Following are the details of five-year (2005-10) strategic plan the State Bank of Pakistan (SBP) has chalked out envisaging soundness of financial sector, effective monetary management, prudent exchange and reserves management, along with an efficient payment systems: Functional Strategies: To ensure the soundness of the financial sector, the SBP will focus its efforts on financial sector deepening, proactive supervision and regulation of financial institutions, strengthening of financial sector, privatisation of the Public Sector Bank and divestment of Government shares in privatised banks, and promotion of Islamic banking as a parallel system.
In the area of monetary management, the SBP will be working on developing a forward looking policy framework, enhancing the effectiveness of Monetary Policy implementation, improving research and data dissemination capabilities, and deepening the financial markets.
For prudent exchange rate and reserves management, the focus of SBP will be on building in-house reserve management capacity, liberalising the capital account in a phased manner, capacity building in the area of risk management, strengthening of reporting mechanism of exchange companies and documenting all capital flows especially cash transactions.
The main targets for the SBP to ensure an efficient and sound payment systems will be through implementation of the Real Time Gross Settlement System (RTGS), promotion of e-banking, establishment of an electronic clearing house, and development of Public Key Infrastructure (PKI) and digital certification.
FINANCIAL SECTOR DEEPENING AND BROADENING OF ACCESS: For financial sector deepening and broadening of access, the short to medium term strategic plan is to consolidate and build on the existing initiatives in agriculture finance, SMEs, mortgage and micro-finance. The strategy includes strengthening of the existing micro-finance regime and expansion of agriculture credit to small farmers and for livestock.
For the SMEs, as an initial step, delivery of credit by banks will be monitored and intermediary/technical support organisations will be encouraged to assist the SMEs in preparing bankable proposals. In the medium term, the staff of the banks will be trained in program lending and the proposed guarantee scheme by the Government of Pakistan (GoP) will be established. To pursue this strategy, close co-ordination will be established with the Small and Medium Enterprise Development Authority (Smeda).
The SBP will organise itself internally to respond to the needs of SMEs and infrastructure financing by inducting skilled manpower in these areas and train younger staff by sending them for attachments.
SMEs, housing and infrastructure Finance Divisions will be strengthened with experts in these areas as well as securitisation and structured finance. One of the initiatives that has not made much headway so far is the infrastructure/municipal bonds, that will open up the financing of long question infrastructure projects to the private sector in partnership with the public sector or on stand-alone basis. Asset Backed Securitisation (ABS) has proved to be quite handy in oil and gas, telecom and roads and highway projects.
The SBP will promote and reinforce the ABS as and when a critical mass of mortgage loans is accumulated, move towards pooling of these loans and structure them into Mortgage Backed Securities (MBS).
PROACTIVE SUPERVISION AND REGULATION OF FINANCIAL INSTITUTIONS: The SBP plans to formulate an agile banking crisis resolution mechanism through implementation of Prompt Corrective Action (PCA) regime and reinforce it with modification in the BCO, 1962. In the short term, the cluster plans to enhance market discipline through adoption of International Accounting Standards 39 and 40, implement of IRAF, and enhance the usage of CIB along with the Data Warehouse (DW).
IRAF will also be further modified to reflect the risk profiles of each banking institution and a standardised template will be developed for this purpose (to be filled in by the banking institution management and endorsed by their Board).
This Risk profile, as assessed by the Banking Desk, will also be taken into account in the final composite rating of each bank. Streamlining of data reporting by banks and DFIs and ongoing improvements in the inspection procedures will also strengthen the existing supervisory regime.
As the AML law becomes fully operational, the SBP will facilitate in setting up a Financial Intelligence Unit (FIU). Contacts will be intensified with the new Economic Crime Wing under the National Accountability Bureau (NAB) and rules of engagement will be laid down explicitly to prevent, detect, and prosecute banking crimes.
For achieving Consolidated Supervision, co-operation with other regulatory bodies (foreign and local) will be intensified, resulting in enhanced off-site monitoring and targeted on-site inspections of cross border branches.
In the medium to long term, a smooth transition from Basel-I to Basel-II and institutionalisation of stress testing will strengthen the existing risk management regime. To accomplish this task the SBP plans to enhance internal capacity to assess the banks' risk measurement, management and mitigation efforts on a systematic basis.
