative and other expenses of Total 10,897 8,888 the Bank is presented in Table 11.7.

11.3.4 Provisions The net provisions against doubtful assets showed reversals of Rs488 million compared to net provisions of Rs123 million during the previous financial year. The net reversals comprised reversal of provisions of Rs452 million on account of loans, advances and other assets, reversal of provisions of Rs99 million in respect of diminution in value of investments offset by expenditure for provisions amounting to Rs63 million against other doubtful assets during the year.

114 Annual Financial Performance Review 2008-09

11.4 Distribution of Profit The Bank earned a net profit of Rs204,212 Table 11.8: Distribution of Profit million for the financial year ended June 30, 2009 as compared to the net profit of Rs164, (million rupee) 793 million previous year (see Table 11.8). Description 2008-09 2007-08 Out of the above profit for the year, an amount Dividend 10 10 of Rs49,026 million is proposed to be Transfer to reserve fund 49,026 96,440 transferred to the Bank’s Reserve Fund. The Surplus profit transferable to 155,176 68,343 dividend payable is Rs10 million which is Federal government same as for the previous financial year. After Total 204,212 164,793 taking into account the above, the surplus profit transferable to the Federal Government is computed at Rs155,176 million compared to the surplus of Rs68,343 million for the previous financial year.

115 12 Consolidated Financial Statement of SBP and its Subsidiaries

M. YOUSUF ADIL SALEEM & CO. ERNST & YOUNG FORD RHODES SIDAT Chartered Accountants HYDER Cavish Court, A-35 Chartered Accountants Block 7 & 8, KCHSU Progressive Plaza Sharea Faisal Beaumont Road Karachi P.O.Box 15541 Karachi

AUDITORS’ REPORT TO THE SHAREHOLDERS

We have audited the accompanying consolidated financial statements of the Issue and Banking Departments of the State Bank of Pakistan (the Bank) and its subsidiaries, SBP Banking Services Corporation and National Institute of Banking and Finance (Guarantee) Limited (together “the Group”), which comprise the consolidated balance sheet as at June 30, 2009 and consolidated profit and loss account, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory information. We have also expressed separate joint opinions on the financial statements of the State Bank of Pakistan and its subsidiary, SBP Banking Services Corporation. National Institute of Banking and Finance (Guarantee) Limited was audited by another firm of Chartered Accountants, whose report has been furnished to us and our opinion in so far as it relates to the amounts included for this subsidiary is based solely on the audit report of other auditor.

Management’s Responsibility for the Financial Statements Management of the Bank is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with the International Accounting Standards 1 to 38 and Accounting Policies for investments and transactions and balances with International Monetary Fund (IMF) as stated in note 4.2 and 4.16, respectively, to the financial statements approved for adoption by the Central Board of the Bank. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatements.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors‟ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity‟s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity‟s internal control. An audit also includes evaluating the appropriateness of

117 Consolidated Financial Statement of SBP and its Subsidiaries accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Basis for Qualified Opinion The Group has maintained a provision of Rs. 2,318 million relating to net assets recoverable from the Reserve Bank of India, the Government of India and those pertaining to transactions in former East Pakistan. This provision has been recorded as other liability of the Banking department and the relevant assets and liabilities have not been netted off. Accordingly, assets of the Issue Department and Banking department are overstated by Rs. 4,053 million and Rs. 5,976 million respectively and liabilities and unrealized appreciation on gold reserve of the Banking Department are overstated by Rs.7,473 million and Rs. 2,556 million, respectively.

Qualified Opinion In our opinion, except for the financial effect of the matter stated in the preceding paragraph, the consolidated financial statements give a true and fair view of the financial position of the Bank and its subsidiaries as at June 30, 2009 and of its financial performance and its cash flows for the year then ended in accordance with International Accounting Standards 1 to 38 and Accounting Policies for investments and transactions and balances with IMF as stated in note 4.2 and 4.16 respectively, to the financial statements approved for adoption by the Central Board of the Bank.

Without further qualifying our opinion, we draw attention to:

a) note 30 to the financial statements. As explained in the note, the management will consider to reclassify the allocation of SDRs to liabilities from the accounting year ending June 30, 2010, as suggested by IMF in a letter written subsequent to the year end. Accordingly, the classification of SDR allocation as equity has been maintained in the financial statements.

b) the additional information given in note 49 to the financial statements.

M. Yousuf Adil Saleem & Co. Ernst & Young Ford Rhodes Sidat Hyder Chartered Accountants Chartered Accountants Karachi Karachi

Mushtaq Ali Hirani Omer Chughtai Audit Engagement Partner Audit Engagement Partner Date: October 12, 2009 Date: October 12, 2009

118 State Bank of Pakistan Annual Report 2008-2009

STATE BANK OF PAKISTAN AND ITS SUBSIDIARIES - ISSUE DEPARTMENT CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 2009

2009 2008 Note (Rupees in '000)

ASSETS

Gold reserves held by the Bank 5 157,543,551 130,970,552

Foreign currency reserves 6 378,121,392 439,104,769

Special Drawing Rights of the International Monetary Fund 7 6,318,150 11,632,215

Notes and coins: Indian notes representing assets receivable from the Reserve Bank of India 8 727,665 683,678 Coins 9 2,496,236 2,718,036 3,223,901 3,401,714

Investments 10 675,410,375 458,259,765

Commercial papers held in Bangladesh (former East Pakistan) 11 78,500 78,500

Assets held with the Reserve Bank of India 12 3,021,743 2,591,897

1,223,717,612 1,046,039,412

LIABILITY

Bank notes issued 13 1,223,717,612 1,046,039,412

The annexed notes 1 to 52 form an integral part of these financial statements.

Syed Salim Raza Yaseen Anwar Muhammad Haroon Rasheed Governor Deputy Governor Comptroller Finance

119 Consolidated Financial Statement of SBP and its Subsidiaries

STATE BANK OF PAKISTAN AND ITS SUBSIDIARIES - BANKING DEPARTMENT CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 2009

2009 2008 Note (Rupees in '000) ASSETS Local currency 9 196,449 181,913 Foreign currency reserves 6 430,086,636 197,206,165 Earmarked foreign currency balances 14 33,959,461 12,040,910 Special Drawing Rights of the International Monetary Fund 7 6,117,522 3,137,123 470,360,068 212,566,111 Reserve tranche with the International Monetary Fund under quota arrangements 15 15,048 13,286 Current account of the Government of Punjab 21.2 40,915,860 - Current account of the Government of Balochistan 21.5 7,127,734 13,908,793 Current account of the Government of Azad Jammu and Kashmir 21.6 - 518,564 Investments 10 495,387,378 635,739,865 Loans, advances and bills of exchange 16 339,782,241 242,880,410 Balances due from the Governments of India and Bangladesh (former East Pakistan) 17 5,416,132 5,033,592 Property and equipment 18 18,263,362 18,522,284 Intangible assets 19 116,393 120,923 Other assets 20 8,823,052 5,539,812 Total assets 1,386,207,268 1,134,843,640

LIABILITIES Bills payable 827,785 1,224,446 Current accounts of the Governments 21 66,621,868 70,823,348 Securities sold under agreement to repurchase 22 - 6,758,751 Deposits of banks and financial institutions 23 273,739,781 424,549,382 Other deposits and accounts 24 167,779,188 145,601,026 Payable to the International Monetary Fund 25 419,003,041 91,263,686 Other liabilities 26 45,286,505 59,302,997 973,258,168 799,523,636 Deferred liability - staff retirement benefits 27 13,796,014 12,183,991 Capital grant rural finance resource centre 59,430 59,430 Deferred income 28 193,549 206,244 Total liabilities 987,307,161 811,973,301 Net assets 398,900,107 322,870,339

REPRESENTED BY Share capital 29 100,000 100,000 Allocation of Special Drawing Rights of the International Monetary Fund 30 1,525,958 1,525,958 Reserves 31 172,729,024 76,288,533 Unappropriated profit 49,025,682 96,440,491 223,380,664 174,354,982

Unrealised appreciation on gold reserves 32 156,772,429 129,768,343 Surplus on revaluation of property and equipment 18.2 18,747,014 18,747,014 398,900,107 322,870,339 CONTINGENCIES AND COMMITMENTS 33

The annexed notes 1 to 52 form an integral part of these financial statements.

Syed Salim Raza Yaseen Anwar Muhammad Haroon Rasheed Governor Deputy Governor Comptroller Finance

120 State Bank of Pakistan Annual Report 2008-2009

STATE BANK OF PAKISTAN AND ITS SUBSIDIARIES CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED JUNE 30, 2009

2009 2008 Note (Rupees in '000)

Discount, interest / mark-up and / or return earned 34 183,112,028 104,882,577 Less: Interest / mark-up expense 35 8,085,169 3,748,759 175,026,859 101,133,818

Commission income 36 1,667,375 720,289 Exchange gain- net 37 34,725,139 61,973,254 Dividend income 9,733,352 6,594,079 Other operating income - net 38 1,220,052 9,631,073 Other income / (charges) - net 39 55,916 (440,596) 222,428,693 179,611,917 Less: Direct operating expenses

Bank notes printing charges 40 4,193,032 3,097,868 Agency commission 41 3,614,261 2,710,017 (Reversal) of provision / provision for: - loans, advances and other assets (451,726) - - diminution in value of investments (98,687) - - other doubtful assets 62,615 122,543 (487,798) 122,543 215,109,198 173,681,489

Less: General administrative and other expenses 42 10,897,194 8,888,130 PROFIT FOR THE YEAR 204,212,004 164,793,359

The annexed notes 1 to 52 form an integral part of these financial statements.

Syed Salim Raza Yaseen Anwar Muhammad Haroon Rasheed Governor Deputy Governor Comptroller Finance

121 Consolidated Financial Statement of SBP and its Subsidiaries

STATE BANK OF PAKISTAN AND ITS SUBSIDIARIES CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED JUNE 30, 2009

2009 2008 Note (Rupees in '000)

Profit for the year before non-cash items 43 198,209,877 147,134,270 (Increase) / decrease in assets: Foreign currency reserves not included in cash and cash equivalents 1,617,223 (67,560) Reserve tranche with the International Monetary Fund under quota arrangements (1,762) (2,405) Securities sold / (purchased) under agreement to re-sale - 33,715,973 Investments (76,800,508) (614,591,949) Discount income received 81,363 - Loans, advances and bills of exchange (96,451,307) 45,198,668 Indian notes representing assets receivable from the Reserve Bank of India (43,987) (45,429) Assets held with the Reserve Bank of India (381,299) (47,765) Other assets (3,286,689) (34,500,401) (175,266,966) (570,340,868) 22,942,911 (423,206,598) Increase / (decrease) in liabilities: Bank notes issued 177,678,200 152,611,013 Bills payable (396,661) 652,504 Current accounts of the Governments (37,817,717) (80,981,160) Securities sold under agreement to re-purchase (6,758,751) (55,058,006) Deposits of banks and financial institutions (150,809,601) 119,380,806 Other deposits and accounts 22,178,162 41,465,030 Payable to the International Monetary Fund 327,739,355 6,199,944 Other liabilities (169,399,862) (37,284,178) 162,413,125 146,985,953 185,356,036 (276,220,645) Payment of retirement benefits and employees' compensated absences (1,711,855) (1,720,000) Proceeds from disposal of investment 19,740 16,868,262 Dividend received 9,733,352 6,594,079 Gold purchased - (169,831) Fixed capital expenditure (516,260) (317,548) Proceeds from disposal of property and equipment 20,926 8,975 7,545,903 21,263,937 Dividend paid to the Federal Government (10,000) (10,000) Increase / (decrease) in cash and cash equivalents during the year 192,891,939 (254,966,708)

Cash and cash equivalents at beginning of the year 663,590,374 918,557,082 Cash and cash equivalents at end of the year 44 856,482,313 663,590,374

The annexed notes 1 to 52 form an integral part of these financial statements.

Syed Salim Raza Yaseen Anwar Muhammad Haroon Rasheed Governor Deputy Governor Comptroller Finance

122 State Bank of Pakistan Annual Report 2008-2009

The annexed notes from 1 to 52 form an integral part of these financial statements. financial these partof integral an form to52annexed1The notesfrom Government. approval theFederal fundof after to theReserve 49,026million proposed has CentralBoardTheRs * totransfer Balance 30, 2009 at June Balance profit transferred to the Federal Government Transferred to reserve fund Dividend Total recognised income and expense for the year Unrealised appreciation on revaluation of gold reserves Profit for the year in equity for 2008 - 09 Changes Balance at June 30, 2008 Balance profit transferred to the Government of Pakistan Transferred to reserve fund Dividend Transactions Refund of advance against issue of share capital Total recognised income and expense for the year Unrealised appreciation on revaluation of gold reserves Profit for the year in equity for 2007 - 08 Changes Balance at June 30, 2007

Syed SalimSyed Raza

Governor

100,000 ------100,000 ------

------Rupees in '000------

capital

Share Share

100,000

1,525,958 ------1,525,958 ------

Allocation

of special

rights of rights drawing

1,525,958

IMF

161,429,024 - 96,440,491 - - - - 64,988,533 - 9,139,871 - 9,893 - - - -

Reserve fund

------Reserves------

55,838,769

2,600,000 ------2,600,000 ------

fund creditRural

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY IN CHANGES STATEMENT OF CONSOLIDATED

2,600,000

FOR THE YEAR ENDED JUNE 30, 2009 THE JUNE FOR YEAR ENDED

1,600,000 ------1,600,000 ------

credit fund Industrial

1,600,000

STATE BANK OF PAKISTAN STATE OF BANK

1,500,000 ------1,500,000 ------

fund Export credit

Attribute to equity of parent holders

Deputy GovernorDeputy

1,500,000

Yaseen Anwar Yaseen

900,000 ------900,000 ------

fund guarantee Loans

900,000

4,700,000 ------4,700,000 ------

credit fund Housing

4,700,000

*49,025,682 (155,176,322) (96,440,491) (10,000) 204,212,004 - 204,212,004 96,440,491 (68,342,868) (9,139,871) (10,000) - - 164,793,359 - 164,793,359

profit / (loss) Unappropriated

9,139,871

156,772,429 - - - 27,004,086 27,004,086 - 129,768,343 - - - - - 50,327,422 50,327,422 -

reserves goldon appreciation Unrealised

79,440,921

18,747,014 ------18,747,014 ------

equipment and property, plant revaluation of on Surplus

Muhammad Haroon Rasheed Muhammad

18,747,014

Comptroller Finance

398,900,107 (155,176,322) - (10,000) 231,216,090 27,004,086 204,212,004 322,870,339 (68,342,868) - (10,000) 9,893 - 215,120,781 50,327,422 164,793,359

176,092,533

Total

------(9,893) (20,000) - - -

Minority

Interest

29,893

398,900,107 (155,176,322) - (10,000) 27,004,086 204,212,004 322,870,339 (68,342,868) - (10,000) - (20,000) 50,327,422 164,793,359

231,216,090 215,120,781 176,122,426

Total

123 Consolidated Financial Statement of SBP and its Subsidiaries

STATE BANK OF PAKISTAN AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2009

1. STATUS AND NATURE OF OPERATIONS

1.1 The Group comprises of:

1.1.1 State Bank of Pakistan (the Bank) State Bank of Pakistan is the Central Bank of Pakistan and is incorporated under the State Bank of Pakistan Act, 1956. The Bank is primarily responsible for the management of credit, foreign exchange and currency in the country and also acts as the fiscal agent of the Government. The activities of the Bank mainly include:

- implementing the monetary policy;

- issuing of currency;

- facilitation of free competition and stability in the financial system;

- licensing and supervision of banks including micro finance banks, development financial institutions and exchange companies;

- organisation and management of the inter-bank settlement system and promotion of smooth functioning of payment systems;

- providing of loans and advances to the Government, banks, financial institutions and local authorities under various facilities;

- purchase, holding and sale of shares of banks and financial institutions on the directives of the Federal Government; and

- acting as depository of the Government under specific arrangements between the Government and certain institutions.

1.1.2 The subsidiaries of the Bank and the nature of their respective activities are as follows:

a) SBP Banking Services Corporation - wholly owned subsidiary: SBP Banking Services Corporation (the Corporation) was established under the SBP Banking Service Corporation Ordinance, 2001 in Pakistan and commenced its operations with effect from January 2, 2002. It is responsible for carrying out certain statutory and administrative functions and activities principally relating to public dealing on behalf of the State Bank of Pakistan.

b) National Institute of Banking and Finance (Guarantee) Limited - wholly owned subsidiary: National Institute of Banking and Finance (Guarantee) Limited (the Institute) was incorporated in Pakistan under the Companies Ordinance, 1984 as a company limited by guarantee. The Institute is engaged in providing education and training in the field of banking, finance and allied areas.

1.2 The head office of the Bank is situated at I.I.Chudrigar Road, Karachi, in the province of Sindh, Pakistan.

1.3 The financial statements are presented in Pak Rupees, which is the Group's functional and presentation currency.

124 State Bank of Pakistan Annual Report 2008-2009

2. STATEMENT OF COMPLIANCE

These financial statements have been prepared in accordance with the requirements of International Accounting Standards (IASs) and policies for investments and transactions and balances with International Monetary Fund as stated in note 4.2 and 4.16 respectively approved for adoption by the Central Board of the Bank. Under the power conferred by the State Bank of Pakistan Act, 1956, the Central Board has approved IAS-1 to IAS-38 for adoption. Where the requirements of policies adopted by the Central Board differ with the requirements of IASs adopted by the Central Board, the requirements of policies adopted by the Central Board take precedence.

Subsidiaries are entities controlled by the Bank. Control exist when the Bank has power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

The consolidated financial statements include collectively the financial statements of the Bank and its subsidiaries. Financial statements of the subsidiaries have been consolidated on a line-by-line basis.

All material inter group balances and transactions have been eliminated.

3. BASIS OF MEASUREMENT

3.1 These financial statements have been prepared under the historical cost convention, except that gold reserves, foreign currency reserve, special drawing rights of IMF, certain investments and certain property and equipment, as referred to in their respective notes have been included at revalued amounts. The preparation of financial statements in conformity with International Accounting Standards 1 to 38 and policies for investments and transactions and balances with IMF as stated in note 4.2 and 4.16 respectively, approved for adoption by the Central Board of the Bank, requires management to make judgements estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities that are not readily available from other sources. The estimates and associated assumptions are based on historical experiences and various other factors that are believed to be reasonable under the circumstances, the result of which form the basis of making judgements about the carrying value of assets and liabilities, income and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both current and future periods. Judgements made by the management in the application of International Accounting Standards 1 to 38 and policies for investments and transactions and balances with IMF as stated in note 4.2 and 4.16 respectively, approved for adoption by the Central Board of the Bank, that have significant effect on the financial statements and estimates with significant risk of material judgment in subsequent years are discussed in note 47 to these financial statements.

3.2 Accounting standards that are not yet effective or not relevant The following standards are applicable from the date mentioned below against the respective standard :-

Standards Effective date (accounting period beginning on or after)

IAS - 1 (Revised) Presentation of financial statements January 1, 2009

IAS - 23 (Revised) Borrowing costs January 1, 2009

IAS - 32 (Revised) Financial instruments: January 1, 2009

The Group expects that the adoption of the above standards will not have any material impact on the Group's financial statements in the period of initial application other than to the extent of certain changes and/or enhancements in the presentation and disclosures in the financial statements resulting from the application of IAS 1. The revised IAS 1 was issued in September 2007 and becomes effective for financial years beginning on or after 1 January 2009.

125 Consolidated Financial Statement of SBP and its Subsidiaries

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

4.1 Bank notes and coins

The liability of the Bank towards bank notes issued as a legal tender under the State Bank of Pakistan Act, 1956 is stated at the face value and is represented by the specified assets of the Issue Department of the Bank. The cost of printing of notes is charged to the profit and loss account as and when incurred. Any un-issued bank notes lying with the Bank are not reflected in the books of account.

The Bank also issues coins of various denominations on behalf of the Government of Pakistan (GOP). These coins are purchased from the GOP at their respective face values. The un-issued coins form part of the assets of the Issue Department.

4.2 Investments

All investments acquired by the Group are initially measured at cost being the fair value of consideration given. Transaction costs are included in the initial measurement of investments. Subsequent to initial measurement, the Group measures and classifies its investments under the following categories:

Held for trading These securities are either acquired for generating a profit from short term fluctuations in market price, interest rate movements, dealer‟s margin or securities included in a portfolio in which a pattern of short term profit making exists. These instruments are subsequently re-measured to fair value. All related realised and unrealised gains and losses are recognised in the profit and loss account.

All purchases and sales of investments categorised as held-for-trading that required delivery within the time frame established by regulation or market convention („regular way‟ purchase and sale) are recognised at the trade date, which is the date the Group commits to purchase or sell the investment, other wise transactions are treated as derivative until settlement occurs.

Held to maturity These are financial assets with fixed or determinable payments and fixed maturity that the Group has the positive intent and ability to hold to maturity other than loans and receivables. These securities are carried at amortized cost, less accumulated impairment losses, if any, and premiums and/or discounts are accounted for using effective interest method.

All regular way purchases and sales are recognised at the trade date, which is the date the Group commits to purchase or sell the investment. Other wise transactions are treated as derivative until settlement occurs.

A financial asset is impaired if its carrying amount is greater than its estimated recoverable amount. The amount of impairment loss for assets carried at amortised cost is calculated as the difference between the asset‟s carrying amount and present value of expected future cash flows discounted at the financial instrument‟s original effective interest rate.

Loans and receivables These are financial assets created by the Group by providing money directly to a debtor. Subsequent to initial recognition, these assets are carried at amortised cost and premiums and/or discounts are accounted for using the effective interest method.

All loans and advances are recognised when cash is advanced to borrowers. When a loan is uncollectible, it is written off against the related provision for impairment. Subsequent recoveries are credited in the profit and loss account.

An allowance for impairment is established if there is evidence that the Group will not be able to collect all amounts due according to the original contractual terms of loans and advances. The amount of the provision is the difference between the carrying amount and the amount recoverable from guarantees and collateral, discounted at the original effective interest rate of loans and advances.

126 State Bank of Pakistan Annual Report 2008-2009

Available for sale securities (AFS) These are the securities which do not fall in any of the above three categories. Subsequent to initial recognition, these securities are measured at fair value except the strategic investments, including investments in National Bank of Pakistan, Habib Bank Limited, Allied Bank Limited and United Bank Limited, and investments in securities the fair value of which cannot be determined reliably. Gain or loss on changes in fair value is taken to and kept in equity until the investments are sold or disposed off, or until the investments are determined to be impaired, at that time cumulative gain or loss previously reported in the equity is included in profit and loss account.

Fair value of the financial instruments classified as held-for-trading and available for sale is their quoted bid price at the balance sheet date.

Investments classified as held-for-trading or available-for-sale are de-recognised by the Group on the date it transfers risks and rewards. Securities held-to-maturity are de-recognised on the day these are transferred by the Group. Gains and losses on de-recognition of held for trading, held to maturity and AFS securities are taken to profit and loss account.

4.3 Derivative financial instruments

The Group uses derivative financial instruments which include forwards, futures and currency swaps. Derivatives are initially recorded at cost and are re-measured to fair value on subsequent reporting dates. Forwards are shown under Commitments in the note 33.2 while the asset and liability portion of a currency swap are presented in Other Assets and Other Liabilities in notes 20 and 26 to the financial statements respectively. The resultant gains or losses from derivatives are included in the profit and loss account on a time proportional basis.

4.4 Collateralised borrowings / lending

Securities sold subject to a commitment to repurchase them at a pre-determined price, are retained on the balance sheet and a liability is recorded in respect of the consideration received in “Securities sold under agreement to repurchase”. Conversely, securities purchased under analogous commitment to resale are not recognised on the balance sheet and an asset is recorded in respect of the consideration paid in “Securities purchased under agreement to resale”. The difference between the sale and repurchase price in the repurchase transactions and the purchase price and resale price in reverse repurchase transaction represents an expense and income, respectively, and recognised in the profit and loss account on time proportion basis.

4.5 Gold reserves

Gold reserves, including those held with the Reserve Bank of India, are stated at the revalued amounts of the fine gold content thereof in accordance with the requirements of the State Bank of Pakistan Act, 1956 and the State Bank of Pakistan General Regulations. Appreciation or depreciation, if any, on revaluation is taken to equity under the head of “Unrealised appreciation on gold reserves” account. Appreciation realised on disposal of gold is credited to the profit and loss account.

4.6 Property and equipment

Property and equipment except land, buildings and capital work in progress are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Freehold land is stated at revalued amount. Leasehold land and buildings are stated at revalued amount less accumulated depreciation and accumulated impairment losses, if any. Capital work-in- progress is valued at cost.

Depreciation on property and equipment are charged to profit and loss account applying the straight-line method whereby the cost/revalued amount of an asset is written off over its estimated useful life. The useful life at the rates specified in note 18.1 to these financial statements. The residual value, useful life and depreciation methods are reviewed and adjusted if appropriate, at each balance sheet date.

Depreciation on additions is charged to the profit and loss account from the month in which the asset is put to use while no depreciation is charged in the month in which the assets are deleted / disposed off. Normal repairs and maintenance are charged to the profit and loss account as and when incurred; major renewals and improvements are capitalised and the assets so replaced, if any, are retired. Gains and losses on disposal of fixed assets are included in profit and loss account.

Increases in carrying amount arising on revaluation of land and buildings are credited to revaluation surplus on revaluation of property and equipment. Decreases that offset previous increases of the same assets are charged against surplus on revaluation of property and equipment in equity, all other decreases are charged to the profit and loss account. The surplus on revaluation realised on property and equipment is transferred to unappropriated profit.

127 Consolidated Financial Statement of SBP and its Subsidiaries

4.7 Intangibles

Intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses, if any.

Intangible assets are amortised using straight-line method over the period of three years. Where the carrying amount of an asset exceeds its estimated recoverable amount it is written down immediately to its recoverable amount.

4.8 Impairment

The carrying amounts of the Group‟s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment of any asset or a group of assets. If such indication exists, the recoverable amount of such assets is estimated. An impairment loss is recognised in profit and loss account whenever the carrying amount of an asset or a group of assets exceeds its recoverable amount except for impairment loss on revalued assets which is adjusted against the related revaluation surplus to the extent that the impairment loss does not exceed the surplus on revaluation of assets. Balances considered bad and irrecoverable are written off from the books of account. Provisions against impairment are reviewed at each balance sheet date and adjusted to reflect the current best estimates. Changes in the provisions are recognised as income / expense in the profit and loss account.

4.9 Compensated absences

The Group makes annual provision in respect of liability for employees‟ compensated absences based on actuarial estimates.

4.10 Staff retirement benefits

The Bank and the Corporation operates:

a) an un-funded contributory provident fund (old scheme) for those employees who joined the Bank prior to 1975 and opted to remain under the old scheme. In 2007, the Bank provided an option to employees covered under general provident scheme to join contributory Provident Fund Scheme effective from June 1, 2007. Moreover, employees joining the Bank service after June 1, 2007 are also covered under the contributory provident fund scheme.

b) an un-funded general provident fund (new scheme) for all those employees who joined the Bank after 1975 and those employees who had joined prior to 1975 but opted for the new scheme.

c) following other staff retirement benefit schemes:

- an unfunded gratuity scheme (old scheme) for all employees other than those who opted for the new general provident fund scheme, or joined the Bank after 1975 and are entitled only to pension scheme benefits.

- a contributory providend fund and contributory gratuity scheme (new scheme) was introduced by the Bank effective from June 1, 2007 for all its employees other than those who opted for pension scheme or unfunded gratuity scheme (old scheme).

- an un-funded pension scheme;

- an un-funded benevolent fund scheme; and

- an un-funded post retirement medical benefit scheme.

Obligations for contributions to defined contribution provident plans are recognised as an expense in the profit and loss account as and when incurred.

Annual provisions are made by the Bank and the Corporation to cover the obligations arising under defined benefits schemes based on actuarial recommendations. The actuarial valuations are carried out under the Projected Unit Credit Method. Unrecognised actuarial gains and losses are recognised in the profit and loss account over the expected average remaining working lives of the employees.

The above staff retirement benefits are payable on completion of prescribed qualifying period of service.

128 State Bank of Pakistan Annual Report 2008-2009

4.11 Deferred income

Grants received on account of capital expenditure are recorded as deferred income. These are amortised over the useful life of the related asset.

4.12 Revenue recognition

- Discount, interest / mark-up and / or return on loans and advances and investments are recorded on time proportion basis that takes into account the effective yield on the asset. However, income on balances with Bangladesh (former East Pakistan), doubtful loans and advances and overdue return on investments are recognised as income on receipt basis.

- Dividend income is recognised when the Group‟s right to receive dividend is established.

- Gains / losses on disposal of securities are recognised in profit and loss account at trade date.

- All other revenues are recognised on time proportion basis.

- Training and education fee is recognised on completion of relevant courses.

- Hostel income is recognised on performing services.

4.13 Finances under profit and loss sharing arrangements

The Group provides various finances to financial institutions under profit and loss sharing arrangements. Share of profit / loss under these arrangements is recognised on accrual basis.

4.14 Taxation

The income of the Bank and the Corporation is exempt from tax under section 49 of the State Bank of Pakistan Act, 1956. Further, income of the Institute is also exempt from income tax as per Clause 92 of Part I of Second Schedule to the Income Tax Ordinance, 2001.

4.15 Foreign currency translation

Transactions denominated in foreign currencies are translated to Pak Rupees at the foreign exchange rate ruling at the date of transaction. Monetary assets and liabilities in foreign currencies are translated into rupees at the rates of exchange prevailing at the balance sheet date.

Exchange gains and losses are taken to the profit and loss account except for certain exchange differences on balances with the International Monetary Fund, referred to in note 4.16, which are transferred to the Government of Pakistan account.

Exchange differences arising under Exchange Risk Coverage Scheme and on currency swap transactions are recognised in the books of account on accrual basis.

Commitments for outstanding forward foreign exchange contracts disclosed in note 33.2 to the financial statements are translated at forward rates applicable to their respective maturities. Contingent liabilities/commitments for letters of credit and letters of guarantee denominated in foreign currencies are expressed in rupee terms at the rates of exchange ruling on the balance sheet date.

129 Consolidated Financial Statement of SBP and its Subsidiaries

4.16 Transactions and balances with International Monetary Fund

Transactions and balances with the International Monetary Fund (IMF) are recorded on the basis of IASs and the guidelines contained in the IMF Manual, Aide Memoire and specific arrangements entered into between the Bank and the Government. A summary of the policies followed by the Group for recording of these transactions and balances is as follows:

- The Government‟s contribution for quota with the IMF is recorded by the Bank as depository of the Government and exchange differences arising under these arrangements are transferred to the Government account.

- Exchange gains or losses arising on revaluation of borrowings from the IMF are recognised in the profit and loss account.

- The cumulative allocation of Special Drawing Rights by the IMF is treated as capital receipt and is not revalued.

From the year ended June 30, 2006, on the directive of Government of Pakistan, all income or charges pertaining to balances with the IMF are taken to the profit and loss account, earlier, income or charges pertaining to balances with the IMF were taken to the Government account, except for the following which were taken to the profit and loss account:

- charges on borrowings under credit schemes other than fund facilities,

- charges on net cumulative allocation of Special Drawing Rights; and

- return on holdings of Special Drawing Rights.

4.17 Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount can be made. Provisions are reviewed at each balance sheet date and are adjusted to reflect the current best estimates.

4.18 Cash and cash equivalents

Cash and cash equivalents include cash, balances in the current and deposit accounts and securities that are realisable in known amounts of cash within three months and which are subject to insignificant changes in value.

4.19 Financial instruments

Financial assets and liabilities are recognised at the time when the Group becomes a party to the contractual provisions of the instrument. The Group derecognises financial asset when it loses control of the contractual rights that comprise the financial asset. The Group derecognises a financial liability when the liability is extinguished, discharged, cancelled or expired.

Any gain or loss on the derecognition of the financial assets and liabilities is included in the profit and loss account currently.

Financial instruments carried on the balance sheet include foreign currency reserves, investments, loans and advances, government accounts, balances with IMF, other deposits accounts and liabilities. The particular recognition and measurement methods adopted are disclosed in the individual policy statements associated with each financial instrument.

4.20 Stocks

Stocks and other consumables are valued at the lower of cost and net realizable value. Cost comprises cost of purchases and other costs incurred in bringing the items to their present location and condition. Replacement cost of the items is used to measure the net realizable value. Provision is made for stocks which are not used for a considerable period of time.

4.21 Accounts receivables and other receivables

Accounts receivables and other receivables are carried at invoice amount less an allowance for any uncollectible amounts. Known bad debts are written off when identified.

130 State Bank of Pakistan Annual Report 2008-2009

4.22 Trade and other payables

Liabilities for trade and other amounts payable are carried at amortized cost, which is the fair value of the consideration to be paid in future for goods and services received, whether or not billed to the Institute.

4.23 Offsetting

A financial asset and a financial liability is offset and the net amount is reported in the balance sheet when the Group has a legally enforceable right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

Net content in troy 2009 2008 Note ounces (Rupees in '000)

5. GOLD RESERVES HELD BY THE GROUP

Opening balance 2,070,208 130,970,552 81,277,106 Additions during the year - - 169,831 Appreciation during the year due to revaluation 32 - 26,572,999 49,523,615 2,070,208 157,543,551 130,970,552

2009 2008 (Rupees in '000) 6. FOREIGN CURRENCY RESERVES

Investments 6.1 & 6.2 138,835,486 241,920,666 Deposit accounts 6.3 & 6.4 383,978,460 355,534,449 Current accounts 6.2 & 6.3 285,394,082 38,855,819 808,208,028 636,310,934

The above foreign currency reserves are held as follows:

Issue Department 378,121,392 439,104,769 Banking Department 430,086,636 197,206,165 808,208,028 636,310,934

6.1 Investments

Held for trading 6.4 138,612,661 240,011,459 Held to maturity - 1,699,851 Available for sale 222,825 209,356 138,835,486 241,920,666

6.2 These include Rs. 224.77 million (2008: Rs. 211.18 million) recoverable from the Government of India. Realisability of these assets is subject to final settlement between the Governments of Pakistan and India.

6.3 The balance in current and deposit accounts carry interest at various rates ranging between 0.01% to 5.75% (2008: 0.75% to 5.82%) per annum.

6.4 These include investments made in international market through reputable Fund Managers. The activities of the Fund Managers are being monitored through a custodian. Market value of these investments is equivalent to USD 1,754 million (2008: USD 3,700 million).

131 Consolidated Financial Statement of SBP and its Subsidiaries

7. SPECIAL DRAWING RIGHTS OF THE INTERNATIONAL MONETARY FUND

Special Drawing Rights (SDRs) are the foreign reserve assets which are allocated by the International Monetary Fund (IMF) to its member countries in proportion to their quota in the IMF. In addition, the member countries can purchase the SDRs from the IMF and other member countries in order to settle their obligations. The figures given below represent the rupee value of the SDRs held by the Bank at June 30, 2009. Interest is credited by the IMF on the SDR holding of the Group at weekly interest rates on daily products of SDRs held during each quarter.

2009 2008 (Rupees in '000) SDRs were held as follows:

By the Issue Department 6,318,150 11,632,215 By the Banking Department 6,117,522 3,137,123 12,435,672 14,769,338

8. INDIAN NOTES REPRESENTING ASSETS RECEIVABLE FROM THE RESERVE BANK OF INDIA

These represent Pak Rupee equivalent of Indian rupee notes which were in circulation in Pakistan until retirement from circulation under the Monetary Order from the Government of Pakistan. Realisability of these assets is subject to final settlement between the Governments of Pakistan and India.

2009 2008 Note (Rupees in '000) 9. LOCAL CURRENCY

Bank notes held by the Banking Department 13 196,449 181,913 Coins 2,496,236 2,718,036 2,692,685 2,899,949 Coins held as an asset of the Issue Department 9.1 (2,496,236) (2,718,036) 196,449 181,913

9.1 As mentioned in note 4.1, the Bank is responsible for issuing coins of various denominations on behalf of the Government. This balance represents the face value of unissued coins held by the Bank at year end.

2009 2008 Note (Rupees in '000)

10. INVESTMENTS

Loans and receivables originated by the Group

Government securities 10.1 Market Treasury Bills (MTBs) 10.2 1,147,773,885 1,071,469,025 Federal Government scrip 2,740,000 2,740,000 1,150,513,885 1,074,209,025 Available for sale investments

Investments in Banks and other financial institutions

Ordinary shares Listed 15,564,908 15,567,366 Unlisted 4,521,707 4,021,706 10.3 20,086,615 19,589,072 Term Finance Certificates 211,801 282,400 Certificates of Deposits 84,264 112,351 20,382,680 19,983,823 Provision against diminution in value of investments 10.4 (503,064) (601,751) 1,170,393,501 1,093,591,097 Investment held to maturity - Pakistan Investment Bonds 404,252 408,533 1,170,797,753 1,093,999,630 Investment - MTBs held as assets of the Issue Department (675,410,375) (458,259,765) 495,387,378 635,739,865

132 State Bank of Pakistan Annual Report 2008-2009

10.1 Investments in Government securities

These represent investments guaranteed / issued by the Government. The profile of return on securities is as follows:

2009 2008 (% per annum)

Market Treasury Bills 11.47 to 14.01 9.26 to 11.19 Federal Government scrip 3 3

10.2 This includes securities having carrying value of Nil (2008: Rs. 7,000 million) given as collateral under repurchase agreement borrowing arrangements.

10.3 Investments in shares of banks and other financial institutions (note 10.3.1)

2009 2008 2009 2008 % of Holding Note (Rupees in '000)

Listed National Bank of Pakistan 75.20 75.20 10.3.2 1,100,806 1,100,807 United Bank Limited 19.49 19.49 10.3.3 5,919,530 5,919,530 Allied Bank Limited 10.07 10.07 10.3.4 350,638 350,638 Habib Bank Limited 40.55 40.61 10.3.5 8,193,934 8,196,391 15,564,908 15,567,366

Unlisted Federal Bank for Cooperatives 75.00 75.00 150,000 150,000 Equity Participation Fund 65.81 65.81 102,000 102,000 252,000 252,000 Other- investments with holding less than or equal to 50% 4,269,707 3,769,706 4,521,707 4,021,706 20,086,615 19,589,072

10.3.1 Investments in above entities have been made under the specific directives of the Government of Pakistan in accordance with the provisions of the State Bank of Pakistan Act, 1956 and other relevant statutes. The management of the Group does not exercise significant influence or control over these entities except for any regulatory purposes or control arising as a consequence of any statute which applies to the entire sector to which these entities belong. Accordingly, these entities have not been consolidated as subsidiaries or accounted for as investments in associates, or joint ventures.

10.3.2 Market value of the Group's investment in the shares of National Bank of Pakistan at June 30, 2009 amounted to Rs. 54,254.63 million (2008: Rs. 99,489.75 million).

10.3.3 Market value of the Group's investment in the shares of United Bank Limited at June 30, 2009 amounted to Rs.8,304.31 million (2008: Rs. 16,776.61 million).

10.3.4 Market value of the Group's investment in the shares of Allied Bank Limited at June 30, 2009 amounted to Rs. 2,691.17 million (2008: Rs. 5,548.25 million).

10.3.5 Market value of the Group's investment in the shares of Habib Bank Limited amounted to Rs. 31,791.71 million (2008: Rs.64,310.51 million). 2009 2008 (Rupees in '000) 10.4 Provision against diminution in value of investments

Opening balance 601,751 601,751 Reversal during the year (98,687) - Closing balance 503,064 601,751

133 Consolidated Financial Statement of SBP and its Subsidiaries

11. COMMERCIAL PAPERS

These represent face value of certain commercial papers amounting to Rs. 78.5 million (2008: Rs. 78.5 million) which are held in Bangladesh (former East Pakistan). The realisability of the underlying amount is subject to final settlement between the Governments of Pakistan and Bangladesh (former East Pakistan).

