VIQAR Book Review FNL

HISTORY OF THE
STATE BANK OF PAKISTAN

© State· Bank of Pakistan
FIRST PUBLISH ED AUGUST I992
Published by the State Bank of Pakistan

Printed at the State Bank of Pakistan Press, Karachi
HIST ORY OF THE
STAT E BAN K OF PAK ISTA N
(1948 -1960 )
Compiled by
S. Aijaz Husain
STATE BANK OF PAKISTA N

KARACH I
Foreword
The idea of compiling the history of the State Bank was initiated
by my illustrious predecessor, Mr. V.A. Jafarey. He also took pains
to provide guidance in the preparation of the synopsis for the history.
The underlying idea behind the project was to preserve for posterity,
the important events and developments in the life of the Bank. The
project needed pains-taking research and consultation with and co-
operation of a number of persons. In the preface, Mr. S. Aijaz Husain
has acknowledged the help that he received from them. I would like
to add my own grateful thanks to all of them for the assistance that
they have rendered.
Looking back on the evolution and growth of the State Bank and
the banking and financial sector in Pakistan, it would not be
unreasonable to derive satisfaction from the successes achieved over
the years. It is noteworthy that expert opinion obtained by the
Government of Pakistan was not supportive of the idea of
establishment of a Central Bank in the early years of the country's
independence. The Government of Pakistan, however, did not
accept such opinion and decided in the larger interest of the country
to establish the Central Bank as from July 1948. Accordingly, the
State Bank of Pakistan commenced operations from July 1, 1948 and
besides performing the usual central banking functions it also played
a pioneering role in the promotion of a number of financial
institutions in the country to service its economic activities and
development objectives. We all owe a debt of gratitude to the
founding fathers of the Bank.
I would be failing in my duty if I do not pay tribute to Mr. S.

Aijaz Husain who has almost single-handedly carried on the project
and has completed the First Volume of the History of the State Bank
of Pakistan.
State Bank of Pakistan,

Karachi, August 15, 1992. I.A. Hanfi
Governor
v
Preface
A comprehensive and authentic history of the State Bank was
long over due. This volume owes its origin to the decision of Mr. V .A.
Jafarey, the former Governor of the Bank, who had strongly felt its
urgency and importance of recording the eventful role the new
institution had played in shaping the economic destiny of the young
state. The assignment was entrusted to me in view of my long
association with the Bank as Secretary of the Central Board of
Directors. It was an ambitious and challenging assignment which
made me at once conscious of my limitations. The assurance of the
Governor that I would have the assistance and advice of an Editorial
Committee to be headed by a retired Governor or Deputy Governor
and composed of a University Professor and a member of the Board
of Directors gave me the confidence to assume the onerous
responsibility. I, however, told him that a 40-year history (1948-1988)
of the Bank could not be compressed into a single volume and that a
phasewise treatment would be more appropriate, the first phase
covering a period from 1948 to 1960-a suggestion he readily
accepted.
After Mr. Jafarey's transfer, his successor, Mr. I.A. Hanfi, was
equally keen on the completion of the project on which, in the
meantime, I had done a considerable amount of spadework. He
commissioned me from my retirement to pick up the threads where I
had left them to complete the task.
In the absence of the Editorial Committee I had to look to the

Governor for his guidance and draw upon the knowledge and
experience of men who had been intimately associated with the Bank
in its early years. Some of them were directly involved in its
organisation and conversant with the heavy odds against which the
Bank had to battle for its survival and growth, the most formidable
among them being the dispute with the Reserve Bank of India over
the division of assets which were in its possession. Pakistan was in dire
need of its share without which it could not put its disorganised
economic house in order. The Bank did not have even the premises
vii
viii PREFACE
to house its newly established offices, nor the trained staff to man
them. The banking system or whatever had remained of it in the wake
of Partition had to be set on its feet to get the economy going. These
are only a few of the numerous problems and their ad hoc and
improvised solutions which have been discussed at length in this
volume. To ensure its impartial and objective treatment I had to go to
the original sources and extensively quote from the documents,
reports, memoranda, speeches of the Finance Ministers and the
Governors of the Bank, besides several of the distinguished
personages in the realm of economics, finance and administration.
I am particularly grateful to Mr. Said Ahmad, who was

intimately concerned with the Bank in its formative phase and
dealings with the Reserve Bank. Some of the episodes narrated by
him throw light on what transpired behind the scenes while the
negotiations were in progress with the Reserve Bank for the division
of assets and liabilities. My thanks are also due to Messrs. N.M.
Uquaili, Naziruddin Mahmood, K.Z. Sheikh, S.U. Deshmukh and
Q.I. Siddiqui for reading and commenting on parts of the manuscript
sent for their perusal. The entire draft was read and approved by the
Editorial Committee after its appointment. To its Chairman, Mr.
I.H. Qarni, the Deputy Governor and its members Messrs. G.M.
Khan Yousafzai, Muzafar Husain and Shahid Hamid, individually
and collectively, I am deeply grateful. I am also indebted to Dr.
Azizali F. Mohammad, Pakistan's alternate Director in the
International Monetary Fund for reading most of the manuscript and
making useful suggestions for its improvement. To my friend,
Mushtaq Ahmad, I am thankful for his advice on the organisation and
composition of the material after he had meticulously gone through
the entire manuscript. To Begum Zahid Husain, the wife of the first
Governor of the State Bank I am greatly obliged for allowing me free
access to the papers of her illustrious husband without whose
imaginative stewardship and insight into the realm of finance and
banking, the State Bank would not have become a going and growing
concern so soon after its establishment.
In the initial stages Mr. Riaz Iqbal assisted me in the collection

of background material. I am particularly grateful to Dr. Tanvir-ul-
PREFACE ix
Islam Pirzadeh who was extremely helpful in the execution of the

project. Mr. Saifullah Rajput took great pains to type out the
manuscript and check and recheck the figures. Mr. Shaukat Ali was
of much help in comparing the many proofs. I cannot help
appreciating the prompt service rendered by Syed Riazuddin the
Chief Librarian in making available to me the relevant data and
books I needed and for preparing the index of this volume. My thanks
are due to Syed Wasimuddin and his staff of the press for executing
the printing work neatly and expeditiously. In acknowledging my
debt to friends and colleagues, I must confess that I alone am
responsible for its errors of commission and omission.
Mr. I.A. Hanfi, the Governor of the Bank has been a continuing
source of encouragement and inspiration to me in the completion of
the project in which he was profoundly interested because of his
position as the Chief Executive of the State Bank of Pakistan.
State Bank of Pakistan, S. AijazHusain

Karachi, August 15,1992. Member-Secretary
Contents
Page
Foreword (v)
Preface (vii)
1 - Historical Background 1
2 - Formation of State Bank of Pakistan 33
3 - The Bank Commences Business 59
4 - Outstanding Issues with Reserve Bank 87
5 - Rehabilitation of Commercial Banking 115
6 - Credit System and Monetary Management 149
7- Agricultural Credit 193
8 - Exchange Control and Management 233
9 - Bank and the Government 299
10 - Building Projects 337
11 - The Bank as an Employer 347
Appendices 369
I. The Pakistan (Monetary System and
Reserve Bank) Order, 1947 371
II. Financial Agreement Between the Government
of the United Kingdom and the Government of
India (August 14, 1947) 389
III. The Pakistan Monetary System and Reserve
Bank (Amendment) Order, 1948 394
IV. The State Bank of Pakistan Order, 1948 400
xi
v. The Banking Companies (Pakistan)
Ordinance, 1947 432
VI. The Banking Companies (Inspection)
Ordinance, 1946) 436
VII. The Banking Companies (Restriction of
Branches)J\ct,1946 440
VIII. The Pakistan Banking (Prevention of Default
and Evasion of Liabilities) Ordinance, 1947 443
IX. The Banking Companies (Control) J\ct, 1948 447
X. Foreign Exchange Regulation J\ct, 1947 456
XI. The State Bank of Pakistan (J\mendment)
Order, 1949 476
XII. J\greement Between the State Bank of Pakistan
and the GovernmentofPakistan. 484
XIII. International Monetary Fund-Membership for
Pakistan 490
XIV. List of Scheduled Banks (as on June 30, 1949) 492
XV. The State Bank of Pakistan J\ct, 1956 495
XVI. Summary of the Report of the Credit Enquiry
Commission 523
XVII. List of Governors and Deputy Governors of the
State Bank of Pakistan 531
XVIII. Central Board of Directors 532
XIX. Local Boards: Karachi, Lahore and
Dacca J\reas (1948-1960) 534
XX. State Bank Offices/Branches 537
XXI. List of Scheduled Banks (as on June 30, 1960) 538
Select Bibliography 541

Index 543
1
Historical Background
The new state of Pakistan was the culmination of a long and grim
struggle dating back to the middle of the nineteenth century. It was
carved out of what is now known as the Indo-Pakistan subcontinent,
which was a part of the British Indian Empire. The subcontinent was
partitioned in the middle of August, 1947. The announcement of the
June 3 Plan by the British Government, followed by the passage of
the Indian Independence Act in the British Parliament on July 16,
declaring August 15, 1947 as the deadline for the transfer of power to
the Dominions of India and Pakistan, gave a legal sanctity to a
political reality.
The Independence Act which had embodied the terms of the

settlement and the modalities of its implementation, had recognised
the almost insuperable difficulties of the transition period. In India
the transition was relatively smooth, while in Pakistan where
everything . had to begin from the beginning it was beset with
overwhelming odds, which perhaps no other nation had to face on the
birth of its independence. The immensity of the task that lay ahead
was outlined by the British Prime Minister, Clement Attlee, in the
course of a debate in the Parliament:
The House (he said) will realise how great is the problem of dealing
with such matters as railways and communications, the Reserve Bank,
--- ----- ----------------------------------------- -------

2 HISTORY OF THE STATE BANK OF PAKISTAN
the monetary and fiscal systems and, of course, defence to mention

only the obvious examples of those services which had hitherto been
operated in the interest of the whole of India. Clearly it must take time
before the separate systems can be set up, and for definite agreements
to be made between the two Dominions. Provision must be made by
some method-it may be joint delegations from the two Dominions-
for carrying out all those activities during the transition period ... 1
What the Prime Minister had not spelt out was the gravity of the
post-independence developments in Pakistan which were not of its
own making, but directly of India's choosing and indirectly with its
blessings. This was manifest from the haste with which the Partition
Plan was pushed through without preparatory homework and a fool-
proof arrangement to ensure a fair division of assets and liabilities
and a impartial international machinery to settle their disputes arising
out of so complicated an undertaking.
The committees, the councils and the tribunals composed gf

delegations from either side were a poor substitute for objective
determination of their claims. Besides, they could function only in a
climate free from suspicion and imbued with a spirit of conciliation.
India being the heir, that is what its presumption was, to the British
legacy in the field of administration, economy, trade, industry,
commerce and communications, was advantageously placed to create
difficulties and even pose a threat to Pakistan which had yet to forge
the means for its survival, over which New Delhi still exercised a
dominant control, especially in matters of finance and defence. The
transfer of power from the British was not accompanied by the
transfer of Pakistan's share in its resources. India's reluctance and
even refusal to part with what legitimately belonged to Pakistan, was
symptomatic of the shape of things to come.
On the eve of Partition the London Economist in its 'Foreign

Report' of May 15, 1947 had observed that the Hindus had resigned
themselves to it partly because they thought it could not work
economically. The Muslims had, it believed, insisted on it without
really considering whether it would work.
House of Commons (Parliamentary Debate) volume 439, pp. 246-268.
HISTORICAL BACKGROUND 3
Pakistan's political sovereignty, though universally recognised,

was not complete without its economic independence in the realm of
public finance, currency and banking, which were conspicuous by
their absence. The country had no central bank or, for that matter, a
banking system worth the name. The Reserve Bank of India which
was legally a common property of both the States was taken over by
India as if by a prescriptive right. While it continued to operate as a
currency and banking authority for Pakistan, its operations were
directed and controlled from New Delhi until June 30, 1948.
Underlying its authority to act for Pakistan was, of course, the
consent of the Government of Pakistan. In the face of India's hostile
posture Pakistan had no other option.
With the monetary resources and instruments of control still

vested in the Reserve Bank, even the overnight establishment of a
central bank, were it practicable, would not have filled the void. And,
in any case, Pakistan was too heavily pre-occupied with the
formidable problem of devising an administrative set-up to
undertake the responsibility of setting up a central bank. There was
no realisation of its difficulties across the border. On the contrary,
these were looked upon as an opportunity to delay the process of
transition and even defeat its ends. Chaudhri Mohamad Ali, who
represented Pakistan on the Expert Committee, responsible for
bifurcating the machinery of government between Pakistan and
India, gave expression to a widely shared misgiving that the control of
central banking function for an extended period by the Reserve Bank
was detrimental to the interests of Pakistan.
Sharing of the assets apart, the very existence of the new State
was imperilled by the outbreak of communal riots throughout India,
particularly in Pakistan's neighbouring provinces of East Punjab, the
United Provinces and New Delhi, followed by a massive wave of
migration unparalelled in the history. Within a span of few weeks,
nearly twelve million men, women and children were uprooted from
their hearths and homes. By whatever modes of transportation
available, railroad, trucks, buses and bullock carts, a sea of humanity
had flooded the road to Pakistan. Thousands trekked their way on
foot. Over five million arrived in Pakistan within five months under
most undescribable conditions of destitution and despair. Purely in

administrative terms, the provision of food, clothing and shelter was
a formidable assignment even for the most well-organised states, for
a state still in its incipient phase it was a mission impossible. The
nerve-shaking events beyond the frontiers had put Pakistan's
unorganised economy in a chaotic state, disrupted the lines of
communications and brought the administration to a breaking point.
After the departure of the Hindus who had controlled the sinews
of trade and commerce in the Punjab, all economic activity had come
to a standstill. The shopping areas were lying empty and the crops in
the fields were standing unattended without agricultural labour to
look after their harvesting and upkeep. The sources of agricultural
credit, too, had dried up. For, with the exception of a few co-
operatives managed by the Muslims, the vast majority of them were
monopolised by the Hindus. They were now left completely barren
and functionless. The commercial banks had also ceased to function.
Wheat and cotton were the two major crops around which the
economy of West Pakistan had revolved. Neither ofthem was locally
consumed in its entirety, a sizeable quantity being exported to other
parts of the subcontinent in the Indian Union. The area used to
produce roughly forty per cent of the total wheat production of the
subcontinent, a considerable portion of which was marketed in East
Punjab, Delhi and regions further south. The story of cotton was no
different. Practically, the entire crop of twelve lakh bales travelled to
the manufacturing centres of Bombay and Ahmadabad, and the
surplus quantity was exported abroad. The Pakistan areas, in return,
imported manufactured goods, particularly textiles for their own
consumption.
The viability of the new state according to well informed
knowledgeable foreign sources was based on the assumption that it
produced nine tenth of India's wheat surpluses, one third of the rice
surplus and one third of total cotton production. The new country
could, in their opinion, prove itself a working proposition if it
achieved (a) a balanced foreign trade position; (b) a standard of living
atleast as good as its people have had in the past; and (c) relatively as
much development and technical progress as the rest of India.
- - --------------------------
The colonial pattern of trade inherited from the British was

seriously dislocated by post-Partition developments. The strategy of
disruption became all the more obvious when the Hindus started
leaving Pakistan, including the province of Sindh, where comparative
calm prevailed but for stray incidents of violence which were quickly
suppressed by stern action taken under the orders of Quaid-i-Azam.
In the colonial era not only the commerce of the Punjab and the
Frontier was diverted from its natural route through Karachi but of
Sind itself was subjected to unnatural diversion. The British had left
one of the finest harbours in the region underdeveloped and given all
the encouragement and attention to Bombay which was also used as
a port of embarkation for the intending pilgrims to Makkah from the
regions of West Pakistan.
Karachi was no more than a fishermen's town. Like the interior

comprising the Punjab, Sind and the Frontier it was a no man's land
as far as industry was concerned, and even in its commercial life
Muslim participation was negligible. Baluchistan was worse off than
all the other provinces. Unlike them it was not an autonomous
province but ruled by a Commissioner, who had no answerability to
the local population. Muslims in all other provinces were the victims
of systematic alienation, but in no other province was their
victimisation more thorough going.
The share of the local Baloch and Pathans in the public and
private services of Baluchistan was very small indeed. In an
overwhelmingly Muslim majority area non-Muslim aliens, mostly
Christians, Hindus, Sikhs and Parsis dominated business, trade and
services. For this deplorable state of affairs the stereotyped reason
given was that the Muslims were not sufficiently educated and that
they had no knack for business and trade. Interestingly, non-Muslim
aliens found it easier to secure domicile certificates in Baluchistan
than did the Muslims from other provinces of India. Grants of such
certificates could, of course, be challenged in a court of law. Both
local and non-local Muslims were, however, put to serious
disadvantage because of the predominance of the non-Muslims in the
services. Discrimination in the administrative services was palpably
visible and the judiciary was completely bereft of their

representation. Its rich natural resources, including a variety of
minerals, were lying untapped. 2
Conditions in East Bengal, which was the most populous

province of Pakist<tn, were far from reassuring. Its political autonomy
was, however, qualified by the presence of a large and powerful
Hindu minority. It formed the educated elite of society, dominant in
services and business alike. In agriculture, too, the Permanent
Settlement of Lord Cornwallis as far back as 1799, had conferred on
the Hindu rent-receiving interests, the privileged position of the
landed gentry. They were fearful of losing their immense political
influence and also their economic stake, with the coming of
independence which had given the Muslim majority its right to self
government. These privileged sections of the Hindu society decided
to leave the province, disposing of their assets except their
agricultural lands since the Evacuee Property Law was not applicable
to the province. The eruption of communal violence in Calcutta gave
them a convenient pretext for migration to neighbouring West
Bengal.
Like West Pakistan, East Pakistan was an agricultural

hinterland of West Bengal, particularly for the flourishing jute
industry of Calcutta. East Pakistan produced about 73 per cent of the
total raw jute of the subcontinent, but did not have a single jute mill
to manufacture it into finished products. All of it was sent across the
border where it was either processed into hessian or gunny bags, to be
exported abroad. The surplus raw jute also found its way to the world
market through Calcutta. Chittagong which should have been its
natural outlet for the export trade as well as an inlet for its import
trade, was a neglected backyard despite its tremendous potentialities
for development into a first class port.
The establishment of Pakistan was an eyesore to the Hindu

entrepreneural and mercantile classes, who were hoping that after
the departure of the British, the economic opportunities shared with
Iqbal Ahmad: Balochistan-lts Strategic Importance, Royal Book Company, Karachi
1992, p.lOZ.
------· -----------------------------------
the British could now be their undisputed monopoly in the future.

The Muslims who had considered themselves once the erstwhile
rulers of India, were still smarting under a shadow of defeat. Left far
too behind in the race for advancement they could play only a
secondary and subservient role in a united India. Partition would
deprive the Hindus of the access to the natural resources and the
markets ofthe Pakistan area. Everything conceivable was, therefore,
done to hasten the collapse of the new State before it had time to
establish itself on a firm footing. Pakistan, they thought, lacked the
essential ingredients of viability because of the inexperience of the
Muslims in economic organisation and their administrative
immaturity. It was in their judgement only a transient phase and
should be given no time to become a permanent phenomenon.
Symbolising the aspirations of the Hindus the Congress could be
relied upon to use the levers of power under its control to undo the
Partition by all means at its command.
Pakistan had no industrial base; its greatest single asset was

agriculture. The network of irrigation system which was perhaps its
only valuable resource, was fed by the rivers which flowed through
Kashmir, now under Indian occupation, could be used to threaten the
economic life of Pakistan by withholding the waters. This is precisely
what they did on Aprill, 1948 on the _morrow of the expiry of the
Standstill Agreement under which all disputes arising out of the
Partition · Plan were to be settled through negotiations and
arbitration. 3 The dispute without any basis to sustain it, was
contrived to erode the agricultural base of the country and reduce it
to an arid zone.
In its industrial inventory Pakistan had barely 34 factories which
made practically no COI\tribution to the per capita income of its
population. There were fourteen textile mills, ten of them located in
East Pakistan which produced no cotton, and four in West Pakistan
which was the land of the silver fibre, no jute mills in East Pakistan
which was a mine of golden fibre, a few cement plants and glassworks
was its total count. Countable on finger tips these could hardly be
Michel Alloys Arthur: The Indus Rivers-A study of the effects of Pakistan, Yale
Univmity, New Haven, 1967, p.196.
considered an industrial base or even the nucleus of such a base in the

future.
Commerce based on its primary commodities was perhaps the

only valuable resource for the sustenance of its economic life and
both were at India's mercy, thanks to the conspiracy of circumstances
and design by which the Partition Plan was hastily improvised.
Agriculture without water or enough water, was inconceivable and
commerce without banking unthinkable. Banking, too, was a
monopoly of the Hindus, who had not abandoned the hope of an
early return to the scene of their exploitation.
The Congress leadership in its own mind was convinced that

with their backwardness for lack of educational facilities, conditioned
by the absence of universities in the Frontier, East Bengal and Sind,
the Muslims were incapable of handling the affairs of the state.
Punjab was the only province to have a university which was also a
Hindu preserve in addition to the Agricultural University at Lyallpur
(Faisalabad), and Baluchistan until1942 was without a college. With
this drawback in education and their belief in Muslims aversion to
commerce, the management of the economy, it was conveniently
assumed across the border, was beyond their ken.
Between June 3 and August 14, 1947 was too brief a span for so
stupendous a task to be accomplished, for which Pakistan was
unprepared. The reason why the Muslims had lagged behind the
Hindus in economic advancement during the British rule were
believed to be equally valid now to falsify Muslims hopes of building
a state which was a far more challenging assignment.
Whatever the hopes the Hindus had entertained on the basis of

their preconceived notions and prejudiced assumptions, Pakistan was
determined to demonstrate its capacity to make the state a going and
growing concern. It was impossible to organise the machinery of
government and its economy, including the essential pre-requisites of
productive and distributive mechanism its separate monetary and
banking system at such a short notice.
----~-----------------
India had to go through no such exercise. It had received a

unified administration, a viable economy, well-organised banking
and currency system and all the requisite services for running the
apparatus of a modern state. No effort for internal reorganisation
except the integration of its princely states and no attempt to establish
diplomatic ties or commercial relations externally, were called for, as
it took over all the foreign missions of British India as a matter of right
on which Pakistan was denied its claim. It had its financial and fiscal
system intact for the collection of revenues, which Pakistan had to
build afresh in the midst of political chaos.
With no impartial authority to adjudicate on the peaceful

settlement of disputes with India and without international aid or
assistance of any kind, Pakistan had to fend for itself. By far the most
formidable challenge the country had to face, was to set up an
administration to perform the functions of a modern state. The
country had no Capital from which the government could operate. A
machinery had to be devised for the collection of revenues for
running the government. Since Partition was to take place in the
middle of the fiscal year (April-March) budgetary and accounting
complications were unavoidable. Then there were problems relating
to currency and exchange. While Pakistan had to have its own
currency, it was physically impossible to print new notes and mint
new coins by August 15. Interim arrangements had, therefore, to be
made before a permanent currency authority was set up. Trade and
economic controls posed yet another problem. If India and Pakistan
were to embark on divergent policies, they were bound to magnify
their difficulties, and for Pakistan their magnitude was stupendous.
The conclusion of a proper trade agreement had to wait the
normalisation of relations between the two countries. Until then an
interim agreement for the movement of commodities in either
direction was an act of necessity.
The share of each Dominion in the assets and liabilities of the

undivided Government of India had to be determined. Different
categories of assets had to be examined separately and divided on an
equitable basis. For instance, the allocation of fixed assets like
railways and telegraph lines could only be done on a territorial basis;
military stores had to be shared on the basis of army units allocated

to each Dominion. A different formula was required for the
apportionment of assets like cash balances and foreign exchange and
the net liabilities of the government.
The head offices of most of the banks were located in India and
the entire banking structure was almost exclusively manned by
Hindus. On the eve of Partition, out of 99 scheduled banks listed on
the Second Schedule of Reserve Bank only one had its head office in
Pakistan. Out of 3,496 branches of the scheduled banks, only 631
were located in Pakistan. The indigenous banking business catering
to the needs of the rural communities was also the virtual monopoly
of Hindus. 4 The major part of the banking sector manned and
managed by the Hindus had gone over to India lock, stock and barrel.
Of the 75 branches of Imperial Bank, that were normally functioning
in West Pakistan before Partition, only 19 were functional after
Partition. With their restricted number and staff strength they were
unable even to discharge their routine functions of accepting deposits
and cashing cheques. In several cases high dignitaries of the State had
to use their influence on the banks to honour their commitment to
their clients. 5
In case of Central Bank of India, out of 81 branches, only 3 kept

functioning. Similarly, out of 97 branches of Punjab National Bank,
only 3 continued to operate, especially for repayment of deposits.
Besides, large-scale transfers of deposits of Hindus from practically
all the banks that were operating in West Pakistan, had commenced
immediately after the announcement of the Partition Plan. The banks
themselves offered facilities for the transfer of such accounts, both of
fixed deposits and cash certificates that had not matured for
repayment. Between June 3 and August 15, 1947 the bulk of the
Hindu deposits had been withdrawn.
The indigenous banking sector in India consisted of two broad categories viz. (1) those
undertaking some type of banking transactions other than pure money lending and (2)
those doing purely money lending business. The indigenous bankers and pure money
lenders whether in Pakistan or in India, were also almost exclusively non-Muslims and
were called Seth, Baniya, Shroff, Mahajan, Khatri, Marwari, Chattiar, etc.
Zahid Husain: Central Banking in Pakistan-The Post-Partition Crisis and the Beginning
of State Bank, The Federal Economic Review, October, 1954, pp. 5-6.
At that time, it was widely believed that Pakistan would be a

financially bankrupt state and the value of its rupee would depreciate
in terms of the India rupee. The indigenous bankers had also
migrated en-bloc to India. In East Pakistan as well, banks had started
closing down in quick succession and money-lenders were winding up
their business. Under these circumstances the entire banking
structure in Pakistan had virtually crumbled. The enormous flight of
capital to India amounting to nearly three thousand million rupees
from West Pakistan alone, according to a reliable estimate, the
rolling tide of the refugees inundating Pakistan and the insuperable
obstacles to the implementation of the partition arrangements were
all parts of a pre-conceived plan.
Partition Arrangements
Following the announcement of Partition Plan, a committee of
the cabinet was formed to consider the memorandum on the
Administrative Consequences of Partition that had been presented
by Lord Mountbatten to the conference leaders the same day. The
committee was presided over by him. Sardar Patel and Rajendra
Prasad of the Congress, and Liaquat Ali Khan and Abdur Rub
Nishtar of the Muslim League, were its members. After the provinces
had voted in favour of Partition the committee was replaced by the
Partition Council on July 1, 1947. The Viceroy was Chairman of the
Council. Sardar Patel and Rajendra Prasad, with Rajgopalcharia as
alternate member, represented the Congress. In view of the
compelling importance of the issues which warranted a quick decision
by the Partition Council, Quaid-i-Azam decided to be on the Council
with Liaquat Ali Khan as its fullfledged member and Abdur Rub
Nisthar as an alternate member.
The Partition Council worked through a Steering Committee

comprising two officers H.M. Patel and Chaudhri Mohamad Ali
representing India and Pakistan. Issues relating to Provincial
Governments were handled by Provincial Partition Committees. The
Steering Committee was assisted by ten Expert Committees of
officials. These Expert Committees covered the entire field of
administration and organisation; records and personnel; assets and
liabilities; central revenue, currency and coinage; economic and

foreign relations and the armed forces. 6 In case an Expert
Committee failed to reach agreement on any issue falling within its
frame of reference, the Steering Committee was authorised to take a
decision subject to the approval of the Partition Council. The points
of disagreement that remained among members of Partition Council
or Provincial Partition Committees were referred to an Arbitral
Tribunal. The Arbitral Tribunal had Sir Partrick Spens, the former
Chief Justice of India, as its Chairman and Justice Sir Harilal J.
Kania of India; and Justice M. Ismail, of Pakistan, as its members.
The Expert Committee, which was assigned the task of dealing

with matters concerning the Reserve Bank of India had (1) Ghulam
Mohammad, (2) Zahid Hussain, (3) I.H. Qureshi as representatives
on behalf of Pakistan and (4) K.G. Ambegaokar, (5) Sanjiva Row
and (6) M.V. Rangachari on behalf of India. The Committee was
required to: (i) make recommendations regarding currency and
coinage arrangements for the two Governments; (ii) formulate
proposals for the division of assets and liabilities of the Reserve Bank
of India and work out the organisational consequences of Partition in
respect of the administrative machinery; (iii) make recommendations
for organising exchange control for the two States and (iv) report on
their membership status of the International Monetary Fund and the
International Bank for Reconstruction and Development.
This Expert Committee submitted its main report on July 28,