Capacity building of existing staff and hiring of those familiar with quantitative techniques and modelling, deployment of appropriate software application packages, collection of relevant data, and conducting of analysis are also planned.
PRIVATIZATION OF PUBLIC SECTOR BANKS AND DIVESTMENT OF GOVERNMENT SHARES IN PRIVATIZED BANKS: The SBP plans to develop appropriate strategies to facilitate the GoP in privatisation and divestment of the Public Sector Banks including the IDBP, SME Bank and Zarai Taraqiati Bank (ZTBAL) and divestment of remaining government shares in the already privatised banks.
The strategy is to proactively play its role as an advisor and facilitator of the privatisation process by bringing improvements in the selection of strategic investors, due diligence process, and successful completion of the transactions.
STRENGTHENING THE FINANCIAL SECTOR: To further strengthen the financial sector, the SBP will focus on introducing a safety net through the intended Deposit Insurance Scheme, a phased increase in the regulatory capital requirement and acting as catalyst in development of an enabling legal framework for private sector credit bureaus.
Modest progress has so far been made in the consolidation and mergers of financial institutions. Although the minimum capital requirement has been raised to Rs 2 billion, effective from December 31, 2005, this amount of almost $35 million is still inadequate in comparison with the trends in the global banking markets.
The SBP is aiming to prescribe $100 million as minimum capital by the end of 2009 - a three-fold jump from the present levels. At present, there are ten banks with $100 million capital.
The higher capital requirements will allow some medium size banks to merge and assuming a capital-assets ratios of 5 percent, to enable these banks to book assets up to $2 billion.
In the coming years, the professional development of human resource base of banking industry will be an area of major focus for the SBP. The SBP has formed several working groups of the banking industry to come up with appropriate recommendations which, after review and approval by the PBA, will then form the basis of Human Resources Policy guidelines for all banks, to be issued by the SBP.
Human Resource Department (HRD) and National Institute of Banking and Finance (NIBAF) of the SBP are also involved in the initial stages of this exercise.
PROMOTING ISLAMIC BANKING AS A PARALLEL AND COMPATIBLE SYSTEM: Islamic banks are becoming popular not only in Pakistan but also all over the world. The work of licensing, supervision, regulation, inspection, Shariah Audit, training of personnel of these Islamic banks or branches are done by the Islamic Banking Department (IBD).
A two-pronged approach will be followed ie attracting international banks of quality to locate in Pakistan and nurturing a cadre of professional Islamic bankers domestically.
CONDUCTING FORWARD LOOKING POLICY ANALYSIS: It has long been recognised that monetary policy management needs a forward-looking dimension due to the existence of long lags between policy action and their intended effects on output and inflation. The major hurdle in this respect for the SBP is the absence of a formal framework that could supplement the forward-looking policy analysis.
In order to address this limitation, the SBP plans to build a macro model to make dynamic impact analysis of various policy scenarios. This will be an inter-departmental task that will help in exploring the inter-linkages in macroeconomic variables, particularly understanding the transmission mechanism of monetary policy. At the same time, the SBP plans to strengthen the forecasting group to make it more effective and result-oriented.
The revision in monetary aggregate is particularly important for the SBP as it anchors its monetary policy to the monetary aggregate. The SBP proposes to compile M3 on monthly basis. Monetary survey will also be reviewed, recast and estimates of M3 prepared regularly as part of this survey.
At the initial stage, owing to data constraints, the M3 series will be compiled on quarterly basis. However, once the data constraints are addressed, the M3 series can be compiled on monthly basis.
ENHANCE EFFECTIVENESS OF MONETARY POLICY IMPLEMENTATION: In the case of Pakistan, the most actively used monetary tool is Open Market Operation (OMO), though its frequency is quite low (less than 3 per month, on average). Experience shows that at times the market remains significantly liquid or illiquid, as the SBP is not able to intervene at the desired level and overnight rates face volatility.
In order to manage the short-term call money market more effectively, the SPB plans to introduce the Liquidity Adjustment Facility in Pakistan. The proposed framework will be subject to a regular quarterly review by the Monetary and Exchange Rate Policy Committee (MERPC).