2009 2008 Note (Rupees in '000) 12. ASSETS HELD WITH THE RESERVE BANK OF INDIA

Gold reserves Opening balance 2,124,701 1,320,894 Appreciation from revaluation during the year 32 431,087 803,807 2,555,788 2,124,701 Sterling securities 443,920 446,480 Government of India securities 17,069 16,037 Rupee coins 4,966 4,679 3,021,743 2,591,897

The above assets were allocated to the Government of Pakistan as its share of the assets of Reserve Bank of India under the provisions of Pakistan (Monetary System and Reserve Bank) Order, 1947. The transfer of these assets to the Group is subject to final settlement between the Governments of Pakistan and India.

2009 2008 Note (Rupees in '000)

13. BANK NOTES ISSUED

Notes held with the Banking Department 9 196,449 181,913 Notes in circulation 1,223,521,163 1,045,857,499 1,223,717,612 1,046,039,412

14. EARMARKED FOREIGN CURRENCY BALANCES

This represents foreign currency held with the Group that is earmarked to meet specific foreign currency commitments of the Group.

15. RESERVE TRANCHE WITH THE INTERNATIONAL MONETARY FUND UNDER QUOTA ARRANGEMENTS

Quota allocated by the International Monetary Fund 130,592,537 115,303,703 Liability under quota arrangements (130,577,489) (115,290,417) 15,048 13,286

16. LOANS, ADVANCES AND BILLS OF EXCHANGE

Governments 16.1 28,733,244 8,700,000

Government owned / controlled financial institutions 16.2 131,892,462 119,234,156 Private sector financial institutions 16.3 176,349,704 113,217,197 308,242,166 232,451,353 Employees 11,045,929 10,419,881 348,021,339 251,571,234 Provision against doubtful balances 16.4 (8,160,598) (8,612,324) 339,860,741 242,958,910 Commercial papers held in issue department 11 (78,500) (78,500) 339,782,241 242,880,410

16.1 Loans and advances to the Governments

Federal Government 1,500,000 4,500,000 Provincial Government - Punjab 10,000,000 - Provincial Government - Balochistan 17,233,244 4,200,000 28,733,244 8,700,000

During the year, mark-up on above balances due from the Federal and Provincial Governments was charged at various rates ranging between 10.87% and 13.92% (2008: 8.90% and 10.29%) per annum.

134 State Bank of Pakistan Annual Report 2008-2009

16.2 Loans and advances to Government owned / controlled financial institutions

Other Scheduled banks Total financial institutions 2009 2008 2009 2008 2009 2008 ------(Rupees in '000) ------

Agricultural sector 16.2.2 & 16.2.3 58,543,026 58,541,539 - - 58,543,026 58,541,539 Industrial sector 16.2.2 11,635,481 12,400,626 - 7,118 11,635,481 12,407,744 Export sector 33,185,792 19,572,450 3,567 3,567 33,189,359 19,576,017 Housing sector - - 11,242,300 11,242,300 11,242,300 11,242,300 Others 17,282,296 17,466,556 - - 17,282,296 17,466,556 120,646,595 107,981,171 11,245,867 11,252,985 131,892,462 119,234,156

16.2.1 Above balances include Rs. 560.00 million (2008: Rs. 556.00 million) which are recoverable from various financial institutions operating in former East Pakistan. The realisability of these balances is subject to final settlement between the Governments of Pakistan and Bangladesh (former East Pakistan).

16.2.2 Exposure to the agricultural and industrial sectors include Rs. 50,174.09 million and Rs. 1,083.12 million (2008: Rs. 50,174.09 million and Rs. 1,083.12 million) respectively, representing the cumulative Government guaranteed financing of Rs. 51,257.21 million (2008: Rs. 51,257.21 million) to Zarai Taraqiati Bank Limited (ZTBL). The restructuring of ZTBL is in progress and detailed terms of repayment of these finances are expected to be finalised in due course.

16.2.3 It includes agricultural financing of Rs.8,000 million (2008: Rs. 8,000 million) given to Punjab Provincial Cooperative Bank Limited (PPCBL). The financing was guaranteed by the Government of Punjab (Provincial Governmet) and was repayable on December 31 ,2007. Subsequent to the year end a rescheduling agreement has been arranged with the provincial government whereby it is agreed that repayment of the above loan would be made in twelve monthly installments of Rs. 250 million each and eighteen monthly installments of Rs.277.778 million starting from August 01, 2009. Further, mark up of Rs. 136.76 million on the above loan has been repaid on September 30, 2009.

16.3 Loans and advances to private sector financial institutions

Other Scheduled banks Total financial institutions 2009 2008 2009 2008 2009 2008 ------(Rupees in '000) ------

Industrial sector 27,277,559 27,724,767 4,797,841 4,939,912 32,075,400 32,664,679 Export sector 144,267,322 80,545,536 - - 144,267,322 80,545,536 Others 6,982 6,982 - - 6,982 6,982 171,551,863 108,277,285 4,797,841 4,939,912 176,349,704 113,217,197

2009 2008 16.4 Provision against doubtful assets (Rupees in '000)

Opening balance 8,612,324 8,612,324 Reversal during the year (451,726) - Closing balance 8,160,598 8,612,324

135 Consolidated Financial Statement of SBP and its Subsidiaries

16.5 The interest / mark-up rate profile of the interest / mark-up bearing loans and advances is as follows:

2009 2008 (% per annum)

Government owned / controlled and private sector financial institutions 1.0 to 12 1.0 to 12 Employees loans 10 10

2009 2008 Note (Rupees in '000)

17. BALANCES DUE FROM THE GOVERNMENTS OF INDIA AND BANGLADESH (FORMER EAST PAKISTAN)

India Advance against printing of notes 39,616 39,616 Receivable from the Reserve Bank of India 837 837 40,453 40,453 Bangladesh (former East Pakistan) Inter office balances 819,924 819,924 Loans and advances 17.1 4,555,755 4,173,215 5,375,679 4,993,139 5,416,132 5,033,592

17.1 These represents interest bearing loans and advances provided to the Government of Bangladesh (former East Pakistan).

17.2 The realisability of the above balances is subject to final settlement between the Governments of Pakistan, Bangladesh (former East Pakistan) and India.

2009 2008 Note (Rupees in '000)

18. PROPERTY AND EQUIPMENT

Operating fixed assets 18.1 17,828,049 18,191,681 Capital work-in-progress 18.3 435,313 330,603 18,263,362 18,522,284

136 State Bank of Pakistan Annual Report 2008-2009

18.1 Operating fixed assets 2009

Cost / revalued Additions / Cost / revalued Accumulated Depreciation / Accumulated Net book value at Annual rate of amount at (deletions) during the amount at June depreciation at (deletions) for the year depreciation at June 30 depreciation % July 01 year 30 July 01 June 30

------(Rupees in '000) ------

Freehold land 3,577,047 - 3,577,047 - - - 3,577,047 -

Leasehold land 12,762,205 - 12,762,205 707,496 349,116 1,056,612 11,705,593 over the term of lease

Buildings on freehold land 959,824 6,664 966,488 189,954 96,398 286,352 680,136 5

Buildings on leasehold land 1,524,068 54,370 1,578,438 286,654 157,003 443,657 1,134,781 5

Furniture and fixtures 185,735 7,268 186,749 80,986 18,349 94,418 92,331 10 (6,254) (4,917)

Office equipment 679,369 105,920 780,265 407,184 97,811 500,646 279,619 20 (5,024) (4,349)

EDP equipment 1,001,894 303,635 1,288,470 906,602 131,996 1,029,885 258,585 33.33 (17,059) (8,713)

Motor vehicles 154,443 54,580 179,331 74,028 29,470 79,374 99,957 20 (29,692) (24,124)

Library Books 755 - 755 755 - 755 -

20,845,340 532,437 21,319,748 2,653,659 880,143 3,491,699 17,828,049 (58,029) (42,103)

2008

Cost / revalued Additions / Cost / revalued Accumulated Depreciation / Accumulated Net book value at Annual rate of amount at (deletions) during the amount at June depreciation at July (deletions) for the year depreciation at June June 30 depreciation % July 01 year 30 01 30

------(Rupees in '000) ------

Freehold land 3,576,297 750 3,577,047 - - - 3,577,047 - - Leasehold land 12,762,205 - 12,762,205 353,748 353,748 707,496 12,054,709 over the term of lease

Buildings on freehold land 948,507 11,317 959,824 94,333 95,621 189,954 769,870 5

Buildings on leasehold land 1,450,818 73,250 1,524,068 141,361 145,293 286,654 1,237,414 5

Furniture and fixtures 170,726 17,792 185,735 65,775 17,771 80,986 104,749 10 (2,783) (2,560)

Office equipment 496,841 184,055 679,369 330,114 78,301 407,184 272,185 20 (1,527) (1,231)

EDP equipment 926,929 75,115 1,001,894 805,267 101,471 906,602 95,292 33.33 (150) (136) Motor vehicles 122,398 54,332 154,443 66,141 25,629 74,028 80,415 20 (22,287) (17,742) Library Books 755 - 755 755 - 755 -

20,455,476 416,611 20,845,340 1,857,494 817,834 2,653,659 18,191,681 (26,747) (21,669)

137 Consolidated Financial Statement of SBP and its Subsidiaries

18.2 Last revaluation was carried out on June 30, 2006 by Sidat Hyder Morshed Associates (Pvt.) Ltd. 18.2.1 Subsequent to revaluation on June 30, 2001, which had resulted in a surplus of Rs.6.953.549 million, the freehold land, leasehold land, buildings on freehold land and leasehold land were revalued again on June 30, 2006 resulting in a net surplus of Rs.12,552.511 million. The valuation was conducted by the independent valuers. Land and buildings were valued on the basis of professional assessment of market values. Had there been no revaluation, the carrying value of the revalued assets would have been as follows:-

2009 2008 (Rupees in '000) Freehold land 36,183 36,183 Leasehold land 16,638 17,390 Buildings on Freehold land 308,211 333,004 Buildings on Leasehold land 446,314 426,823 807,346 813,400

Revaluation surplus of Rs.759.05 million was transferred to unappropriated profits on disposal of assets in earlier years.

18.3 Capital work-in-progress

Buildings on freehold land 82,059 47,321 Buildings on leasehold land 268,781 198,902 Furniture and fixtures 776 100 Office equipment 80,784 81,367 EDP equipment 2,913 2,913 435,313 330,603

19. INTANGIBLE ASSETS Cost at Additions during Cost at Accumulated Amortisation for Accumulated Net book value at Annual rate of July 01 the year June 30 amortisation at the year amortisation at June 30 amortis-ation % July 01 June 30 ------(Rupees in '000) ------

Software 2009 473,927 76,838 550,765 353,004 81,368 434,372 116,393 33.33 Software 2008 403,352 70,575 473,927 239,583 113,421 353,004 120,923 33.33

2009 2008 Note (Rupees in '000) 20. OTHER ASSETS Amounts due from financial institutions under currency swap arrangements 20.1 2,317,912 1,818,325 Accrued interest / mark-up, discount and return 3,992,621 2,944,463 Stationery and stamps on hand 85,257 77,661 Other advances, deposits and prepayments 177,174 615,484 Others 2,250,088 83,879 8,823,052 5,539,812

20.1 This represents the Group's right to receive rupee counterpart of the foreign currency on the maturity of certain currency swap arrangements with commercial banks. The related obligation of the Group to exchange foreign currency with the rupee counterpart has been disclosed in note 26.

138 State Bank of Pakistan Annual Report 2008-2009

2009 2008 Note (Rupees in '000)

21. CURRENT ACCOUNTS OF THE GOVERNMENTS

Federal Government 21.1 44,237,301 18,354,023 Provincial Governments Punjab 21.2 - 11,367,875 Sindh 21.3 20,479,598 32,455,344 North West Frontier Province (NWFP) 21.4 695,329 8,646,106 Balochistan 21.5 - - 21,174,927 52,469,325 Government of Azad Jammu and Kashmir 21.6 1,209,640 - 66,621,868 70,823,348

21.1 Federal Government

Non-food account 58,739,303 196,666 Food account 360,557 306,328 Zakat fund account 14,952,611 13,475,361 Railways - ways and means advances 21.7 (33,742,545) (20,945,231) Fertilizer account 19,220 19,220 Saudi Arabia special loan account 4,124 4,124 Pakistan Baitul Mal fund account 4,306 541,270 Pakistan Railways special account 144,305 3,488,195 Government deposit account no. XII 5,276 5,276 Special transfer account 1,616 9,785,258 UN reimbursement account 3,731,488 11,477,556 Fata Zakat Fund Account 17,040 44,237,301 18,354,023

21.2 Provincial Government - Punjab

Non-food account (99,208,876) (41,378,246) Food account 1,730,967 3,383,354 Zakat fund account 104,597 38,786 District Government account no. IV 56,457,452 49,323,981 (40,915,860) 11,367,875 Classified as a receivable balance 21.7 40,915,860 - Net credit balance - 11,367,875

21.3 Provincial Government - Sindh

Non-food account 7,360,652 22,066,137 Food account 697,812 186,499 Zakat fund account 37,392 68,258 District Government account no. IV 12,383,742 10,134,450 20,479,598 32,455,344

21.4 Provincial Government - NWFP

Non-food account (4,787,023) 2,463,074 Food account 387,840 1,214,100 Zakat fund account 741 4,935 District Government account no. IV 5,093,771 4,963,997 695,329 8,646,106

139 Consolidated Financial Statement of SBP and its Subsidiaries

2009 2008 Note (Rupees in '000) 21.5 Provincial Government - Balochistan

Non-food account (10,324,853) (18,035,223) Food account 333,138 914,760 Zakat fund account 1 91,439 District Government account no. IV 2,863,980 3,120,231 (7,127,734) (13,908,793) Classified as a receivable balance 21.7 7,127,734 13,908,793 Net credit balance - -

21.6 The Government of Azad Jammu and Kashmir

Net Balance 1,209,640 (518,564) Classified as a receivable balance 21.7 - 518,564 Net credit balance 1,209,640 -

21.7 These balances carry mark-up at 12.80% (2008: 10.29% ) per annum.

22. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE

This represented repurchase agreement borrowings and are subject to markup at the rate of 4.10% to 11.18% (2008: 9.74% to 9.95%) per annum. 2009 2008 (Rupees in '000) 23. DEPOSITS OF BANKS AND FINANCIAL INSTITUTIONS

Foreign currency Scheduled banks 19,510,623 12,701,967 Held under Cash Reserve Requirement 64,382,992 57,849,627 83,893,615 70,551,594 Local currency Scheduled banks 189,127,303 353,180,909 Financial institutions 718,709 814,353 Others 154 2,526 189,846,166 353,997,788 273,739,781 424,549,382

23.1 The above deposits are free of interest except deposits under cash reserve requirements which are remunerated at the rates given below: 2009 2008 (per annum)

Foreign currency 0.90% to 2.93% 1.46% to 4.72% Local currency 0.59% to 0.61% 1.98% to 2.59%

140 State Bank of Pakistan Annual Report 2008-2009

2009 2008 Note (Rupees in '000) 24. OTHER DEPOSITS AND ACCOUNTS

Foreign currency Foreign central banks 36,645,435 30,603,600 International organisations 24.2 61,075,725 51,006,000 Others 19,173,063 14,580,025 116,894,223 96,189,625 Local currency Special debt repayment 24.3 23,682,875 23,596,676 Government 24.4 11,012,500 11,012,500 Others 16,189,590 14,802,225 50,884,965 49,411,401 167,779,188 145,601,026

24.1 The interest rate profile of the interest bearing deposits is as follows: 2009 2008 (per annum)

Foreign central banks 0.42% to 2.16% 1.60% to 5.50% International organisations 3.52% to 4.85% 4.26% to 7.15% Others 0.02% to 1.80% 1.81% to 5.08%

24.2 A long-term deposit of USD 500 million by the State Administration Foreign Exchange (SAFE) China received during the year carrying interest at six month LIBOR plus 1% payable semi-annually and maturing in lump-sum on January 2012, has been set off against the rupee counterpart receivable from the Federal Government vide letter dated March 26, 2009 between SBP and Federal Government whereby the Federal Government has agreed to assume all liabilities and risks arising from SBP's agreement with SAFE China.

24.3 These are free of interest and represent amounts kept in separate special accounts to meet forthcoming foreign currency debt repayment obligations of the Government of Pakistan.

24.4 These represent rupee counterpart of the foreign currency loan disbursements received from various international financial institutions on behalf of the Government and credited to separate deposit accounts in accordance with the instructions of the Government.

2009 2008 Note (Rupees in '000) 25. PAYABLE TO INTERNATIONAL MONETARY FUND

Borrowings under: Fund facilities 25.1 & 25.2 333,010,969 1,057,443 Other credit schemes 85,992,043 90,206,218 419,003,012 91,263,661 Current account for administrative charges 29 25 419,003,041 91,263,686

25.1 During the year, IMF granted a Stand By Arrangement Facility amounting to SDR 5,168.50 million. The amount will be disbursed by IMF in 8 tranches starting from November 26, 2008 to November 30, 2010. During the year, two tranches amounting to SDR 2,635.94 million have been received. The facility is subject to mark up based on the weekly rates determined by the IMF and is payable on each quarter. Subsequent to the year end, the facility has been extended up to SDR 7,235.90 million. The remaining balance is receivable in six trenches. The repayment of the facility will commence from February 2012 and will mature by April 2014.

25.2 These facilities are secured by demand promissory notes issued by the Government of Pakistan.

25.3 Interest profile of payable to IMF is as under: 2009 2008 (per annum)

Fund facilities 1.38% to 4.18% 3.59% to 5.67% Other credit schemes 0.50% 0.50%

141 Consolidated Financial Statement of SBP and its Subsidiaries

2009 2008 Note (Rupees in '000) 26. OTHER LIABILITIES

Foreign currency Amounts due to financial institutions under currency swap arrangements 20.1 2,443,103 2,040,240 Accrued interest and discount on deposits 1,256,713 512,391 Charges on allocation of Special Drawing Rights of IMF 15,554 92,865 3,715,370 2,645,496 Local currency Overdue mark-up and return 26.1 4,241,812 3,864,334 Unearned exchange risk fee 5,479 9,115 Remittance clearance account 1,044,332 1,036,714 Exchange loss payable under exchange risk coverage scheme 128,916 129,576 Balance payable to the Government of Pakistan 19,358,324 28,342,868 Dividend payable 10,000 10,000 Share of loss payable under profit and loss sharing arrangements 2,407,129 2,399,071 Payable to Government in respect of privatisation proceeds 2,929,066 2,929,066 Other accruals and provisions 26.2 7,795,564 7,386,965 Others 3,650,513 10,549,792 41,571,135 56,657,501 45,286,505 59,302,997

26.1 It includes markup suspended amounting to Rs. 4,240.15 million (2008: Rs. 3,857.61 million) that is recoverable from Government of Bangladesh (formerly East Pakistan) which is subject to the final settlement between the Government of Pakistan and the Government of Bangladesh.

2009 2008 Note (Rupees in '000) 26.2 Other accruals and provisions

Agency commission 1,014,422 761,570 Provision for employees' compensated absences 2,444,023 2,267,808 Provision for other doubtful assets 26.2.1 2,389,103 2,350,727 Other provisions 26.3 1,308,325 1,308,382 Others 639,691 698,478 7,795,564 7,386,965

26.2.1 It includes Rs. 2,318 million (2008: Rs. 2,261 million) relating to net assets recoverable form the Reserve Bank of India the Government of India and those pertaining to transaction in former East Pakistan.

2009 2008 (Rupees in '000)

26.3 Movement of other provisions

Opening balance 1,308,382 1,175,858 Provision during the year - 132,524 Reversed during the year (57) - Closing balance 1,308,325 1,308,382

Home Agriculture Others Total remittance loan (note 26.3.1) ------(Rupees in '000) ------

Opening balance 260,363 306,067 741,952 1,308,382 Reversed during the year - - (57) (57) Closing balance 260,363 306,067 741,895 1,308,325

26.3.1 This represents provision made in respect of various litigations against the Group.

142 State Bank of Pakistan Annual Report 2008-2009

2009 2008 Note (Rupees in '000)

27. DEFERRED LIABILITY - STAFF RETIREMENT BENEFITS

Gratuity 27.1 54,432 51,282 Pension 9,486,594 8,719,768 Benevolent fund scheme 1,017,373 947,587 Post retirement medical benefits 2,102,394 1,453,457 42.2.3 12,660,793 11,172,094 Provident fund scheme 1,135,221 1,011,897 13,796,014 12,183,991

27.1 Includes a fixed liability of Rs. 26.070 million (2008: 1.164 million) payable to certain employees.

28. DEFERRED INCOME

Opening balance 206,244 340,845 Grants received during the year 198,811 78,790 Amortisation during the year 39 (211,506) (213,391) Closing balance 193,549 206,244

28.1 This represents grant received for capital expenditure and, as indicated in note 4.11 to these financial statements, is being amortised over the useful lives of the related assets.

29. SHARE CAPITAL

Number of 2009 2008 Shares (Rupees in '000) Authorised share capital

1,000,000 Ordinary shares of Rs. 100 each 100,000 100,000

Issued, subscribed and paid-up capital

1,000,000 Fully paid-up ordinary shares of Rs. 100 each 100,000 100,000

The share of the Bank are held by the Government of Pakistan except for 200 shares held by the Central Bank of India (held by Deputy Custodian Enemy Property, Banking Supervision Department, State Bank of Pakistan) and 500 shares held by the State of Hyderabad.

30.. ALLOCATION OF SPECIAL DRAWING RIGHTS OF IMF

30.1 The allocation of SDRs by the IMF has been reflected as part of the equity and carried at historical cost in line with the approved accounting policy by the Board. The draft report issued by the IMF Committee on Balance Of Payment (BOPCOM) in 2007 considered possibility to classify the allocation of SDRs as a liability. Accordingly, the Central Board has approved an annual appropriation equivalent to one-third of the exchange difference that would arise upon reclassification of the allocation from equity to liability with retrospective effect. An amount of Rs. 8,326 million (2008: 6,935 million) has been proposed to be appropriated to Reserve Fund out of the profit for the year ended June 30, 2009. The total exchange differences as on June 30, 2009 amounting to Rs.19,949 million have been appropriated in the reserve fund. 30.2 Subsequent to the year end, in a letter written by Director - Statistics Department, IMF to the Bank, it is stated that in the monetary and financial statistics as published in International Financial Statistics (IFS), the SDR allocation would now be treated as liabilities to non-resident (foreign liabilities) and no longer as "shares and other equity" when held on the balance sheet of the central bank. The letter further states that these changes would be reflected for the first time in October 2009 issue of IFS and will also reflect the historical series at the same time and encourage the adoption of the new treatment of the SDR allocations in the macroeconomic accounts compiled and disseminated by the country, to ensure that the data published by the country and the IMF are consistent and follow the revised international guidelines. The same will be considered for adoption in the next accounting year. The same will be considered for adoption in the next accounting year.

143 Consolidated Financial Statement of SBP and its Subsidiaries

31.1 Reserve Fund This represents appropriations made out of the annual profits of the Bank in accordance with the provisions of the State Bank of Pakistan Act, 1956.

31.2 Other Funds

These represent appropriations made out of the surplus profits of the Bank for certain specified purposes in accordance with the provisions of the State Bank of Pakistan Act, 1956. 2009 2008 Note (Rupees in '000) 32. UNREALISED APPRECIATION ON GOLD RESERVES

Opening balance 129,768,343 79,440,921 Appreciation on revaluation during the year: held by the Bank 5 26,572,999 49,523,615 held with the Reserve Bank of India 12 431,087 803,807 27,004,086 50,327,422 156,772,429 129,768,343

Gold reserves are revalued under the State Bank of Pakistan Act, 1956 and State Bank of Pakistan General Regulation No. 42(vi) at the closing market rate fixed by the London Bullion Market Association on the last working day of the year.

2009 2008 (Rupees in '000) 33. CONTINGENCIES AND COMMITMENTS

33.1 Contingencies

a) Contingent liability in respect of guarantees given on behalf of:

Federal government 72,410,976 52,494,332 Federal government owned / controlled bodies and authorities 13,420,789 11,261,613 85,831,765 63,755,945

Above guarantees are secured by counter guarantees either from the Government of Pakistan or local financial institutions.

b) Certain employees of the Bank who had retired under the Early Retirement Incentive Scheme (ERIS) introduced in the year 2000 had filed a case against the Bank in the Federal Services Tribunal for the enhancement of their entitlement paid under the above scheme. The Tribunal has decided the case in favour of these employees and has directed that the entitlement under the above scheme should include the effect of subsequent increases in certain staff retirement and other benefits. The Bank, in response to the above decision of the Tribunal, has filed a civil petition for leave to appeal in the Supreme Court of Pakistan which is pending for hearing. The management is confident that the Bank would not have to bear any additional expenditure on this account and, accordingly, no provision has been made in this respect.

c) A claim of Rs. 1,600 million has been lodged against the Bank which has not been acknowledged by the Bank. The Bank has a counter claim of Rs. 493 million. With the mutual agreement of both the parties, matter has been referred to an Arbitrator. Management is confident that the Bank will not incur any liability on this account, as such no provision has been made against the claim.

144 State Bank of Pakistan Annual Report 2008-2009

2009 2008 (Rupees in '000)

d) Other claims against the Bank not acknowledged as debts 861,994 903,367

33.2 Commitments

Forward exchange contracts - sales 186,209,260 236,130,214

Forward exchange contracts - purchases 46,802,117 141,502,378

Futures - sale 4,192,494 22,536,696

Futures - purchase 9,408,925 65,350,752

Foreign currency placements - 1,360,160

Capital commitments 7,110 -

Subscription of right shares 500,000 -

Others - 263

34. DISCOUNT, INTEREST / MARK-UP AND / OR RETURN EARNED

Market Treasury Bills - net 153,267,829 58,329,019 Other Government securities 258,052 174,238 Loans and advances to Government 6,485,358 3,445,678 Share of profit on finances under profit and loss sharing arrangements 12,312,218 6,441,138 Foreign currency deposits 5,070,410 26,976,642 Foreign currency securities 5,715,611 9,513,667 Others 2,549 2,195 183,112,028 104,882,577

35. INTEREST / MARK-UP EXPENSE

Deposits 8,048,417 3,690,893 Others 36,752 57,866 8,085,169 3,748,759

36. COMMISSION INCOME

Market Treasury Bills 205,418 31,973 Draft / payment orders 787,251 118,965 Prize Bonds and National Saving Certificates 213,472 187,723 Management of public debts 132,258 40,629 Others 328,976 340,999 1,667,375 720,289

2009 2008 (Rupees in '000) 37. EXCHANGE GAIN - Net

Gain / (loss) on: Foreign currency placements, deposits, securities and other accounts - net 68,364,987 76,483,373 Open market operations (including currency swap arrangements) (402,789) (226,225) Forward covers under Exchange Risk Coverage Scheme 9,059 (24,552) Payable to IMF (35,194,554) (16,939,040) Special Drawing Rights of IMF 1,818,855 2,559,679 Others 132 - 34,595,690 61,853,235 Exchange risk fee income 129,449 120,019 34,725,139 61,973,254

38. OTHER OPERATING INCOME - Net

Penalties levied on banks and financial institutions 1,323,756 2,093,162 License / Credit Information Bureau fee recovered 67,859 97,342 Gain / (loss) on sale of investments: Local 22,755 14,408,719 Foreign (5,516,503) 1,122,263 (5,493,748) 15,530,982 Gain / (loss) on remeasurement of securities classified as held for trading 5,660,437 (8,015,285) Others - net (338,252) (75,128) 1,220,052 9,631,073

39. OTHER INCOME / (CHARGES) - NET Gain on disposal of property and equipment 12,961 3,897 Liabilities and provisions written back - net 594 36,303 Amortisation of deferred income 28 211,506 213,391 Others 115,639 (107,034) Charges on allocation of Special Drawing Rights of IMF (284,784) (587,153) 55,916 (440,596)

145 Consolidated Financial Statement of SBP and its Subsidiaries

40. BANK NOTES PRINTING CHARGES

Bank notes printing charges are paid to Pakistan Security Printing Corporation (Private) Limited at agreed rates under specific arrangements.

41. AGENCY COMMISSION

Agency commission is payable to National Bank of Pakistan (NBP) under an agreement at the rate of 0.15% (2008: 0.15%) of the total amount of collection and remittances handled by NBP.

2009 2008 Note (Rupees in '000) 42. GENERAL ADMINISTRATIVE AND OTHER EXPENSES

Salaries and other benefits 4,785,037 4,007,153 Retirement benefits and employees' compensated absences 3,323,878 2,419,201 Contribution to SBP Employees' Welfare Trust 10,000 10,000 Rent and taxes 42,755 39,740 Insurance 15,381 13,588 Electricity, gas and water 224,622 167,652 Depreciation 18.1 880,143 817,834 Amortisation of intangible assets 19 81,368 113,421 Repairs and maintenance 349,117 259,602 Auditors' remuneration 42.1 8,134 5,611 Legal and professional 458,120 362,513 Travelling and recreation expenses 162,716 162,105 Daily expenses 51,110 57,413 Fuel 10,671 10,906 Conveyance 8,583 9,461 Postages, telegram / telex and telephone 133,559 122,935 Training 78,691 40,509 Examination/ testing services 4,998 1,144 Stationery 23,852 18,153 Remittance of treasure 33,059 - Books and newspapers 20,730 18,969 Advertisement 3,802 9,090 Uniforms 84,614 60,562 Others 102,254 160,568 10,897,194 8,888,130

42.1 Auditors' remuneration

M. Yousuf Ernst &Young Adil Saleem Ford Rhodes & Co. Sidat Hyder 2009 2008 ------(Rupees in '000) ------State Bank of Pakistan Audit fee 1,429 1,429 2,858 2,300 Out of pocket expenses 286 286 572 200 1,715 1,715 3,430 2,500 SBP Banking Services Corporation Audit fee 1,571 1,571 3,142 2,530 Out of pocket expenses 714 714 1,428 500 2,285 2,285 4,570 3,030 National Institute of Banking and Finance (Guarantee) Limited KPMG Taseer Hadi & Co. Audit fee - - 134 80 Out of pocket expenses - - - 1 - - 134 81 4,000 4,000 8,134 5,611

42.2 Staff retirement benefits

42.2.1 During the year the actuarial valuations of the above defined benefit obligations were carried out under the projected Unit Credit Method using following significant assumptions:

- Expected rate of increase in grants and contributions 5 (2007: 4) % per annum.

- Expected rate of discount 13 (2008: 12) % per annum.

- Expected rate of increase in salary 11 (2008: 10) % per annum.

- Expected rate of increase in pension 5 (2008: 4) % per annum.

- Medical cost increase 8 (2008: 7) % per annum.

- Personnel turnover 2 (2008: 2) % per annum.

146 State Bank of Pakistan Annual Report 2008-2009

42.2.2 Present value of the define benefit obligations

Present values of obligations under the retirement benefit schemes and liabilities recognised there against for the past services of the employees at June 30, 2009 based on actuarial valuation as of that date was as follows: -

2009 Present value of the Unrecognised Net recognized defined actuarial gain / liabilities benefit (loss) Note obligation ------(Rupees in '000)------

Gratuity 42.2.5 41,116 (12,754) 28,362 Pension 42.2.5 12,602,432 (3,115,838) 9,486,594 Benevolent 42.2.5 1,200,605 (183,232) 1,017,373 Post retirement medical benefits 42.2.5 4,915,413 (2,813,019) 2,102,394 18,759,566 (6,124,843) 12,634,723 2008 Present Unrecognised value of the Net recognized actuarial gain / defined liabilities benefit (loss) obligation ------(Rupees in '000)------

Gratuity 42.2.5 58,871 (8,753) 50,118 Pension 42.2.5 10,204,547 (1,484,779) 8,719,768 Benevolent 42.2.5 1,134,346 (186,759) 947,587 Post retirement medical benefits 42.2.5 4,543,730 (3,090,273) 1,453,457 15,941,494 (4,770,564) 11,170,930

42.2.3 The following is a movement in the net recognised liability in respect of the defined benefit schemes

2009 Net recognised Charge for Payments Employees Net recognised liabilities at the year during the contribution liabilities July 01 (note 42.2.4) year at June 30 ------(Rupees in '000)------

Gratuity 50,118 14,194 (32,959) (2,991) 28,362 Pension 8,719,768 1,706,994 (914,225) (25,943) 9,486,594 Benevolent 947,587 179,890 (124,441) 14,337 1,017,373 Post retirement medical benefits 1,453,457 903,305 (254,368) - 2,102,394 11,170,930 2,804,383 (1,325,993) (14,597) 12,634,723

2008 Net recognised Charge for Payments Employees Net recognised liabilities at the year during the contribution liabilities July 01 (note 42.2.4) year at June 30 ------(Rupees in '000)------

Gratuity 53,955 9,543 (13,380) - 50,118 Pension 8,360,072 1,242,004 (882,308) - 8,719,768 Benevolent 941,756 167,254 (153,407) (8,016) 947,587 Post retirement medical benefits 1,107,213 588,583 (242,339) - 1,453,457 10,462,996 2,007,384 (1,291,434) (8,016) 11,170,930

147 Consolidated Financial Statement of SBP and its Subsidiaries

42.2.4 Amount recognised in the profit and loss account

The amounts charged in the profit and loss account during the current year in respect of the above benefits are as follows:

2009 Current Interest Settlement Actuarial Employees Total service cost cost & loss contributions curtailment recognised ------(Rupees in '000)------

Gratuity 4,214 7,065 - 2,915 - 14,194 Pension 339,455 1,224,545 - 142,994 - 1,706,994 Benevolent 43,298 136,122 - 14,807 (14,337) 179,890 Post retirement medical benefits 128,149 545,248 - 229,908 - 903,305 515,116 1,912,980 - 390,624 (14,337) 2,804,383

2008 Current Interest Settlement Actuarial Employees Total service cost cost & loss contributions curtailment recognised ------(Rupees in '000)------

Gratuity 2,514 6,512 - 517 - 9,543 Pension 278,883 944,863 - 18,258 - 1,242,004 Benevolent 39,812 113,880 - 5,546 8,016 167,254 Post retirement medical benefits 86,409 353,483 - 148,691 - 588,583 407,618 1,418,738 - 173,012 8,016 2,007,384

2009 2008 2007 2006 2005 ------(Rupees in '000)------42.2.5 Historical information

Gratuity Present value of defined benefit obligation 41,116 58,871 59,461 74,194 92,000 Unrecognised actuarial (gain)/ loss (12,754) (8,753) (5,506) 6,091 (5,000) Provisions in respect of retirement benefit Liability in balance sheet 28,362 50,118 53,955 80,285 87,000

Experience adjustment arising on plan liabilities losses/ (gain) 36,241 6,632 4,211 (8,520) 20,144

2009 2008 2007 2006 2005 ------(Rupees in '000)------Pension Present value of defined benefit obligation 12,602,432 10,204,547 8,589,692 8,434,571 8,247,000 Unrecognised actuarial (gain) (3,115,838) (1,484,779) (229,620) (376,818) (850,000) Provisions in respect of retirement benefit Liability in balance sheet 9,486,594 8,719,768 8,360,072 8,057,753 7,397,000

Experience adjustment arising on plan liabilities loss/ (gain) 1,774,053 1,273,741 (117,735) 408,484 733,000

Benevolent Fund Present value of defined benefit obligation 1,200,605 1,134,346 1,035,583 1,084,594 1,008,000 Unrecognised actuarial (gain) (183,232) (186,759) (93,827) (125,827) (142,000) Provisions in respect of retirement benefit Liability in balance sheet 1,017,373 947,587 941,756 958,767 866,000

Experience adjustment arising on plan liabilities loss/ (gain) 11,280 99,338 (22,303) (6,390) 8,000

Post Retirement Medical Benefits Present value of defined benefit obligation 4,915,413 4,543,730 3,213,026 2,863,632 2,221,000 Unrecognised actuarial (gain) (2,813,019) (3,090,273) (2,105,813) (2,150,808) (1,790,000) Provisions in respect of retirement benefit Liability in balance sheet 2,102,394 1,453,457 1,107,213 712,824 431,000

Experience adjustment arising on plan liabilities losses/ (gain) 428,486 1,132,465 165,511 493,437 758,000

148 State Bank of Pakistan Annual Report 2008-2009

42.3 Employees' compensated absences

The Group's liability for employees' compensated absences determined through an actuarial valuation carried out under the projected unit credit method amounted to Rs. 2,444 million (2008: Rs. 2,308 million). An amount of Rs. 293 million (2008: Rs. 153 million) has been charged to from the profit and loss account in the current period based on the actuarial advice. 2009 2008 Note (Rupees in '000) 43. PROFIT FOR THE YEAR BEFORE NON-CASH ITEMS

Profit for the year 204,212,004 164,793,359 Adjustments for: Depreciation 880,143 817,834 Amortisation of intangible assets 81,368 113,421 Amortisation of deferred income (211,506) (213,391) Provision for: - retirement benefits and employees' compensated absences 3,323,878 2,419,202 - loans, advances and other assets (451,726) 12,382 - other doubtful assets 62,615 122,543 - diminution in value of investments (98,687) - (Gain) / loss on disposal of property and equipment (12,961) (3,897) Gain on disposal of investments (17,283) (14,408,719) Dividend income (9,733,352) (6,594,079) Other accruals and provisions - net 175,384 75,615 198,209,877 147,134,270

2009 2008 (Rupees in '000) 44. CASH AND CASH EQUIVALENTS

Local currency 2,692,685 2,899,949 Foreign currency reserves 807,394,495 633,880,177 Earmarked foreign currency balances 33,959,461 12,040,910 Special Drawing Rights of IMF 12,435,672 14,769,338 856,482,313 663,590,374

45. RELATED PARTY TRANSACTIONS

The Group enters into transactions with related parties in its normal course of business. Related parties include the Federal Government; as ultimate owner of the Bank, provincial government and government of Azad Jammu and Kashmir, government controlled enterprises / entities, and key management personnel of the Group.

45.1 Governments and related entities

The Bank is acting as an agent of the Federal Government and is responsible for functions conferred upon as disclosed in note 1 to these financial statements. Material transactions and balances outstanding from the federal and provincial governments are disclosed in the respective notes to these financial statements.

45.2 Remuneration to key management personnel

Key management personnel of the Group include members of the Central Board of Directors, Governor, Deputy Governors and other executives of the Bank who have responsibility for planning, directing and controlling the activities of the Bank. Fee of the non-executive member of the Central Board of Directors is determined by the Central Board. According to section 10 of the SBP Act, 1956, the remuneration of the Governor is determined by the President of Pakistan. Deputy Governors are appointed and their salaries are fixed by the Federal Government.

149 Consolidated Financial Statement of SBP and its Subsidiaries

The remuneration of the key management personnel was as follows:

2009 2008 Rupees in '000

Short-term employee benefit 66,544 59,192 Post-employment benefit 17,388 11,096 Loans disbursed during the year 4,672 40,468 Loans repaid during the year 10,758 9,330 Interest charged during the year - 10 Director's fees 2,492 1,431

Short-term benefits include salary and benefits including housing allowance, medical allowance, free use of Bank maintained cars in accordance with their entitlements. Post employment benefits include gratuity, pension, benevolent fund and post retirement medical benefits.

46. RISK MANAGEMENT POLICIES The Group is primarily subject to interest / mark-up rate, credit, currency and liquidity risks. The policies and procedures for managing these risks are outlined in notes 46.1 to 46.5 The Bank has designed and implemented a framework of controls to identify, monitor and manage these risks. The senior management is responsible for advising the Governor on the monitoring and management of these risks.

46.1 Credit risk management

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Credit risk in the Group's portfolio is monitored, reviewed and analysed by the appropriate officials and the exposure is controlled through counterparty and credit limits. Counterparties are allocated to a particular class based mainly on their credit rating. Foreign currency placements are made in approved currencies and government securities. Loans and advances to scheduled banks and financial institutions are usually secured either by Government guarantees or by demand promissory notes. Geographical exposures are controlled by country limits and are updated as and when necessary with all limits formally reviewed on a periodic basis. The Group's exposure to credit risk associated with foreign operations is managed by monitoring compliance with investment limits for counterparties. The Group's credit risk mainly lies with exposure towards government sector and financial institutions.