1947 and a supplementary report on August 5 of the same year. The
supplementary report related to the division of sterling balances held
by the Reserve Bank on which there was a sharp division of opinion.
The Committee was also divided on a number of other issues.
Points of Agreement
The Expert Committee's basic and supplementary reports
presented on July 28, and August 5, 1947 had produced more
disagreements than agreements on a wide range of issues which were
a product of India's underlying opposition to the Partition Plan. Its
Menon V.P: Transfer of Power in India, Calcutta Orient Longman, 1959, pp.397-398.
- ·------ ---·---------------------
acceptance in good faith and without reservations was in the larger

and long term interest of India since an under-developed Pakistan in
its search for development, would have provided an ideal market for
Indian machinery and merchandise at its very door step and saved
Pakistan the trouble of tapping overseas sources to meet its
requirements. This was possible only if the Partition scheme was
carried through in a spirit of conciliation and not of confrontation.
The participation of its representatives in the Committees and
Councils was, however, motivated by the design to scuttle the scheme
rather than to facilitate its implementation. The central problem was
an equitable sharing of common assets which were in India's
possession. Without acquiring its share Pakistan's economic balance
sheet was loaded with liabilities. The denial of Pakistan's legitimate
claims and the delay in the transfer of its lawful assets, was certain to
aggravate its difficulties and cast an ominous shadow on the economic
relations between the two countries in the future. India, instead of
looking at a backward Pakistan as a potential trading partner, saw in
its backwardness an opportunity for the reunification of the sub-
continent.
The agreements reached in the Partition Council were
consequently not comprehensive and even in their limited scope
belonged to a low priority area, such as retention of currency and
coinage arrangements, issue of notes bearing inscription,
'Government of Pakistan' and circulation of India notes in Pakistan
as legal tender, continuance of remittance facilities between the two
countries, transfer of movable and immovable property of the
Reserve Bank to Pakistan at book value, fixation of ratio of share in
the profits of the Bank, protection of the rights of its shareholders in
Pakistan, offer of services to recruit staff for Pakistan, assistance for
setting up administrative machinery for exchange control.
Even these so-called unanimous decisions were robbed of their

unanimity by India's insistence on interpreting them to its own
advantage. This was amply borne out by its reluctance to share the
profits according to the formula mutually agreed in principle but in
practice given a unilateral character by insinuating motives to
Pakistan of manipulating the volume of notes to be surrendered
which was to form the basis of the determination of its share, its
refusal to part with the provident fund and gratuity to which its
employees who had opted for service in Pakistan, and at the same
time showing concern for the shortage of trained personnel in
Pakistan. And in the area of agreement, how unreasonable was its
attitude, became obvious from the manner in which it rejected the
suggestions of Pakistan with whose reasonableness no impartial
observer could possibly disagree:
Areas of Disagreement
(1) It was agreed that in matters concerning Pakistan, the

Reserve Bank should take its directive from the Government of
Pakistan. It was Pakistan's view that any differences that arose should
be resolved through diplomatic channels, a suggestion which was not
acceptable to India.
(2) India was vehemently opposed to Pakistan's share of

representation on the Central Board of the Reserve Bank on the
pretext that it would warrant an amendment to the Reserve Bank of
India Act which was not acceptable to it;
(3) Pakistan's demand for the appointment of its nominee as the

Deputy Governor of the Reserve Bank to represent it, encountered
an equally stiff opposition. Such an official, it was argued on the
Indian Government's behalf, was tantamount to interference with its
control over the Reserve Bank, which, it had all along considered to
be its sole preserve.
(4) Pakistan's proposal for a provision in the Reserve Bank of

India Act for the expansion of its currency against ad hoc securities
did not have India's consent. Instead, India suggested a limit of
Rs.200 million for Pakistan and for itself Rs.400 million. Pakistan's
opposition to such a limit was based on its fears that the country
would be placed in a difficult situation if unforeseen circumstances
called for a further expansion. Such a restriction did not exist in the
case of India which could expand its currency without limit.
(5) Administration of Pakistan currency by Reserve Bank for a

further period after September 30, 1948 on an agency basis
terminable at Pakistan's option, was not acceptable to India.
(6) The crucial question of division of assets and liabilities of
Reserve Bank also remained un-resolved. All that the two sides were
agreed upon was that Pakistan Government should take over from
Reserve Bank of India as on October 1, 1948, the liability of over-
printed notes issued by the Bank against which Pakistan Government
would be provisionally allocated a share in the assets held in the Issue
Department of Reserve Bank as on September 30, 1948 in the ratio
in which other assets were held in the Issue Department on that date.
There was a disagreement on the time table for the surrender of India
notes in circulation in Pakistan against allocation of assets to Pakistan
Government. The Indian side suggested that this should be done on
March 31, 1949 and should be equivalent to over-printed notes taken
over by Pakistan Government as on September 30, 1948 and India
notes returned from circulation in Pakistan between October 1, 1948
and March 31, 1949; the Pakistani side argued that the time allowed
was too short and desired the extension of the date convenient to
Pakistan. On the division of assets and liabilities of the Banking
Department, the Committee only proposed that so far as the cash
balance of Pakistan Government and deposits of Pakistani scheduled
banks were concerned, the Reserve Bank should discharge its
obligations in cash in the 'normal manner' without clarifying what this
'normal manner' meant. There was also a divergence of views on the
distribution of Reserve Fund of the Bank. The Indian members were
in favour of its distribution on the basis of ratio of note issue, after
deducting from it certain items, while Pakistani members were of the
opinion that the Reserve:( Fund should be allocated on the principle
adopted for the division of uncovered debt of the Central
Government of India.
(7) Pakistan's plea for a joint approach to the International

Monetary Fund and International Bank for Reconstruction and
Development, for their membership and division of existing quota
between them as successor Governments, did not evoke a favourable
response from their Indian counterparts. To them it was a matter for
the I. M.P. and the World Bank to decide whether India continued to
retain its original membership and whether its quota be reduced and
to what extent.
Supplementary Report on Sterling Balances
The supplementary report on the division of sterling balances,

submitted by the Expert Committee on August 5, 1947 was in the
nature of a separate memorandum, embodying the views of both
sides. Its contents revealed that the Committee could not decide the
basic question of the criterion to be applied for dividing these
balances. The sterling balances held by the Reserve Bank were
largely in the nature of loans advanced by the Government of India
to the British Government to finance its war expenditure which had
entailed heavy sacrifices on the masses. The Pakistani
representatives argued that these sacrifices jointly made by the
people of the two Dominions, should form the most equitable basis
for the division of these balances. According to India the average per
capita income of Pakistani areas, as a whole, was 32 per cent lower
than that of the areas in India. Therefore, Pakistan should get a share
in the sterling balances, determined on the basis of population plus 32
per cent; this worked out to 30.5 per cent of the total sterling
balances.
India was disinclined to keep large sterling securities as assets

against note issue in the Issue Department and suggested that it was
enough to keep a total of gold and sterling securities at 40 per cent of
the note issue. The remaining sterling securities should be treated as
assets of the Government and should be distributed in a manner
already suggested by them (i.e. population plus 32 per cent). In the
Reserve Bank books, such sterling securities transferred should be
replaced by ad hoc securities of Government of India and the share of
Pakistan and India in these securities should be on basis of the
formula proposed for the sterling securities. As for the sterling
balances in the Banking Department, it was suggested that after
keeping a balance of Rs.500 to Rs.600 million, the rest should be
treated in the same way as sterling securities in the Issue Department.
They proposed that Pakistan's share in the sterling securities held in
the Issue Department should be determined entirely on the basis of

notes in circulation in Pakistan, and in the Banking Department on
the basis of the respective proportion of each country in bank
deposits, including their share in the cash balance of undivided
Government of India.
The recommendations of the Expert Committee were examined

by the Steering Committee for resolving controversial issues and
after approval by the Partition Council, were finally embodied in the
Pakistan (Monetary System and Reserve Bank) Order, 1947 issued
on August 14, 1947. This Order did not, however, refer to some of the
important matters on which the Steering Committee had reached
agreement. These included:-
(i) The Government of India should agree to take two nominees
of Pakistan Government on the Central Board of Directors of
the Reserve Bank. This would not require any change in the
Reserve Bank of India Act, as contended by the Indian
members of the Expert Committee.
(ii) The appointment of a Deputy Governor of Reserve Bank by

the Pakistan Government, as demanded by the Pakistan's
representatives of the Expert Committee, would not be
appropriate. However, there should be no objection to the
appointment by Pakistan Government of an Officer on Special
Duty for maintaining contact with the Reserve Bank.
(iii) It was not in the interest of both governments to encourage

unnecessary currency expansion against ad hoc securities. Such
an expansion should, therefore, only be allowed subject to
certain conditions in case of Pakistan7 , upto the extent of
It was propo$ed by the Reserve Bank and agreed to by Steering Committee, that the
portion of the cash balance of undivided Government of India to be handed over to the
Pakistan GoVIernment, as part of the arrangement for the division of assets and liabilities
of R.B.I., would be sufficient for meeting its normal currency requirements during the
period of joint management of currency by the Reserve Bank. Further requirements of
currency by Jl>akistan Government should be met by Ways and Means Advances at a
special rate of 1,2 of 1 per cent; only when these sources have been exhausted, would the
Pakistan Government take recourse to advances against ad hoc securities, subject to an
overall limit.
Rs.400 million against India's ad hoc securities. Besides, in the

case of unexpected contingency, the Pakistan Government
should have a right to ask the Government of India for further
expansion upto Rs.100 million. The Steering Committee had
further recommended that the above limits should only apply
upto March-end, 1948 i.e. before the issue of over-printed
Pakistan notes by the Bank from April1, 1948, but on account
of the stiff opposition of the Reserve Bank to this date, the
position regarding the overall expansion of currency remained
ambiguous.
The main provisions of Pakistan (Monetary System and Reserve
Bank) Order, 1947 were:
Currency and Coinage:
In order to perform its duties as the currency authority of

Pakistan, the Reserve Bank was to have the sole right to issue bank
notes in Pakistan upto September 30, 1948. While India notes were to
continue to remain legal tender in Pakistan upto September 30, 1948
the Reserve Bank was to issue in Pakistan notes inscribed with the
words, 'Government of Pakistan', in English and Urdu from April1,
1948. The Government of India was not liable to pay the value of any
inscribed notes after September 30, 1948.
So far as India rupee coins and India subsidiary coins were

concerned, it was provided in the Order that in case Pakistan
Government had issued any coins the Reserve Bank was not to issue
India coins in Pakistan after March 31, 1948, except to the extent that
Pakistan coins were not available in sufficient quantities for the
purpose of circulation. India one-rupee notes were no longer to be
treated legal tender after September 30, 1948; these were to be
withdrawn to apportion liabilities between the two governments.
Banker to Government
The Reserve Bank was to continue to function as Banker to the
Central and Provincial Governments of Pakistan upto September 30,
1948.
Management of the Public Debt and Exchange Control was to

be taken over by the Government of Pakistan from the Reserve Bank
oflndia from April1, 1948.
Relations with Scheduled Banks
The Government of Pakistan could declare a banking company

having a paid up capital and reserves of not less than half a million of
rupees to be a scheduled bank, provided it was not a scheduled bank
within the meaning of the Reserve Bank of India Act. The Reserve
Bank could, with the previous consent of the Government of
Pakistan, regulate its relations with Pakistani scheduled banks and
the management of clearing houses till June 30, 1948. Every Pakistani
scheduled bank was required to maintain with the Reserve Bank a
balance of not less than 5 per cent of its time liabilities. It was also
required to submit a weekly return showing its assets and liabilities.
In case it was not possible to send a weekly return in view of its
geographical position, a monthly return was to suffice. Provincial Co-
operative Banks in Pakistan, which were covered by the Remittance
Facilities Scheme, were also required to submit similar returns to the
Reserve Bank.
The Banking Companies (Restriction of Branches) Act and the
Banking Companies (Inspection) Ordinance were to apply to the
whole of Pakistan until June 30, 1948. The Reserve Bank was to
continue to exercise the same control over Pakistani scheduled banks
during the period of its operation in Pakistan, as it had been
exercising over the scheduled banks in India. For exercising such a
control, the Banking Companies (Restriction of Branches) Act, 1946
and Banking Companies (Inspection) Ordinance, 1946, promulgated
in undivided India, were to continue to apply to the whole of Pakistan
till the end of September, 1948.
Remittances Between India and Pakistan
The Reserve Bank was required to provide remittance facilities

upto March 31, 1948 at par between its offices in Pakistan and such
office or offices in India, as might be prescribed by the Bank, in such
20 IDSTORY OF THE STAlE BANK OF PAKISTAN
amounts and subject to such rate or rates of commission as might be

approved by the Governments of Pakistan and India.
Management of Foreign Exchange
The Bank was to buy from and sell to any authorised person in
Pakistan foreign exchange upto March 30, 1948 at such rates of
exchange and on such conditions as the Government of Pakistan
would determine from time to time in consultation with Government
of India.
Division of Assets of Issue Department
The Reserve Bank was to deliver to Pakistan the assets of its

Issue Department equivalent in value to the Pakistan notes issued by
it upto June 30, 1948, plus the value of India notes of Rs.2 and above
encashed by the Government of Pakistan upto June 30, 1949 and
delivered to the Reserve Bank.
Reserve Fund
The Pakistan Government's entitlement in the Reserve Fund of

the Bank was to be the same fraction of the amount of the Reserve
Fund of the Bank as on September 30, 1948 which would have
accrued to the Government of India if the Bank were placed under
liquidation on that date, as the fraction of the uncovered debt of the
undivided Government of India for which the Government of
Pakistan became liable on August 15, 1947. This was so because the
Reserve Fund was created at the time of inception of the Reserve
Bank by transferring Government of India rupee securities of the
value of Rs.50 million to the Fund which formed part of its total
uncovered debt.
Division of Bank's Profits
The formula for the division of profits of the Bank, contained in

the Order, was basically the same as devised for the division of assets
of the Issue Department of the Bank viz. the relative share of each in
the total value of notes in circulation in the two territories. It was

based on the principle that the Bank's profits mainly represent the
return on these assets against its note issue liability.
The Order required the Government of Pakistan to take over at

book-value all or any of property held by the Bank in Pakistan for the
purpose of carrying on its business.
Imperial Bank
The Imperial Bank was to act as the agent of the Reserve Bank
of India in Pakistan upto September 30, 1948 on the terms and
conditions as contained in the agreement made between the Reserve
Bank and the Imperial Bank with suitable adaptations.
Status of Reserve Bank in Pakistan
About its legal position the Order provided that the Reserve
Bank would cease to be a part of law in Pakistan, following
enforcement of this Order in the country. Its status would be that of
a corporation existing only by virtue of law of India and capable of
suing and being sued as such in Pakistan.
The Order also listed the amendments to be effected in the

Reserve Bank of India Act to enable the Bank to carry on its
functions in relation to Pakistan. Certain key issues were, however,
left untouched in the Order on which there were either sharp
differences of opinion between the representatives of the two
Governments on the interpretation of decisions of the Expert
Committee. These differences had arisen at the time the draft of this
Order was discussed by them in the joint meetings held on August 13
and 14, 1947, or the final decisions of which had been left to the
Partition Council. They were related to the fixation of limits for
expansion of currency by Pakistan and India against ad hoc securities,
payment of LM.F. Quota, division of sterling balances of the Issue
and Banking Departments and determination of Pakistan's share in
the cash balance and uncovered debt of undivided Government of
India. These matters were, therefore, taken up by the Partition

Council.
Partition Council's Decisions
Except on minor and peripheral issues the Partition Council was

permanently deadlocked on matters of crucial importance to
Pakistan which was delicately poised on the edge of survival. Against
the background of Hindu Muslim conflict and the reservation with
which India had accepted the principle of Partition, its biased
approach acted as a stumbling block in the way of an agreement that
could give Pakistan a breathing space. Instead of being a party to a
settlement, India constituted itself into an arbiter in the dispute. In
the cash balances of Rs.4 billion at the time of Partition, it claimed
more than a lion's share for itself. Pakistan, in India's view was
entitled to no more than Rs.200 million claiming Rs.3800 million as
its own apportionment. The argument advanced for this unduly large
and undeserving appropriation was that the large balances had
accumulated as a result of anti-inflationary measures taken by the
undivided Government of India during the Second World War, and
the working balance was only Rs.SOO million. They did not show any
flexibility in their attitude, despite Pakistan representative's counter-
argument that the benefit of anti-inflationary measures should accrue
to both the Dominions. The question was, therefore, left for the
Arbitral Tribunal to decide.
Regarding the division of public debt, the main difficulty arose
in apportioning the uncovered debt, which represented the excess of
liabilities over the assets of undivided Government of India.
Pakistan's representatives were of the view that the apportionment of
this liability should be in proportion to the contribution made by the
areas included in the Dominions of India and Pakistan to the
revenues of Central Government before Partition. This, it was
contended, was the basis adopted by the Amery Tribunal when
Burma was separated from India. The Indian representatives, on the
other hand, insisted that Pakistan should assume liability for 20 per
cent of the uncovered debt on the basis of population and other
factors although they were not willing to accept the same percentage
for the division of the cash balance between the two countries.
Even more serious difference of opinion arose over the proposal

made by Pakistani representatives that both Dominions should
assume joint responsibility for the public debt of the undivided India
and a statutory commission consisting of equal number of Pakistani
and Indian representatives, be set up to administer the debt. Each
Government was expected to pay from time to time its share of the
amount due to this commission. The Indians feared that the
acceptance of this proposal would lead to a collapse of gilt-edged
securities market in India, Pakistan being economically and
financially an unsustainable entity. As a result, the holders of these
securities, who were mostly Indian owned banks and non-
institutional investors, would suffer heavy financial losses. They,
therefore, made a counter-proposal that India should assume the
liability for the entire debt and Pakistan should repay to the Indian
Union its share of the burden.
Chaudhri Mohamad Ali, the Pakistani representative, refused

to accept this proposal which was born of unjustified distrust of
Pakistan's creditworthiness. Finally, in an effort to break the
dead\ock, he suggested that the Indian proposal could merit
consideration only if the repayment period was spread over fifty years
or more, and the rate of interest was the average rate of interest for
the Indian national debt. He indicated his willingness to discuss such
a proposal with Quaid-i-Azam, if it was authoritatively put forward.
He was accordingly given a proposal, signed by Sardar Patel, under
which Pakistan was to repay its share in fifty annual instalments with
the first instalment falling due on August 15, 1952. Quaid-i-Azam
accepted it provisionally, subject to a satisfactory solution of the cash
balance issue. This was enough for the Viceroy of India to issue an
Order before August 15, 1947 transferring the initial liability of all
loans to the Government of India. However, the share of Pakistan in
the total loan liability remained undecided.
Before taking this and other disputed issues to the Arbitral

Tribunal, Chaudhri Mohamad Ali made a last minute attempt for
settlement by mutual discussion. 8 He suggested to H.M. Patel in

November, 1947 that, if he agreed, he would request the Finance
Minister of Pakistan, Ghulam Muhammad,to come to Delhi and
settle all outstanding issues. Both Sardar Patel and ' Ghulam
Muhammad concurred with Mohamad Ali. A meeting was
consequently held at the residence of Sardar Patel which was also
attended by the Finance Minister of India, Shanmukhan Chetty and
Sir Archibald Rowland, the Financial Advisor to the Governor
General of Pakistan.
No agreement on controversial issues could, however, be
reached in this meeting and it appeared that it would end in failure.
At this juncture Sardar Patel said "H.M. Patel and Mohamad Ali
have settled between themselves most of the problems. Let them go
into the next room and not come out until they have settled the key
problems". They went into the·next room and within three quarters
of an hour reached an agreement.lt was decided that Pakistan's share
in the cash balance, uncovered debt of Government of India and in
the disputed portion of sterling balances should be fixed at 17Yz per
cent. A formal agreement was drawn up which was signed by the
representatives of India and Pakistan in the beginning of December,
1947. All references to the Arbitral Tribunal were withdrawn. The
other issues had already been settled at a lower level. The details of
the agreements concluded following their approval by the Partition
Council, were:.
(i) Cash Balances
Pakistan's share in the total cash balance of Government of
undivided India, including the securities held in the Cash Balance
Investment Account, amounting to a little over Rs.4 billion, was
fixed at Rs.750 million. This was inclusive of Rs.200 million made
available to Pakistan Government as a working balance on August
15, 1947.
(ii) Sterling Balances
In addition to the sterling balances already transferred to
Pakistan in terms of Pakistan (Monetary System and Reserve Bank)
Chaudhri Mohamad Ali: The Emergence of Pakistan, Columbia University Press, New
York & London, 1967, pp. 183-184.
Order, 1947, its share in the residual balance was to be calculated as

under:-
From the total of sterling balances in the Issue and Banking

Departments of the Ba:nk, as on September 30, 1948 the lump sum
payable to the British Government on account of capitalisation of
pensionary liability of·the ·non-resident retired officers and other
personnel who served India and military stores, fixed assets, etc. in
India as on April1, 1947, was first to be deducted. Of the balance, an
amount in sterling, which taken together with the entire amount of
gold held in the Issue Department would constitute 70 per cent of the
liabilities of Issue Department, was to be allocated to Pakistan in
proportion of note liability (let us say, this amount equals to Rs.A
million), alongwith 17lh per cent of the remaining (let us say Rs.B
million). The difference between the total amount of sterling thus
worked out to (Rs.A+Rs.B million) and the amount that Pakistan
was to receive ·as its share of the sterling assets of the Issue
Department in terms of Pakistan (Monetary System and Reserve
Bank) Order, 1947, was to be made available to Pakistan as its
additional share. India was required to sell, on del)land, to Pakistan
this amount of additional sterling against India rupees upto
December 31, 1947.
(iii) Quota in l.M.F. and Membership of IBRD
India was required to give to Pakistan in gold and U.S. dollars or

other acceptable foreign exchange, an amount equal to 17lh per cent
of what undivided India had paid by way of subscription to the
International Monetary Fund and the World Bank. It was, however,
provided that payment in gold by India should not be beyond what
Pakistan would actually be required to pay to the I.M.F. Prior to it,
the Expert Committee had merely suggested for the consideration of
the Partition Council that India should make available to Pakistan,
when the latter becomes a member of I.M.F. and I.B.R.D., its
ascertained share of gold and dollar assets or equivalent value thereof
in the form of U.S. dollars and any other foreign exchange acceptable
to the Fund and the Bank.
Expansion of Currency against Ad hoes
The limits about the expansion of currency against ad hoc

securities was not fully clarified by the Partition Council. It had
merely stated that Pakistan Government should seek Reserve Bank's
advice on the abolition or expansion of limits for expansion of
currency against Pakistan's ad hoc securities after March 31, 1948.
Earlier, the Steering Committee had recommended a limit of Rs.400
million for expansion of currency against ad hoes by Indian
Government and Rs.200 million, or if necessary, upto Rs.300
million, by the Pakistan Government upto March 31, 1948. However,
the entire clause imposing the limit was deleted from the draft of
Pakistan (Monetary System and Reserve Bank) Order, 1947.
Nomination of Directors
Following the decision of Expert Committee and its approval by

the Partition Council that Pakistan Government should be allowed to
nominate two directors on the Central Board of Directors of the
Reserve Bank, the Government of Pakistan proposed that Sir Syed
Maratib Ali may be allowed to continue to hold this office for another
term. For the second nominee, it suggested the name of St. John
Turner, an official of the Bank of England who was assisting the
Finance Ministry of Pakistan at that time in matters relating to
banking. The Government of India agreed to the first proposal and
concerning the second, namely the nomination of Turner, it raised
the objection that being a bank official as well as a de facto official of
Pakistan Ministry of Finance, he was ineligible to hold the office of
Director of the Bank under the Reserve Bank of India Act. Later, on
January 12, 1948, in the vacancy caused by the resignation of Sir
Arthur Bruce, the Government of Pakistan proposed the name of
Nazir Ahmed Khan, an advocate of Lahore. However, since Nazir
Ahmed Khan continued to be a member of the Constituent
Assembly, his nomination as a Director, became void in terms of
Section 11(5) of Reserve Bank of India Act, prescribing the
qualifications of a nominated Director. He, therefore, tendered his
resignation from Directorship with effect from March 11, 1948.
- --- ------------------------
Transfer of Cash Balances
The Bank's functioning as banker to the Government of

Pakistan did not pose any serious problem during the first four
months of operations in Pakistan. Thereafter, it adopted an
unhelpful posture in meeting the legitimate financial needs of
Pakistan Government. Two main issues which created difficulties
between the Pakistan Government and the Bank, related to the
transfer of Pakistan's share in the cash balances of undivided
Government of India and grant of an advance to Pakistan
Government against ad hoc treasury bills.
The Partition Council, in its meeting held in the first week of

December, 1947, had fixed Pakistan's share in the total cash balances
of undivided Government of India at Rs. 750 million, inclusive of
Rs.200 million made available to Pakistan Government as a working
balance on August 15, 1947. Sardar Vallabhai Patel, the Deputy
Prime Minister of India, in a press conference held on January 12,
1948 announced that he had made it quite clear to Pakistan
authorities that the Government of India would not regard the
settlement of this issue as final unless all the outstanding issues
between the two Governments had been resolved. No payment
would, therefore, be made as long as Kashmir issue remained
unresolved. Although the Prime Minister of Pakistan, Liaquat Ali
Khan, had objected to the linking of Kashmir problem with financial
issues, the Reserve Bank, under pressure from the Indian
Government, did not transfer the remaining part of Pakistan's share
in the total cash balance of undivided Government of India
amounting to Rs.550 million. Pakistan Government at that time was
left with a cash balance which was not adequate to disburse the
salaries of government servants.
Pakistan's Financial Predicament
Placed in a tight financial corner by India's refusal to release its

assets amounting to Rs.550 million and utilising them as if it were a
forced interest-free loan from Pakistan, it literally compelled
Pakistan to borrow from it an interest-bearing loan to tide over its
financial crisis. The irony of the situation was, that with Pakistan's
sizeable funds in its custody, India's representatives on the Partition
Council expressed apprehension about Pakistan's ability to repay
Rs.50 million 'Ways & Means Advance' for a brief duration which
they had reluctantly agreed to make in response to our request for
Rs.lOO million. With such large balances in its possession, it was
presumptuous on the part of the Reserve Bank to ask for any further
guarantees for the temporary accommodation in the form of 'Ways &
Means Advance' amounting to only Rs.50 million against Rs.550
million in Pakistan's account held in its custody. The Bank also drew
Pakistan Government's attention to the fact that in the absence of an
agreement between the two Governments on the amount of ad hoc
treasury bills Pakistan could issue, no provision had been made in the
Reserve Bank of India Act for holding these securities in the Issue
Department of the Bank.
In reply to the observations of the Bank, Pakistan's Finance

Secretary remarked that the Government of Pakistan was of the view
that to restrict ways and means advances to Pakistan Government to
only Rs.SO million would be in direct contravention and violation of
the undertakings given by the Reserve Bank at the time of Partition.
About the Bank's assertion that ways_ and means advances
subsequently converted into ad hoc treasury bills would not be
available for transfer to the Issue Department, the Finance Secretary
noted:-
Since these ad hoes have, in any case, to be set off first against India
notes returned by the Government of Pakistan at the time .of division
of assets of the Bank on October 1, 1948, it is hardly necessary that the
treasury bills should necessarily be transferred to the Issue
Department of the Bank from its Banking Department. Even under
the Act, as it stands, therefore, there is nothing to prevent the Reserve
Bank from providing accommodation to the Government of Pakistan
against its ad hoc treasury bills. In the circumstances, we cannot
recognise any validity in the objection raised.
In a separate memorandum, Pakistan's Finance Secretary

demanded that the Bank should transfer Rs.550 million of the cash
balance to the account of Pakistan Government; otherwise the

Reserve Bank should not allow the Government of India to operate
their account without the Pakistan Government's consent.
Emergency meetings of the Central Board of the Reserve Bank

were convened on January 14 and 15, 1948, to consider these issues.
In the meeting held on January 15, 1948 Nazir Ahmed Khan moved
a resolution seconded by Sir Syed Maratib Ali, containing the
following proposals:- (i) the due share of Pakistan Government in the
cash balance having been determined at Rs.750 million, a sum of
Rs.550 million should be credited to the Pakistan Government's
account in addition to Rs.200 million already credited; (ii) in regard
to ways and means advances, the Bank should abide by the decision
of Partition Council viz. ways and means advances should be given to
Pakistan without any limit so long as notes were available in the
Banking Department of the Bank; and (iii) there should be no limit
in respect of expansion of currency against Pakistan Government
securities after March 31, 1948, when Pakistan notes would begin to
be issued and expansion would be effected through Pakistan notes.
The resolution was put to vote and lost, the voting being nine against
the two in favour with one abstention.
After giving in to India's recalcitrant attitude under duress, a

position to which Pakistan had been driven by lack of control over its
resources and with no alternative sources to rely upon, it could only
express its resentment in the form of a protest lodged with the
Reserve Bank of India by Pakistan's Finance Secretary.
The Pakistan Government finds it difficult to believe that a responsible

institution like Reserve Bank of India would wish to risk its reputation
for fair dealing were it not for the interference of India Government
who are determined to strangle Pakistan financially and economically.
In the circumstances, the straight forward course for the Reserve Bank
would be to inform the Government of Pakistan that it finds itself
unable to continue as its banker and currency authority and to effect a
division of the assets of the Bank forthwith.
Meanwhile, the Provincial Governments of Pakistan had to
obtain advances from certain Indian commercial banks to meet their
liabilities, which adopted an ordinary banker's attitude dealing with

an untrustworthy customer in demanding repayment. Following the
observance of a fast unto death by Mahatama Gandhi on the issue of
release of cash balance and other matters, the Indian Government
announced on January 15, 1948 their decision to implement
immediately the agreement on cash balance.
Floatation of Loans
After transfer of cash balance, the Finance Secretary of Pakistan

informed the Reserve Bank, the Government's decision to float
simultaneously three loans; short, medium and long-term. The Bank
was asked to make arrangements for receiving subscriptions towards
these loans at all of its offices in India and Pakistan as well as at the
offices of Imperial Bank in Pakistan and India, in addition to
receiving such subscriptions at Treasuries in Pakistan. The Bank was
further asked to make arrangement at its and Imperial Bank branches
in Pakistan and Treasuries in Pakistan for the issue of 11;2 per cent tax-
free Bearer Bonds, which the Pakistan Government proposed to
issue separately soon thereafter. The Finance Secretary also
enquired whether the Bank would be prepared to take over from the
Government of Pakistan at current market rates, Government of
India securities which they proposed to acquire from Provincial
Governments, semi-Government bodies and institutions in Pakistan
in lieu of their own securities.
The Bank considered it advisable to refer these matters to the

Government of India. It informed the Pakistan Government that: (i)
the Bank would have to ascertain from Government of India whether
they were agreeable to the Pakistan Government competing with
them in the Indian money market for borrowing funds, and (ii) the
Bank would have to consider whether the take-over of Government
of India securities by the Bank from Pakistan Government would suit
its investment portfolio and whether, or not, expansion of currency
would be involved. The Government of India would have, therefore,
to be consulted as the arrangement involved a serious inflationary
potential. It also advised the Government to postpone the floatation
of these loans for a couple of months. However, Pakistan
-- - -- -- - ------ -------------- -----

