Ecnomic Q1

CENTRAL BANK
Central bank is a special institution whose customers are commercial bank and state
According to RP KENT
An institution that is charged with the responsibility of managing the explosion and contraction of the
volume of money in the interest of general public welfare
State Bank of Pakistan=
Central bank of Pakistan is the state bank of Pakistan .state bank of Pakistan was established on 1 st July
1948 .Quaid -e- azam Muhammad ail Jinnah performed its opening ceremony .Now it is working under
the state bank of Pakistan act 1956.
Functions of Central Bank

The main function of a central bank is to act as governor of the machinery of credit in order to secure
stability of prices.
Central bank is the most important bank of a country .it importance is increased manifold during past
century. It acts in the national interest and earning of profit is only a secondary consideration. The
central bank must be independent of political influence.
FUNTIONS=
A CENTRAL bank usually perform the following functions
1. Note issue Agency

The central bank is given the sole monopoly of issuing notes in order to secure control over
volume of currency and credit. These notes circulate throughout the country as legal tender
money. It has to keep a reserve in the form of gold and foreign securities as per statutory rules
against the notes issued by it. Thus the government had to entrust the responsibility of note
issuing to only one bank
Usually two system of note issuing are followed
(i) Fixed fiduciary system.
Under this system the central bank can issue notes up to a certain limit without keeping any
reserves of precious metals or foreign currencies
(ii) Proportional reserve system
Under this system the central bank keeps reserves in the form of gold silver or foreign
currencies in a fixed proportion against issuing of notes.
2. Banker to the Government

Central bank functions as a banker to the government—both central and state governments. It
carries out all banking business of the government. Government keeps their cash balances in the
current account with the central bank. Similarly, central bank accepts receipts and makes
payment on behalf of the governments.
 Provides short term loans to the government
 Act as advisor to the government in financial and monetary matters
 Implements exchange control rules on behalf of the government
3. Bankers Bank
The central bank act as bankers it
 Keep cash reserves of bank .All bank are required by law to keep a percentage of their
deposits with the central bank as cash reserve
 Provide them loans by rediscounting facility
 Controls, supervises and regulates all activities of commercial bank.
4. Lender of last resort
It means that whenever the banks are short of funds and are unable to get help from anywhere
It is the central bank which provides them, loans and brings them out of trouble.
5. Clearing House
Central bank also performs the function of a clearinghouse. Since central bank holds the cash
reserves of other banks it can easily settle their mutual payments.
6. Controller of Credit and Money Supply:

Central bank controls credit and money supply through its monetary policy which consists of two parts
—currency and credit. Central bank has monopoly of issuing notes (except one-rupee notes, one-rupee
coins and the small coins issued by the government) and thereby can control the volume of currency.
The main objective of credit control function of central bank is price stability along with full employment
(level of output). It controls credit and money supply by adopting quantitative and qualitative measures
as discussed in Section 8.25. Following three quantitative measures of credit control by RBI are recalled
for ready reference.
7. Exchange Control:
Another duty of a central bank is to see that the external value of currency is maintained. For instance,
in Pakistan, the state Bank of Pakistan takes steps to ensure external value of a rupee. It adopts suitable
measures to attain this object. The exchange control system is one such measure.
Under exchange control system, every citizen of Pakistan has to deposit with the state Bank all foreign
currency or exchange that he receives. And whatever foreign exchange he might need has to be secured
from the state Bank by making an application in the prescribed form.
8. It manages the national debt, makes interest payments

It manages and raises new loans on behalf of government .the account of foreign and is also
maintained by central bank.
9. Custodian of monetary reserves
All monetary reserves of a country of a country are kept by central bank the reserves are in the
form of gold or foreign currencies
10. Role in economic development
Majority of the countries of the world are poor and are following planned economic
development. The central bank through its various polices, directly and indirectly promotes
development efforts.
 Role of state bank in controlling the credit volume
Control of credit and total money supply is called the monetary policy. Credit (or credit
money) has assumed great importance in the modern economic systems. It is the
lifeblood of modern business .thus for the economic stability of a country a proper
control and regulation of credit money is essential.
Monetary policy is conducted by the State Bank of Pakistan to regulate and control the
volume of money and credit supply in the country in order to achieve specific economic
objectives such as price stability, reducing unemployment, etc.
The objectives of credit control are
(i) Regulate money supply (ii) to increase investments (iii) to increase employment
opportunities (iv) price control
The central bank uses the following method to control credit
 Quantitative controls
These includes
1. Dicount rate policy 2.open market operation
3. Variation in reserve requirement 4.credit rationing
 Qualitative controls
1. Change in margin requirement 2. Regulation of consumer credit
3. Publicity 4.direct action

Ecnomic Q1

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CENTRAL BANK

State Bank of Pakistan=

Functions of Central Bank

A CENTRAL bank usually perform the following functions

1. Note issue Agency

2. Banker to the Government

6. Controller of Credit and Money Supply:

8. It manages the national debt, makes interest payments

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