150 State Bank of Pakistan Annual Report 2008-2009

46.2. Interest / mark-up rate risk management

Interest / mark-up rate risk is the risk that the value of a financial instrument will fluctuate due to changes in the market interest/ mark-up rates. The Bank has adopted appropriate policies to minimise its exposure to this risk.

46.2.1 2009 Interest/ mark-up bearing Non interest/ mark-up bearing Maturity Maturity Total Maturity Maturity Total Grand upto one after upto one after Total year one year year one year < ------(Rupees in '000) ------>

Financial assets

Local currency (including rupee coins) - - - 2,692,685 - 2,692,685 2,692,685 Foreign currency reserves 805,380,793 2,602,465 807,983,258 - 224,770 224,770 808,208,028 Earmarked foreign currency balances - - - 33,959,461 - 33,959,461 33,959,461 Special Drawing Rights of International Monetary Fund - 12,435,672 12,435,672 - - - 12,435,672 Reserve tranche with the International Monetary Fund under quota arrangements - - - - 15,048 15,048 15,048 Current account of the Government of Punjab - - - 40,915,860 - 40,915,860 40,915,860 Current account of the Government of Balochistan - - - 7,127,734 - 7,127,734 7,127,734 Investments 1,147,773,885 2,740,000 1,150,513,885 - 20,283,866 20,283,866 1,170,797,751 Loans, advances and bills of exchange - 339,782,241 339,782,241 - - - 339,782,241 Indian notes representing assets receivable from the Reserve Bank of India - - - - 727,665 727,665 727,665 Assets held with the Reserve Bank of India - - - - 465,955 465,955 465,955 Balances due from the Governments of India and Bangladesh (former East Pakistan) - 4,555,755 4,555,755 - 837 837 4,556,592 Other assets - - - 4,830,433 3,992,619 8,823,052 8,823,052 1,953,154,678 362,116,133 2,315,270,811 89,526,173 25,710,760 115,236,933 2,430,507,744

Financial liabilities

Bank notes in circulation - - - - 1,223,717,612 1,223,717,612 1,223,717,612 Bills payable - - - 827,785 - 827,785 827,785 Current accounts of the Government 44,237,301 - 44,237,301 22,384,567 - 22,384,567 66,621,868 Securities sold under an agreement to repurchase ------Deposits of banks and financial institutions - 64,382,992 64,382,992 - 209,356,789 209,356,789 273,739,781 Other deposits and accounts 44,788,865 72,105,358 116,894,223 39,827,966 11,012,500 50,840,466 167,734,689 Allocation of Special Drawing Rights 1,525,958 1,525,958 - - - 1,525,958 Payable to International Monetary Fund 19,588,999 399,414,042 419,003,041 - - - 419,003,041 Other liabilities - - - 27,902,933 17,383,570 45,286,504 45,286,504 108,615,165 537,428,350 646,043,515 90,943,251 1,461,470,471 1,552,413,723 2,198,457,238 On balance sheet gap 1,844,539,513 (175,312,217) 1,669,227,296 (1,417,079) (1,435,759,711) (1,437,176,790) 232,050,506

Off Balance Sheet Financial Instruments

Off Balance Sheet Gap - - - (133,690,712) - (133,690,712) (133,690,712) Total Yield/Interest Risk Sensitivity Gap 1,844,539,513 (175,312,217) 1,669,227,296 132,273,633 (1,435,759,711) (1,303,486,078) 365,741,218 Cumulative Yield/Interest Risk Sensitivity Gap 1,844,539,513 1,669,227,296 3,338,454,594 3,470,728,225 2,034,968,514 731,482,436 1,097,223,654

151 Consolidated Financial Statement of SBP and its Subsidiaries

46.2.2 The effective interest / markup rate for the monetary financial assets and liabilities are mentioned in their respective notes to the financial statements. 2008 Interest/ mark-up bearing Non interest/ mark-up bearing Maturity Maturity Total Maturity Maturity Total Grand upto one after upto one after Total year one year year one year < ------(Rupees in '000) ------>

Financial assets

Local currency (including rupee coins) - - - 2,899,949 - 2,899,949 2,899,949 Foreign currency reserves 634,821,753 1,487,354 636,309,107 - 1,827 1,827 636,310,934 Earmarked foreign currency balances - - - 12,040,910 - 12,040,910 12,040,910 Special Drawing Rights of International Monetary Fund - 14,769,338 14,769,338 - - - 14,769,338 Reserve tranche with the International Monetary . Fund under quota arrangements - - - - 13,286 13,286 13,286 Current account of the Government of Balochistan - - - 13,908,793 - 13,908,793 13,908,793 Current account of The Government of Azad Jammu and Kashmir - - - 518,564 - 518,564 518,564 Investments 1,070,809,207 2,740,000 1,073,549,207 - 20,450,423 20,450,423 1,093,999,630 Loans, advances and bills of exchange - 242,880,410 242,880,410 - - - 242,880,410 Indian notes representing assets receivable from the Reserve Bank of India - - - - 683,678 683,678 683,678 Assets held with the Reserve Bank of India - - - - 467,196 467,196 467,196 Balances due from the Governments of India and Bangladesh (former East Pakistan) - 4,173,215 4,173,215 - 837 837 4,174,052 Other assets - - - 777,024 4,762,788 5,539,812 5,539,812 1,705,630,960 266,050,317 1,971,681,277 32,737,137 26,380,035 56,525,275 2,028,206,552

Financial liabilities

Bank notes in circulation - - - - 1,046,039,412 1,046,039,412 1,046,039,412 Bills payable - - - 1,224,446 - 1,224,446 1,224,446 Current accounts of the Government 18,354,023 - 18,354,023 52,469,325 - 52,469,325 70,823,348 Securities sold under an agreement to repurchase 6,758,751 - 6,758,751 - - - 6,758,751 Deposits of banks and financial institutions - 57,849,627 57,849,627 366,699,755 - 366,699,755 424,549,382 Other deposits and accounts 24,781,225 81,358,090 106,139,315 621,535 38,840,176 39,461,711 145,601,026 Allocation of Special Drawing Rights 18,961,423 18,961,423 - - - 18,961,423 Payable to International Monetary Fund 15,355,508 75,908,178 91,263,686 - - - 91,263,686 Other liabilities - - - 42,704,446 16,589,436 59,293,882 59,293,882 65,249,507 1,057,931,194 1,142,142,124 463,719,507 1,101,469,024 1,565,188,531 2,707,330,655 On balance sheet gap 1,640,381,453 (791,880,877) 829,539,153 (430,982,370) (1,075,088,989) (1,508,663,256) (679,124,103)

Off Balance Sheet Financial Instruments

Foreign Currency Placement 1,360,160 - 1,360,160 - - - 1,360,160 Forward exchange contracts - purchase - - - 141,502,378 - 141,502,378 141,502,378 Futures contract - purchase - - - 65,350,752 - 65,350,752 65,350,752 ESAF Commitment with IMF ------Futures contract - sales - - - (22,536,696) - (22,536,696) (22,536,696) Forward exchange contracts - sales - - - (236,130,214) - (236,130,214) (236,130,214) Off Balance Sheet Gap 1,360,160 - 1,360,160 (51,813,780) - (51,813,780) (50,453,620) Total Yield/Interest Risk Sensitivity Gap 1,639,021,293 (791,880,877) 828,178,993 (379,168,590) (1,075,088,989) (1,456,849,476) (628,670,483) Cumulative Yield/Interest Risk Sensitivity Gap 1,639,021,293 847,140,416 1,675,319,409 1,296,150,819 221,061,830 (1,235,787,646) (1,864,458,130)

152 State Bank of Pakistan Annual Report 2008-2009

46.3 Currency risk management Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Foreign currency activities result mainly from the Bank's holding of foreign currency assets under its foreign reserves management function and the overall level of these assets is determined based on the prevailing extent of credit and liquidity risks. In order to avoid losses arising from adverse changes in the rates of exchange, the Bank's compliance with the limits established for foreign currency positions is being regularly monitored by the management.

The Group also holds from time to time, foreign currency assets and liabilities that arise from the implementation of domestic monetary policies. Any foreign currency exposure relating to these implementation activities are hedged through the use of foreign currency forwards, swaps and other transactions.

The Group also enters into forward foreign exchange contracts with the commercial banks and financial institutions to hedge against the currency risk on foreign currency swap transactions.

46.4 Liquidity risk management

Liquidity risk is the risk that an entity will encounter difficulty in raising funds to meet commitments associated with the financial instruments. In order to reduce the level of liquidity risk arising out of the local currency activities, the Group manages the daily liquidity position of the banking system including advancing and withdrawal of funds from the system for smoothening out daily peaks and troughs.

The risk arising out of the Group's obligations for foreign currency balances or deposits is managed through available reserves generated mainly from borrowings and open market operations.

46.5 Portfolio risk management

The Group has appointed external managers to invest a part of the foreign exchange reserves in international fixed income securities. The external managers are selected after conducting a thorough due diligence by the Group and externally hired investment consultants, and appointed after the approval of the Central Board. The mandates awarded to the managers require them to outperform the benchmarks which are based on fixed income global aggregate indices. The benchmarks are customized to exclude certain securities, currencies, and maturities to bring it to an acceptable level of risk and within the Bank's approved risk appetite. Managers are provided investment guidelines within which they have to generate excess returns over the benchmark. Safe custody of the portfolio is provided through carefully selected global custodian who is independent of the portfolio managers. The custodian also provides valuation, compliance, corporate actions and recovery, and other value added services which are typically provided by such custodian. The valuations provided by the custodian is reconciled with the portfolio managers, and recorded accordingly.

47. ACCOUNTING ESTIMATES AND JUDGMENTS

47.1 Provision against loans and advances

The Group reviews its loan portfolio to assess recoverability of loans and advances and provision required there against on a continuous basis. While assessing this requirement, various factors including the delinquency in the account, financial position of the borrower and other relevant factors are considered. The amount of provision may require adjustment in case borrowers do not perform according to expectations.

47.2 Impairment of available for-sale investments

The Group determines that available-for-sale equity investments are impaired when there is a significant or prolonged decline in the fair value below its cost. The determination of what is significant or prolonged requires judgment. In making this judgment, the Group evaluates among other factors, the normal volatility in security price. In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the invests, industry and sector performance, changes in technology, and operational and financing cash flows.

47.3 Held-to-maturity investments

The Group classifies non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to- maturity. In making this judgment, the Bank evaluates its intention and ability to hold such investments to maturity.

47.4 Retirement Benefits

The key actuarial assumptions concerning the valuation of defined benefit plans and the sources of estimation are disclosed in note 42.2.1 to the financial statements.

47.5 Useful life and residual value of property and equipment

Estimates of useful life and residual value of property and equipment are based on the management‟s best estimate.

153 Consolidated Financial Statement of SBP and its Subsidiaries

48. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of all the financial instruments reflected in the financial statements approximates their fair value, except strategic investments as mentioned in note 10.3.1 which are carried at cost less permanent impairment in value if any.

49. IMPACT OF IAS 39 AND IFRS 7

Note 2 to the financial statements describes the framework adopted by the Bank. The Bank has undertaken an exercise to prepare additional information, quantifying the effect / impact of International Accounting Standard IAS-39 "Financial Instruments: Recognition and Measurement" and International Financial Reporting Standard IFRS-7 "Financial Instruments : Disclosures" for the year ended June 30, 2009, which has been disclosed in Annexure - A to the financial statements.

50. POST BALANCE SHEET EVENT

The Group based on the letter # F.1(5) IF - 1/2007 dated September 28, 2009 from the Finance Division, Internal Finance Wing, of Government of Pakistan has decided to transfer Rs. 31,110 million from reserve fund to unappropriated profit.

51. DATE OF AUTHORISATION

These financial statements were authorised for issue on October 12, 2009 by the Central Board of Directors of the Bank.

52. GENERAL

52.1 Corresponding Figures

52.1.1 Commitments in respect of letters of credit opened on behalf of the Government of Pakistan are not disclosed as commitments of the Bank and Corresponding figures have also been re-arranged.

52.1.2 Following material corresponding figures have been rearranged / reclassified to reflect more appropriate presentation of event and transactions for the purpose of comparison :-

Current Classification Previous Classification Amount Rupees ('000)

Earmarked foreign currency balances Other assets - others 11,088,798

Other assets Other liabilities 976,840

Other income / (charges) - net Other income 294,220

Other income / (charges) - net Other charges 736,368

52.3 Figures have been rounded off to the nearest thousand rupees, unless otherwise stated..

Syed Salim Raza Yaseen Anwar Muhammad Haroon Rasheed Governor Deputy Governor Comptroller Finance

154 State Bank of Pakistan Annual Report 2008-2009

ANNEXURE - A Impact of IAS 39 and IFRS 7 on Bank's financial statements: Page : 1/3 The following note provides additional information concerning value of assets and liabilities as appearing on the financial statements as per existing framwework and value if the IAS 39 had been adopted by the Bank.

Impact of IAS 39 on Balance Sheet item: As at June 30, 2009

As per Existing Accounting Framework Under IAS 39 Issue Department Banking Department Total Reclassifications Remeasurements Total

Note ------Rs. In '000 ------ASSETS Local currency 9 2,496,236 196,449 2,692,685 - - 2,692,685 Foreign currency reserves 6 378,121,392 430,086,636 808,208,028 (166,207) - 808,041,821 Earmarked foreign currency balances 14 - 33,959,461 33,959,461 - - 33,959,461 Special Drawing Rights of the International Monetary Fund 7 6,318,150 6,117,522 12,435,672 - - 12,435,672 Securities purchased under resale agreements ------Current account of the Government of Punjab 21.5 - 40,915,860 40,915,860 - - 40,915,860 Current account with Government of Balochistan 21.2 - 7,127,734 7,127,734 - - 7,127,734 Current account with the Government of Azad Jammu and Kashmir 21.6 ------Current account with National Institute of Banking and Finance (Guarantee) Limited - a subsidiary ------Investments 10 675,410,375 495,387,378 1,170,797,753 41,100 81,476,912 1,252,315,765 Financial assets pledged as collateral ------Loans, advances and bills of exchange 16 - 339,782,241 339,782,241 3,307,998 (72,040,285) 271,049,954 Reserve tranche with the IMF under quota arrangements 15 - 15,048 15,048 - - 15,048 Indian notes representing asset receivable from the Reserve Bank of India 727,665 - 727,665 (727,665) - - Commercial papers held in Bangladesh 11 78,500 - 78,500 (78,500) - - Assets held with the Reserve Bank of India 12 3,021,743 - 3,021,743 (3,021,743) - - Balances due from Governments of India and Bangladesh 17 - 5,416,132 5,416,132 (5,416,132) - (0) Receivable from India and Bangladesh (former East Pakistan)-net ------Gold reserves 5 157,543,551 - 157,543,551 - - 157,543,551 Property and equipment 18 - 18,263,362 18,263,362 - - 18,263,362 Intangible assets 19 - 116,393 116,393 - - 116,393 Other assets 20 - 8,823,052 8,823,052 (6,285,318) - 2,537,734 TOTAL ASSETS 1,223,717,612 1,386,207,267 2,609,924,880 (12,346,467) 9,436,627 2,607,015,040

LIABILITIES AND EQUITY LIABILITIES Bills payable - 827,785 827,785 - - 827,785 Bank notes issued 13 1,223,717,612 - 1,223,717,612 - - 1,223,717,612 Deposits of banks and financial institutions 23 - 273,739,781 273,739,781 2,990 - 273,742,771 Other deposits and accounts 24 - 167,779,188 167,779,188 342,348 - 168,121,536 Securities sold under repurchase agreements 22 ------Current accounts of Governments 21 - 66,621,868 66,621,868 - - 66,621,868 Current account of SBP Banking Services Corporation- a subsidiary ------Payable to the International Monetory Fund 25 - 419,003,041 419,003,041 911,375 - 419,914,416 Allocation of Special Drawing Rights of Internationaol Monetory Fund 30 - - 1,541,512 19,949,603 21,491,115 Deferred liability - staff retirement benefits 27 - 13,796,014 13,796,014 - - 13,796,014 Capital Grant rural finance resource centre 59,430 59,430 - 59,430 Deferred income 28 - 193,549 193,549 - - 193,549 Other liabilities 26 - 45,286,505 45,286,505 (11,062,946) - 34,223,559 Total liabilities 1,223,717,612 987,307,161 2,211,024,773 (8,264,721) 19,949,603 2,222,709,655

EQUITY Share capital 29 - 100,000 100,000 - - 100,000 Allocation of Special Drawing Rights of International Monetory Fund 30 - 1,525,958 1,525,958 (1,525,958) - - Statutory reserves 31 - 172,729,024 172,729,024 (60,816,515) 111,912,509 Unrealised appreciation on gold reserves 32 - 156,772,429 156,772,429 (2,555,788) - 154,216,641 Surplus on revaluation of property and equipment 18.2 - 18,747,014 18,747,014 - - 18,747,014 Surplus on revaluation of securities - - - - 81,476,912 81,476,912 Unappropriated profit - 49,025,682 49,025,682 (31,173,373) 17,852,309 Equity and reserves - 398,900,107 398,900,107 (4,081,746) (10,512,976) 384,305,385 TOTAL LIABILITIES AND EQUITY 1,223,717,612 1,386,207,268 2,609,924,880 (12,346,467) 9,436,627 2,607,015,040

155 Consolidated Financial Statement of SBP and its Subsidiaries

Impact of IAS 39 on Profit and Loss Account items: Page : 2/3 As at June 30, 2009 Existing Note Reclassifications Remeasurements Under IAS 39 Framework ------Rs. In '000 ------

Interest/ mark-up and similar income 34 183,112,028 (5,899,031) 177,212,997 Interest/ mark-up and similar expense 35 (8,085,169) - (8,085,169) 175,026,859 169,127,828

Commission income 36 1,667,375 - 1,667,375 Exchange gain - net 34,725,139 (34,725,139) - Net foreign exchange gain 37 - 34,725,139 (2,514,137) 32,211,002 Net gain on financial instruments designated at fair value - 6,042,965 6,042,965 Dividend income 9,733,352 - 9,733,352 Other operating income - net 39 1,220,052 (91,914) 1,128,138 Other income / (charges) - net 40 55,916 (52,020) 3,896 Total operating income 222,428,693 219,914,556

Impairment charge/ (reversal) of: - loans, advances and other assets (451,726) (2,406,000) (1,954,274) -diminution in value of investments (98,687) 98,687 - other doubtful assets 62,615 - (62,615) (487,798) (1,918,202) Net operating income 222,916,491 217,996,354

Operating expenses Bank notes printing charges 41 (4,193,032) - (4,193,032) Agency commission 42 (3,614,261) - (3,614,261) General, administrative and other expenses 43 (10,897,194) - (10,897,192) Other operating expenses OPERATING PROFIT 204,212,004 199,291,867

PROFIT FOR THE YEAR 204,212,004 - (4,920,137) 199,291,867

IFRS 7 concerns with certain disclosures regarding financial assets and financial liabilities including the liquidity risk, credit risk, market risk and sensitivity analysis thereof. The adoption of this standard would not impact materially the value of financial assets and financial liabilities as appearing on the balance sheet under the current accounting framework.

156 State Bank of Pakistan Annual Report 2008-2009

Reconciliation of Impact of IAS 39 on Profit and Loss Account: Page : 3/3 Amount Rs. 000

Profit for the Financial Year 2008-09 as per Previous GAAP 204,212,004

Impairment of Loans and Advances (4,920,137)

Profit for the Financial Year 2008-09 as per IAS 39 199,291,867

Reconciliation of Impact of IAS 39 and IFRS 7 on Unappropriated Profit: Un-Appropriated profit for the Financial Year 2008-09 as per Previous GAAP 49,025,682 Add: Reversal of Appropriations - For the year ended June 30, 2007 30,688,835 - For the year ended June 30, 2008 9,139,871 - For the year ended June 30, 2009 20,987,809 60,816,515

Less: Impairment on loans and advances charged to P & L (72,040,285)

Less: Exchange difference on allocation of SDR of IMF charged to P&L Exc - 2006 (13,637,249) Exch- 2007 (429,256) Exch- 2008 (3,368,961) Exch- 2009 (2,514,137) (19,949,603)

Un-Appropriated profit for the Financial Year 2008-09 as per IAS 39 17,852,309

Syed Salim Raza Yaseen Anwar Muhammad Haroon Rasheed Governor Deputy Governor Comptroller Finance

157 13 Financial Statement of SBP

M. YOUSUF ADIL SALEEM & CO. ERNST & YOUNG FORD RHODES Chartered Accountants SIDAT HYDER Cavish Court, A-35 Chartered Accountants Block 7 & 8, KCHSU Progressive Plaza Sharea Faisal Beaumont Road Karachi P.O.Box 15541 Karachi

AUDITORS’ REPORT TO THE SHAREHOLDERS

We have audited the accompanying unconsolidated financial statements of the Issue and Banking Departments of the State Bank of Pakistan (the Bank), which comprise the unconsolidated balance sheet as at June 30, 2009 and unconsolidated profit and loss account, unconsolidated statement of changes in equity and unconsolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements Management of the Bank is responsible for the preparation and fair presentation of these unconsolidated financial statements in accordance with the International Accounting Standards 1 to 38 and Accounting Policies for investments and transactions and balances with International Monetary Fund (IMF) as stated in note 4.2 and 4.16, respectively, to the unconsolidated financial statements approved for adoption by the Central Board of the Bank. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standard on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 159 Financial Statement of SBP

Basis for Qualified Opinion The Bank has maintained a provision of Rs. 2,318 million relating to net assets recoverable from the Reserve Bank of India, the Government of India and those pertaining to transactions in former East Pakistan. This provision has been recorded as other liability of the Banking department and the relevant assets and liabilities have not been netted off. Accordingly, assets of the Issue Department and Banking department are overstated by Rs. 4,053 million and Rs. 5,976 million respectively and liabilities and unrealized appreciation on gold reserve of the Banking Department are overstated by Rs.7,473 million and Rs. 2,556 million, respectively.

Qualified Opinion In our opinion, except for the financial effect of the matter stated in the preceding paragraph, the unconsolidated financial statements give a true and fair view of the financial position of the Bank as at June 30, 2009 and of its financial performance and its cash flows for the year then ended in accordance with International Accounting Standards 1 to 38 and Accounting Policies for investments and transactions and balances with IMF as stated in note 4.2 and 4.16 respectively, to the financial statements approved for adoption by the Central Board of the Bank.

Without further qualifying our opinion, we draw attention to:

b) the additional information given in note 50 to the financial statements.

M. Yousuf Adil Saleem & Co. Ernst & Young Ford Rhodes Sidat Chartered Accountants Hyder Karachi Chartered Accountants Karachi Mushtaq Ali Hirani Audit Engagement Partner Omer Chughtai Date: October 12, 2009 Audit Engagement Partner Date: October 12, 2009

160 State Bank of Pakistan Annual Report 2008-2009

STATE BANK OF PAKISTAN - ISSUE DEPARTMENT UNCONSOLIDATED BALANCE SHEET AS AT JUNE 30, 2009

2009 2008 Note (Rupees in '000) ASSETS

Gold reserves held by the Bank 5 157,543,551 130,970,552

Foreign currency reserves 6 378,121,392 439,104,769

Special Drawing Rights of the International Monetary Fund 7 6,318,150 11,632,215

Notes and coins: Indian notes representing assets receivable from the Reserve Bank of India 8 727,665 683,678 Coins 9 2,496,236 2,718,036 3,223,901 3,401,714

Investments 10 675,410,375 458,259,765

Commercial papers held in Bangladesh (former East Pakistan) 11 78,500 78,500

Assets held with the Reserve Bank of India 12 3,021,743 2,591,897

1,223,717,612 1,046,039,412

LIABILITY

Bank notes issued 13 1,223,717,612 1,046,039,412

The annexed notes from 1 to 53 form an integral part of these financial statements.

Syed Salim Raza Yaseen Anwar Muhammad Haroon Rasheed Governor Deputy Governor Comptroller Finance

161 Financial Statement of SBP

STATE BANK OF PAKISTAN - BANKING DEPARTMENT UNCONSOLIDATED BALANCE SHEET AS AT JUNE 30, 2009

2009 2008 Note (Rupees in '000) ASSETS Local currency 9 196,449 181,913 Foreign currency reserves 6 430,086,636 197,206,165 Earmarked foreign currency balances 14 33,959,461 12,040,910 Special Drawing Rights of the International Monetary Fund 7 6,117,522 3,137,123 470,360,068 212,566,111 Reserve tranche with the International Monetary Fund under quota arrangements 15 15,048 13,286 Current account of the Government of Punjab 21.2 40,915,860 - Current account of the Government of Balochistan 21.5 7,127,734 13,908,793 Current account of the Government of Azad Jammu and Kashmir 21.6 - 518,564 Current account with National Institute of Banking and Finance (Guarantee) Limited - a subsidiary 107,918 47,751 Investments 10 495,348,215 635,700,774 Loans, advances and bills of exchange 16 331,853,796 235,099,049 Balances due from the Governments of India and Bangladesh (former East Pakistan) 17 5,416,132 5,033,592 Property and equipment 18 18,073,733 18,331,133 Intangible assets 19 116,393 120,923 Other assets 20 8,630,077 5,421,609 Total assets 1,377,964,974 1,126,761,585

LIABILITIES Bills payable 827,785 1,224,446 Current accounts of the Governments 21 66,621,868 70,823,348 Current account with SBP Banking Services Corporation- a subsidiary 3,702,522 2,369,636 Securities sold under agreement to repurchase 22 - 6,758,751 Deposits of banks and financial institutions 23 273,739,781 424,549,382 Other deposits and accounts 24 167,779,189 145,601,026 Payable to the International Monetary Fund 25 419,003,041 91,263,686 Other liabilities 26 43,016,815 57,179,315 974,691,001 799,769,590 Deferred liability - staff retirement benefits 27 4,204,684 3,939,778 Deferred income 28 193,549 206,244 Total liabilities 979,089,234 803,915,612 Net assets 398,875,740 322,845,973

REPRESENTED BY Share capital 29 100,000 100,000 Allocation of Special Drawing Rights of the International Monetary Fund 30 1,525,958 1,525,958 Reserves 31 172,704,657 76,264,167 Unappropriated profit 49,025,682 96,440,491 223,356,297 174,330,616

Unrealised appreciation on gold reserves 32 156,772,429 129,768,343 Surplus on revaluation of property and equipment 18.2 18,747,014 18,747,014 398,875,740 322,845,973

CONTINGENCIES AND COMMITMENTS 33

The annexed notes from 1 to 53 form an integral part of these financial statements.

Syed Salim Raza Yaseen Anwar Muhammad Haroon Rasheed Governor Deputy Governor Comptroller Finance

162 State Bank of Pakistan Annual Report 2008-2009

STATE BANK OF PAKISTAN UNCONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED JUNE 30, 2009

2009 2008 Note (Rupees in '000)

Discount, interest / mark-up and / or return earned 34 183,029,210 104,804,382 Less: Interest / mark-up expense 35 8,085,169 3,748,759 174,944,041 101,055,623

Commission income 36 1,667,375 720,289 Exchange gain- net 37 34,725,139 61,973,254 Dividend income 9,733,352 6,594,079 Profit earned through subsidiaries 38 192,481 140,043 Other operating income - net 39 1,114,285 9,570,777 Other income / (charges) - net 40 52,020 (442,148) 222,428,693 179,611,917 Less: Direct operating expenses

Bank notes printing charges 41 4,193,032 3,097,868 Agency commission 42 3,614,261 2,710,017 (Reversal) / Provision of provision for: - loans, advances and other assets (451,726) - - diminution in value of investments (98,687) - - other doubtful assets 62,615 122,543 (487,798) 122,543 215,109,198 173,681,489

Less: General administrative and other expenses 43 10,897,194 8,888,130 PROFIT FOR THE YEAR 204,212,004 164,793,359

The annexed notes from 1 to 53 form an integral part of these financial statements.

Syed Salim Raza Yaseen Anwar Muhammad Haroon Rasheed Governor Deputy Governor Comptroller Finance

163 Financial Statement of SBP

STATE BANK OF PAKISTAN UNCONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED JUNE 30, 2009

2009 2008 Note (Rupees in '000)

Profit for the year before non-cash items 44 196,032,145 145,896,729 (Increase) / decrease in assets: Foreign currency reserves not included in cash and cash equivalents 1,617,224 (67,560) Reserve tranche with the International Monetary Fund under quota arrangements (1,762) (2,405) Securities sold / (purchased) under agreement to re-sale - 33,715,973 Current account of National Institute of Banking and Finance (Guarantee) Limited - a subsidiary (60,167) (33,906) Investments (76,800,508) (614,544,698) Loans, advances and bills of exchange (96,303,021) 47,485,542 Indian notes representing assets receivable from the Reserve Bank of India (43,987) (45,429) Assets held with the Reserve Bank of India (381,299) (47,765) Other assets (3,208,468) (31,200,012) (175,181,988) (564,740,260) 20,850,157 (418,843,531) Increase / (decrease) in liabilities: Bank notes issued 177,678,200 152,611,013 Bills payable (396,661) 652,504 Current accounts of the Governments (37,817,717) (80,462,596) Current account with SBP Banking Services Corporation - a subsidiary 1,332,885 (1,897,003) Securities sold under agreement to re-purchase (6,758,751) (55,058,006) Deposits of banks and financial institutions (150,809,601) 119,380,806 Other deposits and accounts 22,178,163 41,465,030 Payable to the International Monetary Fund 327,739,355 6,199,944 Other liabilities (169,522,546) (41,285,633) 163,623,327 141,606,059 184,473,484 (277,237,472) Payment of retirement benefits and employees' compensated absences (891,810) (792,186) Proceeds from disposal of investment 19,740 16,868,261 Dividend received 9,733,352 6,594,079 Gold purchased - (169,831) Fixed capital expenditure (447,669) (249,334) Proceeds from disposal of property and equipment 14,842 29,775 8,428,455 22,280,764 Dividend paid to the Federal Government (10,000) (10,000) Increase / (decrease) in cash and cash equivalents during the year 192,891,939 (254,966,708)

Cash and cash equivalents at beginning of the year 663,590,374 918,557,082 Cash and cash equivalents at end of the year 45 856,482,313 663,590,374

The annexed notes from 1 to 53 form an integral part of these financial statements.

Syed Salim Raza Yaseen Anwar Muhammad Haroon Rasheed Governor Deputy Governor Comptroller Finance

164 State Bank of Pakistan Annual Report 2008-2009

The annexed notes from 1 to 53 form an integral part of these financial statements. financial these partof integral an form to53annexed1The notesfrom Government. approval theFederal fundof after to theReserve 49,026million proposed Rs has CentralBoardof The * transfer Balance 30, 2009 at June Balance profit transferred to the Government of Pakistan Transferred to reserve fund Dividend Total recognised income and expense for the year Unrealised appreciation on revaluation of gold reserves Profit for the year in equity for 2008 - 09 Changes Balance at June 30, 2008 Balance profit transferred to the Government of Pakistan Transferred to reserve fund Dividend Total recognised income and expense for the year Unrealised appreciation on revaluation of gold reserves Profit for the year in equity for 2007 - 08 Changes Balance at June 30, 2007

Syed SalimSyed Raza

Governor

100,000 ------100,000 ------

------Rupees in '000------

capital

Share Share

100,000

1,525,958 ------1,525,958 ------

special drawing

rights of IMF rights

Allocation of

1,525,958

UNCONSOLIDATED STATEMENT OF CHANGES IN EQUITY IN CHANGES STATEMENT OF UNCONSOLIDATED

161,404,657 - 96,440,491 - - - - 64,964,166 - 9,139,871 - - - -

Reserve fund

------Reserves------

FOR THE YEAR ENDED JUNE 30, 2009 THE JUNE FOR YEAR ENDED

55,824,295

STATE BANK OF PAKISTAN STATE OF BANK

2,600,000 ------2,600,000 ------

fund creditRural

2,600,000

1,600,000 ------1,600,000 ------

credit fund 'Industrial

1,600,000

1,500,000 ------1,500,000 ------

fund Export credit

Deputy GovernorDeputy

1,500,000

Yaseen Anwar Yaseen

900,000 ------900,000 ------

e fund guarante Loans

900,000

4,700,000 ------4,700,000 ------

credit fund Housing

4,700,000

*49,025,682 (155,176,322) (96,440,491) (10,000) 204,212,004 - 204,212,004 96,440,491 (68,342,868) (9,139,871) (10,000) 164,793,359 - 164,793,359

(loss) ed profit / Unappropriat

9,139,871

156,772,429 - - - 27,004,086 27,004,086 - 129,768,343 - - - 50,327,422 50,327,422 -

reserves goldon appreciation Unrealised

79,440,921

18,747,014 ------18,747,014 ------

equipment and property, plant revaluation of on Surplus

Muhammad Haroon Rasheed Muhammad

18,747,014

Comptroller Finance

398,875,740 (155,176,322) - (10,000) 231,216,090 27,004,086 204,212,004 322,845,972 (68,342,868) - (10,000) 215,120,781 50,327,422 164,793,359

176,078,059

Total

165 Financial Statement of SBP

STATE BANK OF PAKISTAN NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2009

1. STATUS AND NATURE OF OPERATIONS

1.1 State Bank of Pakistan (the Bank) is the Central Bank of Pakistan and is incorporated under the State Bank of Pakistan Act, 1956. The Bank is primarily responsible for the management of credit, foreign exchange and currency in the country and also acts as the fiscal agent of the Government. The activities of the Bank mainly include:

- implementing the monetary policy;

- issuing of currency;

- facilitation of free competition and stability in the financial system;

- licensing and supervision of banks including micro finance banks, development financial institutions and exchange companies;

- organisation and management of the inter-bank settlement system and promotion of smooth functioning of payment systems;

- providing of loans and advances to the Governments, banks, financial institutions and local authorities under various facilities;

- purchase, holding and sale of shares of banks and financial institutions on the directives of the Federal Government; and

- acting as depository of the Government under specific arrangements between the Government and certain institutions.

1.2 The head office of the Bank is situated at I.I.Chudrigar Road, Karachi, in the province of Sindh, Pakistan.

1.3 These financial statements are unconsolidated (separate) financial statements of the Bank. The consolidated financial statements of the Bank and its subsidiaries are presented separately.

1.4 The financial statements are presented in Pak Rupees, which is the Bank's functional and presentation currency.

2. STATEMENT OF COMPLIANCE

3. BASIS OF MEASUREMENT

3.1 These financial statements have been prepared under the historical cost convention, except that gold reserves, foreign currency reserve, special drawing rights of IMF, certain investments and certain property and equipment, as referred to in their respective notes have been included at revalued amounts. The preparation of financial statements in conformity with International Accounting Standards 1 to 38 and policies for investments and transactions and balances with IMF as stated in note 4.2 and 4.16 respectively, approved for adoption by the Central Board of the Bank, requires management to make judgments estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities that are not readily available from other sources. The estimates and associated assumptions are based on historical experiences and various other factors that are believed to be reasonable under the circumstances, the result of which form the basis of making judgments about the carrying values of assets and liabilities, income and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both current and future periods. Judgments made by the management in the application of International Accounting Standards 1 to 38 and policies for investments and transactions and balances with IMF as stated in note 4.2 and 4.16 respectively, approved for adoption by the Central Board of the Bank, that have significant effect on the financial statements and estimates with significant risk of material judgment in subsequent years are discussed in note 48 to these financial statements.

166 State Bank of Pakistan Annual Report 2008-2009

3.2 Accounting standards that are not yet effective or not relevant

The following standards are applicable from the date mentioned below against the respective standard :-

Standards Effective date (accounting period beginning on or after)

IAS - 1 (Revised) Presentation of financial statements January 1, 2009

IAS - 23 (Revised) Borrowing costs January 1, 2009

IAS - 32 (Revised) Financial instruments: January 1, 2009

The Bank expects that the adoption of the above standards will not have any material impact on the Bank's financial statements in the period of initial application other than to the extent of certain changes and/or enhancements in the presentation and disclosures in the financial statements resulting from the application of IAS 1. The revised IAS 1 was issued in September 2007 and becomes effective for financial years beginning on or after 1 January 2009.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

4.1 Bank notes and coins The liability of the Bank towards bank notes issued as a legal tender under the State Bank of Pakistan Act, 1956 is stated at the face value and is represented by the specified assets of the Issue Department of the Bank. The cost of printing of notes is charged to the profit and loss account as and when incurred. Any un-issued bank notes lying with the Bank are not reflected in the books of account.

4.2 Investments All investments acquired by the Bank are initially measured at cost being the fair value of consideration given. Transaction costs are included in the initial measurement of investments. Subsequent to initial measurement, the Bank measures and classifies its investments under the following categories: Held for trading These securities are either acquired for generating a profit from short term fluctuations in market price, interest rate movements, dealer‟s margin or securities included in a portfolio in which a pattern of short term profit making exists. These instruments are subsequently re- measured to fair value. All related realised and unrealised gains and losses are recognised in the profit and loss account.

All purchases and sales of investments categorised as held-for-trading that required delivery with in the time frame established by regulation or market convention („regular way‟ purchase and sale) are recognised at the trade date, which is the date Bank commits to purchase or sell the investment, other wise transactions are treated as derivative until settlement occurs.

Held to maturity These are financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity other than loans and receivables. These securities are carried at amortized cost, less accumulated impairment losses, if any, and premiums and/or discounts are accounted for using effective interest method. All regular way purchases and sales are recognised at the trade date, which is the date Bank commits to purchase or sell the investment. Other wise transactions are treated as derivative until settlement occurs.

Loans and receivables These are financial assets created by the Bank by providing money directly to a debtor. Subsequent to initial recognition, these assets are carried at amortised cost and premiums and/or discounts are accounted for using the effective interest method.

An allowance for impairment is established if there is evidence that the Bank will not be able to collect all amounts due according to the original contractual terms of loans and advances. The amount of the provision is the difference between the carrying amount and the amount recoverable from guarantees and collateral, discounted at the original effective interest rate of loans and advances.

167 Financial Statement of SBP

Fair value of the financial instruments classified as held-for-trading and available for sale is their quoted bid price at the balance sheet date. Investments classified as held-for-trading or available-for-sale are de-recognised by the Bank on the date it transfers risks and rewards. Securities held-to-maturity are de-recognised on the day these are transferred by the Bank. Gains and losses on de-recognition of held for trading, held to maturity and AFS securities are taken to profit and loss account.

4.3 Derivative financial instruments

The Bank uses derivative financial instruments which include forwards, futures and foreign currency swaps. Derivatives are initially recorded at cost and are re-measured to fair value on subsequent reporting dates. Forwards are shown under Commitments in the note 33.2 while the asset and liability portion of a currency swap are presented in Other Assets and Other Liabilities in notes 20 and 26 to the financial statements respectively. The resultant gains or losses from derivatives are included in the profit and loss account on a time proportional basis.

4.4 Collateralised borrowings / lending

4.5 Gold reserves Gold reserves, including those held with the Reserve Bank of India, are stated at the revalued amounts of the fine gold content thereof in accordance with the requirements of the State Bank of Pakistan Act, 1956 and the State Bank of Pakistan General Regulations. Appreciation or depreciation, if any, on revaluation is taken to equity under the head of “Unrealised appreciation on gold reserves” account. Appreciation realised on disposal of gold is credited to the profit and loss account.

4.6 Property and equipment

Property and equipment except land, buildings and capital work in progress are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Free hold land is stated at revalued amount. Lease hold land and buildings are stated at revalued amount less accumulated depreciation and accumulated impairment losses, if any. Capital work-in-progress is valued at cost.

Depreciation on property and equipment are charged to profit and loss account applying the straight-line method whereby the cost/revalued amount of an asset is written off over its estimated useful life at the rates specified in note 18.1 to these financial statements. The residual value, useful life and depreciation methods are reviewed and adjusted if appropriate, at each balance sheet date.

168 State Bank of Pakistan Annual Report 2008-2009

4.7 Intangibles

Intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses, if any.