Government did float them successfully, in mid-February, 1948,

without raising funds from the Indian money market, four loans viz.
(a) 23.14 per cent Loan 1953-54, (b) 3 per cent Loan 1960, (c) 3 percent
Loan 1968, and (d) 1Vz per cent income-tax free Bearer Bonds 1958.
Termination of the Bank's Role in Pakistan
The attitude of the Reserve Bank towards the vital interest of

Pakistan seriously strained the relationship between the Bank and
Government of Pakistan. 9 The Government of Pakistan, therefore,
considered it in the best interest of the country to relieve the Bank of
its responsibilities in Pakistan as early as possible. Exploratory talks
were held in this connection between the Governor of Reserve Bank
of India and the High Commissioner for Pakistan in India, Zahid
Husain, who later became the first Governor of the State Bank. In
the wake of these parleys, the Government of Pakistan sent a
communication to the Bank in February, 1948, containing the
Pakistan Government's decision to take over the responsibility of
currency and banking arrangements in Pakistan from the Reserve
Bank of India with effect from April 1, 1948. Tripartite talks were
held thereafter among the representatives of Governments of India,
Pakistan and the Reserve Bank in Bombay between March 10 and
March 13, 1948, and were later continued in Delhi. During these
parleys, it was agreed that Pakistan would terminate its monetary
arrangements with Reserve Bank with effect from June 30, 1948,
instead of March 31, 1948, as proposed but three months earlier than
September 30, 1948 the date originally agreed upon. This and other
decisions reached were embodied in the Pakistan Monetary System
and Reserve Bank (Amendment) Order issued on March 31, 1948.
Illustrative of the India's unhelpful attitude, the Governor of the Bank declined an
invitation extended to him by the Finance Minister at the end of January, 1948, to visit
Karachi for official talks.
2
Formation of State Bank of Pakistan
With no signs of relaxation in the continuing state of tension in

Indo-Pakistan relations, Pakistan was compelled by sheer force of
circumstances on setting up a central bank or monetary authority of
its own earlier than visualised. Non-availability and/or inadequacy of
trained personnel was the main obstacle in the way of its
establishment. In the face of the difficulties the country was
encountering in the realm of finance and banking and the economic
conditions in general, the Secretary of Finance to the Government of
Pakistan advocated a policy of hastening slowly rather rushing hastily
into a field new to its experience. In a letter sent to Raymond
Kershaw1 , the Advisor to the Governor of the Bank of England, John
Turner wrote:
I am trying to persuade the Government of Pakistan not to rush

prematurely into central banking but the views I obtain and the
practical possibilities of setting up a sound central bank are so
conflicting that I am not at all certain yet where the truth lies. But we
must, as you see, have some separate currency authority within a year,
so I am taking the line that we should start with a Currency Controller's
Office based on the Issue Departments of the Reserve Bank of India
at Karachi, Lahore and Dacca, (which will be taken over), other
In addition Raymond Newton Kershaw also sat on the East African, West African,
Palestine and Burma Currency Boards.
33
government business being done by the Imperial Bank of India. I have

suggested that the latter might set up a local Head Office and a Local
Board at Karachi to avoid the political difficulty of control from enemy
camp. This set up might, at a later stage, merge with the Controller's
Office to form a central bank.
The Finance Secretary presumably acting on his own initiative

also sought the opinion of the Reserve Bank on the feasibility of his
proposal and its own thinking on the subject.
Turner's views could, however, find no favour with the

authorities or evoke a favourable response from the public impatient
for a rapid change of status quo after independence. In its judgement
the fulfilment of popular aspirations was not possible unless the
country had its own separate and distinct financial and banking
institutions, essential for ensuring better standards of living for its
people. Both the recognition of economic necessity and strength of
the sentiment in the country, warranted the establishment of a central
bank rather than a currency board to help a speeding rehabilitation of
the banking system in Pakistan.
Legislative Spadework
Once the decision was taken, legislation for its early

implementation could not be delayed. The Finance Secretary had
already started working on it. In December, 1947 he had submitted
an outline of the law to the Finance Minister, Ghulam Mohammed.
The brief document was intended to serve as a basis for discussion to
be altered, modified or altogether replaced by a fresh draft. It was
proposed that the entire share capital of the Bank be subscribed by
the Government. Its amount though undecided was expected to be
large enough to command popular prestige and inspire public
confidence. While no specific qualifications were prescribed for the
offices of the Governor and Deputy Governor except that the first
incumbents of the posts were to be of British origin and that they were
eligible to hold office till the age of 75. No age restrictions and
qualification requirements were laid down for the Directors. The
only sterling securities held by the Reserve Bank were to provide
FORMATION OF STATE BANK OF PAKISTAN 35
cover for the note issue. Turner who had already expressed grave
doubts about the soundness of the proposal in his communication to
the Bank of England reiterated his skepticism:
It would be a fatal attempt, (he observed) to start a 'Reserve Bank'

without adequate staff. We have, as you know, asked the Reserve
Bank of India for advice on this question and great weight must be
given to the opinion they express. I, myself, am not in a position to
assess the possibilities with accuracy and I feel strongly that no
irrevocable decision in connection with the new monetary authority
should be taken until the Reserve Bank's reply to our query has been
received and carefully considered here. He had also stated that he did
not have much time to consult others in drafting the framework of the
central banking law for Pakistan, although it was a question on which
opinion of many people ought to have been sought.
Mumtaz Hasan of Ministry of Finance who earlier had his

training in Reserve Bank of India and Bank of England was
associated with the redrafting assignment at the instance of the
Minister of Finance. A copy of the Turner's draft was sent by him to
the Deputy Economic Advisor, Dr. Anwar Iqbal Qureshi.
In his comments the Deputy Economic Advisor disapproved the

idea of the reservation of the offices of the Governor and Deputy
Governor for British nationals, the extended date of their retirement
from service, restriction of the cover for the note issue to sterling and
Indian securities, and even seeking the opinion of the Reserve Bank
on the proposal for establishing a central bank in Pakistan. He also
drew attention to a number of omissions in the draft and stressed the
need for eliciting expert opinion, which the author of the original
draft had himself admitted was necessary. Preparation of a fresh draft
in consultation with the concerned departments and its circulation to
relevant quarters was vehemently urged by him. The draft in its final
form could be presented to the Constituent Assembly only after it
had been thoroughly examined and scrutinised by the Ministry of
Finance and Law Division. Mumtaz Hasan was in agreement with the
suggestions offered by Dr. Qureshi in their substance as well as the
procedure to be followed.
The Finance Minister subsequently decided to appoint a

committee of non-officials to recommend the lines on which the
future Reserve Bank of Pakistan was to be constituted, empowering
it to elect its own chairman. The Committee was composed of eleven
members, four from East Bengal, three from West Punjab, three
from Sind including two from Karachi and one from N.W.F.P. The
names of the members appointed on the Committee were: Ahmad
Ispahani, Sir Adamjee Haji Dawood, Abdul Matin Chaudhry, Dr.
A.M. Malik, Dewan Bahadur S.P. Singha, Prof. Mohammad Hasan,
Khan Sahib Muhammad Bashir, Mohammad Ali Habib, Hoshang
Dinshaw, Prof. H.R. Batheya and Shaikh Allah Bux.
The first meeting of the Committee held on January 26, 1948

was attended by Dewan Bahadur Singha, Ahmad Ispahani, Sir
Adamjee Haji Dawood, Dr. A.M. Malik, Prof. Mohammad Hasan
and Mohammad Ali Habib. It elected Dewan Bahadur S.P. Singha as
its Chairman and held sessions on January 26 and 27, 1948 to finalise
its recommendations. The agenda of the meeting was not circulated
among the members along with the invitation for reasons of secrecy.
However, in order to help the members to seek expert advice on the
issues to be discussed, the following officials were associated in its
deliberations: (1) John Turner, Secretary of Finance, (ii) Mumtaz
Hasan, Joint Secretary, Finance, (iii) Altaf Gauhar, Finance Officer
and (v) Nawab Ali of the Ministry of Finance.
Despite the initial differences among the members of the

Committee their final reommendations showed a surprising measure
of unanimity. The replies and recommendations on the questions
posed before the Committee were:
Should the Reserve Bank of Pakistan be a state bank or a share-

holders bank?
The Reserve Bank of Pakistan should be a state bank. Part of

the capital may be offered to the public and preference may be
given to small investors.
What should be the amount of capital and reserves?
Both the share capital and reserves should be Rs.20 million

each. One of the members, however, proposed that, as in case
of Reserve Bank of India, neither the share capital nor the
reserves should be less than Rs.SO million.
Who should appoint the Governor and Deputy Governor?
The Government should suggest a panel of names to the Central

Board of the Bank for making the final selection.
The Board should recommend certain names to the

Government for the Office of the Governor and Deputy
Governor. It was also suggested that in case the appointments
were to be made by the Government, these should either be
made directly by the Governor General of Pakistan on the
recommendation of the Board or else by the Cabinet with the
concurrence of the Board.
How many members should the Central Board of the Bank have
and who should appoint them? What should be the powers of the
Board?
There should be seven members of the Central Board, four to be

nominated by the Government and three to be elected from
amongst the share-holders. The Government should also be
empowered to appoint one of its officers on the Board who
should not have the right to vote.
Should there be Local Boards?
The Bank should have Local Boards. Their number should be

restricted in the beginning but with powers to increase them, if
necessary. The Central Board and Local Boards should enjoy
the same powers as conferred on them in the Reserve Bank of
India Act, 1934.
What should be the relationship between the Reserve Bank and

other banks (non-scheduled) in Pakistan?
No non-scheduled bank should be allowed to operate in

Pakistan.
Should the Reserve Bank accept deposits from sources other than
official bodies and banks?
The Reserve Bank should not be turned into a deposit

mobilising institution and should not accept deposits from
sources other than official bodies and banks.
What should be the extent of backing of the currency and what
should the backing consist of!
This matter should be decided by the Government itself.
Should the Bank keep in its portfolio only sterling securities or the
securities of other "approved countries" also?
Securities of other "approved countries" should also be

accepted.
What should be the basis of valuation of gold or silver in the Issue

Department?
No definite recommendation was made by the Committee on

this point. It was suggested by one of the members that gold
should be valued at market price. For Turner, the Government
official attending the meeting, it was not consistent with our
commitment to the I.M.F. implied in our membership of the
Fund.
How should the annual surplus be allocated?
Out of the annual surplus, 4 per cent should be 'allocated to the

public', the rest should go to the reserves upto the limit fixed and
the balance be taken as 'Government revenue'.
~--~- ~~--------- --------- ~-

The other problems discussed by the Committee not included in

the agenda, were the role the Reserve Bank was to play in organising
and expanding agricultural credit and the date from which it was to
start functioning. The Committee recommended that a separate
agricultural bank should be set up as soon as possible. If that was not
feasible, a link between the Reserve Bank of Pakistan and co-
operative banks should be established. The 'Reserve Bank of
Pakistan' should commence its operations, the Committee strongly
advocated, from April1, 1948.
From a comprehensive central banking law the nomenclature of

the Bank could not possibly be excluded and yet it was not on the
agenda of the Committee. The name was used by Mumtaz Hasan and
uncritically adopted by the Committee.
Subsequently, Mumtaz Hasan studied the designations of other

central banks and proposed to the Finance Minister that the "new
currency authority" of Pakistan should simply be called 'Bank of
Pakistan' and no bank in Pakistan should be allowed to bear names
such as Central Bank of Pakistan or National Bank of Pakistan as
such designations might cause confusion. The Finance Minister
finally suggested that the Bank should bear the title: "The State Bank
of Pakistan".
After receiving the orders of the Finance Minister on the Singha

Committee recommendations, a comprehensive draft of central
banking legislation was prepared by the Ministry of Finance in mid-
February, 1948 under the guidance of John Turner and Mumtaz
Hasan, more or less on the same pattern as the Reserve Bank oflndia
Act. On the approval of the Finance Minister the general structure of
the proposed law, the Law Division was asked to give it a final shape.
The Finance Minister, however, desired that after making certain
minor modifications in the various clauses of the legislation, a
meeting of the Singha Committee should be re-convened to examine
the draft legislation. The Committee meeting was held on February
23-25, 1948 which made the following recommendations:
(i) The Bank should be called "State Bank of Pakistan" in

English and "Bank-i-Millat-e-Pakistan" in Urdu.
(ii) The age limit for the retirement of Governor and Deputy
Governor should be fixed at 65 years instead of 75.
(iii) In case the Central Government desired that the Governor

of the Bank should serve any organisation during his tenure of
Governorship, he should be asked to vacate the post before taking up
his new appointment.
(iv) The Executive Committee should consist of Governor, one

or two Deputy Governors, an official member nom,inated by the
Finance Minister and two Directors elected by the Central Board.
(v) An elected Director should not be removed by the

Government until a resolution to that effect was passed by the
Central Board by a two-third majority vote.
(vi) Individual share-holders, other than Government, should

have no more than 10 votes and the Deputy Governor was to have no
voting power.
(vii) It may be made obligatory for the Central Board to hold at

least one meeting each at Dacca and Lahore during a year.
(viii) The allotment of shares should be made in a manner so as

to accommodate small investors to the maximum possible extent and
representatives of various public bodies should be associated to
advise the Bank regarding initial allotment of shares.
(ix) The shares of the Bank should be given the status of trustee
securities.
(x) The Government should be vested with the power to

suspend the Central Board in case of mis-management.
(xi) The Bank may be permitted to advance money to

commercial banks, local authorities, etc. on the security of
immovable property as well.

(xii) The Bank may be authorised to borrow money without any
limit for a period not exceeding three months for its business
purposes.
(xiii) The question of establishing an agricultural bank should be

accorded high priority. Meanwhile, a committee of co-operative
experts should be appointed to devise means for forging close
relationship between the proposed bank and co-operative banks for
better provision of credit facilities to the agricultural sector.
Based on the recommendations of the Singha Committee and

the Finance Minister's observations, a final version of the law was
prepared by the Ministry of Finance in conjunction with the Law
Division for presentation to the Cabinet.
In the meantime, an agreement had been reached between the

Governments of Pakistan and India in mid-March, 1948 for
terminating the Reserve Bank's role in Pakistan from June 30, 1948
instead of September 30, 1948. In the light of this development, the
Law Division in consultation with the Advocate General of Pakistan
made it clear to the Government that if a bill was introduced in the
next session of the Constituent Assembly, which was due to meet on
May 10, 1948 the Assembly would probably like to refer it to a Select
Committee, which could obviously take time in presenting its
recommendations. In that event, the bill could not receive the
Governor General's assent before the first week of June, by which
time it would be too late to take all the preliminary steps necessary to
constitute the Bank such as issue of shares to the public, creation of
the Central Board, preparation of the bye-laws, appointment of staff,
etc. In the circumstances an Order would have to be promulgated by
the Governor-General of Pakistan to enable the Bank to start
functioning from July 1, 1948. With no time left for eliciting the
opinion of members of the Constituent Assembly on the draft Law,
Mumtaz Hasan in consultation with the Finance Minister decided
that before presentation to the Cabinet for approval, it should be
further scrutinized by members of the Special Division that was set up
by the Government in the second half of March, 1948.
Special Division
The Special Division was created to deal exclusively and

expeditiously with the task of making all arrangements necessary for
the commencement of operations of the Central Bank within three
months. It consisted of a few senior Muslim officers of the Reserve
Bank, including Sher Jang Khan and Said Ahmad 2 , whose services
were obtained on special request from the Bank till their permanent
transfer to Pakistan and a few selected officers belonging to Ministry
of Finance.
Zahid Husain, one of the senior most Muslim officers of the

Indian Audit and Accounts Service, who was serving in Delhi as
Pakistan's High Commissioner to India, was summoned to Karachi in
early April, 1948 and assigned the charge of the Division. He had
been associated with the Expert Committee of the Partition Council
dealing with matters concerning the Reserve Bank since June, 1947
and even during his diplomatic assignment immediately after
Partition, he continued to deal with Reserve Bank. Keeping in view
the composition of the Division, it was considered to be an
appropriate body to give final shape to the Central Banking Law for
Pakistan.
The staff of the Special Division worked with extraordinary zeal

and tireless energy to meet the challenge of introducing a suitable
scheme of legislation and belie the contention of the detractors of
Pakistan that it was not a viable and durable proposition. Said
Ahmad, who was closely associated with this Division formulation
wrote:
The Special Division activities were almost entirely devoted to the

formulation of legislation for the creation of State Bank and we used
to meet almost daily for hours together both in the office and at the
residence of Zahid Husain, the Governor-designate and these
Sher J ang Khan and Said Ahmad were to hold the rank of Deputy Governor during the
last years of their service in the Bank.
meetings lasted sometimes beyond midnight. These efforts resulted in

the promulgation of May 12, 1948 of the State Bank of Pakistan Order
as well as the Order for the amendment of the Pakistan (Monetary
System & Reserve Bank) Order, 1947 requiring the Reserve Bank to
relinquish its role in Pakistan on June 30, 1948.
Constitution of the Central Board
Following the provisions made for the constitution of a central

board comprising five nominated and three elected Directors,
immediate steps were taken to secure representation of nominated
Directors on the board. Letters were addressed in mid-April, 1948 to
the Provincial Finance Secretaries of East Bengal, West Punjab and
N.W.F.P. requesting them to recommend names of suitable
candidates for nomination as Directors of the Bank. In making such
recommendations the officials concerned were advised to give
preference to individuals who had knowledge of credit and banking
needs of the country and were also familiar with its economic
conditions.
The Central Cabinet, in its meeting held on May 23, 1948

approved the following names for nomination as the first Directors of
the Central Board of the Bank, representing the area noted against
their names:
1. Wahid-uz-Zaman Dacca
2. Jogesh Das Dacca area and
minority interest
3. HatimA. Alvi Karachi
4. Syed Maratib Ali Shah Lahore
5. Kasim Hussain Kassam Dada Karachi
Issue of Share Capital
The Special Division completed arrangements for raising the

share capital from the public; the subscription list was to open on May
23, 1948 and close on June 2, 1948 but subscribers could submit share
applications in advance of the opening date.
Shares totalling 1,47,000 of the par value of Rs.lOO each

(Rs.14.7 million) were issued for public subscription, carrying a
cumulative dividend rate of 4 per cent. For providing equal
opportunity to persons of all regions, arrangements were made for
receiving share applications at as many centres as possible. All offices
of the Reserve Bank, Lloyds Bank and Habib Bank in Pakistan, the
head post offices in Pakistan and all treasury offices at district
headquarters, where there was no branch of the Reserve Bank, were
authorised to receive subscriptions. Subscription forms were sent to
Dacca under special arrangements made with the Orient Airways and
those to Lahore through a special messenger. In order to give more
time to these offices to distribute forms and the concerned agencies to
receive share applications, the time limit was extended upto June 5,
1948.
Appointment of Staff
The most serious constraint experienced in setting up a full-

fledged central bank was the extreme shortage of trained and
talented personnel. Under the arrangement agreed upon for the
transfer of the staff of the Reserve Bank, the Muslim staff serving the
Reserve Bank and the non-Muslim employees of the Bank, having
their places of domicile in Pakistan, were required to either opt for
service in Pakistan or continue to serve their parent organisation. In
order" to remove any doubts of the employees of the Reserve Bank
about the prospects in Pakistan, the Government of Pakistan
guaranteed their existing terms and conditions of service. The
Governor-designate of the State Bank also accepted this principle on
behalf of the Bank, subject to confirmation by the Central Bdard.
Matters relating to the adjustment of employees' Provident Fund and
Gratuity benefits and leave entitlements were taken up thereafter
with the Reserve Bank.
Given the limited opportunities of employment open to Indian

Muslims, their promotion to senior positions and the reluctance of
- - - - - ------ ---------~---~ --- --

non-Muslim staff, having their places of domicile in Pakistan, only a

tiny band of 8 senior officers, 13 superintendents and 129 clerks opted
to serve Pakistan. More acute was the shortage in the Cash
Department. With a skeleton staff the challenge of establishing and
running a central bank was indeed formidable. Fully aware of the·
gravity of the problem the Government of Pakistan had started a
search for additional staff as early as October, 1947 and advertised
the career opportunities open to men of talent and experience. A
Committee headed by Justice Mohammad Munir with Dr. O.M.
Malik and John Turner as members, selected 18 candidates out of the
26 applicants.
However, the need for a competent officer to manage the

exchange control affairs of the country was immediately felt, since
under the Pakistan (Monetary System and Reserve Bank) Order,
1947 the Government had decided to take over the department from
April1, 1948. Sir Jeremy Raisman3, recommended the name of J.l.
Kenan, an officer on the staff of Lloyds Bank Ltd. London who was
~ppointed as Deputy Exchange Control Officer in the middle of
March, 1948.
Also urgently required were the services of an officer with a

legal background and training for rules and regulations.
Qadeeruddin Ahmad, an advocate of Karachi was appointed as the
Legal Advisor of the Bank. Equally necessary was the appointment
of a Currency Inspecting Officer to tour the offices of the Reserve
Bank in Pakistan for monitoring the withdrawal of India notes from
circulation. S.M.O. Kazmi, an ex-civil servant ofU.P. Government,
was selected for the assignment as Currency Inspecting Officer on a
temporary basis from April 29, 1948 to June 30, 1948 and later
confirmed in the post.
Offers for appointment were also communicated to M.

Mahmood, a Deputy General Manager in Habib Bank and Nabi
Former Finance Member of the Viceroy, Executive Council in undivided India and
Advisor to Governor General of Pakiatan, 1948.
Bakhsh Mohammad Uquaili4, an employee of the Central Bank of

India to serve as Chief Officer and Deputy Chief Officer,
Department of Banking Operations. Both of them joined the Bank.
Selection and appointment of candidates belonging to the Imperial
Bank of India and Hyderabad State Bank on deputation or on regular
basis, continued to be made thereafter.
Search for the Premises
The Reserve Bank had constructed only two buildings, one in

Karachi and the other at Lahore, for accommodating its branch
offices in these cities and had taken a small building on rent for its
newly opened branch at Dacca. Besides, it had purchased a plot of
land in Karachi from a Hindu merchant of the city, costing about
Rs.l.l million. All the properties belonging to Reserve Bank had
been made transferable to the Government of Pakistan on payment
of their book value to the Bank for the conduct of business by its new
monetary authority. The Karachi Office of the Reserve Bank was not
adequate even to meet the growing needs of the staff of this branch.
There was hardly any time left for acquiring a plot of land in
possession of the Reserve Bank and constructing a building on it.
After a hectic search by the Special Division, the Victoria Museum
Building of the Karachi Municipal Corporation at Ingle Road was
selected for housing the Central Directorate of the Bank and was
taken on a monthly rent of Rs.l,SOO with the help of the Central
Government. The Museum exhibits were removed to the Frere Hall
and the cost of insuring and transporting them was paid by the State
Bank. Necessary alterations and modification in the building were
carried out at top speed. It was equipped with essential telephone
facilities and furnished in time for the inauguration ceremony.
Steps were taken simultaneously to solve the accommodation

problem of the staff. Seventy quarters were allotted by the Estate
Office of the Government of Pakistan to accommodate the staff of
the Bank before its inauguration.
N.M. Uquaili after having served State Bank for about a decade in various capacities
joined PICIC as Managing Director in January, 1958. He rose to the position of Finance
Minister in July, 1966.
Rules and Regulations Framed and Agreements Concluded
A number of essential rules and regulations to enable the Bank

to commence its operations were framed after a careful study and
adaptation of the procedures followed by the Reserve Bank. These
were approved by the Central Board, in its first meeting held on July
2, 1948 concerning:-
(i) General Operations of the Bank;
(ii) Elections and meetings of shareholders;
(iii) Expenditure of the Bank;
(iv) Investment of signing powers to the various officers;
(v) Relations with scheduled banks;
(vi) Travelling and Subsistence Allowances to Directors and

Members of Local Boards;
(vii) Fixation of Pay Scales of Senior and Junior Officers;
(viii) Purchase and sale of sterling by the Bank.
Besides, agreements were concluded with the Central Government

and the Imperial Bank spelling out the terms and conditions on which
the State Bank would conduct government business and entrust
agency work to Imperial Bank.
It is to the credit of the staff of the Special Division that it

grappled effectively with these and other critical issues within the
span of three months.
Inauguration Ceremony
Because of the pivotal place a central bank occupies in the

financial set up of a country, Zahid Husain had requested the Quaid-
i-Azam to perform its inauguration ceremony. The Quaid-i-Azam

interrupted his stay in Ziarat and flew to Karachi against medical
advice. Incidentally, this ceremony was also the last public function
attended by the Quaid.
Invitations were extended to the heads of monetary authorities

and Finance Ministries of all the Commonwealth countries, heads of
central banks and other prominent personalities in the banking world
in a number of Muslim and other friendly countries as well as the
members of the diplomatic corps and eminent public figures in
Pakistan. It was attended by about 1,500 guests, including the Prime
Minister of Pakistan, most of the Ministers of the Central Cabinet,
the Governor and Cabinet Ministers of Sind and Judges of the High
Court of Sind. Ghulam Mohammad, the Finance Minister of
Pakistan, could not, however, participate in the ceremony as he had
gone to London to hold talks on sterling balances.
Messages of good will were received from a number of overseas

countries which were read out by the Secretary of the Bank.
Chancellor of the Exchequer of U.K.
I regret that it is not possible for me to be present with you at the

opening ceremony of State Bank of Pakistan. I do send you my very best
wishes for the success of new central banking institution of the Dominion.
Governor, Bank of England
Please accept the sincere good wishes of the Bank of England for the
success of State Bank of Pakistan and the assurance of our friendly co-
operation.
President, Federal Reserve Bank of New York
Directors and officers of the Federal Reserve Bank join me in wishing

success to the State Bank and assuring it of the desire to co-operate with this
newest member of central banking family.
-------------------- ~------
Quaid-i-Azam performing the opening ceremony of the Bank
Governor, Bank of Canada
I send you all our best wishes for success in the years to come. Our
Board of Directors join me in welcoming the State Bank of Pakistan to the
fraternity of central banks and wishes me to assure you of our desire to co-
operate with your institution in any way that lies in our power.
Governor, Reserve Bank of New Zealand
On the occasion of the State Bank of Pakistan's commencing

operations, the Governor and Directors of the Reserve Bank of New
Zealand desire to extend best wishes for the success and progress of the new
central bank.
Treasurer, Commonwealth Bank of Australia
On the auspicious occasion of the establishment of the State Bank of

Pakistan, may I convey our heartiest congratulations and best wishes for the
success and prosperity of the Bank and, through it to our sister Dominion of
Pakistan. The Governor, Commonwealth Bank of Australia extends best
wishes for successful inauguration of your Bank.
Governor, Reserve Bank of India
I hasten to offer cordial felicitations on my own behalf as well as on

behalf of my colleagues of the Central Board of the Reserve Bank of India
to the Government and people of Pakistan on the inauguration of a vitally
important institution. Central banks have a valuable contribution to make
towards the solution of the many complicated problems in the monetary and
economic field that arise in the quest of a nation for higher standard ofliving.
We wish the State Bank of Pakistan a successful career in furthering
Pakistan's public economic policies in the interest of world peace and
prosperity.
Board of Commissioners of Currency Board, Ceylon
The Currency Board of Ceylon desire to offer their felicitations to the

State Bank of Pakistan and trust that the Bank will play an important part in
the development of the Dominion of Pakistan.
Board of Commissioners of Currency Board, Burma
Please accept our sincere good wishes for your future prosperity and
offer of cooperation in all matters concerning our mutual interest.
Governor, Bank of Siam
On this auspicious occasion of the opening of the State Bank of

Pakistan, my colleagues and I send you our goodwill and sincere wishes for
the success and prosperity of your institution and in the great and onerous
task to be undertaken for the greater glory of Pakistan.
Governor, Central Bank of Turkish Republic
Most sincere congratulations and heartiest wishes for continuous

success and prosperity of the State Bank of Pakistan.
Finance Minister, Egypt
It gives me great pleasure to convey to you on the occasion of the

creation of Pakistan's Central Bank my hearty congratulations. This new
institution is of special significance for the prosperity and development of
Pakistan. The friendly ties and deep sympathy between our two countries
make me look forward for closer economic cooperation between Egypt and
Pakistan.
Governor, Bank Misr
I have great pleasure in sending you heartiest congratulations and

sincere wishes for the prosperity of your country and success of your Bank.
Governor, National Bank of Egypt
Best wishes for success and prosperity and assurance that National
Bank Egypt will follow progress with great interest.
Finance Minister, Iraq
We extend our sincere congratulations and best wishes for the

continued success of the State Bank of Pakistan. In the meantime, we shall
offer every assistance possible to cooperate with you for the interest of our
two countries which are bound by intimate friendship.
Governor, Bank Milli, Iran
As Governor of the Central Bank of a Muslim and neighbouring

nation, I offer my most sincere congratulations for the establishment of
State Bank of Pakistan with which country we have strong ties of friendship
and community of religious ideals. I am confident that with the foundation
of the State Bank of Pakistan, commercial relations between the two
countries will gather fresh strength and impetus in the years to come.
The inauguration ceremony started at 6.00 p.m. The Quaid-i-

Azam's drive from the Governor-General's House to the State Bank
Building for performing the opening ceremony was a memorable
occasion. People were perched on house tops along the route of the
Quaid-i-Azam's State Drive. As the Quaid-i-Azam's cream coloured
State Coach, drawn by eight horsemen, wearing the uniform of
Bengal Lancers, and escorted by about 30 horsemen of the
Governor-General's Body Guards, emerged from the Governor-
General House, with Quaid-i-Azam and Miss Fatimah Jinnah,
crowds lustily cheered their leader and the cheering continued
unabated until he reached the State Bank's newly acquired building.
On arrival they were received by the Governor Zahid Husain,
Directors of the Central Board and Senior officials of the Bank. The
Guard of Honour, furnished by the Karachi Police, presented arms
and gave a Royal Salute. The Quaid then inspected the Guard of
Honour and was conducted to the dais. The ceremony started with
recitation from the Holy Quran followed by welcome address by
Governor, State Bank. Welcoming the Quaid-i-Azam, Zahid Husain
observed:-
I wish first to say on behalf of myself and the Directors of the