The SBP also plans to restructure the existing MERPC in the medium to long term through extending its membership to two external experts on monetary policy, raising its status as a decision-making body - by introducing necessary changes in the SBP Act - and releasing minutes of the meeting to the public, after suitable time lags.
While implementing an effective monetary policy is important, it is equally important to do so in a transparent manner. Transparency requires a central bank's openness in explaining the rationale for its specific policy decisions. Transparency insulates the central bank from political pressures. It also helps market participants to form their expectations regarding future outcomes.
There is therefore a need to educate the public on issues relating to economic policy. This will help in creating better understanding and public support for needed economic changes.
For this purpose, a series of pamphlets will be published on major economic issues, which will focus on explaining important economic concepts in simple non-technical language.
IMPROVE RESEARCH AND DATA DISSEMINATION CAPABILITY: The SBP provides a candid and objective review of the economy through its flagship publications (monetary policy statement, annual report, quarterly report, financial sector assessment, financial markets review), and banking sector insights and more in-depth analysis. With a view to enhancing the coverage in the areas of prices, the SBP plans to publish Monthly Inflation Monitor that will contain analytical charts and tables on prices.
At a later stage, this document will be transformed into an Inflation Report that will not only evaluate the developments in inflation and economic conditions, but also analyse the linkages between monetary developments and inflationary trends. In addition, this document may be integrated with the output of inflationary forecasting model (which will be developed as a part of the macro model).
All the same time, it is essential to work on topics of direct operational relevance for the monetary and exchange rate policy, inflation, international trade, and domestic & external debt. With a view to improving its profile in scientific research the SBP plans to substantially increase the quantum of working paper by 2010. In addition, SBP is also working to launch an annual Research Bulletin, which will be a journal of pre-reviewed papers.
The SBP plans to estimate expenditure patterns on the basis of annual surveys conducted by Federal Bureau of Statistics (FBS). The monitoring and analysis of expenditure patterns is important for determining the impact of economic policies on income distribution, poverty, consumption and saving behaviour.
The SBP is also planning to develop a mechanism for periodic review of all data series compiled. Some of the statistical series have outlived their utility whereas information on other highly useful variables such as employment, nominal and real wages, corporate debt, household debt, real estate and construction price indices are missing.
Primary data collection is at present limited to banking and monetary statistics. This strategy will help in increasing the scope, coverage and quality of data to support policy makers, researchers and other stakeholders.
DEEPENING OF FINANCIAL MARKETS: New financial products will be traded in the Money/Bonds market by the introduction of Zero Coupon Yield Curve (ZCYC) through the 'bootstrapping' process. Bond stripping and development of a GoP Bond Index, recognising the need for tradable financial instruments for Islamic banking treasury operations, the SBP plans to design and implement these new instruments.
The SBP is planning the listing of government securities, particularly Pakistan Investment Bonds (PIBs), on the stock exchanges. This will broaden the investor base through inclusion of retail/small institutions.
PRUDENT EXCHANGE RATE AND RESERVES MANAGEMENT: SBP's foreign exchange reserves have risen steadily in the past four years, touching a level in excess of $10 billion. Foreign exchange reserves form part of the national assets and these need to be deployed rationally, keeping in mind the principles of safety, liquidity, and return.
The reserves, which are currently deployed by the SBP's in-house reserve management treasury dealers, are in short-term high quality bank deposits. The SBP plans to improve the return on these reserves, within the central board's approved risk parameters, through capacity building of the front, middle and back offices and to develop competitive benchmarks for future performance.
The SBP is presently monitoring exchange companies through weekly returns and on-site inspections. Exchange companies in category B have already been given one year to organise themselves, appoint the chief executives with proper qualifications and experience and to automate systems. The SBP plans to develop an effective monitoring system for these companies. There is also a strong need to have on-line real time monitoring of these companies, which the SBP plans to establish by the end of 2006.
In the past, attempts have been made by these companies to take out foreign exchange without declaration or a proper reconciliation, leaving room for capital flight. The SBP plans to develop an effective mechanism to control capital flight through airports, in close co-ordination and collaboration with customs authorities and Civil Aviation Authority (CAA).