4.8 Impairment

The carrying amounts of the Bank‟s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment of any asset or a group of assets. If such indication exists, the recoverable amount of such assets is estimated. An impairment loss is recognised in profit and loss account whenever the carrying amount of an asset or a group of assets exceeds its recoverable amount except for impairment loss on revalued assets which is adjusted against the related revaluation surplus to the extent that the impairment loss does not exceed the surplus on revaluation of assets. Balances considered bad and irrecoverable are written off from the books of account. Provisions against impairment are reviewed at each balance sheet date and adjusted to reflect the current best estimates. Changes in the provisions are recognised as income / expense in the profit and loss account.

4.9 Compensated absences

The Bank makes annual provision in respect of liability for employees‟ compensated absences based on actuarial estimates.

4.10 Staff retirement benefits

The Bank operates:

a) an unfunded contributory provident fund (old scheme) for those employees who joined the Bank prior to 1975 and opted to remain under the old scheme. The Bank provided an option to employees covered under old scheme to join Employer Contributory Provident Fund Scheme -ECPF (new scheme) effective from June 1, 2007. Under this scheme contribution is made both by the employer and employee at the rate of 6% of the monetized salary. Moreover, employees joining the Bank service after June 1, 2007 are covered under the new scheme.

b) a unfunded general provident fund (GPF) scheme for all those employees who joined the Bank after 1975 and those employees who had joined prior to 1975 but opted for the new scheme. Under this scheme contribution is made by the employee only at the rate of 5% of the monetized salary.

c) following other staff retirement benefit schemes:

- an EGF was introduced by the Bank effective from June 1, 2007 for all its employees other than those who opted for pension scheme or unfunded gratuity scheme (old scheme).

- an un-funded pension scheme for those employees who joined the Bank after 1975 and before the introduction of EGF which is effective from June 1, 2007.

- an un-funded benevolent fund scheme; and

- an un-funded post retirement medical benefit scheme.

Obligations for contributions to defined contribution provident plans are recognised as an expense in the profit and loss account as and when incurred.

Annual provisions are made by the Bank to cover the obligations arising under defined benefits schemes based on actuarial recommendations. The actuarial valuations are carried out under the "Projected Unit Credit Method". The most recent valuation in this regard was carried out as at June 30, 2009. Unrecognised actuarial gains and losses are recognised in the profit and loss account over the expected average remaining working lives of the employees. The above staff retirement benefits are payable on completion of prescribed qualifying period of service.

4.11 Deferred income

Grants received on account of capital expenditure are recorded as deferred income. These are amortised over the useful life of the relevant asset.

4.12 Revenue recognition

- Dividend income is recognised when the Bank‟s right to receive dividend is established. - Gains / losses on disposal of securities are recognised in profit and loss account at trade date. - All other revenues are recognised on time proportion basis.

169 Financial Statement of SBP

4.13 Finances under profit and loss sharing arrangements

The Bank provides various finances to financial institutions under profit and loss sharing arrangements. Share of profit / loss under these arrangements is recognised on accrual basis.

4.14 Taxation

The income of the Bank is exempt from tax under section 49 of the State Bank of Pakistan Act, 1956.

4.15 Foreign currency translation

Transactions denominated in foreign currencies are translated to Pak Rupees at the foreign exchange rate ruling at the date of transaction. Monetary assets and liabilities in foreign currencies are translated into rupees at the closing rate of exchange prevailing at the balance sheet date.

Exchange differences arising under Exchange Risk Coverage Scheme and on currency swap transactions are recognised in the books of account on accrual basis.

Commitments for outstanding forward foreign exchange contracts disclosed in note 33.2 to the financial statements are translated at forward rates applicable to their respective maturities. Contingent liabilities/commitments for letters of credit and letters of guarantee denominated in foreign currencies are expressed in rupee terms at the closing rate of exchange ruling on the balance sheet date.

4.16 Transactions and balances with International Monetary Fund Transactions and balances with the International Monetary Fund (IMF) are recorded on the basis of accounting policy approved by the Central Board of the Bank. A summary of the policies followed by the Bank for recording of these transactions and balances is as follows:

- Exchange gains or losses arising on revaluation of borrowings from the IMF are recognised in the profit and loss account.

- The cumulative allocation of Special Drawing Rights by the IMF is treated as capital receipt and is not revalued.

All income or charges pertaining to balances with the IMF are taken to the profit and loss account, including the following: - charges on borrowings under credit schemes and fund facilities,

- charges on net cumulative allocation of Special Drawing Rights; and

- return on holdings of Special Drawing Rights.

4.17 Provisions

Provisions are recognised when the Bank has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount can be made. Provisions are reviewed at each balance sheet date and are adjusted to reflect the current best estimates.

4.18 Cash and cash equivalents

4.19 Financial instruments

Financial assets and liabilities are recognised at the time when the Bank becomes a party to the contractual provisions of the instrument. The Bank derecognises financial asset when it loses control of the contractual rights that comprise the financial asset. The Bank derecognises a financial liability when the liability is extinguished, discharged, cancelled or expired.

Any gain or loss on the derecognition of the financial assets and liabilities is included in the profit and loss account currently.

4.20 Offsetting

A financial asset and a financial liability is offset and the net amount is reported in the balance sheet when the Bank has a legally enforceable right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

170 State Bank of Pakistan Annual Report 2008-2009

Net content 2009 2008 in troy Note (Rupees in '000) ounces 5. GOLD RESERVES HELD BY THE BANK

Opening balance 2,070,208 130,970,552 81,277,106 Additions during the year - - 169,831 Appreciation during the year due to revaluation 32 - 26,572,999 49,523,615 2,070,208 157,543,551 130,970,552

6. FOREIGN CURRENCY RESERVES

Investments 6.1 & 6.2 138,835,486 241,920,666 Deposit accounts 6.3 & 6.4 383,978,460 355,534,449 Current accounts 6.2 & 6.3 285,394,082 38,855,819 808,208,028 636,310,934

2009 2008 Note (Rupees in '000) The above foreign currency reserves are held as follows:

Issue Department 378,121,392 439,104,769 Banking Department 430,086,636 197,206,165 808,208,028 636,310,934

6.1 Investments

Held for trading 6.4 138,612,661 240,011,459 Held to maturity - 1,699,851 Available for sale 222,825 209,356 138,835,486 241,920,666

6.3 The balance in current and deposit accounts carry interest at various rates ranging between 0.01% to 5.75% (2008: 0.75% to 5.82%) per annum.

7. SPECIAL DRAWING RIGHTS OF THE INTERNATIONAL MONETARY FUND

Special Drawing Rights (SDRs) are the foreign reserve assets which are allocated by the International Monetary Fund (IMF) to its member countries in proportion to their quota in the IMF. In addition, the member countries can purchase the SDRs from the IMF and other member countries in order to settle their obligations. The figures given below represent the rupee value of the SDRs held by the Bank at June 30, 2009. Interest is credited by the IMF on the SDR holding of the Bank at weekly interest rates on daily products of SDRs held during each quarter.

2009 2008 (Rupees in '000) SDRs were held as follows: By the Issue Department 6,318,150 11,632,215 By the Banking Department 6,117,522 3,137,123 12,435,672 14,769,338

171 Financial Statement of SBP

8. INDIAN NOTES REPRESENTING ASSETS RECEIVABLE FROM THE RESERVE BANK OF INDIA

2009 2008 Note (Rupees in '000) 9. LOCAL CURRENCY

Bank notes held by the Banking Department 13 196,449 181,913 Coins 2,496,236 2,718,036 2,692,685 2,899,949 Coins held as an asset of the Issue Department 9.1 (2,496,236) (2,718,036) 196,449 181,913

2009 2008 Note (Rupees in '000) 10. INVESTMENTS Loans and receivables originated by the Bank

Government securities 10.1

Market Treasury Bills (MTBs) 10.2 1,147,109,714 1,070,809,207 Federal Government scrip 2,740,000 2,740,000 1,149,849,714 1,073,549,207 Available for sale investments

Investments in Banks and other financial institutions

Ordinary shares Listed 15,564,909 15,567,366 Unlisted 4,521,706 4,021,706 10.3 20,086,615 19,589,072 Term Finance Certificates 211,801 282,400 Certificates of Deposits 84,264 112,351 20,382,680 19,983,823 Provision against diminution in value of investments 10.4 (503,064) (601,751) 19,879,616 19,382,072 Investments in wholly owned subsidiaries

SBP Banking Services Corporation 1,000,000 1,000,000 Advance against issue of share capital (NIBAF) 29,260 29,260 1,029,260 1,029,260 1,170,758,590 1,093,960,539 The above investments are held as follows; Issue Department - MTBs 675,410,375 458,259,765 Banking Department 495,348,215 635,700,774 1,170,758,590 1,093,960,539

10.1 Investments in Government securities

These represent investments guaranteed / issued by the Government. The profile of return on securities is as follows:

2009 2008 (% per annum) Market Treasury Bills 11.47 to 14.01 9.26 to 11.19 Federal Government scrip 3 3

10.2 This includes securities having carrying value of Rs. Nil (2008: Rs. 7,000 million) given as collateral under repurchase agreement borrowing arrangements.

172 State Bank of Pakistan Annual Report 2008-2009

10.3 Investments in shares of banks and other financial institutions (note 10.3.1)

2009 2008 2009 2008 % of Holding Note (Rupees in '000)

Listed National Bank of Pakistan 75.20 75.20 10.3.2 1,100,807 1,100,807 United Bank Limited 19.49 19.49 10.3.3 5,919,530 5,919,530 Allied Bank Limited 10.07 10.07 10.3.4 350,638 350,638 Habib Bank Limited 40.55 40.61 10.3.5 8,193,934 8,196,391 15,564,909 15,567,366

Unlisted Federal Bank for Cooperatives 75.00 75.00 150,000 150,000 Equity Participation Fund 65.81 65.81 102,000 102,000 252,000 252,000 Other- investments with holding less than or equal to 50% 4,269,706 3,769,706 4,521,706 4,021,706 20,086,615 19,589,072

10.3.1 Investments in above entities have been made under the specific directives of the Government of Pakistan in accordance with the provisions of the State Bank of Pakistan Act, 1956 and other relevant statutes. The management of the Bank does not exercise significant influence or control over these entities except for any regulatory purposes or control arising as a consequence of any statute which applies to the entire sector to which these entities belong. Accordingly, these entities have not been consolidated as subsidiaries or accounted for as investments in associates, or joint ventures.

10.3.2 Market value of the Bank's investment in the shares of National Bank of Pakistan at June 30, 2009 amounted to Rs. 54,254.63 million (2008: Rs. 99,489.75 million).

10.3.3 Market value of the Bank's investment in the shares of United Bank Limited at June 30, 2009 amounted to Rs.8,304.31 million (2008: Rs. 16,776.61 million).

10.3.4 Market value of the Bank's investment in the shares of Allied Bank Limited at June 30, 2009 amounted to Rs. 2,691.17 million (2008: Rs. 5,548.25 million).

10.3.5 Market value of the Bank's investment in the shares of Habib Bank Limited amounted to Rs. 31,791.71 million (2008: Rs.64,310.51 million). 2009 2008 (Rupees in '000) 10.4 Provision against diminution in value of investments

Opening balance 601,751 601,751 Reversal during the year (98,687) - Closing balance 503,064 601,751

11. COMMERCIAL PAPERS

173 Financial Statement of SBP

2009 2008 Note (Rupees in '000) 12. ASSETS HELD WITH THE RESERVE BANK OF INDIA

The above assets were allocated to the Government of Pakistan as its share of the assets of Reserve Bank of India under the provisions of Pakistan (Monetary System and Reserve Bank) Order, 1947. The transfer of these assets to the Bank is subject to final settlement between the Governments of Pakistan and India.

2009 2008 Note (Rupees in '000) 13. BANK NOTES ISSUED

Notes held with the Banking Department 9 196,449 181,913 Notes in circulation 1,223,521,163 1,045,857,499 1,223,717,612 1,046,039,412

14. EARMARKED FOREIGN CURRENCY BALANCES

This represents foreign currency held by the Bank that is earmarked to meet specific foreign currency commitments of the Bank.

15. RESERVE TRANCHE WITH THE INTERNATIONAL MONETARY FUND UNDER QUOTA ARRANGEMENTS 2009 2008 (Rupees in '000)

Quota allocated by the International Monetary Fund 130,592,537 115,303,703 Liability under quota arrangements (130,577,489) (115,290,417) 15,048 13,286

2009 2008 Note (Rupees in '000) 16. LOANS, ADVANCES AND BILLS OF EXCHANGE

Governments 16.1 28,733,244 8,700,000 Government owned / controlled financial institutions 16.2 131,892,462 119,234,156 Private sector financial institutions 16.3 176,349,704 113,217,197 308,242,166 232,451,353 Employees 3,105,102 2,626,138 340,080,512 243,777,491 Provision against doubtful balances 16.4 (8,148,216) (8,599,942) 331,932,296 235,177,549 Commercial papers held in issue department 11 (78,500) (78,500) 331,853,796 235,099,049

16.1 Loans and advances to the Governments

Federal Government 1,500,000 4,500,000 Provincial Government - Punjab 10,000,000 - Provincial Government - Balochistan 17,233,244 4,200,000 28,733,244 8,700,000

During the year, mark-up on above balances due from the Federal and Provincial Governments was charged at various rates ranging between 10.87% and 13.92% (2008: 8.90% and 10.29%) per annum.

174 State Bank of Pakistan Annual Report 2008-2009

16.2 Loans and advances to Government owned / controlled financial institutions

Other Scheduled banks Total financial institutions 2009 2008 2009 2008 2009 2008 ------(Rupees in '000) ------

16.2.3 It includes agricultural financing of Rs.8,000 million (2008: Rs. 8,000 million) given to Punjab Provincial Cooperative Bank Limited (PPCBL). The financing was guaranteed by the Government of Punjab (Provincial Governmet) and was repayable on December 31,2007.However it remained outstanding and subsequent to the year end a rescheduling agreement has been arranged with the provincial government where the repayment of the above loan would now be made in twelve monthly installments of Rs. 250 million each and eighteen monthly installments of Rs.277.778 million starting from August 01, 2009. Further, mark up of Rs. 136.76 million on the above loan upto June 30, 2009 has been repaid on September 30, 2009. Mark up on outstanding balance carry mark up at the rate applicable to six month treasury bills.

16.3 Loans and advances to private sector financial institutions

Other Scheduled banks Total financial institutions 2009 2008 2009 2008 2009 2008 ------(Rupees in '000) ------

2009 2008 (Rupees in '000) 16.4 Provision against doubtful assets

Opening balance 8,599,942 8,599,942 Reversal during the year (451,726) - Closing balance 8,148,216 8,599,942

16.5 The interest / mark-up rate profile of the interest / mark-up bearing loans and advances is as follows:

2009 2008 (% per annum)

Government owned / controlled and private sector financial institutions 1.0 to 12 1.0 to 12 Employees loans 10 10

175 Financial Statement of SBP

2009 2008 Note (Rupees in '000) 17. BALANCES DUE FROM THE GOVERNMENTS OF INDIA AND BANGLADESH (FORMER EAST PAKISTAN)

17.1 These represents interest bearing loans and advances provided to the Government of Bangladesh (former East Pakistan).

17.2 The realisability of the above balances is subject to final settlement between the Governments of Pakistan, Bangladesh (former East Pakistan) and India.

2009 2008 Note (Rupees in '000) 18. PROPERTY AND EQUIPMENT

Operating fixed assets 18.1 17,638,421 18,003,646 Capital work-in-progress 18.3 435,312 327,487 18,073,733 18,331,133 18.1 Operating fixed assets 2009 Cost / revalued Additions / Cost / revalued Accumulated Depreciation Accumulated Net book value at Annual rate of amount at (deletions) / amount at depreciation at for the year on depreciation at June 30 depreciation % July 01 transfers* June 30 July 01 (deletions) / June 30 during the year transfers*

------(Rupees in '000) ------Freehold land 3,577,047 - 3,577,047 - - - 3,577,047 -

Leasehold land 12,762,205 - 12,762,205 707,496 349,116 1,056,612 11,705,593 over the term of lease

Buildings on freehold land 959,824 6,664 966,488 189,954 96,398 286,352 680,136 5 - Buildings on leasehold land 1,524,068 54,370 1,578,438 286,654 157,003 443,657 1,134,781 5

Furniture and fixtures 94,728 2,558 97,046 43,874 9,038 52,904 44,142 10 (240) (8) Office equipment 349,162 64,202 413,187 179,535 60,209 239,694 173,493 20 (177) (50)

EDP equipment 781,621 292,247 1,061,082 701,858 117,987 815,958 245,124 33.33 (1,720) (1,429) (11,066) * (2,458) *

Motor vehicles 121,868 41,776 139,646 57,506 22,906 61,541 78,105 20 (23,998) (18,871)

20,170,523 461,817 20,595,139 2,166,877 812,657 2,956,718 17,638,421 (26,135) (20,358) (11,066) * (2,458)*

176 State Bank of Pakistan Annual Report 2008-2009

2008 Cost / revalued Additions / Cost / revalued Accumulated Depreciation Accumulated Net book value at Annual rate of amount at (deletions) / amount at depreciation at for the year on depreciation at June 30 depreciation % July 01 transfers* during June 30 July 01 (deletions) / June 30 the year transfers*

------(Rupees in '000) ------

Freehold land 3,576,297 750 3,577,047 - - - 3,577,047 -

Leasehold land 12,762,205 - 12,762,205 353,748 353,748 707,496 12,054,709 over the term of lease

Buildings on freehold land 948,507 11,317 959,824 94,333 95,621 189,954 769,870 5

Buildings on leasehold land 1,450,818 73,250 1,524,068 141,361 145,293 286,654 1,237,414 5

Furniture and fixtures 93,927 7,919 94,728 36,108 9,133 43,874 50,854 10 (1,590) (1,367) (5,528) * Office equipment 211,140 150,179 349,162 132,876 46,854 179,535 169,627 20 (272) (195) (11,885) *

EDP equipment 733,891 64,456 781,621 648,070 65,304 701,858 79,763 33.33 (16,726) * (11,516) *

Motor vehicles 98,904 43,642 121,868 53,804 19,879 57,506 64,362 20 (20,678) (16,177) 19,875,689 351,513 20,170,523 1,460,300 735,832 2,166,877 18,003,646 (22,540) (17,739) (34,139) * (11,516)*

18.2 Last revaluation was carried out on June 30, 2006 by Sidat Hyder Morshed Associates (Pvt.) Ltd.

18.2.1 Subsequent to revaluation on June 30, 2001, which had resulted in a surplus of Rs.6.953.549 million, the freehold land, leasehold land, buildings on freehold land and leasehold land were revalued again on June 30, 2006 resulting in a net surplus of Rs.12,552.511 million. The valuation was conducted by the independent valuers. Land and buildings were valued on the basis of professional assessment of market values. Had there been no revaluation, the carrying value of the revalued assets would have been as follows:-

2009 2008 (Rupees in '000) Freehold land 36,183 36,183 Leasehold land 16,638 17,390 Buildings on Freehold land 308,211 333,004 Buildings on Leasehold land 446,314 426,823 807,346 813,400

Revaluation surplus of Rs.759.05 million was transferred to unappropriated profits on disposal of assets in earlier years.

18.3 Capital work-in-progress

Buildings on freehold land 82,059 47,321 Buildings on leasehold land 268,781 198,902 Furniture and fixtures 776 - Office equipment 80,783 78,351 EDP equipment 2,913 2,913 435,312 327,487

19. INTANGIBLE ASSETS

Cost at Additions Cost at Accumulated Amortis- Accumulated Net book value Annual rate July 01 during the June 30 amortisation ation for the amortisation at June 30 of amortis- year at July 01 year at June 30 ation % ------(Rupees in '000) ------

Software 2009 473,927 76,838 550,765 353,004 81,368 434,372 116,393 33.33 Software 2008 403,352 70,575 473,927 239,583 113,421 353,004 120,923 33.33

177 Financial Statement of SBP

2009 2008 Note (Rupees in '000) 20. OTHER ASSETS Amounts due from financial institutions under currency swap arrangements 20.1 2,317,912 1,818,325 Accrued interest / mark-up, discount and return 3,967,405 2,929,004 Other advances, deposits and prepayments 155,805 590,401 Others 2,188,955 83,879 8,630,077 5,421,609

20.1 This represents the Bank's right to receive rupee counterpart of the foreign currency on the maturity of certain currency swap arrangements with commercial banks. The related obligation of the Bank to exchange foreign currency with the rupee counterpart has been disclosed in note 26.

2009 2008 Note (Rupees in '000) 21. CURRENT ACCOUNTS OF THE GOVERNMENTS

Government of Azad Jammu and Kashmir 21.6 1,209,640 - 66,621,868 70,823,348

21.1 Federal Government

21.2 Provincial Government - Punjab Non-food account (99,208,876) (41,378,246) Food account 1,730,967 3,383,354 Zakat fund account 104,597 38,786 District Government account no. IV 56,457,452 49,323,981 (40,915,860) 11,367,875 Classified as a receivable balance 21.7 40,915,860 - Net credit balance - 11,367,875

21.3 Provincial Government - Sindh

Non-food account 7,360,652 22,066,137 Food account 697,812 186,499 Zakat fund account 37,392 68,258 District Government account no. IV 12,383,742 10,134,450 20,479,598 32,455,344

2009 2008 Note (Rupees in '000) 21.4 Provincial Government - NWFP

Non-food account (4,787,023) 2,463,074 Food account 387,840 1,214,100 Zakat fund account 741 4,935 District Government account no. IV 5,093,771 4,963,997 695,329 8,646,106

21.5 Provincial Government - Balochistan

Non-food account (10,324,853) (18,035,223) Food account 333,139 914,760 Zakat fund account - 91,439 District Government account no. IV 2,863,980 3,120,231 (7,127,734) (13,908,793) Classified as a receivable balance 21.7 7,127,734 13,908,793 Net credit balance - -

178 State Bank of Pakistan Annual Report 2008-2009

21.6 The Government of Azad Jammu and Kashmir

Net Balance 1,209,640 (518,564) Classified as a receivable balance 21.7 - 518,564 Net credit balance 1,209,640 -

21.7 These balances carry mark-up at 12.80% (2008: 10.29% ) per annum.

22. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE

These represented repurchase agreement borrowings and are subject to markup at the rate of 4.10% to 11.18% (2008: 9.74% to 9.95%) per annum. 2009 2008 (Rupees in '000) 23. DEPOSITS OF BANKS AND FINANCIAL INSTITUTIONS

23.1 The above deposits are free of interest except deposits under cash reserve requirements which are remunerated at the rates given below:

2009 2008 Note (per annum) Foreign currency 0.90% to 2.93% 1.46% to 4.72% Local currency 0.59% to 0.61% 1.98% to 2.59%

24. OTHER DEPOSITS AND ACCOUNTS

Foreign currency Foreign central banks 36,645,435 30,603,600 International organisations 24.2 61,075,725 51,006,000 Others 19,173,063 14,580,025 116,894,223 96,189,625 Local currency Special debt repayment 24.3 23,682,875 23,596,676 Government 24.4 11,012,500 11,012,500 Others 16,189,591 14,802,225 50,884,966 49,411,401 167,779,189 145,601,026

24.1 The interest rate profile of the interest bearing deposits is as follows: 2009 2008 (per annum) Foreign central banks 0.42% to 2.16% 1.60% to 5.50% International organisations 3.52% to 4.85% 4.26% to 7.15% Others 0.02% to 1.80% 1.81% to 5.08%

24.3 These are free of interest and represent amounts kept in separate special accounts to meet forthcoming foreign currency debt repayment obligations of the Government of Pakistan. 24.4 These represent rupee counterpart of the foreign currency loan disbursements received from various international financial institutions on behalf of the Government and credited to separate deposit accounts in accordance with the instructions of the Government.

2009 2008 Note (Rupees in '000) 25. PAYABLE TO INTERNATIONAL MONETARY FUND Borrowings under: Fund facilities 25.1 & 25.2 333,010,969 1,057,443 Other credit schemes 85,992,043 90,206,218 419,003,012 91,263,661 Current account for administrative charges 29 25 419,003,041 91,263,686

179 Financial Statement of SBP

25.2 These facilities are secured by demand promissory notes issued by the Government of Pakistan.

25.3 Interest profile of payable to IMF is as under: 2009 2008 (per annum) Fund facilities 1.38% to 4.18% 3.59% to 5.67% Other credit schemes 0.50% 0.50%

2009 2008 Note (Rupees in '000) 26. OTHER LIABILITIES Foreign currency Amounts due to financial institutions under currency swap arrangements 20.1 2,443,103 2,040,240 Accrued interest and discount on deposits 1,256,713 512,391 Charges on allocation of Special Drawing Rights of IMF 15,554 92,865 3,715,370 2,645,496 Local currency Overdue mark-up and return 26.1 4,241,812 3,864,334 Unearned exchange risk fee 5,479 9,115 Remittance clearance account 1,044,332 1,036,714 Exchange loss payable under exchange risk coverage scheme 128,916 129,576 Balance payable to the Government of Pakistan 19,358,324 28,342,868 Dividend payable 10,000 10,000 Share of loss payable under profit and loss sharing arrangements 2,407,129 2,399,071 Payable to Government in respect of privatisation proceeds 2,929,066 2,929,066 Other accruals and provisions 26.2 5,916,227 5,547,508 Others 3,260,160 10,265,567 39,301,445 54,533,819 43,016,815 57,179,315

2009 2008 Note (Rupees in '000) 26.2 Other accruals and provisions Agency commission 1,014,421 761,570 Provision for employees' compensated absences 564,686 481,371 Provision for other doubtful assets 26.2.1 2,389,103 2,350,727 Other provisions 26.3 1,308,325 1,308,382 Others 639,692 645,458 5,916,227 5,547,508

180 State Bank of Pakistan Annual Report 2008-2009

2009 2008 (Rupees in '000) 26.3 Movement of other provisions Opening balance 1,308,382 1,175,858 Provision during the year - 132,524 Reversal during the year (57) - Closing balance 1,308,325 1,308,382

Home Agriculture Others Total remittance loan (note 26.3.1) ------(Rupees in '000) ------

Opening balance 260,363 306,067 741,952 1,308,382 Reversal during the year - - (57) (57) Closing balance 260,363 306,067 741,895 1,308,325

26.3.1 This represents provision made in respect of various litigations against the Bank.

2009 2008 Note (Rupees in '000) 27. DEFERRED LIABILITY - STAFF RETIREMENT BENEFITS

Gratuity 27.1 22,061 13,461 Pension 2,900,124 2,921,481 Benevolent fund scheme 247,521 237,599 Post retirement medical benefits 815,886 571,324 43.5.3 3,985,592 3,743,865 Provident fund scheme 219,092 195,913 4,204,684 3,939,778

27.1 Includes a fixed liability of Rs. 26.070 million (2008: 1.164 million) payable to certain employees.

2009 2008 Note (Rupees in '000) 28. DEFERRED INCOME

Opening balance 206,244 340,845 Grants received during the year 198,811 78,790 Amortisation during the year 40 (211,506) (213,391) Closing balance 193,549 206,244

28.1 This represents grant received for capital expenditure and, as indicated in note 4.11 to these financial statements, is being amortised over the useful lives of the related assets.

29. SHARE CAPITAL Number of 2009 2008 Shares (Rupees in '000) Authorised share capital 1,000,000 Ordinary shares of Rs. 100 each 100,000 100,000 Issued, subscribed and paid-up capital 1,000,000 Fully paid-up ordinary shares of Rs. 100 each 100,000 100,000

181 Financial Statement of SBP

30. ALLOCATION OF SPECIAL DRAWING RIGHTS

30.2 Subsequent to the year end, in a letter written by Director - Statistics Department, IMF to the Bank, it is stated that in the monetary and financial statistics as published in International Financial Statistics (IFS), the SDR allocation would now be treated as liabilities to non- resident (foreign liabilities) and no longer as "shares and other equity" when held on the balance sheet of the central bank. The letter further states that these changes would be reflected for the first time in October 2009 issue of IFS and will also reflect the historical series at the same time and encourage the adoption of the new treatment of the SDR allocations in the macroeconomic accounts compiled and disseminated by the country, to ensure that the data published by the country and the IMF are consistent and follow the revised international guidelines. The same will be considered for adoption in the next accounting year.

31. RESERVES

31.1 Reserve Fund This represents appropriations made out of the annual profits of the Bank in accordance with the provisions of the State Bank of Pakistan Act, 1956.

31.2 Other Funds

These represent appropriations made out of the surplus profits of the Bank for certain specified purposes in accordance with the provisions of the State Bank of Pakistan Act, 1956.

2009 2008 Note (Rupees in '000) 32. UNREALISED APPRECIATION ON GOLD RESERVES

33.1 Contingencies a) Contingent liability in respect of guarantees given on behalf of: Federal government 72,410,976 52,494,332 Federal government owned / controlled bodies and authorities 13,420,789 11,261,613 85,831,765 63,755,945

Above guarantees are secured by counter guarantees either from the Government of Pakistan or local financial institutions.

182 State Bank of Pakistan Annual Report 2008-2009

c) A claim of Rs. 1,600 million has been lodged against the Bank which has not been acknowledged by the Bank. The Bank has a counter claim of Rs. 493 million. With the mutual agreement of both the parties, matter has been referred to the Arbitrator. Management is confident that the Bank will not incur any liability on this account, as such no provision has been made against the claim.

2009 2008 (Rupees in '000)

d) Other claims against the Bank not acknowledged as debts 861,994 903,367

33.2 Commitments 2009 2008 (Rupees in '000) Forward exchange contracts - sales 186,209,260 236,130,214

Forward exchange contracts - purchases 46,802,117 141,502,378

Futures - sale 4,192,494 22,536,696

Futures - purchase 9,408,925 65,350,752

Foreign currency placements - 1,360,160

Subscription of right shares 500,000 -

2009 2008 (Rupees in '000) 34. DISCOUNT, INTEREST / MARK-UP AND / OR RETURN EARNED

Market Treasury Bills - net 153,267,829 58,329,019 Other Government securities 176,689 97,777 Loans and advances to Government 6,485,358 3,445,678 Share of profit on finances under profit and loss sharing arrangements 12,312,218 6,441,138 Foreign currency deposits 5,070,410 26,976,642 Foreign currency securities 5,715,611 9,513,667 Others 1,095 461 183,029,210 104,804,382

35. INTEREST / MARK-UP EXPENSE Deposits 8,048,417 3,690,893 Others 36,752 57,866 8,085,169 3,748,759

183 Financial Statement of SBP

2009 2008 (Rupees in '000) 36. COMMISSION INCOME Market Treasury Bills 205,418 31,973 Draft / payment orders 787,251 118,965 Prize Bonds and National Saving Certificates 213,472 187,723 Management of public debts 132,258 40,629 Others 328,976 340,999 1,667,375 720,289

37. EXCHANGE GAIN - Net Gain / (loss) on: Foreign currency placements, deposits, securities and other accounts - net 68,364,987 76,483,373 Open market operations (including currency swap arrangements) (402,789) (226,225) Forward covers under Exchange Risk Coverage Scheme 9,059 (24,552) Payable to IMF (35,194,554) (16,939,040) Special Drawing Rights of IMF 1,818,855 2,559,679 Others 132 - 34,595,690 61,853,235 Exchange risk fee income 129,449 120,019 34,725,139 61,973,254

38. PROFIT EARNED THROUGH SUBSIDIARIES

SBP Banking Services Corporation 86,714 79,747 National Institute of Banking and Finance (Guarantee) Limited 105,767 60,296 192,481 140,043

The above represents the profit of subsidiaries for the year ended June 30, 2009 transferred to the Bank in accordance with the arrangements mentioned in note 43.3. 2009 2008 Note (Rupees in '000) 39. OTHER OPERATING INCOME - Net

Penalties levied on banks and financial institutions 1,323,756 2,093,162 License / Credit Information Bureau fee recovered 67,859 97,342 Gain/(loss) on sale of investment: Local 22,755 14,408,719 Foreign (5,516,503) 1,122,263 (5,493,748) 15,530,982 Gain / (loss) on remeasurement of securities classified as held for trading 5,660,437 (8,015,285) Others - net (444,019) (135,424) 1,114,285 9,570,777

40. OTHER INCOME / (CHARGES)- NET

Gain on disposal of property and equipment 9,065 2,353 Liabilities and provisions written back - net 594 36,303 Amortisation of deferred income 28 211,506 213,391 Charges on allocation of Special Drawing Rights of IMF (284,784) (587,153) Others 115,639 (107,042) 52,020 (442,148) 41. BANK NOTES PRINTING CHARGES

Bank notes printing charges are paid to Pakistan Security Printing Corporation (Private) Limited at agreed rates under specific arrangements.

42. AGENCY COMMISSION Agency commission is payable to National Bank of Pakistan (NBP) under an agreement at the rate of 0.15% (2008: 0.15%) of the total amount of collection and remittances handled by NBP.

184 State Bank of Pakistan Annual Report 2008-2009

2009 2008 Note (Rupees in '000) 43. GENERAL ADMINISTRATIVE AND OTHER EXPENSES

Salaries and other benefits 1,272,560 1,060,353 Retirement benefits and employees' compensated absences 1,156,716 906,717 Contribution to SBP Employees' Welfare Trust 10,000 10,000 Rent and taxes 33,672 30,980 Insurance 12,566 11,809 Electricity, gas and water 37,828 22,193 Depreciation 18.1 812,657 735,832 Amortisation of intangible assets 19 81,368 113,421 Repairs and maintenance 321,779 238,031 Auditors' remuneration 43.4 3,430 2,500 Legal and professional 447,722 359,320 Travelling and recreation expenses 67,693 62,891 Daily expenses 39,318 47,970 Fuel 8,677 8,330 Conveyance 4,100 3,873 Postages, telegram / telex and telephone 121,089 112,360 Training 49,009 17,307 Examination/ testing services 4,998 1,144 Stationery 12,718 8,768 Books and newspapers 19,157 17,554 Advertisement 2,054 7,526 Uniforms 1,772 1,680 Others 50,789 66,837 4,571,672 3,847,396

Expenses allocated by: SBP Banking Services Corporation 43.1 2,230,123 1,590,123 National Institute of Banking and Finance (Guarantee) Limited 2,620 4,364 2,232,743 1,594,487 Expenses reimbursed to: SBP Banking Services Corporation 43.2 4,011,615 3,376,624 National Institute of Banking and Finance (Guarantee) Limited 81,164 69,623 4,092,779 3,446,247 10,897,194 8,888,130

43.1 Expenses allocated by SBP Banking Services Corporation Retirement benefits and employees' compensated absences 2,165,258 1,512,485 Depreciation 64,865 77,638 2,230,123 1,590,123

43.2 Expenses reimbursed to SBP Banking Services Corporation

Salaries and other benefits 3,478,919 2,918,933 Rent and taxes 8,577 8,254 Insurance 2,605 1,537 Electricity, gas and water 170,107 133,677 Repairs and maintenance 19,385 16,929 Auditors' remuneration 43.4 4,570 3,030 Legal and professional 10,233 3,193 Travelling expenses 7,325 5,832 Daily expenses 11,792 9,443 Recreation allowance 84,334 90,755 Fuel 1,994 1,682 Conveyance 4,483 5,588 Postage and telephone 11,624 9,760 Training 21,622 13,812 Remittance of treasure 33,059 27,743 Stationery 9,219 7,938 Books and newspapers 1,332 1,415 Advertisement 1,748 1,564 Bank guards 68,355 57,988 Uniforms 14,487 12,810 Others 45,845 44,741 4,011,615 3,376,624

185 Financial Statement of SBP

43.3 SBP Banking Services Corporation (the Corporation), a wholly owned subsidiary of the Bank, carries out certain functions and activities principally relating to public dealing on behalf of the Bank and incurs administrative costs in this respect. Accordingly, under mutually agreed arrangements, all of the above costs have been reimbursed to or allocated by the Corporation while profit of the Corporation for the year ended June 30, 2009, as mentioned in note 38, has also been transferred to the Bank. Similar treatment is also followed by the other subsidiary, National Institute of Banking and Finance (Guarantee) Limited, under arrangements mutually agreed with the Bank.

43.4 Auditors' remuneration M. Yousuf Ernst & Young Adil Saleem Ford Rhodes & Co. Sidat Hyder 2009 2008 ------(Rupees in '000) ------

State Bank of Pakistan Audit fee 1,429 1,429 2,858 2,300 Out of pocket expenses 286 286 572 200 1,715 1,715 3,430 2,500

SBP Banking Services Corporation Audit fee 1,571 1,571 3,142 2,530 Out of pocket expenses 714 714 1,428 500 2,285 2,285 4,570 3,030 4,000 4,000 8,000 5,530

43.5 Staff retirement benefits

43.5.1 During the year the actuarial valuations of the above defined benefit obligations were carried out under the projected Unit Credit Method using following significant assumptions:

- Expected rate of increase in grants and contributions 5 (2008: 4) % per annum.

- Expected rate of discount 13 (2008: 12) % per annum.

- Expected rate of increase in salary 11 (2008: 10) % per annum.

- Expected rate of increase in pension 5 (2008: 4) % per annum.

- Medical cost increase 8 (2008: 7) % per annum.

- Personnel turnover 2 (2008: 2) % per annum.

43.5.2 Present value of the defined benefit obligations

2009 Present value Unrecognised of the defined Net recognized actuarial gain / benefit liabilities (loss) obligation Note ------(Rupees in '000)------

Gratuity 43.5.5 3,077 (7,086) (4,009) Pension 43.5.5 3,650,528 (750,404) 2,900,124 Benevolent 43.5.5 284,458 (36,937) 247,521 Post retirement medical benefits 43.5.5 2,124,433 (1,308,547) 815,886 6,062,496 (2,102,974) 3,959,522

2008 Present value Unrecognised of the defined Net recognized actuarial gain / benefit liabilities (loss) obligation ` ------(Rupees in '000)------

Gratuity 43.5.5 15,805 (3,508) 12,297 Pension 43.5.5 3,524,735 (603,254) 2,921,481 Benevolent 43.5.5 373,021 (135,422) 237,599 Post retirement medical benefits 43.5.5 2,228,249 (1,656,925) 571,324 6,141,810 (2,399,109) 3,742,701

186 State Bank of Pakistan Annual Report 2008-2009

43.5.3 The following is a movement in the net recognised liability in respect of the defined benefit schemes: -

2009 Net recognised Charge for Payments Employees Net recognised liabilities at the year during the contribution/Amount liabilities July 01 (note 43.5.4) year transferred at June 30 ------(Rupees in '000)------

Gratuity 12,297 5,417 (18,732) (2,991) (4,009) Pension 2,921,481 539,529 (534,943) (25,943) 2,900,124 Benevolent 237,599 59,510 (52,741) 3,153 247,521 Post retirement medical benefits 571,324 408,327 (163,765) - 815,886 3,742,701 1,012,783 (770,181) (25,781) 3,959,522

2008 Net recognised Charge for Payments Employees Net recognised liabilities at the year during the contribution liabilities July 01 (note 43.5.4) year at June 30 ------(Rupees in '000)------

Gratuity 10,955 3,654 (2,312) - 12,297 Pension 2,969,072 452,039 (499,630) - 2,921,481 Benevolent 242,756 52,779 (61,026) 3,090 237,599 Post retirement medical benefits 435,213 293,773 (157,662) - 571,324 3,657,996 802,245 (720,630) 3,090 3,742,701

43.5.4 Amount recognised in the profit and loss account

The amounts charged in the profit and loss account during the current year in respect of the above benefits are as follows:

2009 Current Interest Settlement Actuarial Employees Total service cost cost & loss contributions curtailment recognised ------(Rupees in '000)------

Gratuity 3,228 1,897 - 292 - 5,417 Pension 61,720 422,968 - 54,841 - 539,529 Benevolent 8,227 44,763 - 9,673 (3,153) 59,510 Post retirement medical benefits 30,475 267,390 - 110,462 - 408,327 103,650 737,018 - 175,268 (3,153) 1,012,783

2008 Current Interest Settlement Actuarial Employees Total service cost cost & loss contributions curtailment recognised ------(Rupees in '000)------

Gratuity 1,420 1,811 - 423 - 3,654 Pension 59,394 364,176 - 28,469 - 452,039 Benevolent 7,997 39,884 - 7,988 (3,090) 52,779 Post retirement medical benefits 23,579 189,643 - 80,551 - 293,773 92,390 595,514 - 117,431 (3,090) 802,245

187 Financial Statement of SBP

2009 2008 2007 2006 2005 ------(Rupees in '000)------43.5.5 Historical information

Gratuity Present value of defined benefit obligation 3,077 15,805 16,461 16,194 18,000 Unrecognised actuarial gain / (loss) (7,086) (3,508) (5,506) (909) (2,000) Provisions in respect of retirement benefit (asset) / liability in balance sheet (4,009) 12,297 10,955 15,285 16,000

Experience adjustment arising on plan liabilities losses/ (gain) 3,870 (1,574) - (274) 4,098

Pension Present value of defined benefit obligation 3,650,528 3,524,735 3,310,692 3,425,571 3,482,000 Unrecognised actuarial gain (750,404) (603,254) (341,620) (370,818) (521,000) Provisions in respect of retirement benefit liability in balance sheet 2,900,124 2,921,481 2,969,072 3,054,753 2,961,000

Experience adjustment arising on plan liabilities loss / (gain) 201,991 290,103 - (112,830) 452,000

Benevolent Fund Present value of defined benefit obligation 284,458 373,021 362,583 374,594 381,000 Unrecognised actuarial gain (36,937) (135,422) (119,827) (130,827) (142,000) Provisions in respect of retirement benefit liability in balance sheet 247,521 237,599 242,756 243,767 239,000

Experience adjustment arising on plan liabilities loss / (gain) (88,812) 23,583 - (545) 14,000

Post Retirement Medical Benefits Present value of defined benefit obligation 2,124,433 2,228,249 1,724,026 1,659,632 1,415,000 Unrecognised actuarial gain (1,308,547) (1,656,925) (1,288,813) (1,385,808) (1,261,000) Provisions in respect of retirement benefit liability in balance sheet 815,886 571,324 435,213 273,824 154,000

Experience adjustment arising on plan liabilities losses / (gains) (237,916) 448,663 - 217,436 479,000

43.6 Employees' compensated absences

The Bank's liability for employees' compensated absences determined through an actuarial valuation carried out under the projected unit credit method amounted to Rs. 564.69 million (2008 : Rs. 481.37 million). An amount of Rs. 83.32 million (2008 : Rs. 49.05 million) has been charged to the profit and loss account in the current period based on the actuarial advice.