State Bank how deeply we appreciate the honour which Quaid-i-Azam
has done us by granting our request to him to perform the opening
ceremony of the State Bank of Pakistan today. When we conveyed this
request to him towards the end of May, he was preparing to leave for
Quetta. We were informed almost immediately that he had been
pleased to grant our request and that if his stay in Baluchistan extended
beyond June 30, he would interrupt it to pay a visit to Karachi,

specially for this occasion of national importance. The favour thus
bestowed on us is the measure of the significance attached to the
opening of the State Bank and has greatly encouraged us in our resolve
to face the task that has been assigned to us of organising and piloting
this Bank so that it should emerge eventually as a powerful institution
for the progress and welfare of our new-born State and its people.
The State Bank of Pakistan has from today taken the place of the
Reserve Bank of India in Pakistan and we now enjoy complete
independence in the domain of banking and currency without which
our freedom to order our economic affairs would be very severely
restricted and circumscribed. The State Bank will be the Central Bank
of Pakistan as Bank of England is for the United Kingdom, the Federal
Reserve Bank for the United States and Reserve Bank of India for
India. It will be the banker of the Central and Provincial Governments
of Pakistan. It will be the bank with which other banks will maintain
their reserves of cash balances. It will have the sole right of issuing
currency notes in Pakistan and will be responsible for managing the
currency of Pakistan in the best interests of the country. It will be the
custodian of the monetary reserves of the country which includes the
reserves of foreign currencies earned by our trade and commerce. It
will be charged with the duty of maintaining the international stability
of our currency in accordance with the policy laid down by the
Government from time to time. It will be responsible for the floatation
and management of public loans on behalf of the Central and
Provincial Governments. Similarly, it will manage exchange control
for the Central Government of Pakistan. It will be the chief adviser of
the Government on all matters relating to credit, currency, floatation
of loans, exchange control, public debt and other monetary problems.
It will also have to see that the commercial banks are following sound
methods of business and maintain sound credit conditions in the
country so that trade and commerce should flow smoothly and add to
the happiness and prosperity of the country. It will be responsible for
taking all possible steps for ensuring stability in the economic sphere to
the extent that it is possible to do so by action in the monetary field.
The commercial banks will be entitled to look to the State Bank for
support and advice at all times.
One of the main tasks entrusted to the State Bank under the State
Bank of Pakistan Order, is to regulate credit to the best advantage of
---------------------------- -
the country. The banks of a country constitute the main organism

through which credit is regulated and controlled. The State Bank, like
the central bank of .1ny other country, will thus have very definite
responsibilities to perform in relation to the other banks. It must
maintain a constant vigil to see that sound banking and credit
conditions are maintained. The power exercised by the banks in
regulating and controlling the economy of a country is incalculable and
its extent is not appreciated by those who are not initiated into the
secrets of their working. This power is available to the banks in the
pursuit of their main objt;ct which is to earn profits. A central bank, on
the contrary, is not a commercial institution working for profit but a
national institution formed for well-defined objects of a national
character. Its duty is to guard and promote the national economy on
the lines prescribed by Government and in discharging this duty it must
not be actuated by the profit motive.
About 50 years ago, very few countries had central banks and
even where some banks had begun by force of events to discharge the
duties of central banks, the position had not fully crystallised and the
concept of central banking had not been clearly appreciated and
established. The Bank of England, since its formation more than 21;2
centuries ago, had been developing the characteristics of a central
bank. Progress took place in certain other countries also in the same
direction. Towards the beginning of this century, as banking spread
and the people began more and more generally to deposit their cash
with the banks, the possibilities of financial panics, if not of crises, with
unfortunate results on business and trade, forced themselves upon
public attention. The advantages of central banking became clear and
it came to. be recognised as an essential part of a banking and credit
structure. The usefulness of central banking became firmly established
during the First World War, after which one country after another
established its central bank. Today, there is hardly any country
without a central bank of its own. Central banks inspire confidence
among the people and ensure stability of their respective banking and
credit system. Chaos is replaced by order and fear of recurrent panics
by confidence in the stability of banking. They render international co-
operation possible and the countries are brought closer together
through them for dealing with their common problems in the monetary
field. After the Partition of India in August, 1947 we hesitated for
some time due to serious inadequacy of trained manpower but logic of
events re-inforced by our faith in our future brought us to the
inevitable conclusion that Pakistan must have a central bank of her

own for the better management and regulation of her affairs. We are
resolved to face whatever difficulties come in our way and it is in this
spirit that we are establishing the State Bank of Pakistan today. In
establishing this Bank we have had to contend with serious difficulties
due to lack of time and trained staff.
The Reserve Bank of India was opened on April1, 1935, but its
nucleus with the necessary complement of senior officers was formed
in February, 1934 and the Governor was appointed in December,
1934. We were able to appoint the Chief Accountant and the Secretary
of the State Bank barely a month ago.
The Muslim officers and staff of the Reserve Bank, who have
opted for service in Pakistan, are barely sufficient even for a few
essential branches of the Bank. We have, therefore, necessarily to
make generous plans for the training of staff and arrangements are
being made to this end. Till the Bank is provided with the full
complement of trained staff, its activities must remain limited and it
will have to confine itself to the performance of its basic and essential
duties.
The problem presented by the inadequate supply of trained staff

is not, however, confined to the State Bank alone. In the past banking
was kept as a close preserve of non-Muslims with the disastrous
consequences that were witnessed for our trade and commerce on the
migration of non-Muslims from West Pakistan and from which we are
still suffering. Measures have to be taken to ensure an adequate supply
of trained staff for banking in Pakistan so that they will be available in
sufficient numbers to the commercial banks to enable them to improve
and expand their services. They will also indirectly stimulate the
opening of new banking enterprises which are urgently required in our
country. We are fully alive to the urgency of this problem and so are
the Government of Pakistan, who have already made the State Bank
responsible for the selection and training of academically well
qualified young men so that an adequate supply of bank officers should
become available within the next few years. Banking in our country is
waiting for young men who will choose it as their career and devote
their talents to its promotion and development. They alone can make
banking an effective instrument in the cause of national service. We,
on our part, are resolved that the State Bank shall fulfil truly and
surely the role assigned to it and thereby make its contribution in full
measure towards the development of banking on sound lines for the
greatness and prosperity of Pakistan.
There is very rightly a general demand from the people of

Pakistan for a clarification of the policy of Government regarding the
ideology which is to guide and inspire us in regulating our political,
social and economic life. The principle of complete equality and
brotherhood is universally recognised to be the most outstanding
feature of Islamic society. What is, however, not so generally
recognised and appreciated is the provision made, according to what is
clearly a well devised plan, for preventing concentration of wealth
without killing the essential incentive to individual initiative and
enterprise. It is this ideology which must inspire us in regulating our
economic life. Banking practices must be subjected to careful scrutiny
on scientific lines by competent economists well acquainted with the
basic principles and requirements of Islam. Their object must be to
find out in what manner and on what lines it would be practicable to
harmonise banking practices with the requirements of Islamic ideals of
social and economic life. It is our intention that the research
organisation, which we propose to establish ip the State Bank, should
devote special and unremitting attention to this most important aspect
of our ideological problem.
It was less than 3 months ago that orders were given to take steps
for establishing this Bank. The few officers and other members of the
staff whom we were able to assemble have worked literally night and
day undeterred by the great magnitude of their task. They have set an
example on which the Bank will be able to look back with pride.
Our thanks are due to the Karachi Municipal Corporation, who

by placing this building at our disposal enabled us to overcome one of
the main difficulties we encountered in establishing this Bank. We are
very thankful to the Public Works and Telephone Departments who
have carried out their part of the work at very short notice for
preparing this building for occupation by the Bank from today.
In conclusion I wish again to express my gratitude and that of my

colleagues to our Quaid-i-Azam for the honour he has done us and the
Bank by coming to Karachi at great personal discomfort, specially to
perform the opening ceremony. His blessings constitute a guarantee

for the success and future greatness of this Bank.
I also wish to thank our guests who have been kind enough to
accept our invitation to attend this ceremony to wish God speed to our
Bank on its career. We thank them all.
Replying to the address of welcome by the Governor, State

Bank, the Quaid-i-Azam said:-
The opening of the State Bank of Pakistan symbolizes the

sovereignty of our State in the financial sphere and I am very glad to be
here today to perform the opening ceremony. It was not considered
feasible to start a Bank of our own simultaneously with the coming into
being of Pakistan in August last year. A good deal of preparatory work
must precede the inauguration of an institution responsible for such
technical and delicate work as note issue and banking. To allow for this
preparation, it was provided, under the Pakistan (Monetary System
and Reserve Bank) Order, 1947 that the Reserve Bank oflndia should
continue to be the currency and banking authority in Pakistan till
September 30, 1948. Later on, it was felt that it would be in the best
interests of our State if the Reserve Bank of India were relieved of its
functions in Pakistan as early as possible. The date of transfer of these
functions to a Pakistan agency was consequently advanced by three
months in agreement with the Government of India and the Reserve
Bank. It was, at the same time, decided to establish a Central Bank of
Pakistan in preference to any other agency for managing our currency
and banking. This decision left very little time for the small band of
trained personnel in this field in Pakistan to complete the preliminaries
and they have by their untiring effort and hard work completed their
task by the due date which is very creditable to them, and I wish to
record a note of our appreciation of their labours.
As you have observed, Mr. Governor, in undivided India

banking was kept a close preserve of non-Muslims and their migration
from Western Pakistan has caused a good deal of dislocation in the
economic life of our young State. In order that the wheels of commerce
and industry should run smoothly, it is imperative that the vacuum
caused by the exodus of non-Muslims should be filled without delay. I
am glad to note that schemes for training Pakistan nationals in banking
are in hand. I will watch their progress with interest and I am confident
that the State Bank will receive the co-operation of all concerned
including the banks and universities in pushing them forward. Banking
will provide a new and wide field in which the genius of our young men
can find full play. I am sure that they will come forward in large
numbers to take advantage of the training facilities which are proposed
to be provided. While doing so, they will not only be benefiting
themselves but also contributing to the well-being of our State.
I need hardly dilate on the important role that the State Bank will
have to play in regulating the economic life of our country. The
monetary policy of the Bank will have a direct bearing on our trade and
commerce, both inside Pakistan as well as with the outside world and
it is only to be desired that your policy should encourage maximum
production and a free flow of trade. The monetary policy pursued
during the war years contributed, in no small measure, to our present
day economic problems. The abnormal rise in the cost of living has hit
the poorer sections of society, including those with fixed incomes, very
hard indeed and is responsible to a great extent for the prevailing
unrest in the country. The policy of the Pakistan Government is to
stabilise prices at a level that would be fair to the producer, as well as
the consumer. I hope your efforts will be directed in the same direction
in order to tackle this crucial problem with success.
I shall watch with keenness the work of your Research

Organization in evolving banking practices compatible with Islamic
ideals of social and economic life. The economic system of the West
has created almost insoluble problems for humanity and to many of us
it appears that only a miracle can save it from disaster that is now facing
the world. It has failed to do justice between man and man and to
eradicate friction from the international field. On the contrary, it was
largely responsible for the two World Wars in the last half century. The
Western world, in spite of its advantages of mechanization and
industrial efficiency is today in a worse mess than ever before in
history. The adoption of Western economic theory and practice will
not help us in achieving our goal of creating a happy and contented
people. We must work our destiny in our own way and present to the
world an economic system based on true Islamic concept of equality of
manhood and social justice. We will thereby be fulfilling our mission as
Muslims and giving to humanity the message of peace which alone can
save it and secure the welfare, happiness and prosperity of mankind.
----·-----··--·-- ----
May the State Bank of Pakistan prosper and fulfil the high ideals
which have been set as its goal.
In the end I thank you, Mr. Governor, for the warm welcome
given to me by you and your colleagues and the distinguished guests
who have graced this occasion as a mark of their good wishes and the
honour you have done me in inviting me to perform this historic
opening ceremony of the State Bank which I feel will develop into one
of our greatest national institutions and play its part fully throughout
the world.
After delivering his address, the Quaid unlocked the big silver
lock inscribed with the words "State Bank of Pakistan" with a silver
key and went round the building. The silver lock and key, which were
locally manufactured, were then presented to the Quaid.
The proceedings were relayed by Radio Pakistan from its two

stations in West Pakistan and transmittor of Pakistan Navy also
directed the programme to East Pakistan.
------------------~----
3
The Bank Commences Business
The Bank commenced its operations on July 1, 1948 with a

skeleton staff. Its Central Directorate was organised literally from its
foundations. The Reserve Bank branches at Karachi, Lahore and
Dacca were not fully equipped to perform even their routine
functions. These were but a few of the myriad problems inherited by
the Bank. Pakistan's share of the physical assets held by the Reserve
Bank in its Issue and Banking Departments, had yet to be
transferred. While the Bank had assumed its responsibility of being
the sole note-issuing authority in the country, the Government had
no note-printing press to print them. The Pakistan inscribed notes
issued by the Reserve Bank which were in circulation throughout the
country had to be withdrawn and replaced by newly designed
Pakistan notes in order to establish claims for the division of assets.
The banking system had nearly crumbled. The vacuum created by the
mass migration of professionally trained personnel had to be filled
and fortified. The Bank was confronted with a complexity of
problems which even old and well established central banks did not
have to face.
The predicament in which the Bank was placed in its infancy was
difficult to appreciate in isolation from the conditions in which
Pakistan was born. The assets of the economy were iq a state of
complete disarry and disruption, and India was refusing to part with
59
those in its possession. The seriousness of the situation was

underlined by the Finance Minister in his first budget speech in
March, 1948;
The process of Partition has resulted in India remaining in full

possession of privileges, facilities and institutions vital to economic
and financial well being of India, while Pakistan had to build every
thing from scratch and that too with its limited resources. The overall
trading, business and economic conditions have been so seriously
disturbed that it now depends on the initiative, power of recuperation
and adaptability of the people of Pakistan how effectively it may be
possible to repair the damage done and reconstruct the fabric of our
economic life.
Putting the economic house in order was a Herculean task in

whose accomplishment the Bank had to lend its shoulder to the
wheel, which was possible only after it had organised its own house.
Its organisation in the light of dearth of machinery, men and even
premises to house its office and staff, however, posed a serious
problem whose solution called for a spirit of dedicated service and
imaginative planning on the part of its pioneers.
Branch Offices
Before Partition the Reserve Bank had only two branch offices
in the Pakistan areas, one at Karachi and the other at Lahore, and
none in the country's largest province which had more than half its of
population. It was as late as February 11, 1948 that an office at Dacca
was set up with limited functions and not until Aprilll, 1948 was the
Imperial Bank divested of its charge of handling government business
in Karachi, while in Lahore and Dacca it continued to hold it upto
October 18 and 25.
An Exchange Control Office was set up at Chittagong on July 1,
1948 to meet the fast growing requirements of foreign trade.
Chittagong was the only natural port of embarkation in East Pakistan
equipped with berthing facilities for large vessels. The Bank also
opened an office of its Issue Department at Peshawar in April, 1948.
Non-availability of experienced and trained staff was the Bank's
THE BANK COMMENCES BUSINESS 61
principal headache for a long time, which was only partially relieved
by supplementary recruitment of raw hands for on-the-job training.
Equally serious was the shortage of premises for office as well as

residential accommodation for the staff at almost all the centres. The
Karachi Office began its operation with full-fledged Issue, Banking
and Exchange Control Departments and a Public Debt Office, at the
old premises of the Reserve Bank on Bunder Road (now M.A.
Jinnah Road). However ill-suited for the purpose, it was the best
possible arrangement under conditions of scarcity caused by a
continuing influx of population from across the border. Karachi
where building activity had come to a standstill during the War, was
particularly hard hit by this influx. The result was, far too few houses
and far too many people to house. The Bank had consequently to rely
on Government assistance. Even the modicum of help it received was
gratefully acknowledged by the Board's Directors in the first Annual
Report. In the meantime, the Bank acquired a plot of land in the
heart of the city in close proximity to the Central Directorate for the
construction of residential flats for its supervisory and clerical staff.
The newly established office of the Bank in Dacca with its

expanded functions relating to Issue, Banking, Exchange Control
and Public Debt, barring government business which continued to be
transacted by the Imperial Bank, had to be housed in the premises of
a school building, so hard pressed was the Bank in the matter of
accommodation. In the same building with its limited space, the
Public Accounts Department had to be squeezed. The paucity of
housing facility in the provincial capital compelled the Bank to
approach the Provincial Government for its cooperation which was
readily extended. A block of flats in the colony under construction for
its own employees, was reserved for the staff of the Bank.
The Lahore Office began operating its Issue and Banking

Departments, including Exchange Control Department and Public
Debt Office while government business continued to be transacted by
the Imperial Bank as agents to the State Bank. In October, 1948, a
Public Accounts Department was opened and government business
taken over from the Imperial Bank. The problem of residential
accommodation was not that acute in the city. In Peshawar, the

Provincial Government placed a number of houses at the disposal of
the Bank for the residential requirements of its staff.
Central Directorate
The Central Directorate began its operations through a Chief
Accountant's Department, a Secretary's Department, a Department
of Banking Operations and Exchange Control. The target set for the
share capital was not achieved before the inauguration ceremony
even till as late as October, 1948. The subscription received up to June
1, 1948 was only Rs. 352,800 as against the estimate of Rs .1 0 million.
Even after the extension of the closing date to June 12, 1948, public
response was disappointing, in view of the generally unsettled
economic conditions and in the absence of institutional investors.
After reviewing the position in the middle of June, the list was
indefinitely kept open. Provincial Governments were requested to
launch special publicity campaigns for sale promotion and active
support of Provincial Co-operative Banks was sought.
These efforts produced encouraging results. Subscription

improved between June 28 and August 12, 1948, but the share of East
Bengal remained below par. Thereafter, the Governor of the State
Bank wrote a letter to the Premier, East Bengal, emphasising the
need for raising the subscription level to a figure commensurate with
the economic importance of the province, accompanied by a request
for his co-operation. This was followed by the Governor's decision to
call a meeting of the representatives of trade and industry on October
26, 1948. His personal appeal to take up the unsubscribed portion of
the share capital of the Bank amounting to about Rs.2 million
produced the desired result and the subscription list could finally be
closed at the end of October, 1948. Dispatch of allotment letters and
share certificates, etc. was completed by April, 1949.
For the purpose of the issue and holding of shares of the Bank
the entire Pakistan territory had been divided into three areas
namely, Karachi, Lahore and Dacca. The jurisdiction of each share
register was as follows:-
Karachi
Karachi Division, Khairpur Division, Hyderabad Division,
Quetta and Kalat Division.
Lahore
Peshawar Division, Dera Ismail Khan Division, Rawalpindi
Division, Lahore Division, Multan Division and Bahawalpur
Division.
Dacca
The entire Province of East Bengal.
Out of three hundred thousand shares of the nominal value of

one hundred rupee each, 49 per cent were offered for public
subscription. The following statement shows the area-wise
distribution of shares of the Bank as on June 30, 1949.
Number of Number Percentage of
Area Shareholders of Shares Shares to
Total Shares
(a) Public
Dacca 1,764 16,748 5.58
Lahore 1,885 60,523 20.18
Karachi 1,634 69,729 23.24
Total: 5,283 1,47,000 49.00
(b) Central Government 1 1,53,000 51.00

Average number
of shares
held by each
shareholder
under( a) 27.8
HISTORY OF THE STATE BANK OF PAKISTAN
64
Constitution of Executive Committee

The Central Board established in May, 1948 was initially
composed of only nominated Directors. The next step was the setting
up of an Executive Committee for discharging the duties of the Board
when it was not in session, as provided for in clause 10 of the State
Bank of Pakistan Order, 1948. In terms of sub clause (1) of this
clause, the Committee had to have two Directors elected by the
Central Board and an officer appointed by the Central Government
besides the Governor and the Deputy Governor. The question of
formation of such a Committee was informally discussed at the Board
meeting held on July 2, 1948 which decided to have three elected
Directors, one from each Area, instead of two, to make it
representative of all the three registers. The Central Government
was requested to approve necessary amendments in the State Bank of
Pakistan Order, 1948. Meanwhile, in its meeting held on August 16,
1948 the Board approved the constitution of hn "Ad hoc Executive
Committee" consisting of two Directors namely Wahid-uz-Zaman
and Kassim Hussain Kassim Dada. A letter was also addressed to the
Ministry of Finance on August 26, 1948 requesting it to nominate one
of its officers on the Committee for attending its next meeting on
September 16, 1948. The Ministry nominated on September 11, 1948
Anwar Ali, its Deputy Secretary, to act as a Member of the
Committee. The Ad hoc Committee, consisting of two Directors and
an official of the Ministry of Finance, continued to discharge its duties
untill it was replaced by a new Committee, composed of three
Directors and a nominee of the Ministry of Finance.
The three Directors for constituting the enlarged Executive

Committee were elected in the Board's meeting held on November
19, 1949 after the approval of the changes proposed in the State Bank
of Pakistan Order, 1948, by the Government. The names of Directors
elected were: Sir Syed Maratib Ali Shah, Hatim A. Alvi and Wahid-
uz-Zaman. Anwar Ali continued to serve as the Government
nominee. The new Committee 1 held its first meeting on December 2,
1949.
1 Subsequent changes in the membership of the Committee till June, 1960 have been
indicated in Appendix.
Quaid-i-Azam inspecting the interior of the Bank's building
Constitution of Local Boards

After the completion of the allotment of shares, issue of share
certificates and area-wise bifurcation of share registers, which
continued till mid-May, 1949 the Bank took up the task of
constituting the Local Boards and arranging election of three
Directors for the Central Board which at that time consisted of only
five Directors nominated by the Central Government in May, 1948.
Subsequently, Victor Turner, the Secretary, Ministry of Finance, was
also nominated on May 16, 1949 as a Director to fill up the vacancy
of a government official on the Central Board.
The draft of the regulations to be followed for electing members

for the Local Boards and Directors for the Central Board had already
been approved by the nominated Directors of the Central Board in
the Board's first meeting held on July 2, 1948. These regulations were
later approved by the Central Government.
Difficulties of communication and lack of administrative

machinery delayed holding of elections to the Central Board and
Local Boards at three different centres simultaneously. These were
held on November 9, 1949 at all the three area offices i.e. Karachi,
Lahore and Dacca both for Local Boards and the Central Board. The
Karachi Office received papers, proposing the names of four
candidates for elections as Members of its Local Board (1) Akbarali
M. Essaji, (ii) Fidahussin A. Lotia, (iii) Sheikh Mohammad Yaqub
and (iv) Mohammad Siddique Dawood, which were found valid. The
number of vacancies being equal to the number of the candidates, the
four aspirants were declared elected unopposed.
The Lahore Office received eight nomination papers from (i)

Mohammad Sharif Muttaqi, (ii) Khawaja Mohammad Yusuf, (iii)
Khawaja Khursheed Ali, (iv) Sheikh Ajaz Ahmad, (v) Noor
Mohammad Khan Malik (vi) Agha Mohammad Khan, (vii)
Naimuddin Khan and (viii) Mahbub Alam. The nomination papers of
the last named candidate were rejected as he was holding shares in the
capacity of the president of a co-operative society and not in his
personal capacity. Of the remaining seven, who contested the
elections the following four were declared elected: (i) Mohammad

Sharif Muttaqi, (ii) Khawaja Mohammad Yusuf, (iii) Khawaja
Khursheed Ali and (iv) Sheikh Ajaz Ahmad. At Dacca the number of
candidates who offered themselves for election fell short of the
number of vacancies. Since only two candidates namely Major
Mohammad Nurul Ameen and Bahauddin Ahmad submitted
nomination forms, they were elected unopposed.
Elections of three Directors for the Central Board, one each
from the three Areas, were also held. Hatim A. Alvi and Mohammad
Sohail contested from the Karachi Area. Alvi was elected. Four
candidates contested from the Lahore Area, (i) Noor Mohammad
Khan Malik, (ii) Mohammad Sharif Muttaqi, (iii) Khawaja
Mohammad Yusuf and (iv) Mahbub Alam and Noor Mohammad
Khan Malik was elected. No contest, however, took place for electing
a Director from the Dacca Area, Sultanuddin Ahmad being the only
candidate.
Composition of the Central and Local Boards after the first
elections, held on November 9, 1949:-
CENTRAL BOARD
Nominated Directors
1. Sir Syed Maratib Ali Shah, Lahore

2. Wahid-uz-Zaman, Dacca
3. P.C. Ghosh, Dacca
4. Hatim A. Alvi, Karachi
5. Kasim Hussain Kassim Dada, Karachi
6. J.B. Shearer (Government official nominated
temporarily with effect from August 2, 1949 to
November 11, 1949 in place of Victor Turner)
Elected Directors
1. Hatim A. Alvi, Karachi Area

2. Noor Mohammad Khan Malik, Lahore Area
3. Sultanuddin Ahmad, Dacca Area
Hatim A. Alvi, who was serving the Central Board in the

capacity of a Director, nominated by the Central Government till
November 9, 1949 was also elected as a Director from the Karachi
Area on that date. Following his election, he tendered his resignation
as a nominated Director and in his place Sir Abdul Hamid was
appointed as Director.
The Local Boards consisted of the following elected Members as

the Central Government had not till then nominated any person as
Member of any of the Local Boards:-
Karachi Area
1. Akberali M. Essaji
2. Fidahussin A. Lotia
3. Sheikh Mohammad Yaqub
4. Mohammad Siddique Dawood
Lahore Area
1. Mohammad Sharif Muttaqi

2. Khawaja Mohammad Yusuf
3. Khawaja Khursheed Ali
4. Sheikh Ajaz Ahmad
Dacca Area
1. Major Mohammad Nurul Ameen
2. Bahauddin Ahmad
(The remaining two members were yet to be
elected from the Dacca Area)
In order to fill the two vacancies of elected Members pertaining

to Dacca Area, elections were held on February 5, 1951 and
Mohiuddin Ahmed and Abu Sadat Mohammad Sayem the only two
candidates in the contest were delcared elected. Election was also
held on the same date for a Member from the Lahore Area in the
vacancy caused by the resignation of Khawaja Mohammad Yusuf,
following his appointment by the Central Government as a Director

of the National Bank of Pakistan which disqualified him for the
membership of the Local Board. In his place, Mohammad Qamar-uz-
Zaman was elected unopposed.
Nominatfon of Members
Besides holding elections of Directors and Members for Central

and Local Boards, arrangements were simultaneously made to secure
representation of the Government nominated Members on the Local
Boards in order to complete their composition as early as possible.
Letters were sent in mid-September, 1948 to the Finance Secretaries
of the Provincial Governments of East Bengal, West Punjab,
N.W.F.~. and Sind, for recommending names of persons considered
suitable by them for nomination by the Central Government on the
Local B9ard of their area by end-September, 1948. A similar letter
was addressed to the Secretary, Ministry of States and Frontier
Regions,1advising him to contact the heads ofBahawalpur, Khairpur
and Kal~t States to recommend such names, in case they were
interested in representation of prominent personalities of their States
on the tiocal Boards. In reply to the above letters the Finance
Secretaries of the Governments of East Bengal and Sind asked the
State Baqk to furnish them a complete list of shareholders registers of
Dacca aqd Karachi Areas for making selection from amongst them,
as required under clause 12, sub clause (2) of the State Bank of
Pakistan brder, 1948. The list had, however, not been compiled by
that time. They were informed of the names of notable individuals,
giving details of the number of shares held by them.
The Provincial Finance Secretaries were at the same time

informed! that in case a subscriber had not purchased the requisite
number of shares of the State Bank to qualify for nomination as a
Member from amongst the shareholders registered in the register of
that area, he would be allotted the qualifying number of shares later
on. As such, the condition restricting selection of suitable candidates
from am~ngst the shareholders was not waived to act as a bar in
recommending names of persons who were more capable than the
persons ~olding the required number of shares. Government was,
.I
thereafter, advised in mid-December, 1948 to acquire a small block

of State Bank shares of the nominal value of about Rs.50,000 for
allotting, at par, from this block of shares, the requisite number of
shares to the persons selected finally by the Central Government for
nomination on the Boards, in case they did not hold the qualifying
number of shares. As it was necessary to amend the State Bank of
Pakistan Order, 1948 to give legal effect to the above suggestion,
necessary changes in clause 12(2) of the Order were also suggested
and introduced later with the approval of Central Government.
Meanwhile, the Government of N.W.F.P. had telegraphically

advised the names of the candidates it deemed fit for nomination on
the Local Board of Lahore Area. On clarification of the point
regarding the criteria to be applied for selection of the names the
other provincial governments also followed suit. By mid-December,
1948 the State Bank had received names of five or more than five
persons from each of the provincial governments for onward
transmission to the Central Government for nominating "not more
than five members" on the Board of each of the areas as provided in
the State Bank of Pakistan Order, 1948. The names recommended
were:-
Government of N. W. F. P.
(Lahore Area)
1. Khan Mohammad YusufKhan Member, Chamber of Commerce

2. Fida Mohammad Khan Advocate
3. K.M. Aslam Managing Director, Peshawar
Electric Supply Co. and
Chairman Pakistan Tanneries
Government of West Punjab

(Lahore Area)
1. Mohammad Sharif Muttaqi Managing Director, Muslim

India Insurance Co. Lahore
2. Khan Bahadur Mohammad Ismail Businessman
3. Syed !Mohammad Shah Advocate, W.P. High Court

4. Moulvi Mohammad Ali Kasuri Businessman
5. N.D.!Siddiqi Han. Secretary, Pakistan
Chamber of Commerce
6. Zahoor Ahmad Chairman, Pakistan Chamber of
Commerce
Govemmrnt of East Bengal

(Dacca Area)
1. Shah"(ldul Haq
I
2. Khaq Bahadur Seraj-ul-Islam Names were telegraphically
3. Habib-ur-Rehman advised without indicating the
4. Rai Bahadur Khagendra official or professional status
Narayan Mitra ofthe persons nominated
5. NurulHuda
Govemm'f!nt of Sind
(Karachi H.rea)
1. Yusuf Abdullah Haroon Industrialist