The Bank further said that capital account convertibility plan will be evolved in a phased manner so that the immediate impact on balance of payments remains limited and manageable. Once the experience from this partial liberalisation is gathered the next round of reforms can be designed for further movement in this direction.
Foreign Exchange Regulations Act (FERA) 1947 will also be updated to make it in sync with the Economic Reforms Act. 1992.
EFFICIENT AND SOUND PAYMENT SYSTEM: The Real Time Gross Settlement System will be completed by December 2005. To reduce the settlement time significantly and increase cost-effectiveness, the SBP plans to establish an electronic clearinghouse. Instead of paper cheques, its image will be forwarded by payee's bank, using secured network, and the clearing will be done automatically.
The SBP also plans to promote accelerated adoption of e-bank and ensure that all banks get networked and connected electronically within the next two years. Security of online payment processing is vital for promotion of e-commerce, and the central bank is playing a key role in the development of a cost-effective infrastructure for PKI and Digital Certification.
MANAGEMENT STRATEGIES: Management Strategies for SBP link up with the functional strategies to ensure that the supporting infrastructure is available to effectively implement the plans. The focus of the management strategies remain on increasing employee attraction, retention and motivation, institutionalising succession planning, implementing the remaining part of the information technology project and the transition plan, and preparing substantive legislation for new products and areas like e-banking.
The SBP will also focus on strengthening its Business Continuity Process (BCP), enhancing its Management Information System (MIS), streamlining its procedures through Business Process Re-engineering (BPR), and a stronger risk based and its audit function.
HUMAN RESOURCE DEVELOPMENT: The SBP plans to increase employee attraction, retention and motivation by reducing recruitment timelines, devising innovative compensation and benefit plans, establishing employee counselling, providing equitable training opportunities and enhancing the Performance Management System (PMS). To develop the capacity to offer market based targeted compensation and benefits packages for the high performers, line managers' ability to provide performance-based incentives is being enhanced.
Moreover, flexi benefits plans are being introduced to address the needs of a diverse workforce. Equitable training opportunities will be identified for line and support staff through specialised higher education to ensure continuous up-gradation of skills and knowledge base in their respective areas.
The SBP also plans to further enhance the PMS to bring transparency and objectivity to decisions regarding employee career management.
In addition to the present training opportunities, employees will be encouraged to spend some time acquiring on-the-job experience of commercial banking and capital markets.
This objective will be achieved through a variety of methods - secondment, deputation, short-term assignments, attachment, and leave without pay. To enhance the career prospects of well-qualified staff, who will eventually assume leadership positions in the SBP, job opportunities of specific duration with international organisations such as Bank of International Settlement (BIS), International Monetary Fund (IMF), World Bank, Asian Development Bank (ADB) and Central Banks and Regulatory Agencies will be identified.
Participation in assessment missions and technical assistance projects will also be solicited for those who wish to limit themselves to short duration assignments. As mentioned above, SBP also plans to play a proactive role in introducing best HR practices in the banking and financial industry and develop its professionals on an ongoing basis.
EFFECTIVE COMMUNICATION STRATEGY: The IT project is planned for completion by September 2005 and will subsequently be handed over by the Project Office to the Information Systems Department (ISD). Successful transition is very critical for the operation of the new system and provision of efficient services. After completion of the remaining tasks of the IT project like ERP, Globus, DW and rollout, the IT Project Management Team plans to prepare a transition plan with timelines and milestones for approval and monitoring by the IT Steering Committee.
The data analysis requirements of the institution and the need to use appropriate business intelligence applications are ongoing. It is the long-term plan of the IT team to keep the quality of application up-dated as per the business needs of the SBP to improve its data management capacity. The IT team further plans to establish an IT security framework and improve it by deploying an appropriate set of security policies.
EFFECTIVE COMMUNICATION STRATEGY: The feedback received from External Stakeholders Survey 2004 showed a high level of satisfaction amongst both the direct stakeholders and the indirect stakeholders with the quality and content of information disseminated by the SBP through its various periodic reports. However, timeliness seems to be an issue. Based on this feedback the SBP plans to further enhance its image as the provider of reliable and accurate data and analysis. A new Communication Policy was finalised at the SMC 2004 to address this need.