44. PROFIT FOR THE YEAR BEFORE NON-CASH ITEMS

Profit for the year 204,212,004 164,793,359 Adjustments for: Depreciation 812,657 735,832 Amortisation of intangible assets 81,368 113,421 Amortisation of deferred income (211,506) (213,391) Provision / (reversal) for: - retirement benefits and employees' compensated absences 1,156,716 906,717 - loans, advances and other assets (451,726) - - other doubtful assets 62,615 122,543 - diminution in value of investments (98,687) - Gain on disposal of property and equipment (9,065) (2,353) Gain on disposal of investments (17,283) (14,408,719) Dividend income (9,733,352) (6,594,079) Other accruals and provisions - net 228,404 443,398 196,032,145 145,896,729

188 State Bank of Pakistan Annual Report 2008-2009

2009 2008 (Rupees in '000) 45. CASH AND CASH EQUIVALENTS

46. RELATED PARTY TRANSACTIONS

The Bank enters into transactions with related parties in its normal course of business. Related parties include the Federal Government; as ultimate owner of the Bank, provincial government and government of Azad Jammu and Kashmir, government controlled enterprises / entities, subsidiaries and key management personnel of the Bank.

46.1 Governments and related entities

46.2 Subsidiaries of the Bank

The balances and material transactions with the subsidiaries have already been disclosed in the financial statements in note 38 and 43. The subsidiaries of the Bank and their primary activities are as follows:

46.2.1 SBP Banking Services Corporation ("the Corporation") wholly own subsidiary

It is responsible for carrying out certain statutory and administrative functions and activities principally relating to public dealing on behalf of the State Bank of Pakistan.

46.2.2 National Institute of Banking and Finance (Guarantee) Limited ("the Institute") wholly own subsidiary

The Institute is engaged in providing education and training in the field of banking, finance and allied areas.

46.3 Remuneration to key management personnel

Key management personnel of the Bank include members of the Central Board of Directors, Governor, Deputy Governors and other executives of the Bank who have responsibility for planning, directing and controlling the activities of the Bank. Fee of the non-executive member of the Central Board of Directors is determined by the Central Board. According to section 10 of the SBP Act, 1956, the remuneration of the Governor is determined by the President of Pakistan. Deputy Governors are appointed and their salaries are fixed by the Federal Government.

The remuneration of the key management personnel was as follows: 2009 2008 Rupees in '000

Short-term employee benefit 43,086 39,672 Post-employment benefit 17,388 11,096 Loans disbursed during the year 4,672 40,468 Loans repaid during the year 10,758 9,330 Interest charged during the year - 10 Director's fees 2,492 1,431

47. RISK MANAGEMENT POLICIES

The Bank is primarily subject to interest / mark-up rate, credit, currency and liquidity risks. The policies and procedures for managing these risks are outlined in notes 47.1 to 47.5. The Bank has designed and implemented a framework of controls to identify, monitor and manage these risks. The senior management is responsible for advising the Governor on the monitoring and management of these risks.

47.1 Credit risk management

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Credit risk in the Bank's portfolio is monitored, reviewed and analysed by the appropriate officials and the exposure is controlled through counterparty and credit limits. Counterparties are allocated to a particular class based mainly on their credit rating. Foreign currency placements are made in approved currencies and government securities. Loans and advances to scheduled banks and financial institutions are usually secured either by Government guarantees or by demand promissory notes. Geographical exposures are controlled by country limits and are updated as and when necessary with all limits formally reviewed on a periodic basis. The Bank's exposure to credit risk associated with foreign operations is managed by monitoring compliance with investment limits for counterparties. The Bank's credit risk mainly lies with exposure towards government sector and financial institutions.

189 Financial Statement of SBP

47.2 INTEREST / MARK-UP RATE RISK Interest / mark-up rate risk is the risk that the value of a financial instrument will fluctuate due to changes in the market interest/ mark-up rates. The Bank has adopted appropriate policies to minimise its exposure to this risk.

47.2.1 2009 Interest / mark-up bearing Non interest / mark-up bearing Grand Maturity Maturity Sub-total Maturity Maturity Sub-total Total upto one after upto one after year one year year one year ------(Rupees in '000) ------Financial assets Local currency (including rupee coins) - - - 2,692,685 - 2,692,685 2,692,685 Foreign currency reserves 805,380,793 2,602,465 807,983,258 - 224,770 224,770 808,208,028 Earmarked foreign currency balance - - - 33,959,461 - 33,959,461 33,959,461 Special Drawing Rights of International Monetary Fund - 12,435,672 12,435,672 - - - 12,435,672 Reserve tranche with the International Monetary Fund under quota arrangements - - - - 15,048 15,048 15,048 Current account of the Government of Punjab 40,915,860 - 40,915,860 40,915,860 Current account of the Government of Balochistan Current account of the Government of - - - 7,127,734 - 7,127,734 7,127,734 Azad Jammu & Kashmir ------Current account with National Institute of Banking and Finance (Guarantee) Limited - - - 107,918 - 107,918 107,918 Investments 1,147,109,714 2,740,000 1,149,849,714 - 20,908,876 20,908,876 1,170,758,590 Loans, advances and bills of exchange - 331,853,796 331,853,796 - - - 331,853,796 Indian notes representing assets receivable from the Reserve Bank of India - - - - 727,665 727,665 727,665 Assets held with the Reserve Bank of India - - - - 465,955 465,955 465,955 Balances due from the Governments of India and Bangladesh (former East Pakistan) - 4,555,755 4,555,755 - 837 837 4,556,592 Other assets - - 4,662,673 3,967,404 8,630,077 8,630,077 1,952,490,507 354,187,688 2,306,678,195 89,466,331 26,310,555 115,776,886 2,422,455,081

Financial liabilities Bank notes in circulation - - - - 1,223,717,612 1,223,717,612 1,223,717,612 Bills payable - - - 827,785 - 827,785 827,785 Current accounts of the Government 45,446,941 - 45,446,941 21,174,927 21,174,927 66,621,868 Securities sold under an agreement to repurchase ------Current account with SBP Banking Services Corporation- a subsidiary - - 3,702,522 - 3,702,522 3,702,522 Deposits of banks and financial institutions - 64,382,992 64,382,992 - 209,356,789 209,356,789 273,739,781 Other deposits and accounts 44,788,865 72,105,358 116,894,223 39,827,966 11,012,500 50,840,466 167,734,689 Payable to International Monetary Fund 19,588,999 399,414,042 419,003,041 - - - 419,003,041 Other liabilities - - - 27,512,581 15,504,233 43,016,814 43,016,814 109,824,805 535,902,392 645,727,198 93,045,781 1,459,591,134 1,552,636,915 2,198,364,112 On balance sheet gap 1,842,665,702 (181,714,704) 1,660,950,998 (3,579,448) (1,433,280,579) (1,436,860,029) 224,090,969

Forward exchange contracts - sales - - - (186,209,260) - (186,209,260) (186,209,260) Forward exchange contracts - purchases - - - 46,802,117 - 46,802,117 46,802,117 Futures - sale - - - (4,192,494) - (4,192,494) (4,192,494) Futures - purchase - - - 9,408,925 - 9,408,925 9,408,925 Foreign currency placements ------Subscription of Right Shares - - - 500,000 - 500,000 500,000 Off balance sheet gap - - - (133,690,711) - (133,690,711) (133,690,711) Total yield/Interest Risk Sensitivity Gap 1,842,665,702 (181,714,704) 1,660,950,998 130,111,264 (1,433,280,579) (1,303,169,318) 357,781,680 Cumulative Yield/Interest Risk Sensitivity Gap 1,842,665,702 1,660,950,998 3,321,901,996 3,452,013,260 2,018,732,680 715,563,363 1,073,345,042

190 State Bank of Pakistan Annual Report 2008-2009

47.2.2 The effective interest / markup rate for the monitory financial assets and liabilities are mentioned in their respective notes to the financial statements.

2008 Interest / mark-up bearing Non interest / mark-up bearing Grand Maturity Maturity Sub-total Maturity Maturity Sub-total Total upto one after upto one after year one year year one year ------(Rupees in '000) ------Financial assets Local currency (including rupee coins) - - - 2,899,949 - 2,899,949 2,899,949 Foreign currency reserves 634,821,753 1,487,354 636,309,107 - 1,827 1,827 636,310,934 Earmarked foreign currency balance - - - 12,040,910 - 12,040,910 12,040,910 Special Drawing Rights of International Monetary Fund - 14,769,338 14,769,338 - - - 14,769,338 Reserve tranche with the International Monetary Fund under quota arrangements - - - - 13,286 13,286 13,286 Current account of the Government of Punjab ------Current account of the Government of Balochistan - - - 13,908,793 - 13,908,793 13,908,793 Current account of the Government of - - 21,510,978 - - 21,510,978 Azad Jammu and Kashmir - - - 518,564 - 518,564 518,564 Current account with National Institute of Banking and Finance (Guarantee) Limited - - - 47,751 - 47,751 47,751 Investments 1,070,809,207 2,740,000 1,073,549,207 - 20,411,332 20,411,332 1,093,960,539 Loans, advances and bills of exchange - 235,099,049 235,099,049 - - - 235,099,049 Indian notes representing assets receivable from the Reserve Bank of India - - - - 683,678 683,678 683,678 Assets held with the Reserve Bank of India - - - - 467,196 467,196 467,196 Balances due from the Governments of India and Bangladesh (former East Pakistan) - 4,173,215 4,173,215 - 837 837 4,174,052 Other assets - - - 674,280 4,747,329 5,421,609 5,421,609 1,705,630,960 258,268,956 1,963,899,916 51,601,225 26,325,485 56,415,732 2,041,826,626

Financial liabilities Bank notes in circulation - - - - 1,046,039,412 1,046,039,412 1,046,039,412 Bills payable - - - 1,224,446 - 1,224,446 1,224,446 Current accounts of the Government - - - 70,823,348 - 70,823,348 70,823,348 Securities sold under an agreement to repurchase 6,758,751 - 6,758,751 - - - 6,758,751 Current account with SBP Banking Services Corporation- a subsidiary 2,369,636 - 2,369,636 - - - 2,369,636 Deposits of banks and financial institutions - 57,849,627 57,849,627 366,699,755 - 366,699,755 424,549,382 Other deposits and accounts 24,781,225 81,358,090 106,139,315 621,535 38,840,176 39,461,711 145,601,026 Payable to International Monetary Fund 15,355,508 75,908,178 91,263,686 - - - 91,263,686 Other liabilities - - - 42,429,336 14,749,979 57,179,315 57,179,315 49,265,120 215,115,895 264,381,015 481,798,420 1,099,629,567 1,581,427,987 1,845,809,002 On balance sheet gap 1,656,365,840 43,153,061 1,699,518,901 (430,197,195) (1,073,304,082) (1,525,012,255) 196,017,624

Off Balance Sheet Financial Instruments

Forward exchange contracts - sales - - - (236,130,214) - (236,130,214) (236,130,214) Forward exchange contracts - purchases - - - 141,502,378 - 141,502,378 141,502,378 Futures - sale - - - (22,536,696) - (22,536,696) (22,536,696) Futures - purchase - - - 65,350,752 - 65,350,752 65,350,752 Foreign currency placements 1,360,160 - 1,360,160 - - - 1,360,160 Import letters of credit ------Subscription of Right Shares ------Foreign Currency ------Off Balance Sheet Gap 1,360,160 - 1,360,160 (51,813,780) - (51,813,780) (50,453,620) Total Yield/Interest Risk Sensitivity Gap 1,655,005,680 43,153,061 1,698,158,741 (378,383,415) (1,073,304,082) (1,473,198,475) 246,471,244 Cumulative Yield/Interest Risk Sensitivity Gap 1,655,005,680 1,698,158,741 3,396,317,482 3,017,934,067 1,944,629,985 471,431,510 717,902,754

(a) On-balance sheet gap represents the net amounts of on-balance sheet items. * includes finances provided under profit and loss sharing arrangements.

191 Financial Statement of SBP

47.3 Currency risk management

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Foreign currency activities result mainly from the Bank's holding of foreign currency assets under its foreign reserves management function and the overall level of these assets is determined based on the prevailing extent of credit and liquidity risks. In order to avoid losses arising from adverse changes in the rates of exchange, the Bank's compliance with the limits established for foreign currency positions is being regularly monitored by the management.

The Bank also holds from time to time, foreign currency assets and liabilities that arise from the implementation of domestic monetary policies. Any foreign currency exposure relating to these implementation activities are hedged through the use of foreign currency forwards, swaps and other transactions.

The Bank also enters into forward foreign exchange contracts with the commercial banks and financial institutions to hedge against the currency risk on foreign currency swap transactions.

47.4 Liquidity risk management

Liquidity risk is the risk that an entity will encounter difficulty in raising funds to meet commitments associated with the financial instruments. In order to reduce the level of liquidity risk arising out of the local currency activities, the Bank manages the daily liquidity position of the banking system including advancing and withdrawal of funds from the system for smoothening out daily peaks and troughs.

The risk arising out of the Bank's obligations for foreign currency balances or deposits is managed through available reserves generated mainly from borrowings and open market operations.

47.5 Portfolio risk management

The Bank has appointed external managers to invest a part of the foreign exchange reserves in international fixed income securities. The external managers are selected after conducting a thorough due diligence by the Bank and externally hired investment consultants, and appointed after the approval of the Central Board. The mandates awarded to the managers require them to outperform the benchmarks which are based on fixed income global aggregate indices. The benchmarks are customized to exclude certain securities, currencies, and maturities to bring it to an acceptable level of risk and within the Bank's approved risk appetite. Managers are provided investment guidelines within which they have to generate excess returns over the benchmark. Safe custody of the portfolio is provided through carefully selected global custodian who is independent of the portfolio managers. The custodian also provides valuation, compliance, corporate actions and recovery, and other value added services which are typically provided by such custodian. The valuations provided by the custodian is reconciled with the portfolio managers, and recorded accordingly.

48. ACCOUNTING ESTIMATES AND JUDGMENTS

48.1 Provision against loans and advances

The Bank reviews its loan portfolio to assess recoverability of loans and advances and provision required there against on a continuous basis. While assessing this requirement, various factors including the delinquency in the account, financial position of the borrower and other relevant factors are considered. The amount of provision may require adjustment in case borrowers do not perform according to expectations.

48.2 Impairment of available for-sale investments

The Bank determines that available-for-sale equity investments are impaired when there is a significant or prolonged decline in the fair value below its cost. The determination of what is significant or prolonged requires judgment. In making this judgment, the Bank evaluates among other factors, the normal volatility in security price. In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows.

48.3 Held-to-maturity investments

The Bank classifies non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. In making this judgment, the Bank evaluates its intention and ability to hold such investments to maturity.

48.4 Retirement Benefits

The key actuarial assumptions concerning the valuation of defined benefit plans and the sources of estimation are disclosed in note 43.5.1 to the financial statements.

192 State Bank of Pakistan Annual Report 2008-2009

48.5 Useful life and residual value of property and equipment

Estimates of useful life and residual value of property and equipment are based on the management‟s best estimate.

49. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of all the financial instruments reflected in the financial statements approximates their fair value, except strategic investments as mentioned in note 10.3.1which are carried at cost less permanent impairment in value, if any.

50. IMPACT OF IAS 39 AND IFRS 7

51. POST BALANCE SHEET EVENT

The Bank based on the letter # F.1(5) IF - 1/2007 dated September 28, 2009 from the Finance Division, Internal Finance Wing, of Government of Pakistan has decided to transfer Rs. 31,110 million from reserve fund to unappropriated profit.

52. DATE OF AUTHORISATION

These financial statements were authorised for issue on October 12, 2009 by the Central Board of Directors of the Bank.

53. GENERAL

53.1 Corresponding Figures

53.1.1 Commitments in respect of letters of credit opened on behalf of the Government of Pakistan are not disclosed as commitments of the Bank and Corresponding figures have also been re-arranged.

53.1.2 Following material corresponding figures have been rearranged / reclassified to reflect more appropriate presentation of event and transactions for the purpose of comparison :-

Current Classification Previous Classification Amount Rupees ('000)

Earmarked foreign currency balances Other assets - others 11,088,798

Other assets Other liabilities 976,840

Other income / (charges) - net Other income 294,220

Other income / (charges) - net Other charges 736,368

53.3 Figures have been rounded off to the nearest thousand rupees, unless otherwise stated..

Syed Salim Raza Yaseen Anwar Muhammad Haroon Rasheed Governor Deputy Governor Comptroller Finance

193 Financial Statement of SBP

ANNEXURE - A Impact of IAS 39 and IFRS 7 on Bank's financial statements: Page : 1/3 The following note provides additional information concerning value and disclosures of assets and liabilities as appearing on the financial statements as per existing framework and value if the IAS 39 had been adopted by the Bank.

Impact of IAS 39 on Balance Sheet item: As at June 30, 2009

As per Existing Accounting Framework Under IAS 39 Issue Department Banking Department Total Reclassifications Remeasurements Total

Note ------Rs. In '000 ------ASSETS Local currency 9 2,496,236 196,449 2,692,685 2,692,685 Foreign currency reserves 6 378,121,392 430,086,636 808,208,028 (166,207) 808,041,821 Earmarked foreign currency balances 14 - 33,959,461 33,959,461 - 33,959,461 Special Drawing Rights of the International Monetary Fund 7 6,318,150 6,117,522 12,435,672 - 12,435,672 Securities purchased under resale agreements - - - - - Current account with Government of Balochistan 21.5 - 7,127,734 7,127,734 - 7,127,734 Current account with Government of Punjab 21.2 40,915,859 40,915,859 40,915,859 Current account with the Government of Azad Jammu and Kashmir 21.6 - - - - - Current account with National Institute of Banking and Finance - - (Guarantee) Limited - a subsidiary - 107,918 107,918 - 107,918 Investments 10 675,410,375 495,348,215 1,170,758,590 41,100 81,476,912 1,252,276,602 Financial assets pledged as collateral - - - - - Loans, advances and bills of exchange 16 - 331,853,796 331,853,796 3,307,998 (72,040,285) 263,121,509 Reserve tranche with the IMF under quota arrangements 15 - 15,048 15,048 - 15,048 Indian notes representing asset receivable from the Reserve Bank of India 727,665 - 727,665 (727,665) - Coins - Commercial papers held in Bangladesh 11 78,500 - 78,500 (78,500) - Assets held with the Reserve Bank of India 12 3,021,743 - 3,021,743 (3,021,743) - Balances due from Governments of India and Bangladesh 17 - 5,416,132 5,416,132 (5,416,132) - Receivable from India and Bangladesh (former East Pakistan)-net - - - - - Gold reserves 5 157,543,551 - 157,543,551 - 157,543,551 Property and equipment 18 - 18,073,734 18,073,734 - 18,073,734 Intangible assets 19 - 116,393 116,393 - 116,393 Other assets 20 - 8,630,077 8,630,077 (6,285,318) 2,344,759 TOTAL ASSETS 1,223,717,612 1,377,964,974 2,601,682,586 (12,346,467) 9,436,627 2,598,772,746

LIABILITIES AND EQUITY LIABILITIES Bills payable - 827,785 827,785 - 827,785 Bank notes issued 13 1,223,717,612 - 1,223,717,612 - 1,223,717,612 Deposits of banks and financial institutions 23 - 273,739,781 273,739,781 2,990 273,742,771 Other deposits and accounts 24 - 167,779,189 167,779,189 342,348 168,121,537 Securities sold under repurchase agreements 22 - - - - - Current accounts of Governments 21 - 66,621,868 66,621,868 - 66,621,868 Current account of SBP Banking Services Corporation- a subsidiary - 3,702,522 3,702,522 - 3,702,522 Payable to the International Monitory Fund 25 - 419,003,041 419,003,041 911,375 419,914,416 Allocation of Special Drawing Rights of International Monitory Fund 30 - - 1,541,512 19,949,603 21,491,115 Deferred liability - staff retirement benefits 27 - 4,204,684 4,204,684 - 4,204,684 Deferred income 28 - 193,549 193,549 - 193,549 Other liabilities 26 - 43,016,815 43,016,815 (11,062,946) 31,953,869 Total liabilities 1,223,717,612 979,089,234 2,202,806,846 (8,264,721) 19,949,603 2,214,491,728

EQUITY Share capital 29 - 100,000 100,000 - 100,000 Allocation of Special Drawing Rights of International Monitory Fund 30 - 1,525,958 1,525,958 (1,525,958) - Statutory reserves 31 - 172,704,657 172,704,657 (60,816,515) 111,888,142 Unrealised appreciation on gold reserves 32 - 156,772,429 156,772,429 (2,555,788) 154,216,641 Surplus on revaluation of property and equipment 18.2 - 18,747,014 18,747,014 18,747,014 Surplus on revaluation of securities - - - - 81,476,912 81,476,912 Unappropriated profit - 49,025,682 49,025,682 (31,173,373) 17,852,309 Equity and reserves - 398,875,740 398,875,740 (4,081,746) (10,512,976) 384,281,018 TOTAL LIABILITIES AND EQUITY 1,223,717,612 1,377,964,974 2,601,682,586 (12,346,467) 9,436,627 2,598,772,746

194 State Bank of Pakistan Annual Report 2008-2009

Page : 2/3 Impact of IAS 39 on Profit and Loss Account items: As at June 30, 2009 Existing Reclassifications Remeasurements Under IAS 39 Framework Note ------Rs. In '000 ------

Interest/ mark-up and similar income 34 183,029,210 (5,899,031) 177,130,179 Interest/ mark-up and similar expense 35 (8,085,169) - (8,085,169) 174,944,041 169,045,010

Commission income 36 1,667,375 - 1,667,375 Exchange gain - net 34,725,139 (34,725,139) - Net foreign exchange gain 37 - 34,725,139 (2,514,137) 32,211,002 Net gain on financial instruments designated at fair value - 6,042,965 6,042,965 Dividend income 9,733,352 - 9,733,352 Other operating income - net 39 1,114,285 (91,914) 1,022,371 Other income / (charges) - net 40 52,020 (52,020) - Total operating income 222,236,212 219,722,075

Impairment (charge)/ reversal of: - loans, advances and other assets 451,726 - (2,406,000) (1,954,274) diminution in value of investments 98,687 - 98,687 - other doubtful assets (62,615) - (62,615) 487,798 (1,918,202) Net operating income 222,724,010 217,803,873

Operating expenses Bank notes printing charges 41 (4,193,032) - (4,193,032) Agency commission 42 (3,614,261) - (3,614,261) General, administrative and other expenses 43 (10,897,194) - (10,897,194)

OPERATING PROFIT 204,019,523 199,099,386 Share of profit from subsidiaries 38 192,481 - 192,481 PROFIT FOR THE YEAR 204,212,004 - (4,920,137) 199,291,867

For the purpose of valuation of listed equity investments, rates quoted at Karachi Stock Exchange have been used. However, in view of the strategic nature of investments, the quoted rate may not be representative of fair value as disclosed in note 4.2 of these financial statements. IFRS 7 concerns with certain disclosures regarding financial assets and financial liabilities including the liquidity risk, credit risk, market risk and sensitivity analysis thereof. The adoption of this standard would not impact materially the value of financial assets and financial liabilities as appearing on the balance sheet under the current accounting framework.

195 Financial Statement of SBP

Reconciliation of Impact of IAS 39 on Profit and Loss Account: Page : 3/3 Amount Rs. 000

Profit for the Financial Year 2008-09 as per Previous GAAP 204,212,004

Impairment of Loans and Advances (4,920,137)

Profit for the Financial Year 2008-09 as per IAS 39 199,291,867

Less: Impairment on loans and advances charged to P & L (72,040,285)

Less: Exchange difference on allocation of SDR of IMF charged to P&L Exc - 2006 (13,637,249) Exch- 2007 (429,256) Exch- 2008 (3,368,961) Exch- 2009 (2,514,137) (19,949,603)

Un-Appropriated profit for the Financial Year 2008-09 as per IAS 39 17,852,309

Syed Salim Raza Yaseen Anwar Muhammad Haroon Rasheed Governor Deputy Governor Comptroller Finance

196 14 Financial Statement of SBP-BSC (Bank) M. YOUSUF ADIL SALEEM & CO. ERNST & YOUNG FORD RHODES Chartered Accountants SIDAT HYDER Cavish Court, A-35 Chartered Accountants Block 7 & 8, KCHSU Progressive Plaza Sharea Faisal Beaumont Road Karachi P.O.Box 15541 Karachi

AUDITORS’ REPORT TO THE SHAREHOLDER

We have audited the accompanying financial statements of SBP Banking Service Corporation (“the Corporation”) which comprise the balance sheet as at June 30, 2009 and profit and loss account, cash flow statement and changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements Management of the Corporation is responsible for the preparation and fair presentation of these financial statements in accordance with the International Accounting Standards 1 to 38 and Accounting Policy for investments as stated in note 5.1 to the financial statements approved for adoption by the Board of Directors of the Corporation. This responsibility includes; designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Corporation’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial statements give a true and fair view of the Corporation’s financial position as of June 30, 2009 and of its financial performance and its cash flows for the year then ended in accordance with International Accounting Standards 1 to 38 and Accounting Policy for

197 Financial Statement of SBP-BSC (Bank) investments as stated in note 5.1 to the financial statements approved for adoption by the Board of Directors of the Corporation.

M. Yousuf Adil Saleem & Co. Ernst & Young Ford Rhodes Sidat Hyder Chartered Accountants Chartered Accountants Karachi Karachi

Mushtaq Ali Hirani Omer Chughtai Audit Engagement Partner Audit Engagement Partner Date: October 12, 2009 Date: October 12, 2009

198 State Bank of Pakistan Annual Report 2008-2009

SBP BANKING SERVICES CORPORATION BALANCE SHEET AS AT JUNE 30, 2009

Note 2009 2008 (Rupees in '000)

ASSETS

Balance in current account with State Bank of Pakistan 3,702,522 2,369,636

Investments 6 913,252 917,533

Employee loans and advances 7 7,928,445 7,781,361

Property and equipment 8 183,510 183,667

Stock in hand 9 81,991 72,806

Other assets 10 47,037 37,093

Total assets 12,856,757 11,362,096

LIABILITIES

Deferred liabilities - staff retirement benefits 11 9,591,330 8,244,213

Other liabilities 12 2,265,427 2,117,883

Total liabilities 11,856,757 10,362,096

Net assets 1,000,000 1,000,000

REPRESENTED BY:

Share capital 13 1,000,000 1,000,000 - Commitments 14

The annexed notes 1 to 21 form an integral part of these financial statements.

Qasim Nawaz Riaz Nazarali Managing Director Director Accounts

199 Financial Statement of SBP-BSC (Bank)

SBP BANKING SERVICES CORPORATION PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED JUNE 30, 2009

Note 2009 2008 (Rupees in '000)

Discount and interest earned 15 82,818 78,195

Net operating expenses 16

Total expenses 6,243,059 4,966,747

Reimbursable from the State Bank of Pakistan (4,012,936) (3,376,624)

Allocated to the State Bank of Pakistan (2,230,123) (1,590,123) - - 82,818 78,195

Gain on disposal of property and equipment 3,896 1,544

Profit transferred to the State Bank of Pakistan 86,714 79,739

The annexed notes 1 to 21 form an integral part of these financial statements.

Qasim Nawaz Riaz Nazarali Managing Director Director Accounts

200 State Bank of Pakistan Annual Report 2008-2009

SBP BANKING SERVICES CORPORATION STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED JUNE 30, 2009

Share capital Unappropriated Total profit ------(Rupees in '000) ------

Balance as at June 30, 2007 1,000,000 - 1,000,000

Profit for the year - 79,739 79,739

Profit transferred to the State Bank of Pakistan - (79,739) (79,739)

Balance as at June 30, 2008 1,000,000 - 1,000,000

Profit for the year - 86,714 86,714

Profit transferred to the State Bank of Pakistan - (86,714) (86,714)

Balance as at June 30, 2009 1,000,000 - 1,000,000

The annexed notes 1 to 21 form an integral part of these financial statements.

Qasim Nawaz Riaz Nazarali Managing Director Director Accounts

201 Financial Statement of SBP-BSC (Bank)

SBP BANKING SERVICES CORPORATION CASHFLOW STATEMENT FOR THE YEAR ENDED JUNE 30, 2009

Note 2009 2008 (Rupees in '000) Cash flows from operating activities

Loss before adjustment of non-cash items 17 (1,914,706) (1,858,112) Expenses reimbursable by the State Bank of Pakistan 4,077,801 3,454,262 Profit transferred to the State Bank of Pakistan (86,714) (79,739) Retirement benefits and employees' compensated absences paid (652,477) (823,377) Discount income received 81,363 76,461 1,505,267 769,495 (Increase) / Decrease in assets Loans to employees (147,084) (2,274,492) Other assets (9,944) (4,761) Stock in hand (9,185) (4,937)

(Decrease) / Increase in liabilities Other liabilities 54,644 (297,753) Net cash from / (used in) operating activities 1,393,698 (1,812,448)

Cash flows from investing activities

Fixed capital expenditure (66,896) (86,376) Proceeds from disposal of property and equipment 6,084 1,821 Net cash used in investing activities (60,812) (84,555)

Net increase / (decrease) in cash and cash equivalents 1,332,886 (1,897,003)

Cash and cash equivalents at beginning of the year 2,369,636 4,266,639

Cash and cash equivalents at end of the year 3,702,522 2,369,636

The annexed notes 1 to 21 form an integral part of these financial statements.

Qasim Nawaz Riaz Nazarali Managing Director Director Accounts

202 SBP BANKING SERVICES CORPORATION NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2009

1. STATUS AND NATURE OF OPERATIONS

1.1 SBP Banking Services Corporation (the Corporation) was constituted under the SBP Banking Services Corporation Ordinance, 2001 (the Ordinance) as a wholly owned subsidiary of the State Bank of Pakistan (SBP) and commenced its operations with effect from January 2, 2002. The Corporation is responsible for carrying out certain statutory and administrative functions and activities on behalf of SBP, as transferred or delegated by SBP under the provisions of the Ordinance mainly including:

- disbursing of loans and advances to the Government, banks, financial institutions and local authorities and facilitating in inter-bank settlement system; - collecting revenue and making payments for and on behalf of and maintaining accounts of the Government, local bodies, authorities, companies, banks and other financial institutions; - receipt, supply and exchange of bank notes and coins; - dealing in prize bonds and other savings instruments of the Government; and Operational work relating to management of debt and foreign - exchange.

Any assets, liabilities, income and expenditure directly relating to the above activities are accounted for in the books of SBP while the cost incurred by the Corporation in carrying out the above activities are either reimbursed from or allocated to SBP and are accounted for as deduction from the expenditure while net profit / loss, if any, of the Corporation is transferred to / recovered from SBP.

1.2 The financial statements are presented in Pak Rupees, which is the Corporation's functional and presentation currency.

2. STATEMENT OF COMPLIANCE

2.1 These financial statements have been prepared in accordance with the requirements of the International Accounting Standards IAS 1 to 38 and the policy for investments as stated in note 5.1 approved for adoption by the Board of Directors of the Corporation. Where the requirements of policies adopted by the Board of Directors of the Corporation differ with the requirements of International Accounting Standards adopted by the Board of Directors of the Corporation the requirements of policies adopted by the Board of Directors of the Corporation take precedence.

3. BASIS OF MEASUREMENT

These financial statements have been prepared under the historical cost convention.

The preparation of financial statements in conformity with International Accounting Standards IAS 1 to 38 and policy for investment as stated in note 5.1 approved for adoption by the Board of Directors of the Corporation, requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experiences and various other factors that are believed to be reasonable under the circumstances, the result of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods.

203 Financial Statement of SBP-BSC (Bank)

In the process of applying the Corporation’s accounting policies, management has made the following estimates and judgements which are significant to the financial statements:(a) classification of investments (Note 6);(b) determining the residual values and useful lives of property and equipment (Note 8.1); (c) accounting for post employment benefits (Note 16.1); and (d) impairment of assets.

4. STANDARDS AND INTEPRETATIONS OF APPROVED ACCOUTING STANDARDS NOT YET EFFECTIVE OR NOT RELEVANT

The following standards and interpretations of approved accounting standards are applicable from the date mentioned below against the respective standard or interpretation: -

Standard or interpretation Effective date (accounting period beginning on or after)

IAS - 1 (Revised) Presentation of financial statements January 1, 2009

IAS - 23 (Revised) Borrowing costs January 1, 2009

IAS - 32 (Revised) Financial Instruments: Presentation January 1, 2009

The Corporation expects that the adoption of the above standards will not have any material impact on the Corporation's financial statements in the period of initial application other than to the extent of certain changes and/or enhancements in the presentation and disclosures in the financial statements resulting from the application of IAS 1. The revised IAS 1 was issued in September 2007 and becomes effective for financial years beginning on or after 1 January 2009.

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

5.1 Investments – Held to maturity

The Corporation classifies its non-derivative financial assets with fixed and determinable payments as held to maturity. In making this judgment, the Corporation evaluates its intention and ability to hold such investments to maturity.

All such investments acquired by the Corporation are initially measured at cost being the fair value of the consideration given. Transaction cost, if any, is included in the initial measurement of investments. Subsequent to initial measurement these securities are stated at cost less accumulated impairment, if any. The cost of securities is adjusted for any amortisation of premiums on a straight-line basis over the period of maturity.

204 State Bank of Pakistan Annual Report 2008-2009

5.2 Retired Employees Fund

The Corporation has approved a scheme for retired employees whereby a deposit scheme is created.

The employees can deposit for terms of either three, five or ten years upon which they will be issued an investment pass book reflecting their contribution. The fund stands reinvested by the employee if not withdrawn on maturity date.

The return is paid semi-annually to retired employees in their accounts with commercial banks after deduction of services charges and withholding tax. If deposits are withdrawn before maturity, the rate of return will be calculated on the basis of the rate applicable to the actual period of the deposit.

5.3 Property and equipment

Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses while capital work-in-progress is stated at cost.

Depreciation on property and equipment is charged to profit and loss account applying the straight-line method at the rates specified in note 8.1 to the financial statements, whereby the cost of an asset is written off over its estimated useful life. The asset's useful life is reviewed, and adjusted if appropriate, at each balance sheet date.

Depreciation on additions is charged to the profit and loss account from the month in which the asset is put to use while no depreciation is charged in the month in which the assets are deleted. Normal repairs and maintenance are charged to the profit and loss account as and when incurred; major renewals and improvements are capitalised and the assets so replaced, if any, are retired. Gains and losses on disposal of property and equipment are recognised in the profit and loss account.

5.4 Stock in hand

Stock in hand includes medicine, store and stationery stock. These are valued at lower of weighted average cost and net realisable value. Net realisable value represents estimated selling prices in the ordinary course of business less the estimated cost of completion and the estimated cost necessary to make the sale.

5.5 Provisions

Provisions are recognised when the Corporation has a present, legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount can be made.

5.6 Staff retirement benefits

The Corporation operates the following staff retirement benefits for employees transferred from SBP (transferred employees) and other employees:

a) an un-funded contributory provident fund (old scheme) for transferred employees who joined SBP prior to 1975 and opted to remain under the old scheme;

b) an un-funded general contributory provident fund (new scheme) for transferred employees who joined SBP after 1975 or who had joined SBP prior to 1975 but have opted for the new scheme and other employees;

205 Financial Statement of SBP-BSC (Bank)

c) the following other staff retirement benefit schemes:

- an un-funded gratuity scheme for all employees other than the employees who opted for the new general contributory provident fund scheme or transferred employees who joined SBP after 1975 and are entitled only to pension scheme benefits; - an un-funded pension scheme; - an un-funded contributory benevolent fund scheme; and - an un-funded post retirement medical benefit scheme.

Annual provisions are made by the Corporation to cover the obligations arising under these schemes based on actuarial recommendations. The actuarial valuations are carried out using the Projected Unit Credit Method. Unrecognised actuarial gains and losses arising at the valuation date are recognised as income / expense in the following year based on actuarial recommendations. The above staff retirement benefits are payable to staff on completion of prescribed qualifying period of service.

5.7 Compensated absences

The Corporation makes annual provision in respect of liability for employees' compensated absences based on actuarial estimates.

5.8 Revenue recognition

Revenue is recognised on time proportion basis that takes into account the effective yield on the asset.

5.9 Taxation

The income of the Corporation is exempt from Tax under section 25 of the SBP Banking Services Corporation Ordinance, 2001.

5.10 Cash and cash equivalents

Cash comprises of cash on hand and balance in current account with the State Bank of Pakistan. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant changes in value.

5.11 Financial instruments

Financial assets and liabilities are recognised at the time when the Corporation becomes a party to the contractual provisions of the instruments and derecognised when the Corporation loses control of the contractual rights that comprise the financial asset and in case of financial liability when the obligation specified in the contract is discharged, cancelled or expired. Any gain or loss on the derecognition of the financial assets and liabilities is included in the profit and loss account.

Financial instruments carried on the balance sheet include the balance in the current account with the State Bank of Pakistan, investments, loans and advances, other assets and other liabilities. The particular recognition methods adopted are disclosed in the individual policy statements associated with each financial instrument.

5.12 Offsetting

A financial asset and a financial liability is offset and the net amount is reported in the balance sheet when the Corporation has a legally enforceable right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

206 State Bank of Pakistan Annual Report 2008-2009

5.13 Impairment

The carrying amount of the assets is reviewed at each balance sheet date to determine whether there is any indication of impairment of any asset or a group of assets. If such indication exists, the recoverable amount of such assets is estimated and the impairment losses are recognised in the profit and loss account.