2. Abdul Qadir Mohammad
Hussain Agriculturist
3. HajiMaulaBux Agriculturist
4. Syed Mehar Ali Shah Co-operative Banker
5. SethFakhruddin Valibhai Businessman
Khairpur State
1. Mumtaz Hasan Qazilbash Vice-President, Executive

Committee, Khairpur State
No names were received from Bahawalpur and Kalat States.
Transmission of these names to the Central Government was,

however, deferred till the completion of elections to enable the
Central Government to fulfil the requirement under section 12(b) of

the State Bank of Pakistan Order, 1948 in making nominations.
Besides, it was also considered essential that the routine functions to
be undertaken by the Local Boards should be clearly determined
before convening their first meetings. The names were thus
transmitted on January 9, 1950 after the result of the elections had
been published, or after a lapse of about one year, following the
receipt of list of the nominees from all the provincial governments.
Meanwhile, the Central Ministry of Finance had also addressed

letters to the Provincial Finance Secretaries on December 30, 1949,
asking each of them to submit to the Ministry, as early as possible, a
panel of 12 persons interested in commerce, industry, co-operative
banking and agriculture, to help the Central Government make
nomination of members from amongst them. The completion of the
Board was thus further delayed. The Central Government showed no
urgency to finalise it either, despite issue of a number of reminders by
the Bank for an early decision, particularly after the receipt of
representations from a number of elected Members to finalise the
composition of Local Boards as early as possible. It was after a lapse
of over eight months that the Central Government announced
appointment of the following persons on the Local Boards in mid-
September, 1950 in the first instance. Some more appointments were
made later on.
Karachi Area
1. Abdul J abbar Fazul Ellahi Karachi

2. K.A. Marker Quetta
3. Choudhari Ghulam Husain Mirpurkhas
4. Mohammad Ally Rangoonwala Karachi
Lahore Area
1. Malik Khuda Bukhsh Khan Peshawar

2. Zahoor Ahmad Lahore
3. Sardat Mohammad Gazanfarullah Khan Bahawalpur

4. D.M. Malik Lahore
Dacca Area
1. Bazlu~ Karim Dacca

2. Ashra~fHossain Jamalpur
(Mymensingh)
3. Abdul J alii Dacca
Following the nomination of above persons, the first meetings of

Local BoaMs were convened soon thereafter by their secretaries in
the third w~ek of September, 1950. 2
I
Vacuum otiTrained Bankers
The ambitious programme of training of officers in the field of

banking initially drawn up by the Government in collaboration with
bankers an~ eminent educationists, including the Vice Chancellor of
Sind Univ¢rsity was not implemented. Instead, responsibility of
training wa~ entrusted to the State Bank and which was introduced as
'Bank Of{icers Training Scheme' within one month of its
eatablishment. Zahid Hussain, soon after his appointment gave
attention to the problems he thought were of pressing urgency. "We
must remember (he said) that establishment and extension of
banking Oil sound lines is impossible without experienced bankers,
mature in ~heir judgement, wise and impartial in their policies and
their adm}nistration, bold in their plans and consistent and
courageous in executing them ... 3
The number of trained and experienced senior bankers who

came over to Pakistan from the Reserve Bank being very small, it was
necessary to tap all possible sources, not excluding the Indian
2 The compos,tion of the Central Board of Directors and Local Boards from June 30, 1948 to
June 30, 19~0 on yearly basis is given in Appendix.
3 Zabid Husa~n: Speech delivered on the occasion of the First Annual General Meeting of the
Bank on September 29, 1949, p.8.
commercial banks which had Muslim officers in their employ. The

Governor was successful in securing the servces of a few senior
officers like Messrs. A. Mohajir, Mohammad Mahmood and S.M.
Masiuddin from the Imperial Bank; Abbas Kazmi, Nazruddin
Mahmood and Syed Raziuddin from the State Bank of Hyderabad
and N.M. Uquaili from the Central Bank. Some overseas sources
were qlso tapped. But the personnel available through these sources
was barely sufficient to meet the immediate requirements of the State
Bank. Therefore, the Bank thought of making alternative
arrangements for the regular supply of trained men for its own needs
and requirements of the commercial banks.
A comprehensive training scheme was formulated under the

personal supervision of the Governor to train university graduates
with high academic qualifications. It was approved by the Central
Board of Directors of the Bank at its meeting held on July 2, 1948.
Mohammad Aminuddin, a retired officer of Lloyds Bank, with long
experience in the profession, was put in charge of the Scheme. This
was a bold departure from the prevalent practice elsewhere, where
officers' posts were filled by promotion from below and not by direct
recruitment. "A young man (he explained) who is kept too long on
duties of a routine and mechanical nature is apt to lose not only his
keeness but also his power of receiving and absorbing knowledge.
The society in which he moves and the general conditions in the
country are not such as to enable him to preserve and advance his
knowledge of the profession from which he earns his Jiving. His
interest seldom extends beyond doing his daily work in conditions
which are often far from congenial and encouraging. In these
circumstances it is unreasonable to expect and unsafe to plan on the
basis that the lower ranks alone can provide men who can occupy high
positions where impartial out-look, clear judgement and
administrative capacity are needed in addition to technical and
professional knowledge. He must exploit both sources-ranks of
junior employees as well as bright university graduates for filling our
cadre of officers··. 4
4 Zahid Husain: Central Banking in Pakistan, The Federal Economic Review, October,
1954, p.13.
The i conservative foreign bankers who were skeptical of the

approac~ were told by the Governor that: "the circumstances of this
country are totally different to those countries from which they derive
their ide4s of training, suitability for responsible positions and of the
value oftCeoretical training imparted by special arrangements. Even
in their own countries ideas are changing under the stress of
conditior1,s created by the vacuum in training and acquisition of
professional knowledge as a result of the war. A broader outlook is
needed". 5
Applications were invited through advertisement from

universit~ graduates all over the country preferably from those who
had majored in Mathematics, Economics or Commerce in their
degree c<hurses. The selected candidates were to be attached to
different ~ommercial banks for practical training for six months and
thereafter given a test. The qualifying candidates were imparted
further tr~ining for another six months both in theory and practice of
banking. The successful among them had prospects but no guarantee
of appoin~ment as officers in the State Bank or commercial banks.
After the~r absorption, which could lead to their appointment as
officers, they were expected to pass Part-1 and Part-11 of the Banking
Diploma pxamination within a period of five years.
Nearly 700 candidates applied from all over the country. Of

these 105 were selected and placed for training with different
commercial banks in East and West Pakistan. All foreign banks co-
operated in this venture. After the completion of the six months
period of training, tests were held at Karachi, Lahore and Dacca. To
evaluate the performance of trainees in order of merit, they were
divided into four categories: those securing 60 per cent marks or more
were placed in 'A' category, 50 per cent or more in 'B' and below in
'C' those who failed in more than OIJ.e subject were put in 'D' category
and their ~urther training was terminated.
Of the 86 candidates who appeared for the tests held at different
centres 24iwere placed in 'A' category, 24 in 'B', 30 in 'C' and 8 in 'D'.
s Zahid Husftin: Speech delivered on the occasion of the First Annual General Meeting of the
Bank on September 29, 1949, p.lO.
The majority of trainees were absorbed by the State Bank and the
National Bank, while the Imperial Bank and the Muslim Commercial
Bank accommodated a few of them.
This Scheme only partially helped to overcome the shortage of

banking officers, especially in the National Bank which had an
ambitious programme of branch expansion. The training scheme was
revived in 1951 with some improvements. Amongst other things, the
minimum educational qualification for applicants was raised to
Second Class M.A. in Economics, or B.A. (Hons.) in Economics or
First Class B.A. in Economics or Commerce or First Class Graduates
in other subjects with strong school and college careers. A written test
was prescribed for their selection. The employees of the State Bank
and National Bank were also eligible to apply under the Scheme.
Five hundred and twelve applications were received from all

over the country but only 112 were found eligible. The centrewise
eligible candidates were: Karachi Area 43, Lahore Area 36, Dacca
Area 31, and Peshawar Area 2. As it was the intention of the Bank to
have a fair representation of all parts of the country, it was felt that
the number of applicants possessing the requisite qualifications was
inadequate from Dacca Area (East Bengal) and Peshawar Area
(N.W.F.P). It was, therefore, decided to relax qualification in their
cases. As a result, 35 more candidates from East Pakistan and 7 from
N.W.F.P. were made eligible for interview. Out of 154 candidates,
who appeared for the interview, 108 qualified in the written test.
Thirty-two of them passed the written test and were assigned to
different commercial banks. After preliminary training of six
months, final tests were arranged in February, 1951 in which 19
appeared and 13 qualified. Four of these trainees were absorbed by
the State Bank and 9 by the National Bank.
Another batch of 59 candidates was selected for training in 1952

under this Scheme. Forty-four of this batch completed their training,
while 40 appeared in the final written test held in October, 1952. Of
the 19 who qualified, five were absorbed by the State Bank and
fourteen by the National Bank. The candidates who failed to qualify
in the test were allowed to continue their training for three months.
They were1re-examined in May, 1952 and only 11 qualified in the test.

The State Bank absorbed two, while the other nine were offered
1
appointment by the National Bank.
Departmental Examinations
i
To make the employees of the Bank more conversant with the
work of ban~ing, a scheme for holding Departmental Examinations
each year fpr bank clerks was introduced in 1950. The employees who
passed the examination had better prospects for promotion. The first
examinatiqn was held in April, 1951. One hundred candidates from
different offices took the test at Karachi, Lahore, Peshawar, Dacca
and Chitta¥ong centres.
Institute oJIBankers in Pakistan
On t~e initiative of the Bank's Governor, an Institute of

Bankers i1Pakistan was established for conducting examinations in
prescribed banking courses for augmenting the strength of qualified
banking st ff in the country. The Institute, which started functioning
from Sept mber 17, 1951 conducted successfully the first Diploma
Associatio Examination in May, 1952 followed by Certificate of
Membersh p Examinations. This examination replaced the
Departme tal Examination till then held under the auspices of the
State Ban . The Governor was elected as the first President of the
Council of he Institute of Bankers.
Foreign Spfcialised Training
Oppo~tunities were also provided to young men for training

with the leading banks of U.K. Those officers who combined good
academic qualifications with reasonable banking experience and
were keen to go abroad were selected and placed for training from 6
to 12 mo1ths with such reputable banks as the Midland, the
Westminister and the Lloyds. Five young bankers were selected in
1950 as the first batch and were placed for training with these banks.
A few offibers also joined the training courses initiated by the
Internationjll Bank for Reconstruction and Development in 1951. In
-- ~-- - - --------------------
subsequent years the State Bank continued to avail of these training

facilities offered by foreign banks as well as international financial
institutions.
Training for Supervisory Posts
The State Bank in collaboration with the National Bank, the

Habib Bank and the Muslim Commercial Bank introduced a scheme
for training of young graduates for supervisory posts. After a
countrywide selection, 100 trainees were enlisted for training for one
year with banks at Karachi, Dacca, Lahore and Chittagong. The first
six months covered both theoretical and practical training and the
remaining period was reserved exclusively for practical training.
Special arrangements were made with the Government of East
Bengal and the universities of Punjab and Dacca for imparting
theoretical training at Chittagong, Lahore and Dacca. The Bank
arranged for theoretical training at Karachi for which it obtained the
services of an experienced educationist who supervised the entire
scheme.
Departmental Promotions
Another source to fill the vacuum was departmental

promotions. Ordinarily, the post of a Junior Accountant by the
nature of the duties attached was such that it should have been filled
by persons who have had experience of the details of the work in the
Bank while serving in the clerical cadres. But a serious departure
from this procedure had to be made and a large number of senior
clerks were promoted as Junior Accountants. Even before the State
Bank was formed, due to the formation of a new office at Dacca and
on account of the depletion of staff in Lahore as also in Karachi
resulting from migration, promotions were made on a large scale. On
the first of July 1948, the State Bank received from India, on transfer,
60 Junior Accountants, 80 Clerks Grade-l and 220 Clerks Grade-H.
During the two years ofthe Bank's existence, 18 Junior Accountants
were promoted as Officers Class-I and 157 Clerks Grade-II as Clerk
Grade-l. The pace and rapidity with which these promotions were
made was not entirely consistent with the requirements for
78 i HISTORY OF THE STATE BANK OF PAKISTAN
I
i
experienc d management. Out of 128 Junior Accountants of the

Bank, 79 ere below 30 years of age. However, the circumstances
prevailing n the aftermath of the Partition made it inevitable to take
such short ut measures in order to enable banking facilities to expand
at the pace required by a rapidly monetising economy.
Pakistan Coins
I
The issue of new designed Pakistan coins was at first to be
handled by Reserve Bank from April1, 1948 until arrangements for
the minting of new coins were taken over by Pakistan. There were
three mint$ at the time of Partition located at Bombay, Calcutta and
Lahore. The capacity of the Lahore Mint (now Pakistan Mint) to
meet its i~~tial requirements for new coins was limited. An estimate
made by t~e Reserve Bank of Pakistan's requirement during 1948-49
was:-
~fCoin
Number of pieces
Type (in Millions)
One-tjupee coin 20.00

lh-rupee coin 9.08
¥4-rupee coin 8.09
Two arna coin 5.21
Half a~ma c.oin 1.51
Single pice 0.85
It was, therefore, decided that all the mints would jointly

undertake minting of Pakistan coins. 6 Even the joint operation was
expected to last for six months after approval of new designs to
produce a sufficient initial stock of these coins, while the Lahore Mint
was gearing up to take over the entire responsibility of production.
The Finance Minister took personal interest in the designing of the
6 Prior to the introduction of decimal currency in January 1, 1961 the rupee was divided into
sixteen annas: an anna was further divided into four pice or twelve pies. Besides these
denominations two anna coins and half anna coins were also in circulation.
new Pakistan coins. He examined the coins of all Islamic countries,

particularly of Egypt, Turkey, Iran and Saudi Arabia, and chose the
'general' design of a silver coin, having the status of rupee in use in
. Iran. On one side of the Iranian coin was the country's emblem; a lion
and the sun. This was replaced by the crescent and star on the reverse
side of Iranian coin, the original design was substituted by the words
(Hakumat-e-Pakistan). The Mint Masters of Bombay and Lahore
were asked to prepare designs which were submitted to the Cabinet
in early September, 1947 for their selection. The Cabinet preferred
the design of the Bombay Mint which was also approved by the
Quaid-i-Azam. The designs for subsidiary coins were then prepared
along the lines approved for notes. Production of coins started at all
the three Mints, with the Lahore Mint stopping all coinage except the
Pakistani. On the morning of April 1, 1948 the Finance Minister
presented the new Pakistan coins to the Quaid-i-Azam in a blue
valvet casket. Addressing the gathering the Finance Minister said:
I am confident that Pakistan rupee will enjoy a very strong position in

the currencies of the world. I may point out that Pakistan is self-
sufficient in food grains and is opulent in the production of agricultural
cash crops. It is certain to have a favourable balance of trade with its
sister Dominion. It goes without saying, therefore, that Pakistan rupee
will be much in demand in order to satisfy the balance of payments in
favour of Pakistan. This ceremony marks an important step in the
economic life of the new state. Pakistan has got its new coins.
In his reply the Quaid-i-Azam observed:
I thank you, Mr. Finance Minister, for the honour you have done me
by presenting the first Pakistan coins and notes to me today. I take this
opportunity of publicly expressing the appreciation of the
Government and people of Pakistan of the way in which you and your
Ministry have handled the finances of our young State and your
untiring zeal to put them on a sound footing. When we first raised our
demand for a sovereign and independent State of Pakistan there were
not a few false prophets who tried to deflect us from our set purpose by
saying that Pakistan was not economically feasible. They painted
extremely dark pictures of the future of our State and its financial and
economic soundness. The very first budget presented by you must
have caused a shock to those false prophets. it has already

demonstrated . the soundness of Pakistan's finances and the
determination of its Government to make them more and more sound
and strong. Although it has meant the tightening of our belts, to a
certain extent, but I am sure that the people of Pakistan will not mind
making sacrifices in order to make our State in the near future really a
strong and stable State so that we can handle more effectively and with
ease our programme, specially for the uplift of the masses. I have no
doubt in my mind about the bright future that awaits Pakistan when its
vast resources of men and material are fully mobilised. The road that
we may have to travel may be somewhat uphill at present but with
courage and determination we mean to achieve our objective which is
to build up and construct a strong and prosperous Pakistan.
The whole rupee, half rupee and quarter rupee coins were made of
pure nickel. The two annas, one anna and half anna pieces were made of
cupro-nickel alloy. The single pice coin was made of bronze alloy and was of
washer type which had been adopted during the Second World War as a
metal saving device. The details of the designs of these coins are given
below:-
Rupee Coins
These coins bore on the centre of obverse face a crescent moon and a
five pointed star with respective values of the coins inscribed in Urdu above
the design and in English below. Around the lower half of the periphery,
each coin was inscribed with a half wreath of stylised laurel leaves
surmounted by a circle of small beads. The centre of reverse face of these
coins bore a monogram in Urdu comprising the words "Hakumat-
e-Pakistan" and the date of year of issue in English figures. The
words 'Government of Pakistan' were inscribed in English around the
upper and the lower periphery, the coins bore a half wreath of stylised laurel
leaves, surmounted by stars of the type of the obverse face. The whole
design of the reverse face was also surmounted by a circle of small beads.
Coins of Small Denominations
The designs of these coins basically conformed to those of rupee, half

rupee and quarter rupee coins. The single pice coin was a hollowed washer
type single pice. Its design differed from the rest. These coins were put into
circulation from Aprill, 1948 along with India coins.
With the issue of Pakistan coins, India coins started returning from
circulation and after the establishment of the State Bank on July 1, 1948 the
pace of replacement of India coins was accelerated. All India coins other
than nickel, brass and quaternary silver coins, were disposed of by remitting
them to India against payment to the Government of Pakistan of their
bullion value.
The India coins were gradually demonetized according to the set

programme with effect from the dates shown below:-
Denomination Date of
Demonetization
1. India nickel brass two anna coin 1-07-1949
2. India nickel whole rupee 1-10-1949
3. All India 1h rupee and Y4 rupee 1-12-1949
4. All India coins except India half

pice and pies 1-07-1951
Total India coins returned to India by the State Bank from July
1, 1948 amounted to Rs.25.4 million.
Designing of Bank Notes
The State Bank, after assuming responsibility for the Currency

issue from the Reserve Bank, continued. to issue Gc;~vemment of
Pakistan bank notes of simple design printed on an emergency basis
by Messrs. Thomas De La Rue Co. Ltd. London and simultaneously
initiated action to design its own. The services of Shaikh Ahmed,
Vice Principal of Mayo School of Arts and Crafts, Lahore were
commissioned in early August, 1948. Specimen of the notes of
various central banks were also collected and examined.
It was discovered that ordinarily the design of a note of a country

contained photographs or paintings of historical monuments or

natural beauty spots or important projects of great economic
consequences or portraits of their leaders and heroes or pictures of
special types of birds, animals of national importance.
Pakistan's flora and fauna were not distinctive in the region.

Although Pakistan had some of the most enchanting sites in the
world, these had yet to be discovered. A strong section of the Muslim
opinion was opposed to having a human portrait on the currency
notes. 7 The territories falling to the share of Pakistan, did not have
any gigantic projects under way. In the circumstances, the choice
narrowed down to historical monuments or commodities of
commercial importance to the country. The Governor placed his
tentative proposals before the Central Board in its meeting on
August 16, 1948.
Denomination Objects
Rs.lOO Front State Bank Building, Karachi

Back Mangla Regulator, Upper
Jhelum Canal, West Punjab
Rs.10 Front Shalimar Gardens, Lahore

Back View of Khyber Pass, NWFP
Rs.5 Front
Alternate (a) One of the famous tombs at
Thatta of Sukkur, Sind
Alternate (b) Attock Fort, Moghul Gun
Alternate (c) Juma Masjid, Lyallpur (view of
minarets from roof)
Back River scene, showing transpor-
tation of jute in East Pakistan
After their approval by the Board (alternative 'a' regarding

front side of the note of Rs.5 denomination), Messrs. Thomas De La
1 The Quaid's Portrait was later printed on notes of higher denominations.
--""-- -----
Rue & Co. were asked to prepare the art work and offer suggestions
for making them more lasting than the ones in circulation and for
eliminating chances of forgery. The colour of the notes and proofs
received, were approved by the Central Board at the end of August,
1948 subject to minor amendments of Urdu calligraphy, location of
signature of the Governor, etc. The intaglio process of printing was
applied, using water marked paper with a star and crescent facing
north west and embodying a security line thread running vertically
down the notes and increasing the strength of the paper from 2000
mean double fold, used in printing of the Government of Pakistan
notes, to 2,500 mean double fold.
Approval of the Government was received on September 26,
1949 in case of notes of Rs.5 and Rs.10 denominations. They did not,
however, approve the blue colour for the notes of Rs.5 denomination
and left the decision to the Board. The design of the notes of Rs.lOO
denomination was not approved either as the Government was not in
favour of incorporating on the front side of the note the photograph
of a building which was being used by the State Bank on a rental basis.
Messrs. Thomas De La Rue & Co. London were, however, given a
green signal for the printing of notes of Rs.5 and Rs.lO
denominations with the following designs and their issue commenced
from September 15, 1951.
Rs.5 Front Picture of a boat in stream,
laden with jute, the golden fibre
of East Pakistan
Back Picture of Khyber Pass, the
natural access to Pakistan
through mountains in the north
west region of West Pakistan
Colour Purple
Rs.lO Front Shalimar Gardens, Lahore, an

extremely well laid, spacious
and beautiful garden built
during the Moghul Rule period
showing the-grandeur
of Moghul Style
Back Historical Tombs in Thatta-

tombs of renowned saints built
during the Muslim rule in Sind
Colour Brown
As for the notes of Rs.100 denomination, it was decided by the

Board in March, 1951 that pending approval of the new design by the
Government, which was likely to take time, they should be printed on
the pattern of existing Government of Pakistan notes, as an
emergency measure, with necessary changes in calligraphy and
inserting security threads, if possible. These notes, which were of a
mauve colour, were printed in geometrical design with Urdu
inscriptions and provided with water-mark of crescent and star on the
left hand side and a security thread line vertically from edge to edge.
They were issued on September 15, 1953. A brief description oftheir
main features is given below:-
Face The general design of the face of all the notes was similar
to £.1 note of the Bank of England. On the right crescent and star in
white were superimposed on a background of protective geometrical
design. The denominational value was given in Urdu and English
numerals. The words (Hakumat-e-Pakistan' and other inscriptions
appeared in Urdu. The English signature of the Finance Minister was
printed on the left hand bottom.
Back Denominational values in Urdu and English numerals

appeared at the corners. The words "Government of Pakistan" were
printed in English on the top. Denominational value in words in
English appeared at the bottom.
Colour The main colour was deep blue for Rs.5/- notes, red for
Rs.10/- notes and rich green for Rs.lOO/- denomination notes.
Government of Pakistan Re.l/- notes and the State Bank's own

notes of Rs.2/- denomination were also issued by the State Bank from
March, 1949. These notes were printed by Messrs. Bradbury
Wilkinson & Co., United Kingdom using lithographic process.
The State Bank's subsequent decision in favour of intaglio

printing process for Pakistan was preceded by a good deal of thinking
on its relative advantages over the more popular lithographic
process. Because of its cheapness the latter had good reasons to
recommend itself to Pakistan. Due to the growing menace of forgery
in all types of notes of lithographic process and a hostile neighbour
from whose borders the entry of forged notes was feared most, the
Bank, however, came to the conclusion that despite its costliness, the
former was the answer to Pakistan's need of greater security for its
notes. Therefore, ignoring the cost factor the Bank supported the
Government's proposal for the establishment of the Pakistan
Security Printing Corporation on intaglio process.
Zahid Husain
(Governor 1948-53)
4
Outstanding Issues with Reserve Bank
In any dispassionate and objective analysis of the course of Indo-

Pakistan relations in the immediate post-partition period, it is
difficult, well nigh impossible, to give the Reserve Bank a clean bill.
India had no exclusive right of ownership on the Bank which was a
joint inheritance of both countries. It is the fact of its location in its
territory that enabled it to assume control of its physical and financial
resources. A junior partner in what was a common stake, had been
reduced to the status of a petitioner for its share which, it was within
the power of the senior partner, to withhold or deny. From the very
onsent while the legitimacy of the claim was not disputed, the
Reserve Bank constituted itself into an arbiter in the division of the
assets in its possession and the determination of the liabilities,
making the State Bank a sufferer on both scores. It was unwilling to
part with what did not belong to it unless Pakistan gave in to the
demands qf the Indian Government on totally extraneous issues, like
Kashmir with which financial matters were deliberately .linked.
Whatever the political motivations of New Delhi, the Reserve Bank
with its status and stature had a moral and legal obligation to honour
its commitments or at least to let the Government of India know what
those commitments were. Such a declaration would have had a
sobering influence on the approach to the problem arising out of
partition of the subcontinent and would have saved the situation from
becoming more complicated and complex. Instead, it adopted the
87
----- -------------------------------------------------------
most uncompromising attitude which magnified the difficulties of

Pakistan in its bid for survival at a critical juncture, prolonging a crisis
of confidence over an extended period by raising one issue after
another so that Pakistan would eventually succumb to the irresistible
pressure of events.
Retirement of India Notes and Coins
To determine the amount of assets due to the Government of

Pakistan it was necessary to ·replace India notes circulating in
Pakistan with Pakistan notes. The process of replacement
commenced on April1, 1948 when the Reserve Bank of India started
issuing Pakistan inscribed Notes. The State Bank of Pakistan took
charge of this operation from July 1, 1948. This entitlement was
guaranteed by Clause 4 of Part IV of the Pakistan (Monetary System
and Reserve Bank) Order 1947, as amended in 1948. Pakistan was
entitled to a share of the assets of the Issue Department of the
Reserve Bank equal to the amount of over-pri,nted Pakistan notes in
circulation on June 30, 1948 plus India notes of Rs.2/- and above,
encashed in the country from July 1, 1948 to June 30, 1949.
In the process of withdrawal of India notes from circulation in

Pakistan difficulties of very unusual character were encountered.
These had to be tackled in earnest to ensure that the bulk of India
notes in circulation were retired within the short period of one year
and three months. Between their withdrawal and replacement there
was a time lag resulting in the shortage of Pakistan Inscribed Notes to
the issuing offices in Pakistan. At one time consignments of notes had
to be flown to the centres to avoid an impending collapse. The
situation was relieved by issuing Government of Pakistan notes of
distinctive designs several months earlier than the scheduled date.
The banking structure which had virtually broken down since the
inadequate untrained staff left at the Treasuries and Sub-Treasuries
after the Partition, could not provide the service to the public to
exchange their currency. Given the vastness of the area, the
percentage of illiteracy in the population and the slowness of means
of communication, specially in East Pakistan, the number of offices
of the Banks and its agencies providing exchange facilities, was
OUTSTANDING ISSUES WITH RESERVE BANK 89
grossly insufficient. These conditions made the task of the State Bank
far more difficult, compelling the adoption of special measures in
order to facilitate the exchange of the bulk of the people's India notes
holdings into Pakistan notes, before the appointed date.
The retirement of India notes from circulation was only the first
step in the programme designed for ensuring their delivery to the
Reserve Bank against the transfer of an equal amount of assets of its
Issue Department to Pakistan. Under clauses 4(2) and 9(1) of Part IV
of the Pakistan (Monetary System and Reserve Bank) Order, the
India notes and coins held in the Currency Chests in Pakistan on June
30, 1948 and the India notes encashed between July 1, 1948 and June
30, 1949 had to be returned to the Reserve Bank before the State
Bank could claim equivalent assets from the Reserve Bank. The
notes and coins were held in the Currency Chests located at the
Treasuries and Sub-Treasuries of the Government and the branches
of the Imperial Bank of India spread all over the country. They had
to be withdrawn to the State Bank's Issue Offices at Karachi, Dacca
and Lahore, counted, examined, packed and shipped to India. It was
an arduous job. Although the Bank's Cash Department was
desperately short of trained staff the entire operation was carried out
by a band of dedicated workers within the specified period.
The quantity of Pakistan notes in circulation on June 30, 1948

was certified by the Reserve Bank to be Rs.515.7 million, which the
Bank was required to transfer to Pakistan assets of its Issue
Department equivalent to this amount immediately after June 30,
1948. The first statement of account of the State Bank of Pakistan,
Issue Department for the week ended the 2nd day of July, 1948 is
reproduced on the next page:-
The India notes retired from circulation between July 1, 1948

and June 30, 1949 and sent to Reserve Bank amounted to Rs.1251.8
million. Out of this amount, notes worth Rs.1230 million were
returned to the Reserve Bank by June 30, 1949, the rest shortly
thereafter.
Under the agreement arrived at between the two Banks the

STATE BANK OF PAKISTAN
\0
An account pursuant to the State Bank of Pakistan Order, 1948 for the Week ended the 0
2nd day of July, 1948

ISSUE DEPARTMENT
LIABILITIES Rs. Rs. ASSETS Rs. Rs.
~
I. A. Gold Coin & Bullion Cl
Notes held in the Banking Deptt. 2,14,63,000 Silver Bullion :>:I
><:
Notes in circulation* 52,08,43,000 Govt. of India Securities ~

~
India notes pending transfer to
the Reserve Bank oflndia 52,50,000 52,50,000
Total notes issued 54,23,06,000 B. Rupee Coin

2,13,29,000
2,13,29,000
~
c:l
Govt. of Pakistan Securities

Internal bills of exchange and
~
0
>tj
other commercial paper
II. Held with the Reserve Bank of

India pending transfer
~
til
Gold Coin and Bullion

Sterling Securities 51,57,27,000
~
Govt. of India Securities
Rupee Coin
Total Liabilities 54,23,06,000 Total Assets 54,23,06,000

• The figure being exclusive of India notes does not represent the total notes in circulation in Pakistan. India notes are the liability of the Reserve Bank of
India and will be returned to them in exchange for corresponding assets as they are replaced by Pakistan notes.
Dated the 6th day of July, 1948. Governor
retired India notes and coins were to be sent by State Bank to the
Reserve Bank at Bombay, from West Pakistan and to Calcutta from
East Pakistan and to be stored in the vaults of the Reserve Bank at
these places in joint custody of the Reserve Bank and a representative
of the State Bank until they were take~ over by the Reserve Bank
after detailed verification. For this purpose the State Bank posted an
officer and an Assistant Treasurer each at Bombay and Calcutta. The
counting process was, however, prolonged by the Reserve Bank on
the plea of shortage of staff, etc. In March, 1949 detailed verification
of India notes was stopped without any plausible grounds.
The total assets which the Government of Pakistan was entitled

to receive from the Reserve Bank were valued at Rs.1767.5 million
out of which assets worth Rs.1276. 7 million only were received by the
State Bank. The composition of the assets actualiy surrendered by
the Reserve Bank was as follows:-
Gold: 19,80,889Tolas Rs.42.1 million(@ Rs.21-3-10

144.170 Grains per tola, the rate at which the gold
value was held in the books of the
Reserve Bank of India)
Sterling Securities
£72.998million Rs. 973.3 million
India Securities Rs. 233.1 million
Pakistan Rupee Coin Rs. 3.1 million
India Rupee Coin Rs, 35.1 million
Total: Rs.1276. 7 million
In March, 1949 the Government of India imposed a ban on the

export of India notes to Pakistan. In order to avert the outflow of
India notes without any offsetting inflow from India to Pakistan, the
Government of Pakistan imposed a reciprocating ban on the export
of the India notes from Pakistan to India on May 2, 1949. The
question of the release of assets amounting to over Rs.490 million
which the Reserve Bank had withheld has remained unresolved to

this day. This item still appears in the Bank's Issue Department
Weekly Statement of Affairs under two headings:
(i) India notes representing assets

receivable from the Reserve
Bank of India. Rs.430.2 million
(ii) Held with the Reserve Bank of

India pending transfer to
Pakistan. Rs. 59.0 million
Shipment of Gold
An episode which occured in the course of obtaining delivery of

gold from the Reserve Bank and its transportation to Pakistan, is
worth recalling as it throws light on the kind of problems Pakistan had
to face in managing its affairs in its earliest days. The incident was
narrated by an ex-Deputy Governor of State Bank, Said Ahmed,
who was acting as Secretary of the Bank at that time, and was deputed
to the Reserve Bank for taking delivery of gold. According to him,
the Reserve Bank intentionally obstructed the transfer on a number
of pretexts, the principal among them being the requirement of
security. After protracted negotiations with the Bank, it was agreed
that the State Bank would charter a plane. The Pakistan Government
was then requested to spare a PAF freighter for this purpose. Soon
after the plane was made available Said Ahmed accompanied by a
small team of State Bank staff, which had experience of handling
gold, flew to Bombay to make arrangements for verification,
weighment, packing and transportation of gold from Reserve Bank
vaults to the PAF plane parked at Santa Cruz (Bombay) Airport.
The Pakistan team found it necessary to take out an effective

insurance cover for the transport of gold to the airport and for loading
it on the plane, as its movement through areas inhabitated by hostile
elements and its loading by such persons posed special hazards. It was
with great difficulty that an insurance company agreed to provide the
requisite cover because of the high risk involved. The operation was
safely accomplished and gold was loaded on the PAF freighter.