The policy will be both responsive as well as proactive in nature. The SBP is also planning to establish a learning resource centre within the new SBP Library so that relevant people (media, students, academics, researchers, etc) are able to access information on finance, economy as well as the SBP's various activities.
STRENGTHENING OF LEGAL FRAMEWORK: A number of new areas are emerging where the SBP plans to venture or has already initiated work, like E-banking, Deposit Insurance Scheme, Electronic Clearinghouse, PKI, Exim Bank and Digital Certification. The SBP plans to help formulate and strengthen the legal framework governing these areas.
Many of the functional strategies listed above encompass either updating/changing the existing legal frameworks or facilitation of enactment of new laws in areas like AML, Private Credit Bureaus, Banking Crisis Resolution, Islamic Banking, Capital Account Liberalisation and legislation for Government Securities.
STRENGTHENING OF CONTINGENCY MECHANISMS: To ensure continuity of critical functions (time-sensitive) of the SBP and prevent any major disruption in financial system of the country the SBP plans to establish a technology Disaster Recovery Center (DCR) to cope with any interruption due to a technology fault or a disaster.
The enforcement mechanisms to ensure regular testing and up-dating will be in place by the end of 2005 and will be co-ordinated by the Business Continuity Process (BPC) co-ordinator with the relevant critical departments.
BUSINESS PROCESS RE-ENGINEERING: The focus of Business process Re-engineering (BPR) is to enhance the operational efficiency and internal controls by removing redundancies in business processes while taking advantage of the implementation of Globus banking solutions, Oracle Enterprise Resource Planning (ERP) and RTGS.
The completion of existing BPR relating to centralised payment and procurement functions will be completed in 2005. In order to enhance efficiency and reporting of Government Accounts, implementation of a new Chart of Accounts and development of interface for Globus with the Project for Implementation of Financial Reporting and Accounting (PIFRA) is planned.
MANAGEMENT INFORMATION SYSTEM: Implementation of Globus, ERP and RTGS will further augment and expedite the process of Management Information Reports/MIS on online basis. SBP plans to upgrade the existing reporting to online and expand the current reporting framework before 2006.
RISK-BASED AUDIT: The SBP plans to develop risk registers for all its departments. The capacity for inspection and audit of Information Technology (IT) based systems will also be strengthened.
SBP BSC: To supplement the strategic plan of the SBP the SBP BSC plans to focus on providing improved currency management processes, timely implementation of infrastructure projects and improvement in the Medical Services for all employees.
Currency Management is the most vital area for SBP SBC. As the retail-banking arm of the central bank, the SBP BSC has to ensure continuous supply of fresh currency notes and coins. Currency Management now has become a specialised function and systems and procedures have to be improved in line with best international practices.
The SBP BSC plans to install note-sorting machines, launch currency notes and coins of new denominations, and proactively supervise commercial banks' branches to reduce complaints by the general public about the availability of fresh currency.
The services departments plan to increase service level standards by timely implementation of infrastructure projects and their maintenance, improved security level standards by timely implementation of infrastructure projects and their maintenance improved security standards, and better medical services for the employees of SBP and its subsidiaries.
While contributing to the strategic plan of the SBP, SBP BSC also plans to conduct a separate planning exercise to ensure the participation of its field offices in the formulation and finalisation of its strategic plan for the next five years.
NIBAF: The strategic plan for NIBAF has been derived from the future training requirements of SBP and SBP BSC. Here, the main focus during the next five years will be on increasing the scope and coverage of its activities, including implementation of intermediate and advanced courses as well as specialised sectoral programs.
Collaborative programs with other domestic training institutes will also be devised and customised regional programs developed to attract delegates from neighbouring countries.
NIBAF will also focus on enhancing the quality and delivery of its programs by revisiting its curriculum and training material and enhancing the diversity of its faculty. While optimising the use of its physical infrastructure and leveraging the use of its IT resources, NIBAF will also ensure that it builds a team of dedicated professionals who can maintain the highest service delivery standards for all stakeholders of SBP and its subsidiaries.
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