Provisions for impairment are reviewed at each balance sheet date and adjusted to reflect the current best estimates. Changes in the provisions are recognised in the profit and loss account.

6. INVESTMENTS 2009 2008 Note (Rupees in '000) Held to maturity Market Treasury Bill 6.1 509,000 509,000 Pakistan Investment Bonds 6.2 404,252 408,533 913,252 917,533

6.1 Market Treasury Bill carries mark-up at the rate of 11.78 percent per annum (2008: 10.1 percent per annum) and is due to mature in March 2010.

6.2 Pakistan Investment Bonds carry mark-up at the rate of 8.0 to 9.6 percent per annum (2008: 8.0 to 9.6 percent per annum) and are due to mature till 2016.

7. EMPLOYEE LOANS AND ADVANCES 2009 2008 Note (Rupees in '000)

Considered good 7,928,445 7,781,361 Considered doubtful 13,584 12,382 7.1 7,942,029 7,793,743 Provision against doubtful loans (13,584) (12,382) 7,928,445 7,781,361

7.1 Represents loans given to the permanent employees of the Corporation, recoverable in equal monthly installments till the retirement of an employee, except the personal loan repayable in twenty four equal monthly installments. These include loans amounting to Rs. 108.313 million that carry mark up at 10% per annum. Maximum maturity of the loan is upto year 2038.

These loans have been given in respect of:-

- Housing loan – Secured against equitable mortgage of the property. - Motor vehicle loan - Secured against equitable mortgage of the vehicle. - Computer and personal loan, given on personal guarantee of two employees of the Corporation.

2009 2008 8. PROPERTY AND EQUIPMENT Note (Rupees in '000)

Operating fixed assets 8.1 183,510 180,551 Capital work-in-progress - 3,116 183,510 183,667

207 Financial Statement of SBP-BSC (Bank)

8.1 Operating fixed assets

The following is a statement of operating fixed assets:

Cost Accumulated Depreciation 2009 As at Additions/ As at As at Charge for As at Net book Annual July 1, (deletions)/ June 30, July 1, the year / June 30, value at rate of 2008 adjustments & 2009 2008 (deletions)/ 2009 June 30, depreciation transfers* adjustments & 2009 % transfers* ------(Rupees in '000)------Furniture and fixtures 87,817 4,426 97,734 36,403 8,649 51,257 46,477 10 (1,101) (387) 6,592 * 6,592 *

Office equipment 383,510 41,295 663,870 287,075 37,244 562,743 101,127 20 (4,108) (3,605) 243,173 * 242,029 *

EDP equipment 229,058 10,861 259,711 209,680 13,352 243,354 16,357 33.33 (4,258) (3,728) 24,050 * 24,050 *

Motor vehicles 35,370 12,286 45,696 22,046 5,620 26,147 19,549 20 (5,694) (5,253) 3,734 * 3,734 *

735,755 68,868 1,067,011 555,204 64,865 883,501 183,510 (15,161) (12,973) 277,549 * 276,405 *

Cost Accumulated Depreciation 2008 Cost at Accumulated Charge for Accumulated Net book Annual Cost at Additions/ June 30, depreciation the year / depreciation value at rate of July 1, (deletions)/ 2008 at July 1, (deletions)/ at June 30, June 30, depreciation 2007 adjustments & 2007 adjustments & 2008 2008 % transfers* transfers*

------(Rupees in '000)------Furniture and fixtures 73,966 15,083 87,817 30,946 6,981 36,403 51,414 10 (1,193) (1,193) (39) * (331) *

Office equipment 333,172 45,271 383,510 245,595 30,962 287,075 96,435 20 (1,255) (1,036) 6,322 * 11,554 *

EDP equipment 202,561 11,892 229,058 168,408 34,925 209,680 19,378 33.33 (150) (136) 14,755 * 6,483 *

Motor vehicles 29,449 7,692 35,370 18,993 4,770 22,046 13,324 20 (1,609) (1,565) (162) * (152) *

639,148 79,938 735,755 463,942 77,638 555,204 180,551 (4,207) (3,930) 20,876 * 17,554

2009 2008 (Rupees in '000)

9. STOCK IN HAND

Medicine, stores and stationery stock 84,345 76,765 Provision against obsoletes items (2,354) (3,959) 81,991 72,806

208 State Bank of Pakistan Annual Report 2008-2009

2009 2008 (Rupees in '000) 10. OTHER ASSETS

Accrued interest / mark-up and return 25,216 15,459 Other advances, deposits and prepayments 21,821 21,634 47,037 37,093

11. DEFERRED LIABILITIES - STAFF RETIREMENT BENEFITS

Gratuity 32,371 37,821 Pension 6,586,470 5,798,287 Benevolent fund scheme 769,852 709,988 Post retirement medical benefits 1,286,508 882,133 8,675,201 7,428,229 Provident fund scheme 916,129 815,984 9,591,330 8,244,213

12. OTHER LIABILITIES

Accruals and provisions 12.1 1,879,337 1,839,457 Others 386,090 278,426 2,265,427 2,117,883

12.1 Accruals and provisions

Provision for employees' compensated absences 1,879,337 1,786,437 Others - 53,020 1,879,337 1,839,457

13. SHARE CAPITAL

2009 2008 (Number of shares) Authorised share capital 1,000 1,000 Ordinary shares of Rs. 1,000,000 each 1,000,000 1,000,000

Issued, subscribed and paid-up capital Fully paid-up ordinary shares of 1,000 1,000 Rs. 1,000,000 each issued for cash 1,000,000 1,000,000

14. COMMITMENTS

Capital Commitments 7,110 -

This represents amounts committed by the Corporation to purchase assets from successful bidders. 2009 2008 15. DISCOUNT AND INTEREST EARNED (Rupees in '000)

Discount on Government securities 81,363 76,461 Interest on staff loans 1,455 1,734 82,818 78,195

209 Financial Statement of SBP-BSC (Bank)

16. NET OPERATING EXPENSES Note 2009 2008 (Rupees in '000)

Reimbursable from the State Bank of Pakistan Salaries, wages and other benefits 3,478,919 2,918,933 Rent and taxes 8,577 8,254 Insurance 2,605 1,537 Electricity, gas and water 170,107 133,677 Repair and maintenance 19,385 16,929 Auditors' remuneration 16.6 4,570 3,030 Legal and professional 10,233 3,193 Travelling 7,325 5,832 Daily expenses 11,792 9,443 Passages 84,334 90,755 Fuel 1,994 1,682 Conveyance 4,483 5,588 Postages and telephone 11,624 9,760 Training 21,622 13,812 Remittance of treasure 33,059 27,743 Stationery 9,219 7,938 Books and newspapers 1,332 1,415 Advertisement 1,748 1,564 Bank guards 68,355 57,988 Uniforms 14,487 12,810 Others 47,166 44,741 4,012,936 3,376,624 Allocated to the State Bank of Pakistan Retirement benefits and employees' compensated absences 2,165,258 1,512,485 Depreciation 8.1 64,865 77,638 2,230,123 1,590,123

6,243,059 4,966,747

16.1 As mentioned in note 5.6, the Corporation operates the following staff retirement benefit schemes:

- an un-funded gratuity scheme for all employees other than the employees who opted for the new general provident contributory fund scheme or transferred employees who joined the SBP after 1975 and are entitled only to pension scheme benefits;

- an un-funded pension scheme;

- an un-funded contributory benevolent fund scheme; and

- an un-funded post retirement medical benefit scheme.

During the year the Corporation has had actuarial valuations carried out for all the above schemes in the report dated September 4, 2009 using Projected Unit Credit Method. Following significant assumptions have been used for the valuations of these schemes as at June 30, 2009:

210 State Bank of Pakistan Annual Report 2008-2009

2009 2008 % per annum

Expected rate of increase in salary level 11 10 Expected rate of discount 13 12 Medical cost trend 8 7 Pension indexation rate 5 4

16.2 The following are the fair values of the obligations under the schemes and liabilities recognised there against for the past services of the employees at the latest valuation dates:

2009 Present value Unrecognised Provision made of the defined actuarial in respect of benefit gain / (loss) retirement obligation benefits ------(Rupees in '000)------

Gratuity 38,039 (5,668) 32,371 Pension 8,951,904 (2,365,434) 6,586,470 Benevolent fund scheme 916,147 (146,295) 769,852 Post retirement medical benefits 2,790,980 (1,504,472) 1,286,508 12,697,070 (4,021,869) 8,675,201

2008 Present value Unrecognised Provision made of the defined actuarial in respect of benefit gain / (loss) retirement obligation benefits ------(Rupees in '000)------

Gratuity 43,066 5,245 37,821 Pension 6,679,812 881,525 5,798,287 Benevolent fund scheme 761,325 51,337 709,988 Post retirement medical benefits 2,315,481 1,433,348 882,133 9,799,684 2,371,455 7,428,229

16.3 The following is the movement of the net recognised liability in respect of the defined benefit schemes mentioned above:

2009 Recognised Charge for Payments Employee Recognised liability as at the year during the Contributions liability as at June 30, 2008 year June 30, 2009 ------(Rupees in '000)------

Gratuity 37,821 8,777 (14,227) - 32,371 Pension 5,798,287 1,167,465 (379,282) - 6,586,470 Benevolent fund scheme 709,988 120,380 (71,700) 11,184 769,852 Post retirement medical benefits 882,133 494,978 (90,603) - 1,286,508 7,428,229 1,791,600 (555,812) 11,184 8,675,201

2008 Recognised Charge for Payments Employee Recognised liability as at the year during the Contributions liability as at June 30, 2007 year June 30, 2008 ------(Rupees in '000)------

Gratuity 43,000 5,889 (11,068) - 37,821 Pension 5,391,000 789,965 (382,678) - 5,798,287 Benevolent fund scheme 699,000 92,263 (92,381) 11,106 709,988 Post retirement medical benefits 672,000 294,810 (84,677) - 882,133 6,805,000 1,182,927 (570,804) 11,106 7,428,229

211 Financial Statement of SBP-BSC (Bank)

16.4 The following amounts have been charged to the profit and loss account in respect of the above benefits: 2009 Current Actuarial Interest Settlement Employee Total service cost (gain)/loss cost cost Contributions ------(Rupees in '000)------

Gratuity 986 2,623 5,168 - - 8,777 Pension 277,735 88,153 801,577 - - 1,167,465 Benevolent fund scheme 35,071 5,134 91,359 - (11,184) 120,380 Post retirement medical benefits 97,674 119,446 277,858 - - 494,978 411,466 215,356 1,175,962 - (11,184) 1,791,600

2008 Current Actuarial Interest Settlement Employee Total service cost (gain)/loss cost cost Contributions ------(Rupees in '000)------

Gratuity 1,094 94 4,701 - - 5,889 Pension 219,489 (10,211) 580,687 - - 789,965 Benevolent fund scheme 31,815 (2,442) 73,996 - (11,106) 92,263 Post retirement medical benefits 62,830 68,140 163,840 - - 294,810 315,228 55,581 823,224 - (11,106) 1,182,927

16.5 Historical Information

2009 2008 2007 2006 2005 ------(Rupees in '000)------Gratuity Present Value of Defined Benefit Obligation 38,039 43,066 43,000 58,000 74,000 Unrecognised actuarial gains / (losses) (5,668) (5,245) - 7,000 (3,000) Liability in balance sheet 32,371 37,821 43,000 65,000 71,000 Experience adjustment arising on plan liabilities (gains) / losses 3,046 5,058 4,211 (8,246) 16,046

Pension Present Value of Defined Benefit Obligation 8,951,904 6,679,812 5,279,000 5,009,000 4,765,000 Unrecognised actuarial gains / (losses) (2,365,434) (881,525) 112,000 (6,000) (329,000) Liability in balance sheet 6,586,470 5,798,287 5,391,000 5,003,000 4,436,000 Experience adjustment arising on plan liabilities (gains) / losses 1,572,062 983,638 (117,735) (295,654) 281,000

Benevolent Fund Scheme Present Value of Defined Benefit Obligation 916,147 761,325 673,000 710,000 627,000 Unrecognised actuarial gains / (losses) (146,295) (51,337) 26,000 5,000 - Liability in balance sheet 769,852 709,988 699,000 715,000 627,000 Experience adjustment arising on plan liabilities (gains) / losses 100,092 75,755 (22,303) (5,845) (6,000)

Medical Present Value of Defined Benefit Obligation 2,790,980 2,315,481 1,489,000 1,204,000 806,000 Unrecognised actuarial gains / (losses) (1,504,472) (1,433,348) (817,000) (765,000) (529,000) Liability in balance sheet 1,286,508 882,133 672,000 439,000 277,000 Experience adjustment arising on plan liabilities (gains) / losses 190,570 683,802 165,511 276,001 279,000

16.6 Employees' compensated absences

During the year, actuarial valuation of employees' compensated absences has been carried out as at June 30, 2009 using the Projected Unit Credit Method. An amount of Rs.92.9 million has been charged after deduction of payments during the year as compared to Rs. 104.437 million in year 2008 based on actuarial recommendations.

212 State Bank of Pakistan Annual Report 2008-2009

Ernst & M. Yousuf Young Adil Ford Saleem Rhodes 2009 2008 16.7 Auditors' remuneration & Co. Sidat Hyder ------(Rupees in '000)------

Audit fee 1,571 1,571 3,142 2,530 Out of pocket expenses 714 714 1,428 500 2,285 2,285 4,570 3,030

17. LOSS BEFORE ADJUSTMENT OF NON-CASH ITEMS 2009 2008 (Rupees in '000)

Net profit for the year 86,714 79,739 Expenses reimbursed by the State Bank of Pakistan (4,012,936) (3,376,624) Expenses allocated to the State Bank of Pakistan (2,230,123) (1,590,123) (6,156,345) (4,887,008) Adjustments for: Provision for retirement benefits and employees' compensated absences 2,092,494 1,512,485 Expenses allocated to the State Bank of Pakistan 2,230,123 1,590,123 Discount on Government securities (81,363) (76,461) Amortization of premium 4,281 4,293 Gain on disposal of property and (3,896) (1,544) equipments 4,241,639 3,028,896

(1,914,706) (1,858,112)

18. RISK MANAGEMENT POLICIES

The Corporation is primarily subject to interest/ mark-up rate, credit and liquidity risks. The policies and procedures for managing these risks are outlined in notes 18.1 to 18.5. The Corporation has designed and implemented a framework of controls to identify, monitor and manage these risks. The senior management is responsible for advising the Governor on the monitoring and management of these risks.

18.1 Interest / mark-up rate risk management

Interest / mark-up rate risk is the risk that the value of a financial instrument will fluctuate due to changes in the market interest/ mark-up rates. The Corporation has adopted appropriate policies to minimise its exposure to this risk. The Corporation's management, the Central Board and the investment committee has set appropriate duration limits and a separate department deals with the monitoring of the Corporation's interest/ mark-up rate risk exposure based on these limits.

213 Financial Statement of SBP-BSC (Bank)

2009 Interest / mark-up bearing Non interest / mark-up bearing Total Maturity Maturity Sub total Maturity Maturity Sub total upto one after one upto one after one year year year year ------(Rupees in '000) ------Financial assets Balance in current account with the State Bank of Pakistan - - - 3,702,522 - 3,702,522 3,702,522 Investments 509,000 404,252 913,252 - - - 913,252 Employee loans and advances 15,168 93,145 108,313 797,832 7,022,300 7,820,132 7,928,445 Other assets - - - 25,216 - 25,216 25,216 524,168 497,397 1,021,565 4,525,570 7,022,300 11,547,870 12,569,435

Financial liabilities Other liabilities - - - 386,090 - 386,090 386,090 - - - 386,090 - 386,090 386,090

On balance sheet gap 524,168 497,397 1,021,565 4,139,480 7,022,300 11,161,780 12,183,345

2008 Interest / mark-up bearing Non interest / mark-up bearing Total Maturity Maturity Sub total Maturity Maturity Sub total upto one after one upto one after one year year year year ------(Rupees in '000) ------Financial assets Balance in current account with the State Bank of Pakistan - - - 2,369,636 - 2,369,636 2,369,636 Investments 509,000 408,533 917,533 - - - 917,533 Employee loans and advances 23,655 102,506 126,161 662,348 6,992,852 7,655,200 7,781,361 Other assets - - - 15,459 - 15,459 15,459 532,655 511,039 1,043,694 3,047,443 6,992,852 10,040,295 11,083,989

Financial liabilities Other liabilities - - - 331,446 - 331,446 331,446 - - - 331,446 - 331,446 331,446 On balance sheet gap 532,655 511,039 1,043,694 2,715,997 6,992,852 9,708,849 10,752,543

18.2 The interest / mark-up for the monetary financial assets and liabilities are mentioned in their respective notes to the financial statements.

18.3 Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The management of the Corporation believes that it is not exposed to any significant level of credit risk. Loans to employees are secured by deposit of title documents with the Corporation and by insurance policies covering any loss arising from the death of the employees. The remaining balances are recoverable from the State Bank of Pakistan and accordingly are not subject to any significant level of credit risk.

18.4 Liquidity risk

Liquidity risk is the risk that the Corporation will encounter difficulties in raising funds to meet commitments associated with financial instruments. The Corporation believes that it is not exposed to any significant level of liquidity risk.

214 State Bank of Pakistan Annual Report 2008-2009

18.5 Fair value of financial assets and liabilities

The fair value of all financial assets and financial liabilities is estimated to approximate their carrying values.

19. RECLASSIFICATION OF COMPARATIVE INFORMATION

Certain prior period's figures have been reclassified consequent upon certain changes in current year's presentation. The material reclassification is as follows:

Current Previous Description Classification Classification Amount (Rupees in '000)

Reclassification of other assets Stock in hand Other assets 47,037

20. DATE OF AUTHORISATION FOR ISSUE

These financial statements were authorised for issue on October 12, 2009 by the Board of Directors of the Corporation.

21. FIGURES

Have been rounded off to the nearest thousand rupees, unless otherwise stated.

______Qasim Nawaz Riaz Nazarali Managing Director Director Accounts

215 15 Financial Statement of NIBAF

AUDITORS’ REPORT TO THE MEMBERS OF NATIONAL INSTITUTE OF BANKING AND FINANCE (GUARANTEE) LIMITED

We have audited the annexed balance sheet of National Institute of Banking and Finance (Guarantee) Limited (“the Institute”) as at 30 June 2009 and the related Income and expenditure account, cash flow statement and statement of changes in equity together with the notes forming part thereof, for the year then ended and we state that we have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of our audit.

It is the responsibility of the Institute‟s management to establish and maintain a system of internal control, and prepare and present the above said statements in conformity with the approved accounting standards and the requirements of the Companies Ordinance, 1984. Our responsibility is to express an opinion on these statements based on our audit.

We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the above said statements are free of any material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the above said statements. An audit also includes assessing the accounting policies and significant estimates made by the management, as well as, evaluating the overall presentation of the above said statements. We believe that our audit provides a reasonable basis for our opinion and, after due verification, we report that:

(a) in our opinion, proper books of account have been kept by the Institute as required by the Companies Ordinance, 1984;

(b) in our opinion:

(i) the balance sheet and profit and loss account together with the notes thereon have been drawn up in conformity with the Companies Ordinance, 1984, and are in agreement with the books of account and are further in accordance with accounting policies consistently applied;

(ii) the expenditure incurred during the year was for the purpose of the Institute‟s business; and

(iii) the business conducted, investments made and the expenditure incurred during the year were in accordance with the objects of the Institute;

217 Financial Statement of NIBAF

(c) in our opinion and to the best of our information and according to the explanations given to us, the balance sheet, Income and expenditure account, cash flow statement and statement of changes in equity together with the notes forming part thereof conform with the approved accounting standards as applicable in Pakistan, and give the information required by the Companies Ordinance, 1984, in the manner so required and respectively give a true and fair view of the state of the Institute‟s affairs as at 30 June 2009 and of the surplus, its cash flow and changes in equity for the year then ended; and

(d) in our opinion, no Zakat was deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980).

ISLAMABAD KPMG TASEER HADI & CO. Date: September 30, 2009 CHARTERED ACCOUNTANTS Engagement Partner: Riaz Akbar Ali Pesnani

218 State Bank of Pakistan Annual Report 2008-2009

NATIONAL INSTITUTE OF BANKING AND FINANCE (GUARANTEE) LIMITED BALANCE SHEET FOR THE YEAR ENDED 30 JUNE 2009 2009 2008 Note Rupees Rupees

NON CURRENT ASSETS

Property plant and equipment 5 6,119,069 7,483,737 Long term deposits 401,400 401,400

CURRENT ASSETS

Stock of stationery and consumables 911,960 895,759 Receivable against training programs - unsecured, considered good 6 61,115,171 6,222,631 Advances, prepayments and other receivables 7 1,500,700 783,819 Due from associated undertaking 8 - 3,467,675 Short term investment - Related party 9 155,170,846 150,818,236 Cash in hand 19,053 - 218,717,730 162,188,120

225,238,199 170,073,257 SHAREHOLDERS' EQUITY

Authorized share capital 200,000,000 200,000,000 (20,000,000 Ordinary shares of Rs.10 each)

Issued, subscribed and paid up capital 10 70 70 Accumulated surplus 24,367,267 24,367,267 24,367,337 24,367,337

NON CURRENT LIABILITIES Advance against issue of shares 11 29,260,770 29,260,770 Deferred grant 12 - 2,248,500 Capital grant 13 59,429,900 59,429,900 88,690,670 90,939,170 CURRENT LIABILITIES

Trade and other payables 14 4,239,812 3,546,627 Due to associated undertaking 15 107,917,880 51,220,123 Advance against training programs 22,500 - 112,180,192 54,766,750

225,238,199 170,073,257

CONTINGENCIES AND COMMITMENTS 16 - -

The annexed notes 1 to 26 form an integral part of these financial statements.

CHIEF EXECUTIVE DIRECTOR

219 Financial Statement of NIBAF

NATIONAL INSTITUTE OF BANKING AND FINANCE (GUARANTEE) LIMITED INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED 30 JUNE 2009

2009 2008 Note Rupees Rupees INCOME

Hostel and training halls income 17 58,396,270 22,550,206 Training and education fee 18 29,495,056 23,507,527 Transferred from deferred grant - 749,500 Other income 19 17,876,004 13,488,666

105,767,330 60,295,899 EXPENDITURE

Administrative and general expenses 20 (83,783,426) (73,987,851)

Surplus/ (deficit) for the year 21,983,904 (13,691,952)

The annexed notes 1 to 26 form an integral part of these financial statements.

CHIEF EXECUTIVE DIRECTOR

220 State Bank of Pakistan Annual Report 2008-2009

NATIONAL INSTITUTE OF BANKING AND FINANCE (GUARANTEE) LIMITED CASH FLOW STATEMENT FOR THE YEAR ENDED 30 JUNE 2009 2009 2008 Rupees Rupees CASH FLOWS FROM OPERATING ACTIVITIES Surplus/ (deficit) for the year before taxation 21,983,904 (13,691,952) Adjustments for non cash items: Depreciation 2,619,676 4,364,389 Assets written off 440,217 - Due from associated undertaking expensed out 1,219,175 - Other income (17,875,577) (13,431,726) (13,596,509) (9,067,337)

Operating profit/ (loss) before working capital changes 8,387,395 (22,759,289) Changes in working capital Increase/ (decrease) in current liabilities: Due to associated undertaking excluding profit allocation 34,130,516 47,551,253 Advance against training programs 22,500 - Trade and other payables 693,185 1,664,632 34,846,201 49,215,885 (Increase)/ decrease in current assets: Stock of stationery and consumables (16,201) (43,848) Receivable against training programs (54,892,540) 4,486,791 Advances, prepayments and other receivables (716,881) (516,266) Due from associated undertaking - 48,150

(55,625,622) 3,974,827 Net changes in working capital (20,779,421) 53,190,712

Net cash (used in)/ generated from operating activities (12,392,026) 30,431,423

CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditure (1,111,888) (4,460,657) Miscellaneous income received 810,065 679,533 Increase in deferred grant - 2,248,500 Investment disposed/ (purchased) during the year 12,712,902 (8,898,809) Net cash generated from/ (used in) investing activities 12,411,079 (10,431,433)

CASH FLOW FROM FINANCING ACTIVITIES

Advance against issue of shares repaid during the year - (19,999,990) Net cash used in financing activities - (19,999,990)

Net increase in cash and cash equivalents 19,053 - Cash and cash equivalents at beginning of the year - - Cash and cash equivalents at end of the year 19,053 -

The annexed notes 1 to 26 form an integral part of these financial statements. - -

CHIEF EXECUTIVE DIRECTOR

221 Financial Statement of NIBAF

NATIONAL INSTITUTE OF BANKING AND FINANCE (GUARANTEE) LIMITED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2009

Accumulated Share Capital Total Surplus

Rupees Rupees Rupees

Balance as on 01 July 2007 70 24,367,267 24,367,337

Deficit for the year - (13,691,952) (13,691,952)

Deficit allocated to State Bank of Pakistan ("Parent entity") - 13,691,952 13,691,952

Balance as at 30 June 2008 70 24,367,267 24,367,337

Surplus for the year - 21,983,904 21,983,904

Surplus allocated to State Bank of Pakistan ("Parent entity") - (21,983,904) (21,983,904)

Balance as at 30 June 2009 70 24,367,267 24,367,337

The annexed notes 1 to 26 form an integral part of these financial statements.

CHIEF EXECUTIVE DIRECTOR

222 State Bank of Pakistan Annual Report 2008-2009

NATIONAL INSTITUTE OF BANKING AND FINANCE (GUARANTEE) LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009

1 STATUS AND NATURE OF BUSINESS

National Institute of Banking and Finance (Guarantee) Limited (“the Institute”) was incorporated under the Companies Ordinance, 1984 on March 21, 1993 in Pakistan, as a Private Institute Limited by Guarantee having share capital. The Institute is engaged in providing education and training in the field of banking, finance and allied areas. State Bank of Pakistan is the parent entity of the Institute ("the Parent Entity).

2 BASIS OF PREPARATION

2.1 Statement of compliance

These financial statements have been prepared in accordance with the approved accounting standards as applicable in Pakistan and the requirements of the Companies Ordinance, 1984. Approved accounting standards comprise of such International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board as notified under the provisions of the Companies Ordinance, 1984. Wherever the requirements of the Companies Ordinance, 1984 or directives issued by the Securities and Exchange Commission of Pakistan differ with the requirements of these standards, the requirements of the Companies Ordinance, 1984 or the requirements of the said

2.2 Significant accounting estimates

The preparation of financial statements in conformity with approved accounting standards requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgments made by management in the application of approved accounting standards that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in the ensuing paragraphs.

(a) Property, plant and Equipment

The Institute reviews the residual values and useful lives of property, plant and equipment on regular basis. Any change in the estimates in future years might affect the carrying amounts of the respective items of property, plant and equipment with a corresponding affect on depreciation charge and impairment.

(b) Impairment

The Institute‟s assessment relating to impairment of assets is discussed in notes 3.2.

The Institute assesses the amount of provision for slow moving stocks on the basis of their actual pattern of usage. Provision is determined for those stocks, which are not used for considerable period of time. Provision for other receivables is determined by using judgment based on past business practices, probability of recovery and lapsed time period of due balance.

223 Financial Statement of NIBAF

2.3 Basis of measurement

These financial statements have been prepared on the historical cost basis.

2.4 Functional and presentation currency

These financial statements are presented in Pakistan Rupee (PKR), which is the Institute's functional currency.

2.5 Initial application of IFRS

The Institute has applied IFRS 7 "Financial instruments: Disclosures" which became applicable for the periods starting from 01 July 2008. This application has resulted in certain increased disclosures. However; there was no impact in the reported figures of income and expenditure account.

3 SIGNIFICANT ACCOUNTING POLICIES

3.1 Property, Plant and Equipment

These are stated at cost less accumulated depreciation and provision for impairment, if any. Depreciation on additions is charged from the month the asset is available for use and on disposal up to the month preceding the month of disposal. Depreciation for the year is calculated using the straight line method at rates given in note 5 to the financial statements and included in the income and expenditure account. Maintenance and normal repairs are charged to income as and when incurred. Major extensions, renewals and improvements are capitalized. Gains and losses on disposal of property, plant and equipment are taken to the income and expenditure account currently.

3.2 Impairment

The carrying amounts of the Institute‟s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment loss. If any such indication exists, the recoverable amount of assets is estimated and impairment losses are recognized as expense in the income and expenditure account.

3.3 Deferred grants

Grants related to specific assets are set up as deferred grants and recognized as income on a systematic basis over the useful life of the related assets.

3.4 Stocks

3.5 Accounts receivables and other receivables

Accounts receivables and other receivables are carried at invoice amount less an allowance for any uncollectible amounts. Known bad debts are written off when identified.

3.6 Investment held to maturity

Investments with fixed or determinable payments and fixed maturity and where the Institute has positive intent and ability to hold to maturity are classified as held to maturity. These are initially recognized at cost inclusive of transaction costs and are subsequently carried at amortized cost using the effective interest rate method.

224 State Bank of Pakistan Annual Report 2008-2009

3.7 Trade and other payables

3.8 Cash and cash equivalents

Cash and cash equivalents comprise cash in hand, cash with banks in current and deposit accounts.

3.10 Financial instruments

Financial assets and liabilities are recognized when the Institute becomes a party to contractual provisions of the instrument. These are initially measured at cost, which is the fair value of the consideration given and received respectively. These financial assets and liabilities are subsequently measured at fair value or amortized cost as the case may be. The Institute de-recognizes a financial assets or a portion of financial asset when, and only when, the Institute looses control of the contractual right that comprise the financial asset or portion of financial asset. While a financial liability or part of financial liability is de-recognized from the balance sheet when, and only when, it is extinguished i.e., when the obligation specified in the contract is discharged, cancelled or expired.

3.11 Offsetting financial assets and liabilities

A financial asset and a financial liability is offset and the net amount is reported in the balance sheet if the Institute has a legal enforceable right to set-off the recognized amounts and intends either to settle on net basis or to realize the asset and settle the liability simultaneously.

3.12 Provisions

A provision is recognized in the balance sheet when the Institute has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the can be made of the amount of obligation.

3.13 Revenue recognition

(i) Training and education fee is recognized on completion of relevant courses. (ii) Hostel income is recognized on performance of services. (iii) Profit on bank accounts and interest on investment is accounted for on a time proportion basis using the applicable rate of interest.

3.14 Taxation

Income of the Institute, being a subsidiary of State Bank of Pakistan is exempted from income tax under section 49 of the State Bank of Pakistan Act, 1956. Further, income of the Institute is also exempted from income tax as per Clause 92 of Part-1 of Second Schedule to the Income Tax Ordinance, 2001

225 Financial Statement of NIBAF

3.15 New accounting standards and IFRIC interpretations that are not yet effective

The following standards, interpretations and amendments to approved accounting standards are effective for accounting periods beginning from the dates specified below. These standards, interpretations and the amendments are either not relevant to the Institute's operations or are not expected to have significant impact on the Institute's financial statements other than increase in disclosures in certain cases. - Revised IAS 1- "Presentation of financial statements' (effective for annual periods beginning on or after 1 January 2009) introduces the term total comprehensive income, which represents changes in equity during a period other than those changes resulting from transactions with owners in their capacity as owners. Total comprehensive income may be presented in either a single statement of comprehensive income (effectively combining both the income statement and all non-owner changes in equity in a single statement), or in an income statement and a separate statement of - Revised IAS 23- "Borrowing costs' (effective for annual periods beginning on or after 1 January 2009) removes the option to expense borrowing costs and requires that an entity capitalize borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. - Amendments to IAS 32- "Financial instruments: Presentation" and IAS 1 "Presentation of Financial Statements" (effective for annual periods beginning on or after 1 January 2009) – Puttable financial instruments and obligations arising on liquidation requires puttable instruments, and instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation, to be classified as equity if certain - Amendment to IFRS 2- "Share-based Payment' – Vesting Conditions and Cancellations (effective for annual periods beginning on or after 1 January 2009) clarifies the definition of vesting conditions, introduces the concept of non- vesting conditions, requires non-vesting conditions to be reflected in grant-date fair value and provides the accounting treatment for non-vesting conditions and cancellations. - Revised IFRS 3- Business Combinations (applicable for annual periods beginning on or after 1 July 2009) broadens among other things the definition of business resulting in more acquisitions being treated as business combinations, contingent consideration to be measured at fair value, transaction costs other than share and debt issue costs to be expensed, any pre-existing interest in an acquiree to be measured at fair value, with the related gain or loss recognised in profit or loss and any non-controlling (minority) interest to be measured at either fair value, or at its proportionate interest in the identifiable assets and liabilities of an acquiree, on a transaction-by-transaction basis. - Amended IAS 27- Consolidated and Separate Financial Statements (effective for annual periods beginning on or after 1 July 2009) requires accounting for changes in ownership interest by the group in a subsidiary, while maintaining control, to be recognized as an equity transaction. When the group loses control of subsidiary, any interest retained in the former subsidiary will be measured at fair value with the gain or loss recognized in the profit or loss. - IFRS 8- Operating Segments (effective for annual periods beginning on or after 1 January 2009) introduces the “management approach” to segment reporting. IFRS 8 will require a change in the presentation and disclosure of segment information based on the internal reports that are regularly reviewed by the Institute‟s “chief operating decision maker” in order to assess each segment‟s performance and to allocate resources to them. - IFRIC 15- Agreement for the Construction of Real Estate (effective for annual periods beginning on or after 01 January 2009) clarifies the recognition of revenue by real estate developers for sale of units, such as apartments or houses, 'off-plan', that is, before construction is complete. - IFRIC 16- Hedge of Net Investment in a Foreign Operation (effective for annual periods beginning on or after 1 October 2008) clarifies that net investment hedging can be applied only to foreign exchange differences arising between the functional currency of a foreign operation and the parent entity‟s functional currency and only in an amount equal to or less than the net assets of the foreign operation, the hedging instrument may be held by any entity within the group except the foreign operation that is being hedged and that on disposal of a hedged operation, the cumulative gain or loss on the hedging instrument that was determined to be effective is reclassified to profit or loss. - The interpretation allows an entity that uses the step-by-step method of consolidation an accounting policy choice to determine the cumulative currency translation adjustment that is reclassified to profit or loss on disposal of a net investment as if the direct method of consolidation had been used.

226 State Bank of Pakistan Annual Report 2008-2009

- IFRIC17- Distributions of Non-cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009) states that when a Institute distributes non cash assets to its shareholders as dividend, the liability for the dividend is measured at fair value. If there are subsequent changes in the fair value before the liability is discharged, this is recognized in equity. When the non cash asset is distributed, the difference between the carrying amount and fair value is recognized in the income statement. - IFRIC 18- Transfers of Assets from Customers (to be applied prospectively to transfers of assets from customers received on or after 01 July 2009). This interpretation clarifies the requirements of IFRSs for agreements in which an entity receives from a customer an item of property, plant, and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services (such as a supply of electricity, gas or water). - Amendments to IAS 39 Financial Instruments: Recognition and Measurement – Eligible hedged Items (effective for annual periods beginning on or after 1 July 2009 clarifies the application of existing principles that determine whether specific risks or portions of cash flows are eligible for designation in a hedging relationship. - IAS 27 „Consolidated and separate financial statements' effective for annual periods beginning on or after 1 January 2009). The amendment removes the definition of the cost method from IAS 27 and replaces it with a requirement to present dividends as income in the separate financial statements of the investor. - IFRS 4 - Insurance Contracts (effective for annual periods beginning on or after 1 January 2009). The IFRS makes limited improvements to accounting for insurance contracts until the Board completes the second phase of its project on insurance contracts. The standard also requires that an entity issuing insurance contracts (an insurer) to disclose information about those contracts. - Amendment to IFRS 7 - Improving disclosures about Financial Instruments (effective for annual periods beginning on or after 1 January 2009). These amendments have been made to bring the disclosure requirements of IFRS 7 more closely in line with US standards. The amendments introduce a three-level hierarchy for fair value measurement disclosures and require entities to provide additional disclosures about the relative reliability of fair value - Amendments to IAS 39 and IFRIC 9 - Embedded derivatives (effective for annual periods beginning on or after 1 January 2009). Amendments require entities to assess whether they need to separate an embedded derivative from a hybrid (combined) financial instrument when financial assets are reclassified out of the fair value. - Amendment to IFRS 2 – Share-based Payment – Group Cash-settled Share-based Payment Transactions (effective for annual periods beginning on or after 1 January 2010). Currently effective IFRSs requires attribution of group share- based payment transactions only if they are equity-settled. The amendments resolve diversity in practice regarding attribution of cash-settled share-based payment transactions and require an entity receiving goods or services in either an equity-settled or a cash-settled payment transaction to account for the transaction in its separate or individual

4 FINANCIAL RISK MANAGEMENT

The Institute has exposure to the following risks from its use of financial instruments: (a) Credit risk (b) Liquidity risk (c) Market risk. This note presents information about the Institute‟s exposure to each of the above risks, the Institute‟s objectives, policies and processes for measuring and managing risk, and the Institute‟s management of capital. Further quantitative disclosures are included throughout these financial statements. The Board of Directors has overall responsibility for the establishment and oversight of the Institute‟s risk management framework. The Board has delegated the responsibility for developing and monitoring the Institute‟s risk management policies to its management. The management reports regularly to the Board of Directors on its activities. The Institute‟s risk management policies are established to identify and analyse the risks faced by the Institute, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Institute‟s activities. The Institute, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Institute management monitors compliance with the Institute‟s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Institute.

227 Financial Statement of NIBAF

(a) Credit risk

Credit risk is the risk of financial loss to the Institute if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Institute‟s receivables against training programs and investment securities.

(i) Receivable against training programs

The Institute‟s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the Institute‟s customer base, including the default risk of the industry and country, in which customers operate, has less of an influence on credit risk.

(ii) Investments

The Institute limits its exposure to credit risk by only investing in State Bank of Pakistan. This investment is in Subsidiary General Ledger Account (SGLA) maintained by the State Bank of Pakistan-Banking Services Corporation, Karachi. The Institute's management does not expect any counterparty to fail to meet its obligations.

(b) Liquidity risk

Liquidity risk is the risk that the Institute will not be able to meet its financial obligations as they fall due. The Institute believes that it is not exposed to any significant level of liquidity risk.

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Institute‟s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the

(i) Currency risk

The Institute is not exposed to currency risk.

(ii) Interest rate risk

The interest rate risk is the risk that the value of the financial instrument will fluctuate due to changes in the market interest rates. Sensitivity to interest rate risk arises from mismatches of financial assets and liabilities that mature in a given period. The Institute is not exposed to Interest rate risk.

(iii) Other market price risk

The primary goal of the Institute‟s investment strategy is to maximize investment returns on surplus funds. The Institute adopts a policy of ensuring minimize its price risk by investing in fixed rate investments like treasury bills of State Bank of Pakistan.

228 State Bank of Pakistan Annual Report 2008-2009

NATIONAL INSTITUTE OF BANKING AND FINANCE (GUARANTEE) LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009

5 PROPERTY, PLANT AND EQUIPMENT

Tangible-owned Electronic data Furniture and Total processing Office equipment Vehicles fixtures equipment (Rupees)

Cost Balance as at 01 July 2007 16,501,379 4,517,321 31,028,433 3,574,504 55,621,637 Additions during the year 317,844 668,080 476,733 2,998,000 4,460,657 Transfer in during the year - 296,000 - - 296,000 Balance as at 30 June 2008 16,819,223 5,481,401 31,505,166 6,572,504 60,378,294

Balance as at 01 July 2008 16,819,223 5,481,401 31,505,166 6,572,504 60,378,294 Additions during the year 283,883 404,865 423,140 - 1,111,888 Transfer in during the year - 122,067 - 518,000 640,067 Write-offs (4,912,996) (15,180) (739,156) - (5,667,332) Balance as at 30 June 2009 12,190,110 5,993,153 31,189,150 7,090,504 56,462,917

Depreciation Balance as on 01 July 2007 12,389,307 2,829,671 30,141,226 2,873,964 48,234,168 Depreciation charge for the year 1,656,820 1,241,604 484,975 980,990 4,364,389 Transfer in during the year - 296,000 - - 296,000 Balance as at 30 June 2008 14,046,127 4,367,275 30,626,201 3,854,954 52,894,557

Balance as on 01 July 2008 14,046,127 4,367,275 30,626,201 3,854,954 52,894,557 Depreciation charge for the year 661,822 656,069 357,852 943,933 2,619,676 Transfer in during the year - 56,730 - - 56,730 Write-offs (4,522,004) (11,467) (693,644) - (5,227,115) Balance as at 30 June 2009 10,185,945 5,068,607 30,290,409 4,798,887 50,343,848

Carrying amounts - 2008 2,773,096 1,114,126 878,965 2,717,550 7,483,737 Carrying amounts - 2009 2,004,165 924,546 898,741 2,291,617 6,119,069

Rates of depreciation 10% 33.33% 20% 20 - 25%

5.1 Assets except for land and buildings in use of the Institute, were transferred by State Bank of Pakistan. No amount, for its use, has been charged by State Bank of Pakistan to the Institute. 5.2 The depreciation charge for the year has been allocated to administrative and general expenses - Also refer note 20.