Thereafter, a signal received from the Control Tower to immediately
move the plane, disturbed the pilot. As the freighter started to move
from the apron to the runway for take-off, one of its carriage wheels
got stuck in the mud where the earth had softened after a heavy
downpour. Inspite of strenous efforts the pilot failed to pull out the
plane. His requests to the Airport Authorities for a hauling van to
tow it evoked no response. The PAF personnel and the State Bank
team were confronted with an unforseen and dangerous situation as
a plane fully loaded with precious cargo could not be left unguarded.
Said Ahmed contacted the Deputy Governor of Reserve Bank of
India, Sir Ceicil Trevor, on phone and requested him to arrange for
the posting of guards around the plane and to use his good offices in
providing a hauling van. A quick response from the Deputy
Governor facilitated the pulling out operation. The plane took off
arriving late in the night at the P AF Airbase at Karachi. This bitter
experience compelled the exercise of greater caution in subsequent
transfers of gold from India to Pakistan.
Disputes Over Release of Assets
The Reserve Bank of India, under instruction from the

Government of India, refused in March, 1949 to release any more
assets from its Issue Department against India notes retired from
circulation in Pakistan. Protracted correspondence between the two
governments followed by several meetings, both at Secretarial and
Ministerial level, could not resolve the dispute. The reasons
advanced by India for not allowing release of assets worth Rs.480
million were:-
(i) Large quantities of India notes were transferred to

Pakistan from India after June 30, 1948 which were also
retired by the State Bank in addition to notes actually in
circulation in Pakistan on the above date;
(ii) A portion of the notes returned to the Reserve Bank

included notes which were issued for the first time after
June 30, 1948;
(iii) The Government of Pakistan made extensive and

extraordinary facilities available for the encashment of
India notes, thereby keeping their legal tender status alive
in Pakistan after the stipulated date of September 30, 1948
for encouraging import of India notes into Pakistan;
(iv) The facility for the exchange of India one rupee notes was
provided on a meagre scale and terminated prematurely;
(v) Instructions were issued placing restrictions on the issue of

India notes to travellers proceeding to India.
In issues raised by India were at first discussed at meetings held

on April 6 and 7, 1949 at Bombay between the representatives of
India and Pakistan, it was pointed out by the Pakistani
representatives that:-
(i) There was no provision prohibiting free movement of notes
between the two countries. The possibility of some quantities of
Indian notes crossing the border into Pakistan after June 30, 1948 and
vice versa could not be ruled out. However, as Pakistan was entitled
to receive assets against surrender of India notes to Reserve Bank
which were in circulation as on June 30, 1948 or for whose
encashment there was a pre-existing right in respect of which right of
encashment existed on that date, all the India notes encashed and
retired by the State Bank between July 1, 1948 to June 30, 1949 and
returned to Reserve Bank, had to be taken into account by the Bank
for the purpose of division of assets. India's complaint that the
movement had been substantially against it was neither valid nor
relevant, for a two-way traffic was unavoidable in the agreement
reached between the two countries.
(ii) There was no question of imposing any restrictions on the

encashment of India notes issued for the first time after June 30, 1948.
Neither there was any restriction on the movement of notes between
the two countries nor did the Reserve Bank ask the State Bank to
impose any such restriction. Besides, the notes issued by the Reserve
Bank in the immediate post-June 30, 1948 period, were of the old
pattern and therefore not distinguishable from those already in

circulation.
(iii) Pakistan did not provide any exceptional facilities for the
encashment of India notes in order to encourage their import into
Pakistan, as contended by India. On the contrary, the arrangements
made for this purpose fell below the actual minimum requirements
and were far from satisfactory for covering all the 182 Treasuries
spread over an area of 3,581 square miles. In fact, India notes did not
change hands either in private or public after they ceased to be legal
tender in Pakistan. Government Departments, Railways, Posts and
Telegraph Departments, local bodies, banks and private firms, did
not accept them in their transactions. Wide publicity was also given to
warn the public about the date from which they were not acceptable
legal tender in Pakistan. It was worth reflecting how could the import
of India notes have been encouraged by Pakistan for the purpose of
their conversion into Pakistan notes as India and Pakistan notes were
of equal value and, at the same time, the facilities available for
exchange in Pakistan were extremely limited compared to those
existing in India;
(iv) India's claim that facilities for the exchange of India one
rupee notes were provided on a meagre scale and discontinued
prematurely was untenable for, although Pakistan was required to
encash India one rupee notes only upto September 30, 1948,
extension of the facility upto January 31, 1949 was a concession to the
holders of these notes. This facility was provided despite the fact that
no safeguard existed in favour of Pakistan against import of one
rupee notes from India. India, on the other hand, was empowered
under the agreement of March, 1948 to impose a ban on import of one
rupee notes into India from Pakistan after June 30, 1948.
No restrictions were placed on the issue of notes to travellers to

India and the movement continued to be free. However, on account
of progressive contraction of India notes in circulation in Pakistan it
was discovered that travellers were experiencing some difficulties in
obtaining them. The banks were, therefore, instructed to issue to
passengers travelling to India limited quantities of notes withdrawn
from circulation for which Pakistan was entitled to the assets of the
Issue Department. The arrangement made for their re-issue to
travellers in limited quantities was thus in the nature of a special
concession. India's complaint that a ban was imposed on the export
of the notes to India was consequently not correct. It could never
have been the intention that notes collected in Pakistan for claiming
assets should be re-issued to travellers proceeding to India which
would extinguish the claim, were the notes left in India.
All the foregoing reasons advanced by India for withholding

transfer of assets pre-supposed that conditions were deliberately
created by Pakistan to encourage the flow of notes from India to
Pakistan and to discourage their outflow. The free movement of
notes between the two countries took place in both directions in the
normal manner. It was anticipated when the agreement for the
transfer of assets was reached. The movement of notes from India to
Pakistan must have been more than offset by reverse movement from
Pakistan to India in the wake of migration of refugees accompanied
by transfers of profits and capital by the Hindus.
The Indian Government, however, continued to raise

extraneous objections to deny to Pakistan its legitimate share in
Reserve Bank of India's assets. It subsequently argued that of the
total notes returned by Pakistan to India, notes worth Rs.440 million,
represented funds to finance jute purchases during the 1948 season.
Payment for such notes should, therefore, be claimed under the
Payments Agreement concluded between the two countries.
In a bid to resolve the deadlock another conference was

convened between the representatives of the two countries at New
Delhi in May, 1951 which proved to be the last meeting held for this
purpose. Thereafter, the matter continued to be pursued through
correspondence.
Regarding the Indian Government's contention of movement of

India notes to Pakistan for financing the jute trade, they were
informed in September 1949, that the value of notes against which
assets were claimed in respect of East Bengal was only Rs.458.8
- -
~ 1
Central Boa rd of Directors

(Standing from left to right) Said Ahma d (Secre
tary), Kassim Dada, Noor Muhammad Khan
(Sitting) Syed Maratib Ali Shah, Sher fang Malik, Anwar Ali, Mohammad Ismail;
Khan (Deputy Governor), Zahid Husain (Gove
rnor), Abdu l Hamid, Hatim A. A/vi
million, comprising over-printed Pakistan notes in circulation in the

Province as on June 30, 1948 ofthe value ofRs. 74.1 million plus India
notes retired from circulation between July 1948 and June 30, 1949,
amounting to Rs.384. 7 million. In the absence of adequate
arrangements for the exchange and retirement of India notes, the
figures of Rs.458.8 million hardly represented even normal notes in
circulation in the province. Moreover, in view of dearth of banking
facilities in East Bengal, the backward condition of the cultivators
and the jute crop valued at Rs.1200 million each year the value of
notes ordinarily in circulation, quite independently of the seasonal
flow of notes from Indian territories, must necessarily have been
higher than the notes actually surrendered. India's contention that
notes worth Rs.440 million represented notes sent from India to East
Bengal after June 30, 1948 to finance the 1948 jute crop, therefore,
was not sustainable. The dispute over the division of assets has
remained unresolved to date.
Payment of Rupee Coins and Notes
The Reserve Bank made payment for the whole rupee coins and
one rupee notes withdrawn from Pakistan Government's Surplus
Stock for issue in Pakistan between April 1, and June 30, 1948 by
transferring from their reserves to Pakistan Government's Surplus
Stock, India one rupee notes of equivalent amount which could
hardly be regarded as payment in the real sense as these notes were
of no value to Pakistan. The Reserve Bank, however, maintained
that it was a good payment and that resort to this method of exchange
was intended to avoid expansion of currency against Pakistan coins.
This stand was, however, untirable in view of clear provision in the
Monetary Order.
Share in Reserve Bank's Profit
In terms of Partition Arrangements, the Reserve bank was

required to transfer to Pakistan its share in the profits earned by it
during the. year ended June 1948, a year in which it undertook
transactions in both India and Pakistan. The profits to be transferred,
as calculated by the State Bank, worked out at Rs.13.5 million. When
a request to this effect was made, the Reserve Bank did not comply
on the pretext that without a final settlement of the question of
division of assets between the two countries against the note issue
liability of the Bank, Pakistan's share in the profits earned by the
Bank could not be correctly assessed as its profits largely represented
the rate of return earned by it on these assets. The Bank has
continued to withhold payment of Pakistan's share in the profits
eversince.
Interest Transfer on Securities
The Reserve Bank's reluctance to part with Pakistan's share in

the securities both Indian and Sterling was also too obvious from their
partial release in the latter half of 1949 although it was legally obliged
to honour its commitment in its entirety under the Partition
Agreement. The Bank had earned interest on them during the period
they remained in its physical possession, pending their transfer to
Pakistan. However, the Reserve Bank refused to entertain State
Bank's claim to pay its share of interest on them from July 1, 1948. It
only agreed to pay interest on them from the date of their physical
transfer.
Restrictions on Transfer
of Shares and Securities
Under the Moveable Evacuee Property Agreement of June,

1950 there was no ban on the transaction of shares of joint stock
companies, securities etc. held by migrant Indian or Pakistan
nationals, except in case of shares of joint stock companies whose
head office had remained in Pakistan/India but the shareholders
holding majority of shares had migrated to the other country. The
Indian Government, however, placed restrictions on the release of
such shares and securities held by migrant Pakistani nationals,
making their release subject to the prior approval of the Exchange
Control administered by the Reserve Bank. Similarly, the Indian
Government in violation of the Partition Agreements, prohibited
sale of India securities enfaced for payment of either principal or
interest or both in Pakistan to any one in India without a general or
- - --- ---------
OUTSTANDING ISSUES WITII RESERVE BANK 99
special permission of the Reserve Bank. On the other hand, such

securities were being issued by the State Bank to the Indian
companies in Pakistan who opted for remittance of their profits to
India.
Wrong Debits by Reserve Bank
The Reserve Bank and its agent, Imperial Bank of India, had
erroneously debited the Account of Government of Pakistan with
Rs.28.382 million in early October and November, 1948. When this
error was brought to the notice of the Bank, it credited a sum of
Rs.18.452 million to the account of Government of Pakistan on
October 13, 1948 while the balance of Rs. 9. 93 million was paid by the
Imperial Bank of India on December 30, 1948. The Reserve Bank
was, therefore, asked to pay to the Government of Pakistan interest
at the rate of 3 per cent per annum for the period during which these
amounts remained un-credited to the account of Government of
Pakistan. The Bank declined to entertain the claim without assigning
any reasons.
Surplus Assets and Reserve Fund
Pakistan had also become entitled to a share in Surplus Assets

held by the Reserve Bank as on June 30, 1948. The State Bank,
therefore, requested the Reserve Bank in July, 1949 to furnish a
detailed statement of the Surplus Assets held by it on the above date
for ascertaining Pakistan's share in these assets - a request which
was not complied with on the plea that the basis of calculating Surplus
Assets had not been clarified when an agreement was reached
between the two countries on the overall division of assets and
liabilities. In its view, it was a matter for the government to decide.
The State Bank contended that the objection of Reserve Bank was
merely of a technical nature, designed to complicate a simple issue
which could have been amicably settled by applying the same criteria
for determining Surplus Assets as in the case of liquidation of a joint
stock company. In the backgroun~ of these developments, the
Reserve Bank asked for the intercession of the Government of India
which suggested that an Indo-Pakistan Conference be held for
1()() HISTORY OF THE STATE BANK OF PAKISTAN
discussing this and other outstanding financial issues between the two
countries. Accordingly, the question was taken up by Indo-Pakistan
Conference in New Delhi in May, 1956. It was decided to give credit
in the debt settlement for Pakistan's share in Surplus Assets and
Reserve Fund in accordance with Partition Agreements. The dispute
thus remained pending till the negotiation of a settlement on the
overall debt question between the two governments.
Transfer of Balances of Optees
The welfare of the employees of the Bank was a consuming

concern of the management. All possible measures were taken by the
State Bank, even under abnormal conditions through which the
country was passing, to rehabilitate the employees and provide a
congenial climate for them to devote undivided attention to their
duties. The first problem that had to be tackled was the transfer of
balances in the Provident Fund; the Guarantee Fund and rest of the
dues of the staff formerly in the employ of the Reserve Bank and now
in the service of the State Bank of Pakistan. The Reserve Bank's
aversion to the transfer of these funds was followed by protracted
negotiations. The Bank had a moral and legal responsibility to make
enbloc payment in their individual accounts in the State Bank of
Pakistan. Surprisingly, it refused to treat them as optees, vehemently
contending that their action was tantamount to resignation, and as
such, a matter of settlement between them and the Bank and not with
the State Bank of Pakistan.
This was not a logically tenable contention since the transfer of

services had taken place in accordance with mutually agreed official
arrangements made at the time of Partition, amounting to a
continuation and not an interruption of their previous service. The
hardships entailed by the dilatory tactics compelled the State Bank to
accept the proposal of the Reserve Bank for direct payment. The
optees were advised to execute an undertaking to the effect that the
entire Provident Fund and bonus on Guarantee Fund received by
them, would be transferred to the State Bank for credit to their
accounts. It was under a letter of authority that the State Bank was to
receive the payments on their behalf from the Reserve Bank.
After all arrangements had been completed for receipt of

payments from India, the Reserve Bank suddenly reversed its stand
and informed the State Bank that, under the evacuee laws in force in
India, all the amounts due to the optees had been vested in the
Custodian of Evacuee Property in India, expressing its inability to
transfer the balances direct to the employees concerned or to the
State Bank. To break the stalemate created by the attitude of the
Reserve Bank and avoid the attendant hardships to the concerned
employees the State Bank decided that all balances payable by
Reserve Bank to the optees, be credited to their individual accounts
in the State Bank to the debit of Suspense Account, pending transfer
to the Charge Account.
The dispute continued to drag for nearly seven years before an

agreement was reached between the two government. A Press Note
containing its provision was issued on May 15, 1955. On this basis the
Claims Organisation of Pakistan advised the State Bank to lodge a
claim for the outstanding dues of the optees against the Reserve Bank
of India. By the year 1956, claims of 370 optees, amounting to
Rs.0.977 million were lodged with the Government of India. In the
meeting of the Officers-in-Charges of the Central Claims
Organisation of Pakistan and India, held at Rawalpindi on February
23, 1959, the Indian Representative once again declined to consider
any other claim excepting those relating to Provident Fund, Pension
and Gratuity, contending that the Press Note of May 15, 1955 did not
envisage their settlement through the Claims Organisations.
To the persistent efforts of the Central Claims Organisation of

Pakistan, the Reserve Bank of India ultimately yielded but only
partially. It accepted the claims of only 80 employees amounting to
Rs.0.14 million. The State Bank supplied the Pakistan Claims
Organisation with the Power of Attorney executed by these claimants
to enable that Organisation to recover the amount from the Reserve
Bank for payment to the State Bank. The claims of the remaining 290
employees remained under investigation and in suspense.
The State Bank made yet another attempt to negotiate directly

with the Reserve Bank for transfer of other dues payable to the
optees, without evoking a positive response from the Reserve Bank

which maintained its original plea that this money had been vested in
the Custodian of Evacuee Property of India under instructions of the
Government of India. The Government of Pakistan was apprised of
this decision pending a settlement of the dispute in the next meeting
of the officials of the two governments.
Arrangements for Printing of Notes
The State Bank after taking over charge of the control of

currency and central banking from Reserve Bank from July 1, 1948
continued to issue Pakistan Inscribed Notes printed and supplied by
Government of India from its Security Printing Press at Nasik.
However, within a few days of its establishment the Bank found itself
in a predicament when the Indian Security Printing Press expressed
its inability to fulfil the agreement to supply requisite quantities of
inscribed notes for replacement of India notes. Realising the
seriousness of the situation the Government of Pakistan made frantic
efforts to devise alternative arrangements for printing of notes to
ensure an uninterrupted and regular supply to the State Bank for
which contacts were established with leading British printing firms.
There was no time to think of any elaborate design for the new notes.
Broad outlines were indicated and designs of Rs.S/-, Rs.lO/- and
Rs.lOO/- notes were got prepared by Messrs. Thomas De La Rue &
Co. Ltd., London and printed by them by intaglio process. These
notes were issued from October 1, 1948. A brief description of the
main features of these notes is given below:-
Face The general design of the face of all the notes was similar
to £.1 note of the Bank of England. On the right Pakistan Crescent
and Star in white were superimposed on a background of protective
geometrical design. The denominational value was given in Urdu and
English numerals. The words "Hakumat-e-Pakistan" and other
inscriptions appeared in Urdu. The English signature of the Finance
Minister of Pakistan was printed on the left hand bottom.
Back Denominational values in Urdu and English numerals

appeared at the corners. The words 'Government of Pakistan' were
- - - - ~--- ---~----
printed in English on the top. Denominational value in words in

English apeared at the bottom.
Colour The main colour was deep blue for Rs.5/- notes, red for
Rs.lO/- notes and rich green for Rs.100/- denomination notes.
Government of Pakistan rupee one notes and the State Bank's

own notes of rupee two denomination were also issued by the State
Bank from March, 1949. These notes were printed by Messrs.
Bradbury Wilkinson & Co. United Kingdom by lithographic process.
Subsequently Messrs. Thomas De La Rue & Co. agreed to

participate with the Government of Pakistan in establishing a
Security Printing Press in Pakistan. A private limited co_mpany with
an authorised capital of Rs. 7. 5 million of which 60% shares· were to
be held by the Government of Pakistan and 40% by Thomas De La
Rue & Co. was formed. The foundation stone of the Pakistan
Security Printing Corporation was laid by the Governor General of
Pakistan on March 11, 1949 and steps were taken to expedite the
construction of a factory, installation of machines and commissioning
of the press into service. Messrs. Thomas De La Rue & Co.
undertook to meet the requirements of the Bank in all types of
security documents viz. note forms, cheque forms, Treasury Bill
forms, etc. either full or in part until the press in Pakistan started
production and became capable of meeting the entire requirements
in full.
Pakistan was forced to make these sudden and highly expensive

arrangements because of India's denial of access to the printing
facilities meant for the whole of the subcontinent but was by design
and accident located in its own territory.
The Pakistan Security Printing Corporation started printing

notes in rupee one and five denomination in the year 1952-53. During
the year 1953-54 it started printing notes of all denominations and the
State Bank stopped getting notes from Messrs. Thomas De La Rue &
Co. London.
The State Bank's decision in favour of intaglio printing process

for Pakistan was preceded by a good deal of thinking on its relative
advantages over the more popular lithographic process. Because of
its cheapness the latter had good reasons to recommend itself to
Pakistan. Due to the growing menace of forgery in all types of notes
of lithographic process and a hostile neighbour from whose borders
the entry of forged notes was constantly feared most, the Bank came
to the conclusion that despite its costliness, the former was the right-
answer to Pakistan's needs of greater security for its notes.
Therefore, ignoring the cost factor the Bank supported the
Government's proposal for the establishment of the Pakistan
Security Printing Corporation on intaglio process.
In the light of deteriorating political relations between Pakistan

and India, Pakistan did not consider it safe to allow the Inscribed
Pakistan notes to remain in circulation a minute longer than was
absolutely essential. Frantic efforts were, therefore, made to obtain
the supply of Pakistan notes in as large quantities as possible from
London so as to replace the Reserve Bank of India Inscribed Pakistan
notes in circulation in the country and also to meet the additional
demand dictated by growth of economic activity in the country.
Although by any normal standards, it would have been premature to
divest Pakistan Inscribed notes of their legal tender character a short
time after the complete withdrawal of India notes from circulation in
Pakistan, the situation was serious enough to warrant their
withdrawal from November 1, 1949, following extensive publicity
exhorting the public to exchange their holdings of Indian currency
with Pakistan notes. The exchange facility was available at all the
offices of the State Bank, Government Treasuries, Sub-Treasuries
and branches of the Imperial Bank of India operating in Pakistan.
The Pakistan Inscribed Notes were demonetised effective from
January 15, 1952 but exchange was allowed at State Bank of Pakistan
offices upto April15, 1952 by members of the public who could give
sound reasons for not surrendering them by the stipulated date.
After the demonetization extensive representations were

received by the Government of Pakistan and the State Bank from the
public for revival of the exchange facility. The facility was revived
from October 1, 1956 to September 30, 1957. During this period an

appreciable amount of these notes were tendered for exchange.
Payments Agreement
During the course of the tripartite talks between the

Government of India and Pakistan and the Reserve Bank in Bombay
in March, 1948, to modify the bilateral monetary arrangements, it
was agreed that Exchange Control and also restrictions on transfer of
funds of securities should be avoided and that instead, a payments
agreement be concluded. Accordingly, a Financial Agreement was
signed on June 30, 1948, for settlement of monetary transactions for
one year (July 1, 1948 to June 30, 1949) in the first instance.
The object of the agreement was to allow free movement of

trade between the two Dominions and provide protection to each
against excessive liabilities in free Sterling that were likely to arise in
the absence of exchange control, rendering it difficult to distinguish
between capital and current transactions. The main provisions of the
agreement were as follows:-
(1) The official rate of exchange between India and Pakistan

rupees would be at par. Pakistan would become a member of the
International Monetary Fund as soon as possible, and for that
purpose would declare a par value for the Pakistan rupee equal to
0.268601 grams of gold, in conformity with the India rupee.
(2) There would be no exchange control between the two

countries, nor would any restrictions be placed on the transfer of
funds or securities from one dominion to the other, whether such
transfers were on capital or current account. The right to impose
restrictions on the movement of gold was reserved by both countries.
(3) The Reserve Bank on behalf of the Government of India and

the State Bank on behalf of the Government of Pakistan, would
purchase each other's currency without limit. It was agreed that no
payment would be made by either party as long as the amount of
accumulated balances of India rupees to the extent of Rs.150 million
and so would the Reserve Bank to the same limit. It was further
agreed that an amount not exceeding £7.5 million in excess of Rs.150
million would be adjusted by payment into Sterling Account No.1
held in the Bank of England. Any amount exceeding this figure
would be paid into Sterling Account No.2 at the Bank of England. 1
(4) It was agreed that the agreement would be reviewed three

months before the date of its termination, subject to the provision
that if during its currency the transfer of funds from one Dominion to
another assumed such large proportion as to exert undue strain on the
foreign exchange reserves of either dominion, the two governments
should consult together with a view to modifying the agreement.
(5) In the event of either government taking action which

resulted in a depreciation of its currency in terms of the curreny of the
other Dominion, India rupees held by the State Bank, and Pakistan
rupees held by the Reserve Bank, should be revalued on the basis of
the new parity, and which ever Bank incurred a loss as a consequence
of such revaluation would have its balance written up by the credit of
additional India rupees or Pakistan rupees, as the case might be.
Discussion on the question of continuation or otherwise of the

Payments Agreement were held in June, 1949 between the two
governmets at which the State Bank was represented. It was decided
to extend the principal agreement for a further period upto June 30,
1950 subject to certain modifications. The supplementary agreement
was signed on September 10, 1949.
The total favourable balance of Pakistan with India during the

year 1948-49 amounted to Rs.247 million. Of this an amount of Rs.23
During the World War-11, the undivided India along with several other countries
accumulated large balances in the United Kingdom known as 'Sterling Balances'. In the
interest of her own economy the United Kingdom adopted the policy of negotiating
agreements with the countries owing these balances in order to specify the amount of
withdrawals by each country from period to period. In accordance with this policy the first
Sterling Balances Agreement between the Government of U.K. and India was signed on
August 14, 1947. Under this Agreement all balances were transferred to an account
known as Account No.2 which contained all blocked sterling. Amount which was agreed
to be released as a result of negotiations were transferred from Account No.2 to Account
No.1.
million was received by Pakistan in 'free' sterling and Rs.96.5 million

in No.2 Sterling Account (in respect of identifiable capital transfers
connected chiefly with the purchase and sale of Pakistan Provincial
Securities and Government of India Securities). The balance of
Rs.127 .5 million was held by Pakistan in India rupees at the end of the
year. This figure declined to Rs.107.3 million at the end of July, 1949,
but again rose to Rs.256.8 million by September 18, 1949. Then came
the devaluation of the Pound Sterling, followed by the devaluation of
India rupee. This created a deadlock over the exchange ratio which
resulted in the total stoppage of trade between the two countries. The
operation of the Payments Agreement came to a standstill.
Under the Payments Agreement the balance of Rs.256.8 million

became eligible for writing up in terms of devalued India rupee. India
did not do this and the matter remained in dispute.
Devaluation
The devaluation of pound sterling on September 17, 1949 which

was a signal for a large number of international currencies to follow
suit, had confronted the nascent state of Pakistan with a serious
problem of adjustment in the world economy. There was a threat to
its yet unorganised economy being completely thrown out of gear if
it had decided to devalue its currency. Till then the country had no
disequilibrium in its balance of payments. And whatever its potential
as a supplier of goods and services in the world market in the long run,
in the short term its export surplus was not capable of expansion,
while the cost of its imported captal goods was bound to rise and
adversely affects its development programme. What transpired on
that eventful occasion was communicated by Said Ahmad, the
Secretary of the Bank at that time, to the author. In a letter he
subsequently wrote he had recalled how he was disturbed at the dead
of night by a messenger, who had come with a message, requring his
presence at the Central Directorate along with Uquaili and Jack
Kennan. After the announcement of the decision, for which they
were waiting breathlessly that the Government of Pakistan had no
intention to devalue the rupee, he added:
We had not only to work out the new exchange rates of the Pakistani
rupee but also to consider as to what other measures had to be taken
in our Exchange Control Regulations in the light of Government of
Pakistan's decision. There was no exchange control between Pakistan
and India in the early stages, immediate regulations had to be framed
to introduce exchange control over all types of financial transactions
between the two countries. We set about drafting and finalising the
various consequential control devices and successfully completed
them for announcement and circulation when the bank opened for
business on the following day. The process of further tightening
control measures continued as the difference in the Pakistani rupee
exchange rate and the rate of the pound sterling and other currencies
afforded a powerful incentive to speculators to transfer funds abroad
through unofficial channels and it was found necessary to plug all holes
as far as possible.
India did not see her way to accept the position created by her
own decision to devalue its rupee. The Reserve Bank announced on
September 21, 1949 that it would not quote any rate for the purchase
and sale of Pakistan rupee. India wanted the two Banks to announce
their rates and commence business. The State Bank of Pakistan
suggested that before the announcement was made, it was desirable
for the two Banks to hold consultations in order, first, to reconcile the
balances in their respective accounts; and, secondly, to decide how
the 'intransit' transactions should be brought to the account by the
Banks. Meanwhile, the date by which Payments Agreement accounts
were required to be settled, arrived on September 30; Pakistan had a
favourable balance of Rs.265.8 million outstanding on that date, of
which the excess of over Rs.150 million was payable to it in free
sterling under the Payments Agreement. A telegraphic message
requesting the Reserve Bank to make this payment produced no
positive response. In reply to the suggestion of the Government of
India that the Banks should announce the rates at which they were
prepared to purchase and sell each other's currencies, the State Bank
proposed in addition to the reconciliation of acounts and settlement
of in transit transactions, the payment due to the State Bank should be
made. India declined to make the payment on the ground that the
Payments Agreement not being designed for the special situation
which had arisen as a resut of devaluation of the master currency and
- · - - · - - ----
a number of other currencies, it could no longer be considered to be

operative. India went on to say that since the State Bank wanted to
connect the payment of excess over Rs.150 million with the
announcement of rates, it would not be possible to make any
announcement.
In the correspondence that ensued following the deadlock,