229 Financial Statement of NIBAF

NATIONAL INSTITUTE OF BANKING AND FINANCE (GUARANTEE) LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009

6 This includes Rs. 49,652,759 (2008: Rs. 3,186,965) receivable from associated undertakings.

2009 2008 7 ADVANCES, PREPAYMENTS AND OTHER RECEIVABLESNote Rupees Rupees

Advances to staff - Unsecured, considered good 1,162,465 317,110 Advances to suppliers - Unsecured, considered good 30,000 129,777 Prepayments 305,370 334,067 Other receivables - Unsecured, considered good 2,865 2,865

1,500,700 783,819

8 DUE FROM ASSOCIATED UNDERTAKING - Considered good

Receivable from Parent Entity 3,467,675 3,467,675 Less: Transferred from deferred grant (2,248,500) - 1,219,175 3,467,675 Less: Amount expensed out to income and expenditure account 20 (1,219,175) -

- 3,467,675

9 SHORT TERM INVESTMENT - RELATED PARTY 2009 2008 Investment held to maturity Note Rupees Rupees

Government Treasury Bills 9.1 155,170,846 150,818,236

155,170,846 150,818,236

9.1 This investment were purchased by the Institute from the Parent entity for a period of 12 months. This investment is shown at amortized cost by using effective rate of interest ranges from 9.1593% to 14.2529% per annum (2008: 9.0046% to 10.1251% per annum). This investment is in Subsidiary General Ledger Account maintained by the State Bank of Pakistan-Banking Services Corporation, Karachi. 2009 2008 10 ISSUED, SUBSCRIBED AND PAID UP CAPITAL Note Rupees Rupees

7 ordinary shares of Rs.10 each issued for cash 10.1 70 70

70 70

10.1 State Bank of Pakistan hold 06 ordinary shares and Deputy Governor of State Bank of Pakistan holds 01 share of the Institute as at the balance sheet date (2007: State Bank of Pakistan hold 07 shares).

230 State Bank of Pakistan Annual Report 2008-2009

2009 2008 11 ADVANCE AGAINST ISSUE OF SHARES Rupees Rupees

State Bank of Pakistan 29,260,770 29,260,770

29,260,770 29,260,770

2009 2008 12 DEFERRED GRANT Rupees Rupees

Fixed assets acquired from grant 2,248,500 2,998,000 Less: Depreciation charge - (749,500) 2,248,500 2,248,500 Less: Transferred to due from associated undertaking (2,248,500) -

- 2,248,500

13 CAPITAL GRANT

This represents capital grant amounting to US $ one million received by the Institute in January 2005 from State Bank of Pakistan - SBP for establishment of Rural Finance Resource Centre. The grant disbursed by SBP is out of the proceeds of loan given to the Government of Pakistan (GoP) by Asian Development Bank vide loan agreement No. 1987-PAK dated 23 December 2002. SBP has not outlined terms and conditions regarding the repayment of this amount.

14 TRADE AND OTHER PAYABLES 2009 2008 Rupees Rupees

Creditors 1,506,798 1,805,158 Traveling and training cost payable 149,535 143,198 Accrued expenses 2,295,135 1,151,327 Security deposits 288,344 446,944

4,239,812 3,546,627

15 DUE TO ASSOCIATED UNDERTAKING

State Bank of Pakistan 107,917,880 51,220,123

107,917,880 51,220,123

This represents the current account of the Institute with the State Bank of Pakistan ("Parent entity") to manage the financial affairs of the Institute. This is unsecured and payable on demand.

16 CONTINGENCIES AND COMMITMENTS

The Institute's contracted commitments outstanding at the year end amounting to Rs.Nil (2008: Rs. 262,650).

231 Financial Statement of NIBAF

NATIONAL INSTITUTE OF BANKING AND FINANCE (GUARANTEE) LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009 2009 2008 17 HOSTEL AND TRAINING HALLS INCOME Note Rupees Rupees

Rental income 51,118,346 16,388,047 Service charges 1,340,892 1,995,030 Food and beverage income - net 17.1 5,937,032 4,167,129

19.1 58,396,270 22,550,206

17.1 Food and beverage charges are net of related food and beverage expenses. 2009 2008 18 TRAINING AND EDUCATION FEE Note Rupees Rupees

International courses 6,571,803 12,851,755 Domestic courses 17,368,253 4,145,772 Islamic banking courses 5,555,000 6,510,000

19.1 29,495,056 23,507,527

19 OTHER INCOME

Interest on investment - Endowment fund 17,065,512 12,752,193 Miscellaneous income 810,065 679,533 Exchange gain 427 56,940

19.1 17,876,004 13,488,666

19.1 During the year, it was agreed between the Institute and the Parent Entity that the Institute will charge the Parent Company for services being availed by them from the Institute. Accordingly, following amounts have been charged by the Institute during the year for services rendered to the Parent Entity for the years 2007, 2008 and 2009. 2009 2008 Note Rupees Rupees

Hostel and training halls income 30,421,607 - Training and education fee 9,577,244 - Other income 696,472 - 40,695,323 - 20 ADMINISTRATIVE AND GENERAL EXPENSES

Salaries, wages and other benefits 33,559,853 27,868,181 Training costs 8,059,507 9,389,768 Repair and maintenance 6,754,085 4,642,221 Lodging, catering and allied services 2,425,335 7,138,680 Traveling and conveyance 3,136,438 2,589,793 Printing and stationery 1,915,229 1,446,900 Medical expenses 1,903,775 1,121,859 Electricity, gas and water 16,686,967 11,781,860 Telephone and fax charges 781,154 630,766 Vehicle running expenses 1,198,506 894,112 General consumables 322,631 137,170 Security charges 1,035,500 696,700 Insurance 210,231 242,383 Newspapers, books and periodicals 240,896 106,590 Postage and courier 65,541 184,166 Entertainment 227,382 72,063 Auditors' remuneration 134,000 81,000 Rent, rates and taxes 505,600 505,600 Assets written off 5 440,217 - Legal and professional charges 165,000 37,100 Due from associated undertaking expensed out 8 1,219,175 - Depreciation 5.2 2,619,676 4,364,389 Others 176,728 56,550 83,783,426 73,987,851

232 State Bank of Pakistan Annual Report 2008-2009

NATIONAL INSTITUTE OF BANKING AND FINANCE (GUARANTEE) LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009

21 FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES

21.1 Credit risk

Exposure to credit risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the balance sheet date was. 2009 2008 Rupees Rupees

Deposit 401,400 401,400 Receivable against training programs 61,115,171 6,222,631 Advances, short term deposits and other receivables 1,195,330 449,752 Short term investment - Related party 155,170,846 150,818,236 Due from associated undertaking - 3,467,675

217,882,747 161,359,694 21.2 Impairment losses

(a) The maximum exposure to credit risk for receivable against training programs at the balance sheet date by geographic region was:

2009 2008 Rupees Rupees

Domestic 58,335,114 6,216,499 Other regions 2,430,057 6,132

60,765,171 6,222,631 (b) The aging of receivable against training programs at the balance sheet date was:

2009 2009 2008 2008 Rupees Rupees Rupees Rupees

Gross Impairment Gross Impairment Not past due 26,254,688 - 3,692,950 - Past due 0-30 days 2,434,260 - - - Past due 31-365 days 31,055,110 - 1,538,553 - More than one year 1,021,113 - 991,128 - 60,765,171 - 6,222,631 -

Based on historical record, the Institute believes that no impairment allowances is necessary in respect of receivable against training programs not past due more than one year.

233 Financial Statement of NIBAF

NATIONAL INSTITUTE OF BANKING AND FINANCE (GUARANTEE) LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009

21.3 Liquidity risk

The following analysis shows the Company's financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity dates. The amounts disclosed in the table are the contractual undiscounted cash flows and also include the impact of estimated future interest payments.

------Contractual cash flows------Carrying 6 months 6 to 1 to More than 30 June 2009 amount Total or less 12 months 5 years 5 years Rupees Rupees Rupees Rupees Rupees Rupees

Trade and other payables 4,239,812 4,239,812 4,239,812 - - - Due to associated undertaking 107,917,880 107,917,880 53,958,940 53,958,940 - - 112,157,692 112,157,692 58,198,752 53,958,940 - -

30 June 2008

Trade and other payables 3,546,627 3,546,627 3,546,627 - - - Due to associated undertaking 51,220,123 51,220,123 25,610,062 25,610,062 - - 54,766,750 54,766,750 29,156,689 25,610,062 - -

21.4 Market risk

The Institute is not exposed any significant level of market risk.

21.5 Fair value

The fair value of the financial assets and liabilities of the Company are not materially different from their carrying amounts.

22 CAPITAL MANAGEMENT

The Institute's objective when managing capital, is to safeguard the Institute's ability to continue as a going concern so that it can continue to provide return to shareholders and benefits for other stakeholders, and to maintain a strong capital base to support the sustained development of its business. The Institute's Board of Directors regularly monitors the capital structure of the Institute by ensuring that appropriate capital is injected and manages its capital structure by monitoring return on net assets and makes adjustments to it in the light of changes in economic conditions. There were no changes to Institute's approach to capital management during the year and the Institute is not subject to externally imposed capital requirements.

23 TAX STATUS

The returns for the tax years upto 2008 stand assessed in terms of section 120 of the Income Tax Ordinance 2001. However the tax authorities are empowered to reopen these assessments within five (5) years from the date of assessment.

234 State Bank of Pakistan Annual Report 2008-2009

NATIONAL INSTITUTE OF BANKING AND FINANCE (GUARANTEE) LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2009

24 TRANSACTIONS WITH RELATED PARTIES

The Institute is a wholly owned subsidiary of State Bank of Pakistan ("Parent Entity"); therefore all subsidiaries and associated undertakings of State Bank of Pakistan are the related parties of the Institute. Other related parties comprise of directors and key management personnel and entities over which the directors are able to exercise significant influence. All transactions are made by the State Bank of Pakistan on behalf of the Institute. Transactions with other related parties, if any, are not disclosed as the management is of the opinion that it is impracticable to disclose such transactions due to the nature of the Balances with related parties including remuneration and benefits to key management personnel and Chief Executive Officer under the terms of their employment are as follows:

2009 2008 Parent Entity Rupees Rupees

Balances at the year end Short term Investment 155,170,846 150,818,236 Due to associated undertaking 107,917,880 51,220,123 Due from associated undertaking - 3,467,675 Advance against issue of shares 29,260,770 29,260,770 Receivable against training Programs (SBP) 40,695,323 - Receivable against training Programs (BSC) 8,957,436 3,186,965

Transactions during the year Investment purchased/matured and re-invested 144,599,699 143,770,951 Value of assets transferred at net book value 583,337 - Income earned on behalf of the Institute 105,767,330 60,295,899 Expenses incurred on behalf of the Institute 83,783,426 73,987,851 Allocation of surplus/ (deficit) 21,983,904 (13,691,952)

Remuneration to Chief Executive Officer, Director and Key Management Personnel

Transactions during the year Salaries, wages and other benefits to: - Chief Executive Officer 3,998,411 3,416,981 - Director - 5,000 - Key Management Personnel 19,460,665 16,099,868

25 GENERAL

25.1 Due to revision of the 5th Schedule to the Companies Ordinance, 1984 by the Securities and Exchange Commission of Pakistan vide SRO 859(1)/ 2007 dated 21 August 2007, certain additional disclosures have been made in these financial statements.

25.2 Figures have been rounded off to the nearest rupee, unless otherwise stated.

26 DATE OF APPROVAL OF FINANCIAL STATEMENTS

These financial statements were authorized for issue by the Board of Directors on September 30, 2009.

CHIEF EXECUTIVE DIRECTOR

235 Annexure

A Chronology of Policy Announcements

A-1 Banking Policy & Regulation Group

A-2 Development Finance Group

A-3 Financial Market/Reserve Management Group

A-4 Payment System

B-1 Central Board – Decisions and Deliberations during 2008-09

B-2 Business Continuation Management

B-3 Risk Based Audit Approach

B-4 General ‘Counsel’s’ Office

C Organizational Chart

D Management Directory

E External Relation Department’s Achievements

A Chronology of Policy Announcements

A-1 Banking Policy & Regulation Group

Date of Circular/Circular Policy Decision Announcement Letter No In order to facilitate banks/DFIs to develop a process for assessing their overall capital adequacy on continuing basis in relation to their risk profile and a strategy for maintaining their capital levels, “Guidelines on Internal Capital Adequacy Assessment Process” have been developed. These guidelines are aimed to supplement the instructions issued vide BSD Circular No. 08 dated June 27, 2006 on the Basel II implementation in August 12, BSD Circular No. Pakistan. 2008 17 of 2008

All Banks/DFIs are required to have in place sound and effective process for assessing their overall capital adequacy in the light of the guidelines. They may adopt any available capital assessment methodology based on their size, nature and complexity of the operations. The assessment process so adopted should be comprehensively documented and made part of bank/DFI‟s strategic decision making process. The banks/DFIs were advised vide BSD Circular No. 19 dated September 05, 2008 to maintain minimum CAR, on consolidated as well as on standalone basis has been increased for banks/DFIs to 10%. Those banks/DFIs whose CAR is at present less than 10% are advised to meet the shortfall latest by 31st December, 2008. Further, variable CAR was introduced based on the CAMELS-S. In view of the transition from Basel-I to Basel-II and to facilitate the banks/DFIs in meeting the requirements of BSD Circular No. 19 dated September 05, 2008, following changes were made: November 25, BSD Circular No. 2008 i) Banks/DFIs shall achieve the minimum Capital 30 of 2008 Adequacy Ratio (CAR) of 9% on standalone as well as on consolidated basis, regardless of their CAMELS-S rating, latest by 31st December, 2008.

ii) Banks/DFIs shall achieve the minimum CAR of 10% and the requirement of variable CAR by 31st December 2009.

ii) The variable CAR requirement, based on the CAMELS-S ratings, will be advised to each bank/DFI separately in due course of time.

3 State Bank of Pakistan Annual Report 2008-2009

iii) CAR calculations shall be based on Basel II and as per the guidelines issued by the State Bank of Pakistan from time to time in this regard. Banks were allowed to avail the benefit of 30 percent of FSV of pledged stocks and mortgaged commercial and residential properties held as collateral against all NPLs for three years from the date of classification for calculating provisioning requirement w.e.f. 31-12-2008 subject to compliance with the following conditions:

i) The additional impact on profitability arising from availing the benefit of FSV against pledged stocks and mortgaged commercial and residential properties shall not be available for payment of cash or stock January 27, BSD Circular No. dividend. 2009 02 of 2009 ii) Heads of Credit of respective banks/DFIs shall ensure that FSV used for taking benefit of provisioning is determined accurately as per guidelines contained in PRs and is reflective of market conditions under forced sale situations.

1) Party-wise details of all such cases where banks/DFIs have availed the benefit of FSV shall be maintained for verification by State Bank‟s inspection teams during regular /special inspection. The Securities and Exchange Commission of Pakistan issued notification relating to accounting treatment of impairment losses recognized as on 31-12-2008 on valuation of listed equity investment held in Available for Sale (AFS) Category. (SECP‟s Notification No.SRO. 150(1)/2009 dated the 13th February, 2009) SBP had allowed the banks /DFIs, if they so desire, adopt the aforesaid Notification of SECP. This will be subject to the full disclosure and restriction on dividend as required vide Para 3 and Para 1-(iii) of the said February 13, BSD Circular No. Notification. However, early recognition of full 2009 04 of 2009 impairment loss by Banks / DFIs was encouraged.

As per the instructions, the impairment loss, if any recognized as on 31-12-2008 due to valuation of listed equity investments held as “Available for Sale” to quoted market prices of 31-12-2008 may be shown under the “Equity”. The amount taken to equity as per Para-1 above including any adjustments/effect for price movements during the quarter of calendar year 2009 shall be taken to Profit and Loss Account on quarterly basis during the calendar year ending on 31-12-2009. 4 Chronology of Policy Announcements

Any benefit resulting from allowing shall not be available for payment of dividend.

In view of the general global slowdown in growth and capital accumulation by financial institutions and representations from shareholders, the minimum Paid up Capital (free of losses) requirements issued vide BSD Circular No. 19 of September 5, 2008 were revised. Under the revised instructions the banks are required to raise their paid up capital (free of losses) as per the following timeframe: Minimum Paid up Capital (free of Timeframe losses) 1 Rs 6 billion 31.12.2009 2 Rs 7 billion 31.12.2010 3 Rs 8 billion 31.12.2011 4 Rs 9 billion 31.12.2012 5 Rs 10 billion 31.12.2013 While capital adequacy standards will continue as previously and all banks/DFIs shall be required to increase CAR to 10% w.e.f., December 31, 2009 April 15, 2009 BSD Circular No. irrespective of their CAMELS-S rating, till further 07 of 2009 instructions. Branches of foreign banks (FBs) operating in Pakistan are also required to raise their assigned capital (net of losses) to Rs. 10 billion within the above prescribed timelines. However, those foreign banks whose Head Offices hold Paid up capital (free of losses) of at least equivalent to US$ 300 million and have a CAR of at least 8% or minimum prescribed by their home regulator, whichever is higher, will be allowed with prior approval of the State Bank to maintain assigned capital as under:

a) FBs operating with upto 5 branches are required to raise their assigned capital to Rs. 3 billion latest by 31st December 2010. b) FBs operating/desirous of operating with 6 to 50 branches are required to raise their assigned capital to Rs. 6 billion latest by 31st December 2010. 1. Banks / DFIs, which have provided for the impairment on Available for Sale (AFS) August 01, securities as on December 31, 2008, may adjust BSD Circular No. 2009 their impairment, due to recovery in market 08 of 2009 prices during the year 2009. However, this adjustment shall be only to the extent which is in excess of already created impairment as on

5 State Bank of Pakistan Annual Report 2008-2009

31-12-2008. Such adjustments, authenticated by the Statutory Auditors of Banks / DFIs, shall be taken to Revaluation Surplus / (Deficit) account and not to be routed through Profit / Loss account, with adequate disclosures in the financial statements.

2. In cases where impairment on AFS equity investment, made as on 31-12-2008 is sufficient to cover the impairment required during the year 2009, no additional impairment is to be made. Removal/Resignation of CEOs

For ensuring smooth transition, the Board/ appointing authorities of banks/DFIs and MFBs will intimate SBP BPRD Circulars No. Aug 19 2008 at least 2 months before removing the CEO of the bank. 09 & 10

Similarly, the CEO will also submit a two-month prior notice to SBP before resigning from his assignments with the bank. 100% LC Margin on Non-Essential & Luxury Items BPRD Circular Aug 27 2008 No.11 100% cash margin on the import of luxury and non- essential items was imposed Fair Debt Collection Guidelines Nov 03 2008 BPRD Circular No.13 The guidelines on debt collection were issued to set the minimum standards to be observed by Banks/DFIs. Financing Facilities by Banks/DFIs to Microfinance Banks (MFBs) and Micro Finance Institutions (MFIs)

To achieve additional funding requirement of BPRD Circular No. microfinance industry, Pakistan Microfinance Credit Dec 19 2008 15 Guarantee Facility (“MCGF”) was introduced to facilitate and promote channelization of funds from banks/DFIs to MFBs/MFIs. The MCGF will provide Partial Guarantee, which will not only reduce the credit risk of the participating banks/DFIs but will also help in enhancing the outreach of the microfinance to poor and marginalized segment of the society. Limit on Exposure to a Single Person

To reduce risk concentration of the credit portfolio, the limit on exposure to a single person/group was revised, BPRD Circular No. Jan 17 2009 in a phased manner over the next five years. Under the 01 Prudential Regulation R-1, currently total outstanding exposure by a bank / DFI to any single person is not allowed in excess of 30% of the bank‟s / DFI‟s equity as disclosed in the latest audited financial statements, subject to the condition that fund based exposure does

6 Chronology of Policy Announcements

not exceed 20% of the bank‟s / DFI‟s equity. Similarly, maximum limit for exposure to a group is 50% of the bank‟s/DFI‟s equity, with the condition that fund based exposure does not exceed 35% of the bank‟s/DFI‟s Equity. Per Party as well as group exposures have to be reduced to 25% of the bank‟s/DFI‟s Equity by end of 2013. Margin restrictions for financing against the security of sugar stock

BPRD Circular No. Feb 09 2009 In order to discourage hoarding of sugar, the 02 Banks/DFIs were advised to comply with the instructions issued on margin restrictions for financing against the security of sugar stock. Amendment in Prudential Regulations for Consumer Financing

At the time of granting facility, the banks/DFIs shall ensure:  to obtain a written declaration about various facilities already availed by borrower from other BPRD Circular No. banks/FIs Feb 11 2009 04  to obtain a consumer credit report of the borrower from SBP or any other consumer credit information bureau  that monthly amortization payments of consumer loans should not exceed 50% of net disposable income of the borrower  that maximum unsecured limit should not exceed Rs. 1,000,000. Overseas Branch Licensing Policy

BPRD Circular No. March 05 2009 Policy issued to strengthen overseas operations of local 05 banks. The policy provides a comprehensive framework for appointment of heads of overseas operations, branch operations and performance monitoring. Current Ratio

BPRD Circular No. March 07 2009 06 Banks/DFIs were given freedom to determine by themselves the appropriate level of current ratio for various types of borrowers. Customers Due Diligence (CDD)

Previous instructions on KYC substituted with CDD requirements. The objective was to strengthen BPRD Circular March 9 2009 Letter No. 07 the existing CDD/ KYC measures and bring the requirements closer to international standards. The main features of the revised instructions include:  Mandatory requirement of Customer Due Diligence (CDD) at the time of opening account

7 State Bank of Pakistan Annual Report 2008-2009

as well as on occasional transactions above rupees one million.  Prohibited anonymous accounts in the name of fictitious persons.  More stringent criteria for determining and verifying beneficial ownership.  Introduced concept of high-risk and low-risk customers.  Prohibited use of personal accounts for business purposes

PRIME MINISTER’S SPECIAL FUND FOR RELIEF OF VICTIMS OF TERRORISM

In order to help the victims of terrorism in Dir, Swat, Bajaur and Waziristan Agency of NWFP and FATA, BPRD Circular May 11 2009 Banks were instructed to open special account under Letter No.15 Prime Minister‟s Special fund for Relief of Victims of Terrorism and receive donations from both domestic and international donors at all their branches operating in Pakistan.

Banking Facilities for Internally Displaced Persons (IDPs)

BPRD Circular No. May 15 2009 08 In order to provide the basic banking facilities to IDPs at their door step, instructions were issued to Banks/MFBs having branches in affected areas of Malakand Division to ensure availability of basic banking facilities for IDPs Deposit of sponsor shares in blocked account with Central Depository Company of Pakistan BPRD Circular No. (CDC) May 16 2009 09 Microfinance banks were required to deposit the sponsor shares in a blocked account with CDC. Pension disbursement through banks

In response to the Suo-Moto Notice of honorable BPRD Circular No. June 06 2009 Supreme Court regarding pension disbursement through 11 all branches of all the licensed banks, necessary instruction were issued to banks for cooperating with pensioners in their account opening. Fit and Proper Criteria for Shariah Advisors

Reference to BD Circulars No.2 and 4 dated March 20, September 17, IBD Circular No. 03 2007 and August 16, 2007 respectively on the same 2008 of 2008 subject. With a view to facilitate the Islamic Financial Industry, it has been decided to revise Para 7 (a) & (b) of Annexure to IBD Circular No.2 of 2007, regarding “Conflict of Interest” as follows:

8 Chronology of Policy Announcements

a) The Shariah Advisor of an Islamic Banking Institution (IBI) shall not work in any other IBI in any capacity whatsoever. Additionally, in the spirit of good corporate governance, no Shariah Advisor shall approve a transaction from both sides representing two financial institutions. b) Shariah Advisor of an IBI shall not hold any executive/non-executive position in any other financial institution, except working as member Shariah Board/Committee of other financial institution(s). c) Other instructions on the subject shall remain unchanged. Instructions and Guidelines for Shariah Compliance in Islamic Banking Institutions

With refer to IBD Circular No.2 dated 25th March, 2008 on the same subject. With a view to facilitate the Islamic Financial Industry, it has been decided to revise clause 1(vi) of Appendix A to Annexure I of IBD Circular # 2 of 2008, regarding the Essentials of Islamic Modes of Financing (Murabaha), as follows: “vi) Wherever possible, the invoice issued by the supplier shall be in the name of Bank- Account Client e.g. “1st Islamic Bank – ABC Company” as the commodity would be purchased by an agent on behalf of November 15, IBD Circular No. 04 such financier. In case it is not possible, then specific 2008 of 2008 approval from the Shariah Advisor should be sought for the transactions. It is preferable that the payment for such commodities should be made by the financier directly to the supplier or credited in an Escrow Account. In both the cases, the Murabaha financing account shall be debited only after completion of offer and acceptance between the customer and the IBI. If direct payment to the supplier by the IBI is not feasible for valid reasons, such reasons shall be recorded by the IBI for making payment to the supplier through the agent for purchase of goods. However, in this case proper utilization of funds shall be ensured by the IBI.”Other instructions on the subject shall remain unchanged. Implementation of Islamic Financial Accounting Standard for Ijarah (IFAS 2)

Reference to Islamic Financial Accounting Standard for Ijarah IFAS – 2 notified by the Securities and Exchange January 27, IBD Circular No. 01 Commission of Pakistan (SECP) as per SRO No. 2009 of 2009 431(I)/2007 dated May 22, 2007 and Clause-V of Annexure 2 to IBD Circular No 2 of 2008 regarding Financial Reporting and General Disclosure for Islamic Banking Institutions (IBIs).

9 State Bank of Pakistan Annual Report 2008-2009

In view of the representation of Pakistan Banks‟ Association regarding practical issues in implementation of this standard for the reporting year ended December 31, 2008, it has been decided to allow implementation of this standard w.e.f January 01, 2009. Accordingly, IBIs shall ensure that henceforth all returns/statements submitted to State Bank as well as the Quarterly/Annual Financial Statements shall be prepared in line with this Standard.

Submission of Returns to IBD-Revision of MSP

With reference to IBD Circular Letter No 1 of 2006 on same subject and subsequent instructions issued on subject from time to time. The parallel run of Quarterly Report of Conditions (QRC) has been called off vide OSED Circular Letter No 1 of 2009. Therefore IBIs are advised to discontinue the submission of paper based QRC Part A, B & C. IBD Circular Letter April 10, 2009 No. 01 of 2009 Moreover, as per Circular No 1 of 2009 on “Implementation of Islamic Financial Accounting Standard for Ijarah (IFAS 2-Ijarah)” format of Monthly Statement of Position (MSP) has also been revised. All Islamic banking Institutions are advised to report MSP on new format with effect from April 2009, through email only at [email protected]. All other instructions on the subject remain unchanged.

Revision of Capital Adequacy Requirement (CAR) For IBBs

With reference to clause 7 of Annexure-III of IBD Circular No. 2 of 2004 (read with BPRD Circular No.1 of 2003), regarding Capital Adequacy Ratio (CAR) requirement for Islamic Banking Divisions / Branches of conventional Banks. It has been decided to revise clause 7(i) of IBD Circular No. 2 (Annexure-III) of 2004 IBD Circular Letter immediately as under: Clause 7(i): Islamic Banking June 06, 2009 No.02 of 2009 Fund / CAR.

All conventional Banks having Islamic Banking License for IBBs should maintain a minimum Islamic Banking Fund of Rs 50 million, at any point of time as seed capital and should also maintain Capital Adequacy Ratio (CAR), as applicable on Bank-wide basis, prescribed by SBP from time to time. All other instructions contained in the said Circular shall remain the same.

10 Chronology of Policy Announcements

A-2 Development Finance Group

Date of Circular No. Policy decision Announcement Enhanced Indicative Per Acre Credit Limit for Agriculture Financing

In line with the Government‟s priority for the development of agriculture sector and to ensure availability of adequate and timely credit to the farming community, State Bank of Pakistan has enhanced indicative per acre credit limits on an average of 70% for major & minor crops, orchards and forestry. The enhancement in limit has been made on the basis of current prices of inputs like seed, fertilizer, pesticides, fuel, electricity, etc.

Further to facilitate farmers in getting loans for September 29, ACD Circular No. 05 growing of orchards and agro forestry, year 2008 wise per acre indicative credit limits for growing of orchards viz. mango, citrus, apple, banana, coconut, dates, guava, etc. and agro forestry viz. acacia, shesham, bamboo, etc. have also been provided.

The enhanced per acre credit limits are indicative in nature and banks are allowed to finance lower or higher than the limits based on actual credit requirements of specific farmers, market conditions and prices of farm inputs.

Banks are advised to circulate the above instructions to its branches immediately for compliance. Guidelines on Islamic Financing for Agriculture

Keeping in view the potential and demand for Islamic banking products in the area of February 03, ACD Circular No. 01 agriculture, SBP, in consultation with 2009 stakeholders, has developed the attached guidelines on Islamic financing for agriculture to facilitate banks in developing specific Shariah compliant products to meet financing needs of the farming community.

Banks are advised to use the guidelines for

11 State Bank of Pakistan Annual Report 2008-2009

developing their own Shariah compliant products for financing to agriculture sector according to their policy and operational & market requirements, subject to compliance with SBP regulations and approval from their Shariah Advisor. SHARING OF CUSTOMER DATA WITH PILOT/PRIVATE CIB

Currently, MFBs regulated by SBP share their customers‟ data with and use SBP‟s e-CIB; however, a large number of MF clients (at present approximately 50%) are served by non- SBP regulated MFIs with no credit history of their customers either at SBP or private credit bureaus. Both MFBs and MFIs are operating in the same markets with good chances of overlapping customers thus the risks of over indebtedness and loans adjustment by customers with different organization exists. Jan 05, 2009 MFD Circular No.01 of 2009 Further, the envisaged accelerated MF growth has also made it imperative to have a dedicated MF-CIB in Pakistan for smooth functioning of MF markets.

In this regard, Microfinance Banks may like to share their customers‟ data with pilot/private CIB(s) subject to development of comprehensive customer protection and confidentiality guidelines duly approved by their Board of Directors. Further, express customer consent is mandatory for sharing customer data with other institutions/ CIB and the duty of maintaining confidentiality will remain with the Microfinance Bank. Commodity Operations Financing (COF) Procurement of Wheat by The Private Sector-2009

It was decided that banks will continue to provide financing facilities to their eligible borrowers (licensed functional flour mills only) for procurement of indigenous wheat January 30, SMEFD Circular No.03 strictly (from fresh wheat crop 2009) subject to 2009 the following conditions:  Loans will be repayable on or before 31st January 2010 positively  Funds will be available for procurement of wheat only against pledge of wheat stock.  10% margin will be applicable.

12 Chronology of Policy Announcements

 Banks will determine the rate of markup on lending to the private sector for the purposes of wheat procurement depending upon the risk profile of each borrower.  Banks will not entertain any application for fresh loans after 30-06- 2009.  Banks are also allowed to provide facilities for wheat procurement by the seed processing plants  No revaluation of existing stock of wheat for release of any differential amount to borrows.  The banks shall be under obligation to immediately recall the advances allowed to the private sector in case of hoarding of wheat by the functional flour mills Withdrawal of minimum cash margin

It was decided to withdraw minimum cash April 23, 2009 SMEFD Circular Letter No 5 margin requirement of 10% of the value of the wheat stock on wheat financing for the private sector. Long Term Financing Facility (LTFF)

Re-fixation of Mark-Up Rates under LTFF Scheme: July 2, 2008 MFD Circular No. 05

Existing Rates of Mark up (viz. 8 – 10% p.a.) shall continue to be applicable Modification in Procedure for Refinance:

In order to facilitate banks/DFIs to provide November 12, financing facilities to the exporters SBP started SMEFD Circular No. 04 2008 providing 100% refinancing under LTFF Scheme. Earlier refinancing was restricted to the extent of 70% of financing provided by the banks/DFIs under the Scheme. Grace Period Facility:

January 22, One year grace period facility was allowed SMEFD Circular No. 01 2009 under SBP‟s Long Term Financing Schemes (viz. LTF-EOP including Debt Swap Facility and LTFF), effective 1st January, 2009. Eligibility of Sectors/Industries:

January 23, SMEFD Circular No. 02 Ethanol industry was included in the list of 2009 Sectors eligible under the Scheme.

13 State Bank of Pakistan Annual Report 2008-2009

The GoP made some modification in the Mark Up rate subsidy. It was decided that the period of the subsidy shall be enhanced to 2 years (from July 1 2007 to June 30, 2009. Further, the subsidy for the period from Jul 1, 2008 to Dec 30, 2009 will be paid in march 09 and the subsidy for Jan 1, 2009 to Jun 30 2009 shall be February 25, paid in July 2009 subject to allocation in SMEFD Circular No 5 budget of FY10. It was also decided that those 2009 spinning mills that could not avail subsidy for the first six months ending on December 31, 2007 due to their inability to seek settlement of their overdue loan installments or any other reason may also file claims separately to their banks for availing 3% mark up subsidy of said period in March 2009, provided their default has since been settled. Eligibility of Sectors/Industries:

March 16, 2009 SMEFD Circular No.07 Furniture and Pharmaceutical Sectors were also included in the list of eligible Sectors of the Scheme. Eligibility of Sectors/Industries:

 Six value added sub-sectors of Spinning have also been included in the list of eligible Sectors of the Scheme.  However, SBP will refinance up-to 50% of the financing facilities to be provided by April 21, 2009 SMEFD Circular No.08 the banks/DFIs to the eligible borrowers of above six sub-sectors / processes of Spinning Sector under LTFF Scheme; while the remaining 50% will be financed by the banks/DFIs from their own sources at lending rates of respective lending institutions as agreed with the borrowers.

Refinancing of outstanding loans under LTFF Scheme:

 One time opportunity was provided to the eligible exporters (excluding Textile & Garments) to refinance their outstanding April 21, 2009 SMEFD Circular No.09 long term commercial loans, for import/purchase of plant & machinery, with loans under SBP‟s LTFF Scheme.  However, refinance facilities under said arrangements were restricted to the extent of 50% of outstanding loans.  Remaining 50% shall continue to be

14 Chronology of Policy Announcements

financed by the banks/DFIs from their own sources as per original terms & conditions of respective lending institutions.  This facility remained valid only up to 30th June 2009.

Modification in LTFF Scheme:

 Refinancing under LTFF Scheme has been allowed against LCs established before the announcement of the Scheme and retired after June 30, 2007.  Moreover, refinancing under the Scheme has also been allowed against plant/machinery used for regeneration of June 26, 2009 SMEFD Circular No. 11 textile waste into usable fiber.  However, refinancing shall be allowed to the extent of 50% of financing provided by banks/DFIs to the eligible borrowers availing above facilities and remaining 50% will be financed by the banks/DFIs from their own sources as per the terms & conditions of financing banks/DFIs agreed with the borrowers. Grace Period Facility under LTF- EOP/LTFF:-

 Banks / DFIs were allowed that they may also allow Grace Period Facility under LTF-EOP/LTFF Scheme, against Feb 27, 2009 SMEFD Circular Letter No 1 installment(s) falling due on December 31, 2008, for a maximum period of one year.  They were also allowed to consider the requests of those borrowers for Grace Period Facility whose loans have been rescheduled / restructured after 30th June 2008. Refinance Against Second Hand Machinery:

Under the LTFF Scheme refinancing facility has also been allowed against imported second hand machinery with certain terms & SMEFD Circular Letter No. conditions which included:- March 11, 2009 3  Second hand machinery purchased from local suppliers shall not be ineligible.  The useful life of such machinery should be more than the period of loan itself.  The borrowers should submit an in-order report from PBA‟s approved surveyors.

15 State Bank of Pakistan Annual Report 2008-2009

 Maximum period of refinance shall be three years.  LCs established from the date of said circular to December 31, 2009 shall be eligible for refinancing from SBP. Grace Period Facility – Extension in Deadline:

Deadline for submission of cases for availing April 27, 2009 SMEFD Circular Letter No 6 Grace Period Facility under LTF-EOP/LTFF Scheme was extended from March 31, 2009 to May 11, 2009.

Eligibility of Generators / Captive Power Plants under LTFF Scheme:

Financing facilities under LTFF Scheme have also been allowed for import of generators/captive power plants (including other allied machinery items used to generate electricity) to export oriented units/projects which are not eligible under LTFF Scheme on following terms & conditions:- i. The capacity of generator/captive power plant shall not be in excess of their in- house energy requirements for the manufacturing of their products. In case SMEFD Circular Letter No of excess generation capacity, only the June 08, 2009 07 proportionate financing up to the manufacturing requirements of the unit/project will be eligible. ii. Refinancing shall be allowed to the extent of 50% of financing provided by banks/DFIs for import of generators/captive power plants. iii. L/Cs established since January 1, 2008 but retired/to be retired during the period from January 1, 2009 to December 31, 2009 shall be eligible for refinancing under the Scheme. iv. Minimum exports of the unit/project should be at least 50% of its annual sales. Extension of Limits under LTFF Scheme:

SMEFD Circular letter Limits sanctioned under LTFF Scheme for FY June 20, 2009 No.09 08-09 were continued till finalization of new limits under the Scheme for the financial year 2009-10. Export Finance Scheme (EFS) August 20, 2008 SMEFD Circular No.01 GRANT OF LIMIT FOR FY 2008-09

16 Chronology of Policy Announcements

The overall quantum of limits for banks under EFS for FY 2008-09 was increased by 25% of the amount outstanding as on 30th June 2008. Accordingly, on an overall basis, SBP would allow limits to the extent of Rs 125 billion to banks under the said Scheme during FY 09; as per the modified procedure, the share of banks would also increase accordingly. Modifications in Procedure for Refinance (Part-I)

In order to facilitate banks to provide financing to the exporters, the Export Finance Scheme (EFS) was amended and it was decided that

i) SBP shall provide 100% refinance under Part I of the scheme. However, banks November 05, would continue to provide 30% finance SMEFD Circular No.02 2008 from their own sources against loans taken under Part II of the scheme. ii) SBP shall take over the 30% financing provided by banks from their own sources against all loans outstanding as on 31-10- 08. iii) The limit of each bank under EFS for the FY 2008-09 will be revised on quarterly basis and conveyed to banks individually

Modifications in Procedure for Refinance (Part-II)

To further facilitate banks & exporters, it was decided that

i) State Bank will henceforth provide 100% refinancing to banks against export finance provided by them to exporters under Part-II of EFS subject to November 12, fulfillment of the requirements of the SMEFD Circular No.03 2008 Scheme.

ii) SBP shall take over the 30% financing provided by banks from their own sources against all loans outstanding.

iii) Banks shall henceforth not be entitled to deduct the funds provided under both parts of the Scheme from their Time and Demand Liabilities determined for the purpose of computation of both Cash

17 State Bank of Pakistan Annual Report 2008-2009

Reserve Requirement and Statutory Liquidity Requirement

Procedures for Refund of Fine-Modification

The Procedure for Refund of Fines charged December 26, SMEFD Circular No.05 under Export Finance Scheme was modified 2008 and it was decided that henceforth a force majeure event shall be the deciding factor for the cases. Extension in Period under Part-I

It was decided that the EFS facility under Part I shall be available for 270 days. Exporters shall be allowed rollover of EFS loans taken under Part I for a period of 90 days provided shipment has been made within 180 days of availing the loan and Annexure „D‟ has also February 14, SMEFD Circular No 4 been submitted. The exporters will get finance 2009 upto 85% of the value of firm export order/contract/letter of credit and will be required to make shipments equivalent to 117% against refinance availed for 270 days from the export of eligible commodities under Part-I (pre-shipment). Similarly, in case of post shipment, exporters will be eligible to avail 85% refinance against the respective shipment. Performance Based Mark-up Rates

It was decided to further incentivize financing under EFS (Part-II) by way of lowering mark- up rates for high performers. The following mark-up rates will be charged from exporters based on their export performance against March 09, 2009 SMEFD Circular No 6 borrowing from SBP under EFS Part-II:-

Performance Mark-up Rate for Requirement Borrower 7.5% p.a. (Standard EFS 2.00 to 3.00 times Rate) 3.01 to 4.00 times 7.0% p.a. 4.01 to 5.00 times 6.5% p.a. Above 5.0 times 6.0% p.a.