India agreed that under the Payments Agreement, the India rupee
would be at par and that no change would be made by any party
except through mutual consultation and after giving due notice. As
against this Pakistan's contention was that immediately on the
announcement of the devaluation of Pound Sterling, India had
declared its decision and communicated it to the I.M.F. for
confirmation. Information of this decision was received by Pakistan
after it had been approved by the I.M.F. Pakistan, therefore, held
that consequent upon this action on the part of India, a new parity
had come into being between India and Pakistan rupee which was
wholly the result of action by India. In the correspondence that
followed India took shelter under the Payments Agreement.
Exploratory talks were held on October 22, 1949. Ambergaokar

of the Indian Ministry of Finance and Mumtaz Hasan of the Pakistan
Finance Ministry discussed the treatment of accumulated balances
under the Payments Agreement and the basis of resumption of Indo-
Pak trade. Regarding the first, the Pakistan Government urged that
their balances (of the order of Rs.250 million) to be written up and
then settled in terms of the Payments Agreement i.e. Rs.150 million
in India rupees and the balance in sterling, but Ambergaoker argued
that since the Payments Agreement had ceased to be operative, the
settlement of balances was not automatic but was subject to
negotiation between the two governments. His suggestiuon for a free
rate of exchange was not acceptable to the Pakistan representative,
who hinted at the possibility of Pakistan imposing exchange control.
The differences being irreconcilable trade transactions between

the two countries came to a halt, leading to the emergence of an un-
official unrecongnised market outside the banking system. The
inevitable consequence of suspension of trade was a rapid
deterioration in their economic relations. While import restrictions

were imposed by India, Pakistan refrained from any retaliatory
measures. The demand for India rupee was further increased by the
fact that a large number of Muslims in India were dependent on
remittances from Pakistan and also because of the substantial profits
earned by Indian concerns operating in Pakistan, and from sizable
rents of agricultural and urban property accruing to residents in
India. Notwithstanding the prevalence of abnormal circumstances
the rate for the Pakistan rupee during most of the period remained
considerably above parity, reaching upto Rs.lOO/- to Rs.150/- India.
Unofficial dealings acted as a safety value to relieve individual
hardships, particularly in the case of personal remittances. A
complete and effective stoppage of transactions between people with
very close personal and family ties had caused intolerable misery and
deprivation. Orders were issued in November 1949 under the
Banking Companies Control Act for the resumption of dealing in
India rupees by scheduled banks within the limits of their own
resources. These orders were primarily intended to allow banks to
clear outstanding items and to adjust their accounts. Because of their
limited resources the banks were not able to finance fresh
transactions.
The deadlock lasted for seven months. It was in April, 1950 that
an agreement was signed with India, providing for opening of trade
on a limited scale. India was forced to negotiate this agreement since
the deadlock had adversely affected its jute mills which were heavily
dependent on supplies of raw jute from East Bengal. Consisting of
two parts, first the agreement provided for the delivery of raw jute by
Pakistan against the exports of a number of commodities by India,
such as jute goods, cotton and woollen textiles, steel, etc. on a
balanced basis in monetary terms. Transactions under the first part of
the agreement which were accounted for in India rupees were in
effect cleared at the official rate of exchange. The goods were
invoiced in India rupee and documents transacted through the
commercial banks were made out in its own currency, but for the
purpose of payments by Pakistani importers and to Pakistani
exporters, India rupees were converted into Pakistan rupees at the
official rate.
An important change in the regulations was the extension of

exchange control to India from July 1, 1950, but applicable only to
exports from Pakistan to India and French and Portuguese territories
in India. Exemptions were made in respect of commodities which
under the Indo-Pakistan Trade Agreement in April, 1950 were
exportable free from any exchange restriction.
Upon admission to membership of the International Monetary

Fund on July 11, 1950 Pakistan notified to the Fund an initial par
value of its rupee equivalent to 0.268601 grammes of fine gold per
rupee, or Rs.3.30852 per U.S. dollar. This rate came up for
discussion at the meetings of the Executive Directors and the Board
of Governors of I.M.F. held in Paris in September, 1950. Pursuant to
her decision not to recognise our exchange rate, India submitted a
Memorandum to the meeting opposing any proposals to fix the par
value of the Pakistan rupee at any level other than parity with its own.
It was decided, however, to postpone consideration of the issue for
further examination, for prolonging the state of uncertainty which
had been exercising pressure on Pakistan rupee. However,
subsequent events provided justification for the soundness of the
country's non-devaluation decision, and in February 1951, India
recognised the par value of Pakistan rupee. A little later, the I.M.F.
announced the acceptance of Pakistan's initial decision not to
devalue its currency. Thus came to a close, an unpleasant period of
doubt and uncertainty stemming from India's refusal to accept
dealings with Pakistan on the spurious plea of its mutual acceptance.
After the acceptance by India of the par value of Pakistan rupee

the following rates were fixed for transactions in respective
currencies.
(i) State Bank of Pakistan buying rate Rs.144-0-9 India, for

Rs.lOO/- Pakistan
(ii) State Bank of Pakistan selling rate Rs.143-13-3 India, for

Rs.100/- Pakistan
(iii) Reserve Bank of India buying rate Rs.69-8-3 Pakistan, for

Rs.lOO/- India
(iv) Reserve Bank of India selling rate Rs.69-6-6 Pakistan, for

Rs.lOO/- India
Both Central Banks were free to purchase each other's currency

against the sale of sterling, and each party had the right to call for
settlement in free sterling at any time of any balance in its favour.
Depreciation in Assets
Consequent upon the devaluation of Pound Sterling and India

rupee, the value of the State Bank's assets in Sterling and India
Securities suffered depreciation in terms of Pakistan rupees to the
extent of 30.5 per cent.
The value of Sterling Assets alone held by the Bank as on

September 17, 1949, amounted to Rs.1357.4 million:-
Issue Departament Rs. 842.4 million

Banking Department Rs. 515.0 million
Total: Rs.1357 .4 million
In addition, the following assets held by the Bank were

affected:-
(i) Indian Securities held in

the Issue Department Rs.316.4 million
(ii) India Notes representing assets receivable

from the Reserve Bank of India Rs.431.1 million
(iii) Assets held with the Reserve Bank

pending transfer to Pakistan Rs. 59.0 million
(iv) Balance of our Account with the Reserve

Bank of India-Banking Department Rs.257 .8 million
------------------------------------------·----- .---
Face
SPECIMEN
Rs.lOO. Pakistan notes first issued by the Reserve Bank of India, as from April I, 1948
inscribed with the words 'Government of Pakistan' in English and Urdu on them.
Back
Face
SPECIMEN
Rs.S. Pakistan note issued by the Reserve Bank of India as from April I, 1948.
Back
The depreciation losses on revaluation of the assets in terms of

Pakistan rupees worked out to:-
(a) Loss on Sterling Assets Rs.414.3 million
(b) India Securities Rs. 96.6 million
(c) Loss on revaluation of items(ii)

and (iii) above Rs.148.3 million
(d) Loss on other commitments in connection

with forward sterling contracts
and other transactions Rs. 32.0 million
When a deficiency arises in the value of assets occasioned by a

change in the exchange rate, the normal practice is to make it up by
the issuance of Government Securities. As the Government of India
did not agree to the non-devaluation of Pakistan rupee and did not
approve its rates, it was first decided that only the Sterling Assets held
by the Bank should be shown in the books of the Bank at the new
rate. Ad-hoc Treasury Bills for Rs.414.2 million carrying interest at
1h per cent per annum were given to the Bank to cover the
depreciation losses on Sterling Assets in September, 1949. On further
consideration the Central Government allowed at the end of March,
1950 additional Ad-hoc Treasury Bills of the face value of Rs.128.6
million bearing interest at 1h per cent per annum to cover losses on
items (b) and (d) above.
The rest of the items remained under scrutiny by the

Government till the end of August 1950 when it was decided that
balances shown against items (ii) and (iii) should also be revalued.
The Government, therefore, sanctioned a further issue of Ad-hoc
Treasury Bills of the face value of Rs.148.3 million to cover the
difference due to revaluation of the assets mentioned in items (ii) and
(iii) above.
The balance of State Bank account with the Reserve Bank as on

September 18, 1949underthe provisionsofthePaymentsAgreement
shown in the aforementioned item (iv) became due for being written
up when the India rupee was devalued. The Government of India did
not, however, agree to honour the terms of the Payments
Agreement. Consequently, State Bank suffered exchange losses
amounting to Rs.38.87 million which continued to appear in the
Balance Sheet of the Banking Department from year to year.
5
Rehabilitation of Commercial Banking
Few central banks in the world were confronted with a task more
exacting in its demands than the State Bank in its endeavour to
establish itself as the Bankers' Bank, Banker to the Government and
as the Controller of the country's monetary and credit mechanism.
From a state of nothingness it had to create a machinery for its own
operation as well as preside over the organisation of a banking system
which had completely collapsed in the wake of Partition. But for the
determination, drive and dedication of a small band of men in charge
of putting the country's economic house in order the problem would
have defied solution. How grim were the prospects was obvious from
the breakdown of the system, if system it could be called, under the
chaotic conditions in which Pakistan found itself at the very moment
of its birth.
Eversince the idea of partitioning the subcontinent was put

forward as a solution of the Hindu-Muslim conflict, the economic and
financial viability of Pakistan was questioned by its opponents.
Speculation was rife about its impending doom. The new state, it was
prophesied, would go bankrupt and its currency would rapidly
depreciate. These misgivings had prompted the Hindus who had
dominated its economic life and monopolised its trade, to transfer
their capital and funds across the border.
115
The territories to form part of Pakistan 1 were not well provided

with banking facilities, which are the life line of business and
commerce. Undivided India had 99 scheduled banks2 with 3497
branches throughout the country, of which only 13 banks and 631
branches, were located in Pakistan areas. The paid-up capital and
reserves of these banks did not amount to more than 10 per cent of the
total paid-up capital and reserves of undivided India. These branches
were small compared to their counterparts in India and their share of
deposits, advances and bills discounted was just one tenth. 3 Owned
and controlled as these banks were by the Hindus, the services they
rendered rapidly dwindled after their head offices were transferred to
India. The banking sector was left high and dry on their departure.
The Muslim owned Australasia Bank was a solitary exception. It was
too small and ill-equipped an institution to handle the business that
used to be transacted by the migrating Indian banks. How
insignificant was its role was obvious from the following account of its
origin, nature and scale of operation.
The Australasia Bank was established in 1942 in a motor garage in
Lahore with a staff of three. Initially, it was little more than an agency
for the collection of rents from the family estate. Then, the tenants
began to open accounts and the bank to make advances against gold,
insurance policies, and merchandise. Management of family
properties led to the business of managing other people's estates and
the new bank soon encountered opposition from the established
banks. Discrimination took the form of a collection charges applied to
local cheques, on the ground that the new bank was not located in the
'Bank Square'. The Australasia Bank was at that stage a non-
scheduled bank, but it was claimed that at this time it was not accorded
the facilities available even to that class of bank. The Reserve Bank of
India was loath to grant facilities for the exchange of notes or the grant
of accommodation. After two years, the bank was moved to a new
building. It did the same business as before though on an increased
Since the break-up of the figures for the two countries which had formed part of a single
unified economy until August 15, 1947, a discrepancy in the statistics quoted by
economists and banking experts on either side was inevitable.
Reserve Bank of India: Report of the 14th Annual General Meeting of Shareholders,
published in August, 1948.
Vakil, C.N.: Economic Consequence of Divided India, Vora & Co., Bombay, 1950,
p.SlO.
REHABILITATION OF COMMERCIAL BANKING 117
scale. A number of branches were opened. In due course it applied for

inclusion in the Schedule and was accorded the status of a scheduled
bank in the financial year 1946-47. After Partition the bank was
entrusted with the collection of Treasury revenues and payments on
behalf of the Government in certain centres. Subsequently, it was
granted a licence to undertake foreign exchange business, and further
branches were opened. The bank is still small, though included in the
Schedule, but it does a business comparable in quality and scope with
larger and longer-established banks. If any proof were needed that the
Muslim is capable of the initiative and persistence to embark upon the
complex business of banking, this case study should provide useful
evidence. 4
The Foreign Exchange Banks which had not shifted any of their
branches to India were also adversely affected by wholesale exodus of
Hindu trained banking staff and their offices shrivelled. The Imperial
Bank which, as agent of Reserve Bank was to act as agent to
Government of Pakistan, had to close down most of its offices in West
Pakistan while the few offices that remained had to work with only a
fraction of their normal staff. Zahid Husain who, prior to his
appointment as Governor of the State Bank was Pakistan's High
Commissioner in India, made the following comments:
It is believed in Pakistan and there is evidence in support of the belief
that the withdrawals were planned in the conviction that they would
lead to breakdown of all services and result in a collapse of the new
State. Disturbances and migrations started in the Punjab several days
before August 14, 1947 though they assumed their full intensity after
the date of independence. I was at that time in the Punjab as a member
of the Partition Committee and personally came to know from the
highest authority, who had information in his possession, that the riots
had been planned by the dominant political party across the border to
kill the State at birth. Subsequently, I had occasion to see Lord
Mountbetten in Delhi at a critical moment in the immediate post
partition period. He was in a state of excitement boardering almost
anger after an attack near Lahore on a train which was carrying Hindu
refugees to East Punjab. In these conditions banking like many other
services was completely paralysed and there seemed no hope of early
Wilson, J .S.G.: Money and Banking in Pakistan; Banking in the British Commonwealth,
edited by R.S. Sayers, Clardon Press, Oxford 1952, pp.276-277.
revival. The bankers, (as I learned later in the course of my meetings

with them when the scheme for establishing the State Bank was being
prepared) believed that this was a temporary phase that the Hindus
would return and resume their place in the country's economic and
social life and that the Muslims would not take readily to banking. No
serious effort was made to recruit and train Muslims for banking
except by a few institutions and complaints against Muslim staff were
generaJ.S
The announcement of the Partition Plan on June 3, was a signal

for the proprietors of these banks to shift their business from Pakistan
territory to the Indian Union. While all the 12 Indian banks
transferred their headquarters from Pakistan to India, there was one
scheduled bank, namely Habib Bank which shifted its head office
from Bombay to Karachi on the eve of Partition. It was, however, not
possible for one or two banks to fill the void created by the closure of
majority of the banks in quick succession within a matter of few days.
As a result, the number of scheduled banks' branches went down
from 631 before Partition to 213 when Pakistan came into being. The
paid up capital and reserves had been reduced from 10 per cent of
undivided India to mere 1lh per cent after Partition. By the time the
State Bank was established on July 1, 1948 the number of branches
had further declined to only 195. The situation was particularly grave
in West Pakistan where the number had dwindled to a bare 69.6
In East Pakistan although all the scheduled banks had shifted

their headquarters to West Bengal, the number of offices remained
unchanged or (pending the withdrawal of deposits by the Hindus who
were biding their time) until the bulk of deposits had been withdrawn
by the Hindus.
The closure down of a large number of scheduled bank branches
resulted in substantial curtailment of banking services both for the
public and the government. Some of the banks in West Pakistan
closed down all, or most of their branches in several cases without
Zahid Husain: Central Banking in Pakistan; The Federal Economic Review, October,
1954, pp.6-7.
Abdul Qadir, Ten years of banking; Ten Years of Banking in Pakistan, published by the
State Bank of Pakistan, p.7.
discharging their liabilities to depositors or making any arrangement

for payment of such liabilities. Consequently, the account holders in
Pakistan were finding it difficult to get back their deposits from such
banks. The Muslim refugees who came to Pakistan and had their
deposits with banks in India were also facing the same problem,
despite the absence of restrictions on transfer of bank accounts from
one country to the other. The acute shortage of staff further
compounded the problem. The Imperial Bank which was responsible
for Government Treasury work was, at times, unable to transact even
government business due to dearth of staff.
A number of complaints were received by the Government from

the members of the public about the non-payment of their deposits.
The Government immediately undertook to alleviate their plight
with a view to minimising inconvenience to evacuee depositors.
In November, 1948 the Bank in consultation with the Central

Government, set up two separate sections at Dacca and Karachi to
deal with complaints against banks in East and West Pakistan. At
Karachi alone as many as 1324 complaints were received involving a
sum of over Rs.7.5 million. These cases were taken up with banks
concerned without satisfactory results. While some of the banks had
completely disappeared, others had suspended payments under
proposed scheme of arrangements with creditors, but even in case of
banks which were normally functioning in India the response was not
encouraging.
Indo-Pakistan Agreements on Banking

The Government of Pakistan entered into an agreement with
the Government of India on December 25, 1947 for the withdrawal of
all restrictions on transfers of bank accounts. A Committee of six
members comprising representatives of Central and Provincial
Governments and banking interests was to be constituted to
investigate the difficulties of banks and to suggest measures to the
Governments of India and Pakistan for restoring the normal
functioning of the banks. For the convenience of depositors who
desired to get their accounts transferred from one country to the
other, it was decided that each bank should notify one of their
branches in each country to which their depositors could apply.
As a result of further discussion between the representatives of

both the Central Governments, including their Provincial
Governments of West and East Punjab, the Reserve Bank and the
other banks, arrangements were made for facilitating resumption of
business by banks which had closed their offices owing to
disturbances, or found themselves unable to carry on their normal
functions due to insufficient staff. The West Punjab Government
agreed to make all the necessary arrangements for the protection and
housing of non-Muslim staff of banks in Lahore and also to provide
guards at bank premises at the expense of the banks. Arrangements
were also made for the training of Muslim candidates in Lahore for
recruitment to bank's services. When banks were unable to transact
business except at one branch at Lahore or a limited number of
branches at a few centres, they were allowed to close the remaining
branches and remove their business to safer areas. Permission to
remove all their valuables, cash, securities, records, etc. to the
branches at which business was sought to be consolidated, had to be
secured from the Custodian of Evacuee Property. To avoid
inconvenience and distress to evacuee depositors, banks were
required to desist from returning cheques and refusing the transfer of
accounts on minor grounds.
To facilitate transfer of accounts from one country to the other,
banks were requested to designate one office in India and one in
Pakistan. Both the countries agreed not to place any restrictions on
transfer of accounts or remittance of funds. Banks which had claims
to their own property or the property of their depositors, were asked
to take early steps to register their claims with the Custodian of
Evacuee Property of the province in which the property was situated.
The West Punjab Government agreed to give facilities to banks for
surveying their financial position. It extended full cooperation to all
the Indian banks in the recovery of assets and records from their
branches functioning or closed. The Chairman, Panjab National
Bank, which had over 90 branches in Pakistan, in his speech at the
shareholders' meeting on August 7, 1948 stated:
It was only when the back of refugee problem was broken and inter-
Dominion talks at government level resumed that it became possible
for us to organize a systematic salvage of our assets in West Punjab and
removal of essential records from the mofussil branches, which were
no longer functioning, to our main office in West Punjab-47, The
Mall, Lahore. Under the inter-Dominion Agreement, the Pakistan
Government, I am glad to say, is giving all help to our men in this task.
We have successfully evacuated the records, etc., of as many as ninety
offices from West Punjab and the task of recovery and realization of
our assets in West Pakistan is proceeding apace. 7
The next important step in Indo-Pakistan Banking Agreement

was taken when the Governments of India and Pakistan ratified the
decisions arrived at the inter-Dominion Conference on Banking held
at Lahore in April, 1949. The Conference discussed problems
affecting evacuee depositors and commercial and co-operative banks
in the Punjab. The provisions of the Agreement were:
(i) Muslim accounts which had been transferred by banks

from West Pakistan to India without application from
depositors were to be re-transferred to their branches in
West Pakistan by the end ofJune, 1949. In case these banks
had no longer any branches in West Pakistan,
arrangements had to be made for the payment of deposits
on application from the depositors through a bank in West
Pakistan specified for this purpose.
(ii) It was recognised that there should be an arrangement

whereby indemnity bonds obtained in one country in the
case of loss of fixed deposits receipts, cheque books, and
pass books were accepted by the other Dominion.
(iii) It was agreed that banks in both the countries should notify
the names and addresses of depositors who did not operate
their accounts during the period January, 1948 to March,
1949 to the Central Banks in order that this information
could be exchanged and the depositors traced.
Parakash Tandon: Banking Century, published by Penguin Book (India) Ltd., New
Delhi, 1989, p.316.
(iv) The Government of Pakistan agreed to consider the grant

of annual permits to bank staff stationed permanently in
West Pakistan and specified officers of the head office.
(v) The banks not functioning in Pakistan normally were, on

depositing an amount equal to their outstanding liabilities
in West Pakistan, to be permitted to remove their accounts
books and remit surplus funds provided certified copies of
the accounts in respect of outstanding liabilities were kept
in Pakistan. The amount of deposit to be made in Pakistan
would be verified by the State Bank and the deposit would
be made in favour of a bank approved for the purpose by
the State Bank. The outstanding liabilities in the case of a
bank under a scheme of arrangements would mean
liabilities outstanding in terms of the scheme as sanctioned
by a High Court in Pakistan. Similar arrangements were to
be made in the case of the Indian branches of the
Australasia Bank.
(vi) Banks functioning in Pakistan could sell stocks pledged by

evacuee depositors and deposit with the Custodian only the
surplus sale proceeds. In the case of stocks hypothecated to
banks but requisitioned or sold by the Government, where
the entire sale proceeds had to be deposited with the
Custodian, the banks could adjust their dues against the
sale proceeds on the Custodian admitting their claims. In
the case of mortgages of immovable property, the
Custodian was to admit the claims of banks on the
production of necessary evidence and the banks were not
required to file suits in civil courts. The Custodian was also
to register claims relating to unsecured debts incurred by
evacuees on proof of debt supported by an
acknowledgement from the debtor.
(vii) As regards the accounts of firms and companies with the

Imperial Bank, it was stated that there should be no
difficulty in transferring them in case they had no liabilities
in Pakistan.
~-- -----~-----------------
(viii) Two representatives were to be nominated by each country

to watch the implementation of the decisions reached in
regard to commercial banks.
Implementation of Banking Agreement
The Agreement also provided for the establishment of an

agency to monitor the implementation of the Agreed Decisions. The
progress in implementation, however, remained slow. On the other
hand, the number of complaints received at the Sections set up by the
State Bank at Karachi and Dacca continued to increase and by June,
1952· a total of 3437 had been registered involving claims of Rs.28
million. Meanwhile, in June, 1950 the Governments of the two
countries entered into another agreement known as the Indo-
Pakistan Agreement on Movable Property of Evacuees. This
Agreement had a close bearing on some of the provisions of the
Agreement on Banking. A meeting of the Implementation
Committee on the above Agreement was held in New Delhi in June,
1952 at which several decisions were taken and the difficulties
experienced by Indian banks in removing their records and surplus
assets from Pakistan to India were brought to the notice of the
Pakistan authorities for redress. No material progress was, however,
made on the implementation of the provisions of the Agreement
because of the legal and exchange difficulties involved. In March,
1955 a conference of the representatives of the Governments of India
and Pakistan was, therefore, convened at Karachi to discuss besides
related issues the particular question of en-bloc transfer of safe
deposit vaults, lockers and evacuee bank accounts. These issues were
again discussed at Karachi in April, 1955 by the two Governments at
Ministerial level. The decisions taken were known as the Agreed
Decisions on the Banking Agreement, 1949. A procedure for
implementing the terms of the Banking Agreement as modified by
the Agreed Decisions was, therefore, evolved. According to the
procedure, the Reserve Bank and the State Bank prepared lists of
evacuee accounts to be transferred from Pakistan to India and vice
versa. These lists were to be exchanged by Central Banks of the two
countries for the purpose of verification before their finalisation.
Agreed Decisions
Two meetings of the Implementation Committee were held in
July and September, 1956 for discussion of the outstanding issues. In
addition to reviewing the progress of implementation of the Agreed
Decisions of March-April, 1955, the Committee considered the
difficulties encountered in the realisation of assets of banks and
recommended the steps to be taken for their removal. It was agreed,
inter alia, that apart from giving the banks every facility for disposal
of immovable property owned by them, the Governments concerned
would expedite the sale of evacuee immovable property mortgaged
or chargeable in favour of banks in payment of their dues.
The Implementation Committee on the Movable Property
Agreement met twice at Karachi and New Delhi in the months of
January and April, 1958 respectively. The decisions arrived at in the
first meeting provided that no restrictions would be imposed on the
transfer of funds by banks from India to Pakistan to the extent
necessary, in cases where sufficient liquid assets were not available in
Pakistan to enable them to discharge their liabilities towards Pakistan
nationals, that on the March 1, 1958, India would supply bank-wise
totals of Muslim deposits and that on March 25, 1958, the delegations
of the two countries would meet to exchange the detailed lists of bank
accounts and of lockers and safe deposits. The delegations, however,
met on April16 and 17, 1958 to review the progress made by the two
Governments on the transfer of lockers and safe deposits. The
following decisions were taken at that meeting:-
(1) That Pakistan Government would supply the list of third
party claims against safe deposits/lockers by May 31, 1958.
(2) On June 5, 1958 safe deposits and lockers would be handed

over to the Diplomatic Representatives of the other
country at Lahore and Delhi.
(3) The question of bank charges in regard to safe deposits and

lockers should be discussed in the light of the replies
received from banks by the Governments of the two
countries.
- ---- --------------------
At the meeting of the Implementation Committee on the Indo-

Pakistan Movable Property Agreement held at New Delhi towards
the end of November, 1960 the progress made since the last meeting
was examined. Consideration of certain important items such as
transfer of lockers and safe deposits, exchange of bank accounts in en
bloc areas in the two countries, status of displaced banks, etc. was
postponed till the next meeting of the Committee as both the parties
felt that prior consultations with their respective Governments was
necessary. The Committee decided to meet at Rawalpindi in
January, 1961.
Banking Legislations
The Government of Pakistan with a view to protecting the

interest of banks and their depositors took necessary legislative
measures to meet the situation. It promulgated two Ordinances:
(1) Banking Companies Ordinance 1947 on October 22, 1947 and
(2) Pakistan (Prevention & Default & Evasion of Liabilities)
Ordinance, on December 15, 1947.
The first Ordinance was aimed at providing moratorium to the

banking companies which had temporarily been incapacitated from
meeting their liabilities. The object of the second Ordinance which
was further amended by another Ordinance dated December 20,
1947 was to protect the interests of Pakistani depositors against non-
payment of foreign banks and prohibited removal of assets etc. from
Pakistan. However, these measures could not be effectively and
efficiently implemented in the absence of country's own central
banking authority since Reserve Bank continued to function as
common Central Bank for both the countries. ·
In the preamble of the State Bank of Pakistan Order, 1948 it was

laid down that 'it is necessary to provide for the constitution of the
State Bank to regulate the issue of bank notes and keeping of reserves
with a view to securing monetary stability in Pakistan and generally to
operate the currency and credit system of the country to its advantage'.
When the Bank started its operations it soon discovered that the State
Bank of Pakistan Order, 1948 had not been vested with adequate
powers to effectively control the operations of banks to safeguard the

interests of depositors as well as to control the credit conditions
through banking channels. A comprehensive legislation was drafted
and in December, 1948 the Banking Companies (Control) Act was
passed, under which the State Bank was equipped with powers to
control the operations of all banking companies in the country. To
safeguard the interests of depositors, it provided that all banking
companies should maintain assets in Pakistan upto 75 per cent of their
liabilities in Pakistan. Amongst other things, the Act also empowered
the Bank to appoint itself as Official Liquidator of a banking
company.
The Bank took a series of steps to reinforce measures earlier

taken by the Government for rehabilitation of commercial banking
and, at the same time, organised and strenghtened the administrative
machinery to deal with the situation. The Department of Banking
Operations which was later renamed Banking Control Department
was entrusted with the overall responsibility of dealing with the
problems of banks and take necessary measures to rehabilitate,
improve and develop the banking system so that credit conditions
could eventually be controlled through the banking channels. With
the object of keeping close watch and tackling promptly and
efficiently the problems relating to East Pakistan, a branch of
Banking Control Department was established at Dacca early in
October, 1948.
Through its Banking Control Department, the Bank was able to

supervise the monetary and banking system of the country by
effectively administering the banking legislations. The problems
relating to scheduled and non-scheduled banks and their relations
with the State Bank were streamlined. Necessary measures were
initiated to ensure that sound banking practices were followed by the
banking system of the country. This was meant to ensure that the
deposits of the public placed with the banks were not endangered by
recklessness and lack of foresight on the part of the management.
At the same time, the Bank gave high priority to filling in the
vacuum in the banking structure created by closing down of a large
REHABTUTATION OF COMMERCIAL BANKING 127
number of banks in the wake of Partition. The Pakistani banks were

induced to open new branches and every assistance was provided by
the State Bank to help establish them. The Central Government and
Provincial Governments at the instance of the State Bank issued
instructions that buildings vacated by migrating banks were allotted
to local banks.
Before the passing of the Banking Companies (Restriction of