Reduction in Export Performance Requirements under Part-II for Hand Knotted Carpets

June 22, 2009 SMEFD Circular No 10 It was decided that, for the exporters of Hand knotted Carpets, the required performance for financing facilities availed under Part II of EFS during FY 2008-09 be revised to 1.50 times as 18 Chronology of Policy Announcements

against existing performance requirements of 2.0 times. The entitlement of limits for FY 2009-10 shall, however, continue to be fixed as per existing criteria / instructions. RELAXATIONS TO EXPORTERS IN EXPORT PROCEEDS

In order to facilitate the exporters, it was September 18, SMEFD Circular Letter decided to account for the export proceeds 2008 No.01 realized by the exporters upto July 31, 2008 for the purpose of entitlement of limit in their EE- 1 statement of 2007-08, to enable them to avail limit there-against for FY 2008-09 HANDKNOTTEDCARPETS-MATCHING PERFROMANCE REQUIREMENT – PART-II

October 20, SMEFD Circular Letter In order to facilitate the exporters of Hand 2008 No.02 Knotted Carpets it was decided to enhance the entitlement of limit from existing 50% to 67% for the monitoring year 2008-09 on the basis of export proceeds realized during monitoring year 2007-08. Bleached/unbleached cloth with export value of US$ 2.50 Sq.meter-ELIGIBILY UNDER EFS SMEFD Circular Letter No. April 02, 2009 4 It was decided that refinance facility shall be available for export of bleached/unbleached cloth with export value of US$ 2.50 or above per square meter. Export Finance Scheme (EFS) /Islamic Export Refinance Scheme (IERS)- Extension in Limit

In order to ensure that the financing facilities are available to exporters till finalization of their new limits under Part-II of Scheme, it was decided that the limits sanctioned by banks to SMEFD Circular Letter No. June 20, 2009 individual exporters under Part-II of the 8 Scheme for 2008-09 shall continue upto August 31, 2009, to enable exporters to avail financing facilities under the Scheme pending preparation of EE-1 statements, their verification by the Foreign Exchange Operations Department, SBP-BSC and submission of the same to the Refinance Units of the concerned office of SBP-BSC.

19 State Bank of Pakistan Annual Report 2008-2009

A-3 Financial Market/Reserve Management Group

Date of Circular No. Policy Decision announcement Appointment Of Primary Dealers For Financial Year 2008-09:

It is advised that the following institutions have been selected to act as Primary Dealers for the financial year 2008-09. 1. ABN Amro Bank (Pakistan) Limited 2. Citibank N.A. FSCD Circular June 30, 2008 3. Habib Bank Limited No. 09 4. JS Bank Limited 5. MCB Bank Limited 6. National Bank of Pakistan 7. Pak Oman Investment Company Limited 8. Standard Chartered Bank (Pakistan) Limited 9. United Bank Limited Cut-Off Time During The Month Of Ramadan:

The following cut-off timings will remain effective during the month of Ramadan.

Cut-Off time For FX After Days For Settlement of FSCD Circular Ramadan, Transactions August 29, 2008 Interbank Deals by ADs No. 11 cut-off time For Monday to for Thursday 01:30 PM 01:00 PM settlement and Saturday of interbank For Friday 12:15 PM 12:00 PM deals and for FX transactions by authorized dealers will automatically be reverted to pre-Ramadan timings. All are advised to strictly observe the above timings. Government of Pakistan Ijara Sukuk:

The notification of the Government of Pakistan Ijara Sukuk Rules, 2008 (the “Rules”) is enclosed for your information (Annexure “A”). Consequently, the detailed instructions and guidelines regarding issuance and other operational details of GOP Ijara Sukuk are enclosed as under:-

September 06, FSCD Circular 1. All commercial banks including Islamic Banks (and Non-banks 2008 No.13 subjected to SLR and entitled to open current account with SBP) will be eligible to open Subsidiary General Ledger accounts (SGLA) with State Bank of Pakistan for the Ijara Sukuk. Commercial Banks having Islamic branches will have to maintain separate SGLA‟s to clearly distinguish between the holdings of the Islamic branch and its conventional counterpart. 2. All Islamic banks and commercial banks with Islamic Branches will be designated as primary dealers for the purpose of participating in the auction of GOP Ijara Sukuk to be announced by the State Bank of Pakistan. Islamic Branches will not be 20 Chronology of Policy Announcements allowed to separately place bids in the auction. 3. The Sukuk will be issued at face value. 4. GOP Ijara Sukuk will be sold via competitive auctions held by State Bank of Pakistan in which participation will be restricted to the above mentioned primary dealers. 5. As per the Rules, the maturity period of the first Sukuk issue will be for three years from the date of issue. The profit on the Sukuk shall be paid semi-annually on the basis of rental rate announced by the State Bank of Pakistan prior to start of each half year. The semi-annual profit will be benchmarked against the latest weighted average yield of the 6 month Market Treasury Bills determined one day prior to the start of each 6 month Rental Period (commencing from the issue date of Sukuk) and determined in the same manner at the start of each half year. In case the last held Market Treasury Bill auction the 6 month tenor is either rejected by the State Bank of Pakistan or there is no participation from the market, State Bank of Pakistan will use the 6 month tenor as given on the Reuters PKRV page (121-180 days) as the above benchmark determined one day prior to the start of each 6 month rental period. 6. Primary Dealers will be required to place bids as margin over / under the benchmark 6 month Treasury Bill weighted average yield. Minimum. Bid size will be PKR 100,000 and in multiples thereof. Primary Dealers will be free to place multiple bids. Margin has to be specified in terms of bps over / under the benchmark rate upto a maximum of two decimals points. 7. State Bank of Pakistan will have the sole discretion to accept / reject any bid without assigning any reason thereof. The highest margin over the six month Treasury Bill weighted average yield (at and below which SBP decides to accept all bids) will apply uniformly to all accepted bids. This margin will remain fixed over the entire tenor of the Sukuk. This can be explained by the following example: GOP Ijara Sukuk Required amount: PKR 10,000 million ummulative Profit Rate 1 Bank A 1,000 1,000 TBill -10.00 bps 2 Bank B 3,000 4,000 TBill - 5.00 bps 3 Bank C 2,000 6,000 TBill + 0.00 bps 4 Bank D 4,000 10,000 TBill + 5.00 bps 5 Bank E 5,000 15,000 TBill +10.00 bps 6 Bank F 3,000 18,000 TBill +15.00 bps 7 Bank G 2,000 20,000 TBill + 20.00 bps a. For example, the required amount is PKR 10 billion and bids are received from seven banks totaling PKR 20 billion. b. The primary dealers will be ranked and selected in the competitive auction on the basis of lowest profit rate. Banks A-D qualifies for the issue. c. Accordingly cut off will be established at bid no. 4 and each bank A-D will be awarded the Sukuk at TBill + 5 bps. 8. In order to ensure that there is no over concentration, holding of any commercial bank including Islamic banks cannot exceed 25%

21 State Bank of Pakistan Annual Report 2008-2009

of the issue amount as of close of any business day. In case of commercial banks with Islamic branches this holding restriction will be applied on a combined / amalgamated basis. 9. A Tender Notice inviting sealed bids from the primary dealers would be broadcasted on SBP‟s REUTERS page SBPK16 / Newspapers and will give details of the auction program. 10. All primary dealers are required to send their bids as per required format. 11. The Auction result would be announced through SBP‟s REUTER Page SBPK17. 12. The legal structure of the Sukuk and the related documentation is explained in Annexure “C”. 13. Successful bidders would be required to duly execute, within one day of announcement of Auction result, a Certificate Subscription Undertaking through their authorized signatories at the premises of the State Bank of Pakistan Banking Services Corporation (“SBP BSC”), Karachi to subscribe to the Sukuk and deposit the requisite amount for settlement of the accepted bids on the settlement date of the auction. 14. The settlement date will be the date of issue of the Sukuk. 15. As mentioned in the Rules Ijara Sukuk will be scripless and held in the SGLA accounts of commercial banks. Sukuk can be traded in the secondary markets and are transferrable through SGLA. Primary dealers are free to sell Ijara Sukuk to eligible investors as described in the Rules. In such cases all banks will be required to open IPS accounts of their customers reflecting the customer holdings of Ijara Sukuk. In this regard, the current procedures applicable for IPS accounts will also apply to that of Ijara Sukuk. Cut-Off Timing For Dealing By Banks’ Treasuries:

The cut-off dealing time for all permitted Foreign Exchange, Derivatives and Money Market transactions will be observed as follows; December 26, FSCD Circular  Monday through Friday : Up to 4:30pm, and 2008 No.17  For Saturdays: Up to 1:00pm.

The above instructions will be effective from Friday, January 02, 2009. Authorized Dealers are advised to strictly observe the above mentioned timings. It is further re-iterated that cut-off timings for settlement of interbank deals conveyed vide FSCD Circular No. 20 of October 31, 2007 will remain unchanged. Amendments in Special US Dollar Bond Rules 1998:

The federal Government is pleased to direct that in special US Dollar Bond Rules 1998, following further amendments shall be FSCD Circular made and shall be deemed to have been made on July 1, 2009, March 11, 2009 No. 03 namely:

In the aforesaid rule (a) In rule 8, for the full stop, at the end, a colon shall be substituted and thereafter the following proviso shall be 22 Chronology of Policy Announcements

added, namely:- “provided that the exemption from income tax in this rule shall be withdrawn with effect from July 1, 2008”. (b) In the rule 8A, the words, figure and comma “and rule 8 except the provisions about exemption from levy of Zakat,” shall be omitted. Changes In Rules Governing Primary Dealer System:

In order to further rationalize and to align those with market practices following changes (highlighted in bold letters) are being made in existing PD rules:

NEW AMENDED RULE Primary Dealer’s Privileges: Only designated PDs would be eligible to participate in the auctions of Government Securities. The requirement of other banks/ institutional investors would be covered from these PDs or from other secondary market players. PDs will be allowed to entertain Pass-through bids, but such volumes will not be counted towards secondary market performance evaluation of the respective.

PDs would be allowed to carry a short position in securities managing it through repos up to a maximum of three consecutive months for bonds and two weeks for MTBs. FSCD Circular June 06, 2009 However, they would be required to mark-to-market their No.07 short positions on daily basis and report them to SBP on prescribed formats. Primary Dealer’s Obligations: PDs would actively participate in all auctions of tradable government securities. The State Bank of Pakistan would announce pre-auction target amount in short-term as well as in long-term government securities. Non-competitive Bids (NCBs) will be allowed for both MTBs and PIBs. Non-competitive bids however will be accepted as 15% of the pre-announced auction target by the State Bank of Pakistan for investors other than banks/ DFIs/ NBFIs through PDs. An important responsibility of the PD will be to underwrite the auctions of Long-term paper offered by the State Bank of Pakistan. To avoid any out of market quotes the bid price for long-term paper would be confined to a range of + 50 basis points from the respective tenor prices appearing on Reuters PKRV page on the last working day prior to bidding. Each PD shall be required to ensure compliance of minimum underwriting target of 3.5% to be applied on the Pre-auction target or the issued amount, whichever is lower, for

23 State Bank of Pakistan Annual Report 2008-2009

respective tenors of PIBs (July –June) and compliance to this shall not be restricted on each auction basis. The non- compliance for underwriting requirements by PD may affect renewal of its primary dealership for next year. Each PD shall be eligible to claim underwriting commission, to the extent of minimum underwriting target (as explained in rule D-3) or the bid amount accepted, whichever is less, in respect of auction of Long Term securities. The claim for underwriting commission shall be lodged by PD after the settlement date. It would be compulsory for all the PDs to quote two-way prices to other PDs, Non-PDs, and institutional investors etc. as per instructions contained in rule D-8, subject to availability of limit. In secondary market, all PDs may quote in terms of yield rather than price. In case of PIBs, the maximum bid/offer spread will be 15bps for on the run issues up to 10 years tenor bonds. In case MTBs, the maximum bid/offer spread for on the run issues will be 25bps. PDs have to ensure two-ways prices in secondary market within above defined maximum bid/offer spreads for marketable lot-size for both MTBs and PIBs. The marketable lot-size for MTBs will be in range of PKR 100.0mln – 300.0mln (multiples of PKR 100.0mln).The marketable lot-size for PIBs will be in range of PKR 50.0mln – PKR 200.0mln (multiples of PKR 50.0mln). On-the-run issues defined for above obligation would represent last the two issues in the market. At any given day, a PD‟s holding in a particular issue with days to maturity greater than 1-year will not exceed 30.0% of the total issued amount or PKR 1.5billion, whichever is higher in each tenor. However for Non-PDs the limit will be 15.0% or PKR 1.5 billion, whichever is higher, in each tenor. The PDs issue-wise holding limit of 30.0% will run-down to 15.0% of the issued amount on expiry of 90days from the purchase date of that particular issue. This revised limit would apply only on issues sold during FY’08 and onward. Compliance to above instructions on current holding as on date of this circular by PDs, be effectively met by 30 September 2009. PD Performance Criteria: Each PD should be required to ensure compliance of minimum underwriting target of 3.5% to be applied on the Pre-auction target or the issued amount, whichever is lower, for respective tenors of PIBs (July-June). Each PD should bring a minimum of 5.0% of the NCB target of MTBs and PIBs during a fiscal year. However, for non- competitive bidding, the ceiling for one investor will be linked with pre-auction target i.e. 0.25% of the auction target or PKR 25.0million, whichever is higher. In case of breach of this limit through submission of multiple bids in one tenor, all such 24 Chronology of Policy Announcements

bids would be treated as void.

Foreign Exchange Exposure Limit (FEEL): To adjust the FEEL of ADs according to the changed market conditions & trade volumes, it has been decided that, effective from June 15th, 2009, the FEEL of ADs would now be calculated as 20% of their Paid-up Capital (free of losses) with a maximum cap of PKR 2,000 million. However, SBP reserves the right to assign the FEEL of any AD below 20% of Paid-up Capital (free of losses), based on the trends observed in the utilization of FEEL. FSCD Circular The FEEL of ADs would now be reviewed annually on the basis of June 10, 2009 No. 09 annual audited accounts each year and any changes will be advised to each AD individually through separate letter. In the case of banks incorporated in Pakistan the limit would cover all the branches including overseas branches if any, as already advised vide FSCD Circular No 06 referenced above. The assigned FEEL should be meticulously adhered to and any breaches would attract penal actions, as deemed appropriate. The guidelines for calculating the aggregate foreign exchange exposure as conveyed vide Para 4 of FE Circular No. 12 dated May 29, 1999 would remain unchanged.

A-4 Payment System

Date of Announcement Circular No. Policy Decision January 17, 2009 Circular No. 01 Operational Guidelines for Credit Card Business in Pakistan

Credit Card business is an important segment of consumer financing offered by the Commercial Banks and DFIs. The number and the volume of transaction are showing a healthy growth of this business. The complex nature of the product coupled with lack of awareness is resulting in rising number of complaints and disputes. In order to streamline the process and support the growing business there is a need of proper and well defined procedures. In this regard „Operational Guidelines for Credit Card Business in Pakistan” have been developed in consultation with all the stakeholders. The objectives of these guidelines are to:

1. Set the minimum standard of services 2. Promote good banking practices in Credit Card operation 3. Enhance transparency in Credit Card processing 4. Promote fair and cordial relationship

25 State Bank of Pakistan Annual Report 2008-2009

between institutions and their customers 5. Foster customer confidence in e- banking products and banking system

The guidelines are in addition to the existing instructions / guidelines on the subject. Compliance of these guidelines will be observed from March 01, 2009, except where separate deadlines have been mentioned. All non-compliant institutions will be subject to penalty under the relevant clauses of Payment Systems & Electronic Funds Transfer Act 2007 and Banking Companies Ordinance, 1962.

26 B-1 Central Board Decisions and Deliberations during 2008-09

The key matters where decisions were taken by the members of the Central Board of Directors are given as under:

Corporate Governance 1. Appointment of Dr. Waqar Masood Khan, Finance Secretary, as member of the Central Board of directors of State Bank of Pakistan. 2. Post retirement facilities to the Governor. 3. Performance Report for January 2006 – December 2008. 4. Appointment of Syed Salim Raza as Governor, State Bank of Pakistan. 5. Salary and Perquisites of the Governor. 6. Appointment of Mr. Salman Siddique, Finance Secretary, as member of the Central Board of directors of State Bank of Pakistan. 7. Meeting Fee of Directors of the Central Board. 8. Nomination to the Committee of the Central Board on Audit. 9. Directorship of Sardar Mohammad Ali Jogezai. 10. Delegation of Powers to Governor to decide individual hardship medical cases. 11. SBP Act, 1956 and draft of new SBP Act. 12. Appointment of Mr. Muhammad Kamran Shehzad as Deputy Governor. 13. Appointment of Mr. Mansur-ur-Rehman Khan as Banking Ombudsman/ Reallocation of responsibilities of Governors. 14. Terms and Conditions of Appointment of Mr. Muhammad Kamran Shehzad as Deputy Governor. 15. Consolidated list of Perquisites, Facilities and Post Retirement Benefits of the Deputy Governors. 16. Expansion of the Committee of the Central Board on Monetary and Credit Policies. 17. Appointment of Mirza Qamar Beg as Director on the Central Board of SBP and his nomination of the Committee of the Board on Building Projects.

Monetary policy & Research 1. Monetary Policy Statement (July – December 2008). 2. Review of Economy - Annual Report of SBP 2007-08. 3. Financial Stability Review (2007). 4. The State of Pakistan’s Economy – First Quarterly Report (July-September, 2008). 5. Monetary Policy Statement (January – March, 2009). 6. The State of Pakistan’s Economy – 2nd Quarterly Report (October – December, 2008). 7. The State of Pakistan’s Economy – 3rd Quarterly Report (January – March, 2009). 8. Monetary Policy Statement (April – June, 2009).

Banking 1. Quarterly Performance Review of the Banking System for the Quarter Ended March 31, 2008. 2. Quarterly Performance Review of Banking System for quarter ended June 30, 2008. 3. Liquidity Support by SBP to Small Banks under Federal Government Credit Guarantee Scheme, 2008. 4. Performance Review of Banking System for quarter ended September 30, 2008. 5. Future Banking Strategy and other reform measures. 6. Draft Banking Act.

27 State Bank of Pakistan Annual Report 2008-2009

7. Quarterly Performance Review (QPR) of the Banking System for Quarter ended December, 2008. 8. Quarterly Performance Review of the Banking System for quarter ended March, 2009. 9. Re-composition of membership of Private Sector Credit Advisory Council (PSCAC).

Financial Markets and Reserve Management 1. Briefing on Reserve Management and liquidation of foreign exchange Portfolio under the management of external fund managers.

Corporate Services 1. Revenue Expenditure Budget and Capital Expenditure Budget of SBP and its Subsidiaries for the FY 2008-09. 2. Revision in State Bank of Pakistan Expenditure Regulations. 3. Approval of expenditure to procure services for special audit of HSBC, Hong Kong (Custodian). 4. Annual Financial Statements for the year ended June 30, 2008. 5. Debit Balance of Government of Balochistan (November, 2008). 6. Profit & Loss and Review of Expenditure Budget for quarter ended September 30, 2008 and Estimates for the Period October to June 2009. 7. Engagement of Mr. Makhdoom Ali Khan, Advocate to defend the writ petition. 8. Encashment of Leave for Deceased Employees. 9. Revision in Overtime Allowance. 10. Return on Employee Contributory Provident Fund & Gratuity Fund. 11. Restoration of Family Pension. 12. Renewal of Contract of Ms. Sara Bakhtiar, General Counsel. 13. Maintenance Contract for Products under 4th Addendum of Automation Project through M/S. Hyundai Information Technology. 14. Maintenance Contract for UPS Systems. 15. Request for N.O.C by Supreme Court of Pakistan for rehabilitation work in SBP building situated at Lahore. 16. Recruitment of OG-2 in the Bank. 17. Amendments/clarifications in existing Career Development Policy. 18. Profit & Loss account and Review of Revenue & Capital Expenditure Budget for the Period ended March 31, 2008 along with estimates for the period April to June, 2009. 19. Submission of audited accounts of I. I. Chundrigar Road Beautification Project. 20. Optically Variable Ink (OVI), Security Feature on New Design Bank note of Rs 500. 21. Appointment of Auditors and Fixation of Audit Fee for FY 2008-09 & 2009-10. 22. Pakistan Railways (PR) Overdraft with SBP. 23. Debit Balance of Government of Boluchistan (March, 2009). 24. Restoration of Rest & Recreation Allowance. 25. Payment of Allowance to Officers deputed at Karachi and Lahore Airports. 26. 100% reimbursement of Medical expenses incurred by Ms Rizwana Riffat from AKUH and amendment in Policy. 27. Inflationary adjustment of 20% increase in the Monetized Salary of Mr. Yaseen Anwar, Deputy Governor. 28. Profit & Loss account and Review of Revenue & Capital Expenditure Budget for the Period ended March 31, 2009 along with estimates for the period April to June, 2009. 29. Engagement of Auditors for Review of Financial Statements. 30. Amendment to ECF Trust Deed and EGF and ECPF Regulations – 2007. 31. Ratification of on account payment of the Federal Government (April, 2009). 32. Promotion of Director ERD. 33. Career Development Policy. 28 Annexure - B

34. Extension of Rest & Recreation Facility to Clerical/Non Clerical employees. 35. Payment of Actuarial Value of Pension/Gratuity for contractual service. 36. Financial Approval for Procurement of Consultation Services for in house training program.

29 State Bank of Pakistan Annual Report 2008-2009

B-2 Business Continuation Management

This year a marked dynamism in the area of Business Continuity Management (BCM) has been witnessed. Cognizant of the central position of BCM in the wake of evolving security challenges central banking staff has more proactively participated in all related exercises and events. This vigour vouches for continuity of the critical and time sensitive operations of Central Bank during a disaster. Since effective Business Continuity Management concentrates on the impact, as opposed to the source of the disruption, thus an overriding focus has been required to enhance resilience capabilities, enabling financial industry participation and supervision of Central Bank to manage broad range of disruptions. Possibility of natural disasters, acts of terrorism, and other severe operational disruptions/threats require State Bank of Pakistan (SBP) to focus on the Business Continuity Planning (BCP). Effective Business Continuity Management involves business impact analysis, recovery strategies and business continuity plans as well as testing & rehearsal, training and awareness programs. To further improve the Business Continuity Program of SBP, following significant initiatives have been taken in the field of Business Continuity during the last year.

Establishment of I.T Disaster Recovery Site The establishment of Disaster Recovery Setup had been identified. The core objective of the task is to provide continuity of its critical information technology services in case of a local or site disaster at its Primary / backup Data Centers in Karachi. In pursuance of this core objective, establishment of an IT Disaster Recovery Site is in progress and technology equipment have been procured, installed, configured and implemented on an interim basis that will finally be transferred to DR Data Center that is in process. Network communication has also established and ISTD has developed a comprehensive plan for IT Service Continuity.

BCP Crisis Centre In light of the importance of testing and exercising BCP, a dedicated BCP Crisis Centre was established at SBP Backup Site, to be used by critical departments to carry out their tests and rehearsals. To allow smooth conduct of exercises, fully connected and networked computers with required office machines have been made available. The lockers for each critical department have also been provided inside the BCP Crisis Centre for placing their important manuals, data and required stationery items.

Establishment of BCP Backup Site In order to ensure optimal and reliable performance of critical functions of SBP during disaster situation, another BCP Backup site has been established at a more safe and accessible site. This would help to avoid financial, systemic and reputational risks associated with the functions of State Bank. To make it operative the physical infrastructural work has been completed during the last year while installation of IT related equipments, etc. would be undertaken during the current year.

Updation of BCP Books BCP Books are maintained as a live document and various changes are therefore, incorporated in the BCP document on immediate basis as and when necessary, based on the feedback received from critical departments of SBP and SBP-BSC field offices. Therefore, twenty five updates were issued during the year.

30 Annexure - B

BCP Committee and Emergency Support Group Meetings BCP committee comprises senior management drawn from the critical areas of SBP, who coordinate all aspects of BCP. The committee is responsible for the oversight, initiation, planning, approval, testing & audit of the BCP. In this regard, four BCP committee meetings were held during the year to oversee the BCP activities and review the results of quality assurance activities.

The Emergency Support Group consists of Heads of the Critical Support Services Departments. The Group is responsible for all the activities and tasks that support the recovery and continuity of the critical processes and functions in the event of a disaster at any SBP location. Emergency Support Group meetings were also conducted at the BCP Backup site to discuss and review the preparedness.

Testing and Rehearsal Rigorous testing & exercising the Business Continuity Plan enhance readiness of employees to cope with a disaster. Therefore, guidelines on testing & rehearsal were issued. To streamline the testing procedure at SBP and to facilitate the departments to conduct their tests and rehearsals smoothly, an annual test and rehearsal plan was consolidated and monitored with surprise element to check the readiness of critical departments and field offices of SBP and to ensure the continued effectiveness of the Business Continuity Plan in an ever-changing environment. In this regard, 32 mock exercises and 17 rehearsals were conducted by departments and SBP field offices along with table top testing. In addition to that evacuation drills were held at field offices and SBP main building.

31 State Bank of Pakistan Annual Report 2008-2009

B-3 Risk Based Audit Approach

The Internal Audit & Compliance Department (IA&CD) at State Bank of Pakistan conducts financial, operation and information systems audit of SBP operations. IA&CD performs independent checks for compliance with policies, guidelines, applicable laws & regulations, evaluates the reliability of financial records and the security of information system in SBP. In addition to recommending improvements in internal efficiencies, IA&CD also works with other departments to review controls in new systems and business processes.

The objectives of IA&CD include among others, advising and recommending senior management improvements in internal control and risk management systems. IA&CD reviews the effectiveness of internal controls employed by various departments to reduce non-compliance and provide independent appraisal on the activities of SBP aiming to add value, improve operational efficiency, risk management and internal control systems. All this contributes towards minimizing all types of risks and generally contributes towards greater efficiency.

The Risk based internal audit approach is followed in accordance with the Internal Audit Charter. Separate divisions for Financial/Operational Audit and IT Audit are carrying out duties under clearly defined roles and responsibilities. An Audit Committee of the Board is also overseeing Internal Audit functions. Recently IA&CD has taken the following initiatives:  A risk scoring model was developed in line with the best practices. The annual audit plan of the Department for year 2009-10 was upgraded based on the risk scoring model.  To further comply with IIA Standards, a quality assessment review unit has been established in the department. It ensures that the Internal Audit Reports are in accordance with IIA standards.

32 Annexure - B

B-4 General ‘Counsel’s’ Office

Restructuring of the Division and upgrading its functions The Legal Services Division was restructured in 2006 to a full-fledged department as the General ‘Counsel’s’ Office (GCO) with the appointment of a Special Counsel who oversees its three divisions and support office. Recently, a new litigation division has been added to focus on various litigation cases of the Bank.

A major cultural change has been successfully initiated to promote the concept of preventive law. Much closer interaction with the client departments has led to a better understanding of operational needs and bank wide targets. This has, in turn, fostered comfort of the client departments to discuss anticipated problems with a view to prevention. The incidence of consulting the GCO before undertaking a project or action has steadily increased as compared to the earlier practice of only seeking legal advice after a problem had arisen.

Improvements have been made in the processing of employee house building loans, administrative cases forwarded by SBP BSC, and other cases where legal opinion is required. The processing time is, in most cases, reduced to less than a week. Cases in which extensive research is required may, however, take longer.

There is greater participation and support in litigation matters as the Legal Professionals coordinate with outside counsel and attend court with the concerned officers, in material cases of SBP and its Subsidiaries.

The first legal cases management system of SBP was initiated in 2007. The system has now been implemented and will also assist in keeping track of litigation cases as well as keep a record of all the legal opinions in the software. Previously, such records were maintained manually.

Prevent and Minimize Litigation The GCO has started collecting and analyzing the status of litigation cases on a frequent basis, including reasons for any adverse orders. This helps the department to review its performance on a regular basis and seek to eliminate the causes of adverse orders, as much as possible.

The practice of preventive law is believed to be a major contributory factor to the reduction in litigation.

Drafting and Amendment of Legislation The GCO is deeply involved in the study, discussion, drafting/re-drafting and amendment of laws and in various proposed laws which include:

 The State Bank of Pakistan ACT, 1956.  Draft Banking Act.  Amendments to the Banking Companies Ordinance, 1962.  Deposit Protection Act.  Proposed Consumer Protection Law.  Proposed Financial Crimes Law.  Draft Securities Act.  Draft Financial Services Commission Act.  Demutualization Act.

33 State Bank of Pakistan Annual Report 2008-2009

 Anti-Money Laundering Ordinance, 2007.

The major concluded legislation work was on the Payment Systems and Electronic Fund Transfer Act which was a new law approved and enacted in 2007. This year the proposed new SBP Act was finalized and forwarded to the Ministry of Finance. Other laws and amendments are in various stages of the process.

Numerous contracts including the major payment systems and technical contracts were drafted/redrafted and issues amicably resolved through negotiation and drafting of correspondence by the GCO.

The GCO has actively participated in the process of amending the Anti Money Laundering Ordinance, 2007, in consultation with the Ministry of Law.

Rules and Regulations for the Financial Monitoring Unit were drafted and vetted under the Anti- Money Laundering Ordinance, 2007.

Recent coordination on the drafting of Micro Finance Credit Guarantee Facility sponsored by the Department for International Development, UK will assist SBP in its efforts to promote microfinance through Micro Finance Banks.

The General ‘Counsel’s’ Office, being a support service department generally supports the initiatives and functions of other departments from the legal perspective and as such endeavors to contribute meaningfully to almost all initiatives and projects of the SBP.

34 C Organizational Chart

State Bank of Pakistan - Existing Organization Structure As on June 30,, 2009

Governor Management Committee

Anti Money Laundering Unit Governor’s Secretariat

Deputy Governor Deputy Governor (Banking Policy & Development (Banking Supervision & Corporate Finance) Services)

Economic Advisor Executive Director Executive Director (Policy / Research) Comptroller Finance (Banking Policy & Regulation & Development (Financial Markets / Executive Director (Financial Resources Finance) Reserve Management) (Banking Supervision) Management)

Monetary Policy Banking Policy & Domestic Markets & Agricultural Credit Monetary Regulation Human Banking Payment Management Resources Inspection Finance System Economic Analysis (On-site) Banking Microfinance Information Surveillance International Markets Off-site Systems & & Investments Supervision & Treasury Technology Research Enforcement Operations Infrastructure & Consumer Training & Housing Finance Protection Development Statistics & Data Financial Markets Warehouse Strategy & Conduct Museum & Art SME Finance Islamic Banking Gallery

Financial Stability Business Exchange Policy Support Services Library

Financial Markets & Reserve Management Monetary Policy & Research Cluster Banking Cluster Cluster (FMRM Cluster) Banking Supervision Group (BSG) & Corporate Services Cluster (CS Cluster) (MPR Cluster)

Legend Corporate Internal Audit & Secretary’s Office Compliance

Cluster Head Note: -. ED BS is directly reporting to Governor for Human Resources Department External Relations Risk Management & Compliance

Group Head

General Counsel’s Office Department Head

Governor’s Office

State Bank of Pakistan Annual Report 2008-2009

D Management Directory

Name Designation E-Mail Phone 021-99212447 Syed Salim Raza Governor [email protected] 021-99212448 Deputy Governor – Muhammad Kamran Banking Policy & 021-99212455 [email protected] Shehzad Development Finance 021-99212456

Deputy Governor – 021-99212451 Mr. Yaseen Anwar Banking Supervision & [email protected] Corporate Services 021-99212452 Mr. Aftab Mustafa Corporate Secretary [email protected] 021-99212522 Khan

Economic Adviser/Executive Directors/ Comptroller Finance

Mr. Riaz Riazuddin Economic Adviser [email protected] 021-99212535

Executive Director - Mr. Amer Aziz [email protected] 021-99212496 Banking Supervision Executive Director - Mr. Asad Qureshi Financial Markets/ [email protected] 021-99212453 Reserve Management Executive Director, Mr. Noman Ahmed Internal Audit & [email protected] 021-99212499 Qureshi Compliance Department

Comptroller Finance – Mohammad Haroon Financial Resource [email protected] 021-99211869 Rasheed Management

Monetary Policy and Research Cluster

Director, Statistics & Dr. Azizullah Khattak [email protected] 021-99212565 DWH Department Muhammad Mansoor Director Economic [email protected] 021-99212464 Ali Analysis Department Director, Monetary Dr. Hamza Ali Malik [email protected] 021-99212533 Policy Department

Dr. Muhammad Ali Director, Research [email protected] 021-99218137 Choudhary Department

37 Management Directory

Acting Head, Financial Ms. Sahar Babar [email protected] 021-99213570 Stability Department

Banking Cluster

Muhammad Ashraf Director , Agricultural [email protected] 021-99217216 Khan Credit Department Mr. Mansoor Hassan Director, SME Finance [email protected] 021-99212596 Siddiqui Department Director, Infrastructure Mr. Rizwan Pesnani & Housing Finance [email protected] 021-99212979 Department Head Microfinance Dr. Saeed Ahmed [email protected] 021-99212557 Department Director Banking Mr. Inayat Hussain [email protected] 021-99211059 Inspection Department Director, Off-site Mr. Shaukat Zaman Supervision & [email protected] 021-99212602 Enforcement Department Syed Irfan Ali Director, BP&RD [email protected] 021-99216580 Director, Islamic Mr. Pervez Said [email protected] 021-99212495 Banking Department Ms. Lubna Farooq Director, Banking 021-99212964 [email protected] Malik Surveillance Department 021-99213984 Head, Consumer Mr. Mohsin Rasheed [email protected] 021-99212432 Protection Department

Financial Markets and Reserve Management Cluster

Director, Exchange Syed Samar Hasnain [email protected] 021-99212459 Policy Department Director, Domestic Muhammad Ali Markets & Monetary [email protected]. 021-99213960 Malik Management pk Department ED (FM/RM) directly looking after:  International Markets & Executive Director Investment [email protected] 021-99212453 Department  Financial Markets Strategy & Conduct Department

38 State Bank of Pakistan Annual Report 2008-2009

Corporate Services Cluster

Head, Human Resources Mr. Zafar Iqbal [email protected] 021-99211489 Department

Muhammad Saleem Director, Payments [email protected]. 021-99212549 Rehmani System Department pk Chief Information Mr. Sabah-Uz-Zaman [email protected] 021-99212539 Officer Muhammad Habib Director, Finance [email protected] 021-99212481 Khan Department rg.pk Director, Museum & Art Dr. Asma Ibrahim [email protected] 021-99211867 Gallery Director, Training & Mr. Ahsan Kamal Development [email protected] 021-99212473 Department Co. Director, Business Mr. Rehan Hyder Support Services [email protected] 021-99212398 Department Special Offices Director, External Syed Wasimuddin Relations and Chief [email protected] 021-99212562 Spokesman Ms. Sara Bakhtiar General Counsel [email protected] 021-99212541 Chief Risk Officer - Risk Mr. Suleman Management and [email protected] 021-99212467 Chhagla Compliance Department

39 Annexure E

E External Relations Department’s Achievements

Like other central banks, the State Bank of Pakistan also believes that continuous communication with its stakeholders is a prerequisite to play its role effectively as an architect of the monetary policy, and regulator of the banking industry of the country. With the emergence of new trends in media, especially with the advent of private electronic media in Pakistan, the importance of External Relations Department has increased manifold. To promote the image of SBP both at home and abroad, ERD is playing a proactive role in projecting SBP as an autonomous, modern, dynamic and highly professional central bank.

ERD has successfully managed proper coverage for SBP both in print and electronic media to extensively cover policy initiatives of the State Bank. To put things into perspective, a total of 216 press releases, both in English and Urdu versions, were released to media in fiscal year 09. (This number excludes routine press notes which are released on daily/weekly basis.) In addition, five press conferences of the SBP Governor were arranged in FY09 while numerous interviews/panel discussions of EDs/Directors were arranged in the electronic media.

During FY09, ERD developed and executed an extensive Media Coverage Plan on the 60th anniversary of the State Bank on July 1, 2008. Special news packages in electronic media and newspaper supplements were arranged to highlight SBP’s achievements since 1948. In addition, ERD published a Special Bank News Supplement having artistic and colorful layout on the SBP’s 60th anniversary. The Department also conceived and facilitated production of a documentary on SBP that was run by Aaj TV Network on July 1, 2008. To apprise the senior management and officers of the Bank about the latest socio-economic and political developments in the country, ERD further improved the format of Daily Electronic News Update and it also started disseminating a fortnightly Electronic SBP News Bulletin, which was generally appreciated by the Bank employees. ERD also contributed towards SBP’s corporate social responsibility by donating well over 25,000 copies of publications of the Bank to leading universities/educational institutions throughout the country. Distribution of SBP’s publications touched the figure of 92,887 in FY09.

41 State Bank of Pakistan Annual Report 2008-2009

List of Publications Rate Per Sr.No. Name of Publication Copy (Rs) Monthly Publications 1 Statistical Bulletin 160 2 Export of Goods & Services 260 3 Import of Goods & Services 260 Quarterly Publications 1 The State of Pakistan’s Economy 320 2 Quarterly Performance Review of the Banking System 50 Bi-annual Publications 1 Statistics on Scheduled Banks in Pakistan. 180 Annual Publications 1 Annual Report -Review of the Economy (Vol-I) 450 2 Annual Report-Performance Review (Vol-II) 375 3 Equity Yield on Ordinary Shares 140 4 Export Receipts 240 5 Handbook of Statistics on Pakistan’s Economy 300 6 Balance Sheet Analysis of JSC Listed on KSE 600 7 Banking Statistics of Pakistan. 435 8 Banking System Review (BSR) 230 9 Foreign Liabilities & Assets and Foreign Investment in Pakistan 145 10 Pakistan Balance of Payments 150 11 Pakistan Financial Sector Assessment (FSA) 395 13 Financial Stability Review (FSR) 395 14 Index Number of Stock Exchange Securities. 150 Miscellaneous Publications 1 Foreign Exchange Manual-Vol-I & Vol-II (NA) 950 2 Islamic Banking & Finance-Theory & Practice by Muhammad Ayub (NA) 480 3 Minimum Capital Requirement for Banks. 100 4 Current Issues Pakistan Economy 170 5 Key Issues Pakistan Economy 170 6 Leading Issues Facing Pakistan Economy 170 7 Prudential Regulations for Corporate/Commercial Banking 100 8 Prudential Regulations for Consumer Financing 50 9 Prudential Regulations for SME Financing 60 10 Research Bulletin 250 11 Quaid's Property and Investment (Urdu) 200 SBP History 1 SBP History Vol- I (1948-1960) 650 2 History Vol-I I (1960-1977) 550 3 History Vol-III (1977-1988) 925 4 History Vol-IV (1988-2003) 1200