Branches) Act, 1946 there was no bar whatsoever on the opening of
branches by banks in undivided India. By the passing of the Act, the
opening of offices of banks registered in undivided India was made
subject to the previous sanction of the Reserve Bank but the foreign
banks were still free to open branches anywhere in undivided India.
After independence the Banking Companies (Restriction of
Branches) Act, 1946 became applicable to banks registered in
Pakistan with the result that the Indian banks and other foreign banks
enjoyed unrestricted freedom to open branches anywhere in
Pakistan. The gravity of the situation was soon realised and by an
Ordinance promulgated early in November, 1948 the Banking
Companies (Restriction of Branches) Act, 1946 was amended so as to
make the provisions applicable to all banks whether incorporated in
or outside Pakistan. As a result of this amendment no bank could
open any new branch or re-open a branch that was once closed
without the prior sanction of the State Bank.
Although the number of Indian banks branches functioning

after Partition was larger than those of non-Indian banks and with the
exception of a few important ones they were concentrating their
efforts on collection of their assets from the country. However, the
Imperial Bank, being the agent of Reserve Bank and subsequently
that of State Bank, had a special position. So far as non-Indian
foreign banks were concerned their main business was confined to
financing of import-export trade. The status of these banks was of
small branch offices whose policies in the minutest details were
subject to control and guidance from their head offices. There were
only two Pakistani banks namely, Australasia Bank and Habib Bank.
Originally established in India in 1941, the Habib Bank though young
was not inexperienced. Its first branch was opened on Mohammad
Ali Road in the heart of the city of Bombay. It was appointed by the
Quaid-i-Azam as a banker to the Bihar Relief Fund, the Muslim
League Fund and the Pakistan Fund. Soon after its migration to
Pakistan, the Habib Bank launched an ambitious programme of
extending the area of activities. For signal services it rendered to the
country in a critical period, the Governor of the State Bank paid
eloquent tribute. 'In a dismal picture this youthful institution, he said,
did its best to relieve the gloom.' The Government gave all possible
encouragement to the Bank to extend the network of its branches and
expand its field of activity and even seriously considered a proposal to
entrust the business of the Treasury to its care. Another Pakistani
bank which made its appearance on the scene, was the Muslim
Commercial Bank.
The Muslim Commercial Bank was incorporated in Calcutta in

July, 1947 with an authorised capital of Rs.30 million divided into
shares of Rs.100 each. The start was made in a small room in
Calcutta. Then premises were hired in Karachi, Dacca, Lahore and
Chittagong. The head office was shifted to Dacca in the middle of
1948 and the Bank commenced operations with five branches. The
head office was subsequently shifted to Karachi.
The three Pakistani banks were encouraged to open branches at

all important centres both in East and West Pakistan. It was,
however, not possible for them to bridge the gulf which continued to
widen due to simultaneous closure of Indian banks and their
descheduling.
During the first year of the existence of the State Bank, 21

applications were received, 17 for opening of new branches and 4 for
changing location of the existing branches. Licences were issued for
the opening of 38 new branches as against 61 applied for, while all
applications for the change of location were approved. Of the
licences for new branches 10 were for East Pakistan and 28 for West
Pakistan.
-- ---·--------------------------------------------------
Face
Rs.JOO. Pakistan Government had to arrange printing of its own notes with an English
Company and issued them as from October 1, 1948 when Reserve Bank of India
declined to supply Pakistan inscribed notes in sufficient quantity.
Back
Face
Rs.lO. Pakistan first notes issued by the Government of Pakistan
Back
Special Position of Imperial Bank
The Imperial Bank was agent of the Reserve Bank before

Partition for conducting government business in places where the
Reserve Bank had no offices of its own. It was a part of historical
development. Until the foundation of the Reserve Bank in 1935 the
Indian banking system was in a way dominated by the Imperial Bank
which, in addition to its ordinary internal commercial business, also
acted as the bank of the bankers and as banker to the Government as
well. Its special position was recognised by entrusting it with
government's business throughout the country except in the few
places where the Reserve Bank was able to open its offices. For this
purpose the Imperial Bank acted as agent of the Reserve Bank who
was responsible under the law for all government business. Thus, in
the field of government business and as bankers' bank, the Imperial
Bank in effect functioned as part of central banking machinery.
From July 1, 1948 it also became the agent of the State Bank for
conducting the business of Central and Provincial Governments. It
had 28 branches and 53 sub-offices before Partition in areas which
were to become Pakistan of which only 19 branches were functioning
after Pakistan came into being. The stop gap arrangements made for
the conduct of Treasury business were far from satisfactory. For
example, in the Lahore Division in its 14 Treasuries and Sub-
Treasuries, the Bank was functioning only at one place. At the
remaining 13 stations, a Divisional Treasurer was appointed who
used a private bank as his agent for an estimated turnover of Rs.40 to
Rs.50 million.
By virtue of its privileged position as an agent of the State

Bank, the Imperial Bank was expected to give its unqualified support
both to the Government and the country. Pakistan's predicament can
be well imagined from the expression of the Bank's inability to
purchase even token amounts of its securities on the spurious plea
that these securities were not marketable. It was an intolerable
situation. As agent of the State Bank it made disbursement on behalf
of the Government to the civilian as well as defence establishments
and kept custody of large amounts of notes and coins. If other banks
--.--·--------------------
which did not owe to the Government the same degree of

responsibility and did not enjoy the same privileged position had
adopted a similar attitude, the State Bank's difficulties would have
increased mainfold.
The National Bank of Pakistan
In these circumstances the Governor of the State Bank realised

the need for a commercial bank truly national in character and
enjoying the full support and confidence of the Government and the
public alike. This bank was to be so constituted as to be able to take
over the agency of the State Bank from the Imperial Bank as soon as
feasible.
The establishment of a new bank in preference to entrusting the

agency work to any of the existing institutions was considered
desirable for more than one reason. The selection of a foreign bank
would have been inconsistent with national objectives. In principle
the advisability of handing over Treasury business to a private
institution in the management of which the Government did not have
a reasonable share, was open to question. Also, the private banks
that could be considered suitable did not either have adequate staff
resources or were too clearly identified with sectional or individual
interests to appeal to the people. Above all, there was an urgent need
of a banking institution which could take up and pursue a bold
programme of expansion with vision and imagination, relatively
uninfluenced by narrow considerations of immediate loss or gain. In
brief, setting up of a national bank had become indispensable
because of foreign dominance of the banking sector evidenced by the
breakdown of the deposits between local and foreign banks. Of the
total bank deposits of Rs.1080 million held in Pakistan on July 1,
1948, Rs.740 million were held by the foreign banks, whose activities
were largely confined to foreign trade. The internal banking
requirements of the country were sorely neglected. Not surprisingly,
just after the establishment of the State Bank, the Governor urged
upon the Government of Pakistan the urgency and importance of
having a commercial bank of our own. In a detailed memorandum to
the Finance Minister, Ghulam Mohammad, he pressed for an early
decision on the question. The main difficulties of (i) capital and (ii)
staff, were underlined but these had to be faced and overcome.
The bank was to be established with an authorised capital of

Rs.40 million of which initially only Rs.10 million were to be issued
and paid up. In a year or two another Rs.10 million were to be issued.
The Government was urged to take a share between 20% to 25% of
the capital. It was confidently hoped that a bank established under
the patronage of the State Bank and in partnership with the Central
Government would catch the imagination of the masses and evoke
immediate popular support. The type of bank proposed could
reasonably be expected to yield dividends and was likely to be
considered a profitable investment. The general expectation that the
share capital offered to the public, would be fully subscribed was,
therefore, not misplaced.
To meet its staff requirement the Governor had already put into
force a training scheme for bank officers, which was intended to train
over 100 officers in a period of 18 months. Moreover, he expressed
his intention that in recruiting staff for the State Bank he would keep
in mind the requirements of the projected commercial bank.
The Government gave its approval to the project after

consultation between the Governor of the State Bank and the
Finance Minister towards the end of October, 1948. A probe into the
capital market was, however, felt necessary before going ahead with
the operations.
The Governor's investigations revealed an encouraging
response from leading commercial circles of the country. To his
request for permission to form a Promotor's Company he received a
green signal and the Company was registered with the following
Directors: (1) Seth Mohammad Ali Habib, Karachi; (2) S. Wajid Ali,
Karachi; (3) Mirza Ahmed Ispahani, Chittagong; (4) Sh. MianZahur
Ahmed, Lahore; and (5) Rafiuddin Siddiqi, Chittagong. N.M.
Uquaili, Chief Officer, Banking Control Department, and also the
head of the Bank Officers' Training Scheme, was appointed to take
charge of the new project. He continued in this capacity till April, 9,
1949 when he was relieved by M.A. Muhajir, who later became the
Managing Director of the National Bank of Pakistan.
The Company was registered on February 3, 1949. Special

legislation was called for to confer a special position on the new bank.
The draft of the bill was ready in the first week of May, 1949 and was
submitted to the Government, which referred it to a Committee,
consisting of representatives of the Promotors' Company, the State
Bank and Ministry of Finance to examine it. The bill in a modified
form was ready by mid-August, 1949 for introduction in the next
session ofthe legislature. The aim was to establish the bank by April,
1950.
In September, 1949 the State Bank and the Government were
compelled by events to accelerate their programme. As stated
earlier, the devaluation of Sterling was followed by the devaluation of
the India rupee and other currencies. Pakistan's decision not to
follow suit produced an angry reaction across the border ensuing in a
trade deadlock between the two countries and a total cessation of jute
purchase by India.
In the case of jute, foreign influence and interests were

particularly dominant. The various classes of intermediaries between
the grower and exporter were largely financed by exporters who
brought out funds from India through the banks. It was likely that
banks unwilling or unable to transfer funds from India would fail to
provide normal credit facilities to the various intermediaries and the
exporter. An urgent need was felt for an indigenous agency to finance
Pakistani agents and businessmen in the jute market.
In this moment of crisis it was decided to launch the National

Bank of Pakistan without waiting for the next session of the
Assembly. The State Bank assured the Government that necessary
staff would be provided immediately to open offices in the main
centres of jute in East Bengal. The draft bill was accordingly taken in
hand and with the addition of a few transitional provisions to ensure
its proper worl~ing during the emergency, it was promulgated on
November 9, as-National Bank of Pakistan Ordinance, 1949.
As an author and pioneer of the scheme for the establishment of

the National Bank of Pakistan and in order to ensure its close
association with the State Bank, and to pilot it through initial stages
it was decided by Government that Zahid Husain, Governor, State
Bank, should also be appointed President of the Central Board of
Directors of the National Bank of Pakistan. Under the provisions of
the State Bank of Pakistan Order the Governor could not occupy any
such position in a commercial bank. Therefore, in May, 1949 an
amendment was issued to the Order providing that the Governor, in
addition to his duties as Governor or Deputy Governor, could be
entrusted by an order of the Central Government with such duties in
relation to the National Bank of Pakistan as may be specified.
The non-availability of trained staff compelled the bank to

borrow the services of experienced officers of the State Bank initially
on deputation with the ultimate object of their permanent absorption
into its own service. Later, the majority of the candidates, trained and
qualified under the State Bank's Scheme, were recruited to the
National Bank. The recruitment of these officers provided a solid
base for its structure and expansion. In the first week of July, 1952,
Zahid Husain conveyed to the Finance Minister of his reluctance to
hold the office of the President of the National Bank since it involved
particularly for a person holding the office of the Governor of the
State Bank, a large measure of responsibility without power to back.
In a detailed letter he spelt out the reasons for his decision-
The appointment of Governor of the State Bank as President of the
National Bank has certain necessary implications. The State Bank,
and I myself personally, were largely responsible for sponsoring the
establishment of the National Bank. The State Bank has gone all out
to assist its organisation and services. The appearance before the
public of the Governor of the State Bank as President of the National
Bank quite justifiably leads the businessmen and the general public to
believe that the policies of the National Bank, the methods of its
operations, its general approach to banking problems have the
complete approval of the Governor personally and of the State Bank
generally. If it fails in any respect to come up to the expectations of the
public; if the service which it provides is not all that the people desire
from a national organisation, they quite rightly consider that the State
Bank and its Governor must be responsible for it equally with others.
In actual fact therefore both the Governor and the State Bank have the
responsibility without the power to match it. The State Bank as such
has the power under the law, but as I will explain it is not in a position
to use it. This position I regard as unsatisfactory.
The State Bank is invested with certain powers of inspection,

supervision and control of commercial banks for which it has a special
department known as the Banking Control Department. However,
the State Bank has felt itself unable to deal with the National Bank in
the normal way as it does with the other banks. The inhibition arises
from the fact that the Governor is also the President of the National
Bank. It has the Joint Secretary and Deputy Secretary in the Finance
Division of the Ministry on its Board. This invests the National Bank
with a very special position. The attempts of the State Bank to ensure
regularity have often been resented. This need not have caused any
misgiving or anxiety if the President himself had been able to exercise
the requisite power and authority. The position in brief is that the State
Bank is not able to exercise its authority, vested in it under the law,
over the National Bank, nor is the Governor of the State Bank by
virtue of his position as President able to ensure that the vacuum thus
created is properly filled.
There are two ways of dealing with the situation:-

Either
(1) The Governor of the State Bank should cease to be President of
the National Bank so that the State Bank should be able to deal
with it as it deals with other banking institutions;
Or
(2) The President of the National Bank so long as this office is
combined with that of the Governor of the State Bank should be
invested with specific powers in relation to the National Bank.
The latter is necessary because of the view held in certain
quarters that the President as such has no power or authority
beyond presiding at the meetings. From the purely personal
point of view the first alternative would be preferable as it would
relieve me of a responsibility which has weighed very heavily on
my mind during the last three years. Most of my plans as well as
my ideas regarding the organisation of the National Bank have
had to be abandoned for lack of proper authority.
I feel, however, that I must warn the Government even at the cost of
my position being misunderstood, that there is a large amount of work
at the level of planning, organisation, training and implementation to
be done in the National Bank and unless it is attended to properly the
organisation of the National Bank will remain loose, weak and liable
to upsets under any special stress. In the circumstances of Pakistan it
is not sufficient that a bank should have an increasing number of offices
and a good profit and loss account at the end of the year. These would
satisfy a banker whose outlook is confined to banking and that also in
the very narrow field of his own particular institution. It is necessary to
view the progress of a national institution like the National Bank in the
general context of economic development, economic ascendency of
foreigners, training of high grade staff, the need of Pakistani bankers
to spread their services in foreign countries, particularly Muslim
countries, etc. In other words, the national bank of a country like
Pakistan should be developed with full regard to our political and
economic aspiration and as rapidly as possible. This cannot be
achieved as the present management seeks to do by importing British
and other foreigners. If the Governor of the State Bank ceases to be
President of the National Bank, the State Bank will be able to
discharge its normal responsibility to ensure regularity and compliance
with the law, but as to development of banking in consonance with the
aspirations of the country the responsibility shall have to be assumed
by the Government through its official directors serving on the
National Bank. I am satisfied that the bankers themselves will be
wholly unable to look beyond their narrow horizon and will remain
occupied with their petty business problems from day to day, as also
with appointments, transfers and promotions which to many are the be
all and end all of our national endeavours.
If the Government decides to choose the second alternative, I would

suggest that the National Bank of Pakistan Ordinance should be
amended so as to provide for the delegation to the President by the
Central Government of such powers as may be considered necessary
by the latter from time to time. Following this amendment the
Government should issue directions specifying the nature and scope of
the authority to be exercised by the President. This direction should, I
suggest, take the following form:-
(1) The President should be empowered to call for any papers he

may wish to see;
(2) The President should be empowered to make any suggestions to

the management of the National Bank. These suggestions should
be duly considered by the Managing Director who should inform
the President of the action proposed to be taken thereon. In case
of difference of views the President may, if he so desires refer the
matter to the Government, whose decision shall be binding;
(3) The President may issue to the management of the National

Bank any instructions that he considers necessary. If the
Managing Director finds himself in disagreement on any issue
which he cannot resolve after discussion with the President he
can refer the matter to the Government through the President.
The decision of the Government shall be binding.
The authority of the Central Board shall not be affected by these

instructions. Wherever a matter requires to be referred to the Board it
shall be so referred. Where the President has issued any instructions
and if the matter requires to be referred to the Board the Managing
Director shall do so unless he submits the matter to the Government
for a decision. When a decision has been received from the
Government action will be taken accordingly by taking the order of the
Central Board where necessary.
In conclusion I wish to repeat that from my purely personal point

of view I have absolutely no interest in retaining the Presidentship of
the National Bank and if the Government decides not to accept my
suggestions to invest the President with specific powers, I would like to
submit my resignation from the Presidentship of the National Bank
and to be relieved of my responsibility for that institution.
The Ministry of Finance later accepted the logic of his argument

and relieved Zahid Husain of the additional charge of office of
President of the National Bank of Pakistan.
Opening of Branches by Banks
The Central Board of Directors of the State Bank, at its meeting

held on January 21, 1950 reviewed the progress made by banks in
opening of their branches in Pakistan. During the 18 months of the
operation of the State Bank, ending December 31, 1949,44 branches
were opened by scheduled banks in both the wings of the country and
one by a non-scheduled bank. Of the total branches opened, 28 were
Pakistani, 12 Indian and 4 belonged to Exchange Banks.
In addition to the above mentioned branches 7 were opened by

National Bank, of which 6 were in East Pakistan.
The scheduled banks in Pakistan (National Bank not included)

as on December 31, 1949 had the following number of branches.
No. of Branches in Total

Banks West East
Pak: Pak:
Pakistani scheduled banks 4 52 7 59

Indian scheduled banks 23 40 68 108
Exchange Banks 8 17 8 25
Total: 35 109 83 192
Among the Indian banks, Imperial Bank had the largest number
of branches namely 28, of which 20 were in West Pakistan and 8 in
East Pakistan. The Central Bank of India had 14 branches of which 4
were in West Pakistan and 10 in East Pakistan, while Comilla
Banking Corporation and Comilla Union Bank had 16 and 13 each in
East Pakistan. In East Pakistan all the branches of the Exchange
Banks were concentrated at Chittagong Port except the ones at
N arayanganj whereas in West Pakistan 3 of the Exchange Banks had
branches at places other than Karachi, namely Lahore, Peshawar,
Quetta and Rawalpindi.
Branch Licensing Policy
The Board noted that now as the period of emergency had

passed and banking facilities were available at most of the important
centres both in East and West Pakistan, it was necessary to lay down
a well thought out policy for licensing of new branches. The Board
adopted the recommendations of the Governor:
(i) Pakistani Scheduled Banks
The new policy should favour the expansion of Pakistani

scheduled banks for obvious reasons. They were to be given
permission to freely expand their area of operation in West Pakistan
except when the financial position of the banks did not justify further
expansion and provided suitably trained and experienced staff had
been arranged for. Similarly, permission was to be granted
unconditionally to non-scheduled Pakistani banks for opening
branches within the province of incorporation provided they fulfilled
the conditions of registration.
(ii) Indian Scheduled Banks
No restriction was placed on the opening of branches by the

Imperial Bank for the period upto June 30, 1950 when the position
was to be reviewed in the light of the bank's agency agreement with
the State Bank. In case of other Indian banks no permission for new
branches was to be given unless the proposed branch was located at
a centre from where there was considerable volume of inter-
Dominion trade with India and Indian banks were not already
adequately represented at that centre to cope with the volume of such
trade. No permission in any case was to be accorded to any Indian
non-scheduled bank.
(iii) Exchange Banks
The Exchange Banks were to be confined to the port towns of

Karachi and Chittagong with the exception of provincial
headquarters where the restriction could be relaxed if there were
European or other foreign firms to be served or there was
considerable trade with foreign countries. However, the Governor
could, by special order and for reasons to be recorded in writing,
permit any bank to open its branch or branches anywhere in Pakistan.
Foreign traders and bankers were highly critical of the policy.

The President of the Overseas Chamber of Commerce, Karachi at
the Annual· General Meeting of the Chamber held after the
~~~~- -~- ---

announcement of the Branch Licensing Policy, remarked:
Whether or not in pursuance of the State Bank of Pakistan's concept

of Islamic Banking it is to be regretted that restrictions should have
been placed in the way of certain banks in regard to opening new
branches in Pakistan. Pakistan cannot do other than benefit from the
knowledge and experience of the Exchange Banks, and it is to be
hoped that this is merely a temporary phase in the development and
expansion of Pakistan Banking System.
The Governor, State Bank was not surprised by the

unfavourable reaction of the Exchange Banks. He had read the
report of the Central Banking Enquiry Committee which had
commented upon the tendency of foreign banks as far back as 1931.
Explaining the policy of the Board, the Governor, in his speech,

at the second Annual General Meeting of the Bank, held on
September 26, 1950 said:
After the Partition due to lack of staff the banks were incapacitated
from embarking on a programme of expansion and all they could do
was to keep skeleton services in being in their main offices in the more
important towns. Gradually, the position improved and an increased
supply of trained staff became available. In these circumstances there
has been evidence of a desire on the part of foreign banks to expand in
the interior of the country. The policy of these banks in respect of the
employment of Pakistanis in responsible positions is uncertain. You
would agree that it would be idle on our part to expect that Pakistanis
employed by them will rise to the highest positions of power and
responsibility. There are obvious objections on economic grounds to
the extension of foreign banking institutions in the interest of the
country. Banks are very powerful institutions and their influence
which can be exerted as much against as in favour of our interests
makes itself felt in various forms which an ordinary observer is unable
to link with their ultimate sources. Having taken full account of
financial, economic and also political considerations your Board has
laid down that foreign banks should confine themselves to port towns
where foreign trade is concentrated. They recognise, however, that
adequate foreign banking services should be available in the more
important towns from where trade is carried on with foreign countries
on an appreciable scale. I am sure you will all endorse the policy which
has been adopted by your Directors in this important matter. I wish to
take this occasion to express the hope that we will not be
misunderstood in this matter. There is a new spirit abroad in all
countries which have recently emerged from political subjugation or
which are still suffering from it. A spirit of dissatisfaction and
impatience is gripping the people, of which, due note must be taken.
New forces are arising which refuse to tolerate the presence of
remnants of political and economic domination, much less to allow
them to expand in any direction.
The new branch licensing policy enabled Pakistani banks to

make an all-out effort to establish their branches at all important
centres in the country. The progress made by National Bank in
opening of over 40 branches in both the wings of the country, training
of its staff and consolidation of its structure was found in 1952 to
justify the transfer of the agency of the State Bank for government
business from Imperial Bank to this national institution. According
to a planned programme the Bank began taking over the agency work
from April, 1952 and completely replaced the Imperial Bank in this
field by the middle of September.
The other Pakistani banks were also equally successful in

opening branches in the interior of the country and helped to offset
the withdrawal of numerous Indian banks from the Schedule of the
State Bank. Within the four years of the operation of this policy by
June 30, 1954 the position had stabilised with 32 scheduled banks and
246 branches as compared with 38 scheduled banks and 195 branches
on July 1,1948. Between July 1,1948 andJune30, 1954, 129branches
of Indian banks had been closed down and 180 new branches opened,
almost entirely by Pakistani banks.
United Bank Ltd.
In November, 1959 another Pakistani bank was established with

an initial authorised capital of Rs.20 million and a paid-up capital of
Rs.10 million. At that time, the national banking scene was
dominated by three major banks, namely Habib Bank, the National
Bank and the Muslim Commercial Bank. The United Bank,

however, showed great dynamism and drive in expanding its
activities for finding a prominent place for itself on the banking map
of Pakistan.
The branch licensing policy continued to be reviewed and

refined to promote balanced development of banking facilities in the
country. By the end of 1960, Pakistani banks were able to establish
additional 184 branches covering a wide area and relatively smaller
towns. The total number thus increased from 246 in 1954 to 430.
Weeding out of Unsound Banks
While the State Bank continued to encourage Pakistani banks to

expand their network of branches in the interior of the country,
simultaneously steps were taken to weed out the banks whose
financial condition was beyond repair or whose activities were
prejudicial to the interests of their depositors. This was indeed a
challenging situation, perhaps unparalleled in the history of banking
in any other country. The complaints from Muslim depositors
continued to pour in increasing number against Indian banks, some
of which were functioning, while others had suspended payment but
still had their branches in Pakistan and there was yet another category
which had completely evacuated from Pakistan to India with no
arrangement whatsoever for the payment to the depositors. The
Banking Companies (Control) Act, 1948 which, among other things,
granted the State Bank the powers to take remedial steps in the case
of banks of which the inspection revealed unsatisfactory condition.
Inspection was the only means available with the State Bank to
ascertain the true state of affairs and apply corrective measures. With
so large a number of such banks and acute shortage of experienced
staff conversant with commercial banking and trained in the
techniques of bank inspection it was a formidable task. However,
with a few officers available, inspection of such banks was promptly
undertaken.
The Banking Control Department was directed to conduct

in:)pection of bank:) which were delaying payment to depositors or
were reported to be financially unsound. The first bank to be

inspected was the Asiatic Commercial Bank which, by an agreement
was reported to have exchanged the assets and liabilities with Ideal
Bank Ltd., one of the early Muslim banks of Delhi. Following the
Inter-Dominion Banking Agreement in April, 1949 which aimed at
facilitating the payment of bank deposits to evacuee, complaints
started piling up that deposits of Muslims with Ideal Bank Ltd. Delhi
who had migrated to Pakistan were not allowed to withdraw by the
Asiatic Bank Ltd. The inspection of the bank was conducted in June,
1949 to determine the true state of affairs and help the Muslim
depositors to recover their hard-earned savings which they needed
most after migrating to Pakistan. The inspection soon revealed that
the outgoing Hindu management of the bank had denuded the bank
of tangible assets and as a result the bank had to go into liquidation.
It was followed by inspection of 7 Indian banks, 4 in West

Pakistan and 3 in East Pakistan during the last six months of June,
1949. As a result, most of these banks were prohibited from accepting
deposits and subsequently taken into liquidation. However, by the
year ending 1949 five Indian scheduled banks had been descheduled.
The total number of scheduled banks as on December 31, 1949 was
thus reduced to 35 as against 40 in September, 1949.
During the next two years, inspection was conducted of four

more Indian banks, of which three were prohibited from accepting
fresh deposits and after some time they were eventually placed under
liquidation. One bank was allowed to function under a Scheme of
Arrangements and hence no further action taken.
Besides, two more banks, one in West Pakistan and another in

East Pakistan, were inspected. The condition of the bank in West
Pakistan was considered not too bad and certain remedial measures,
such as appointment of a competent general manager, closing down
branches under loss, etc., were suggested. The bank in East Pakistan
was due for liquidation but because of the interest and the sentiments
of its Muslim depositors, was allowed to enter the Scheme of
Arrangements.
Simultaneously, special arrangements were also made to review

the position of small banks in East Pakistan. A very senior officer was
deputed to conduct this review and on his recommendation a Deputy
Chief Officer was appointed to help rehabilitate the banking
structure in that wing. The Deputy Chief Officer personally
conducted summary inspections of a large number of banks to
determine whether or not they were functioning properly. The report
of summary inspections was made a basis for taking action against the
defaulting banks.
Following the weeding out operations the number of Indian

scheduled bank's branches operating in Pakistan was reduced to 53 in
1954, as against 146 in June, 1948. The number of Indian banks also
dropped from 27 in June, 1948 to 17 in 1954.
Scope of Inspection Enlarged
During the course of inspection the State Bank continued to

adopt measures for strengthening its inspection machinery and
enlarging the scope of its activities. By conducting inspection of
Indian banks in emergency the utility of inspections as a medium of
discovering true state of affairs of banks in the country and the
determination of accurate measures for improving their condition,
became fully manifest. A need was, therefore, felt to conduct not
only the inspection of banks whose position specially warranted it but
also of those banks which were apparently functioning satisfactorily,
so as to ensure that no weakness went un-noticed. Previous
inspections being confined only to problem banks, there was a grave
danger that future inspections of banks may create doubts in the
minds of the public about the financial viability of a bank subjected to
inspection. At the instance of the State Bank, therefore, the
Government made a public announcement of the policy that in future
all banks would be regularly inspected by the State Bank.
In accordance with this policy, regular inspections were started

of all banks in the country, beginning with those having their
principal offices in Karachi.
Law Relating to Inspections
The Reserve Bank was authorised to conduct inspection of

banks, registered under the Companies Act, through the Ordinance
No.IV of 1946, which was promulgated on January 15, 1946 in
undivided India. The Ordinance was intended for inspection of banks
in emergency i.e. where the position of a bank indicated need for
inspection for determining whether or not the interests of its
depositors were safe. The powers to order inspections to be
conducted by the Reserve Bank were vested in the Government of
India and the Reserve Bank was requested to submit its inspection
reports to the Government, which was authorised to take one of the
following actions if the financial conditions or management of the
bank concerned was reported to be unsatisfactory:-
(i) To prohibit the bank from accepting fresh deposits.
(ii) To de-schedule the bank or refuse its inclusion in the

Schedule.
In the event of wilful breach of orders prohibiting the bank from

accepting fresh deposits, every director or officer responsible for the
breach was punishable with a fine extending to twice the amount of
deposits so received. Also, if any director or officer refused to
produce any book or record or withheld any information, he was
liable to a fine upto Rs.SOO/- which could be extended by Rs.SO/- for
every day the default continued. The Central Government also had
the right to publish such parts of the inspection report as were
considered in the public interest, after giving due notice to the bank
concerned.
The powers mentioned above did not include measures for

reconstruction and improvement of a bank if its condition was found
unsatisfactory. A special section was, therefore, introduced in the
Banking Companies (Control) Act, 1948 which provided as follows:-
(1) To call a meeting of the bank's directors for discussing

matters arising out of inspection of a bank.
Abd ul Qad ir
(Gov ernor 1953-60)
Laho re Office premises
(2) To make such changes in its management, within such

time, as the State Bank considered necessary.
This power was considered a deterrent for the directors and

executives of banking companies from misusing the bank funds or to
serve their own interests and of their associates. In Pakistan, the State
Bank had to use these powers only on one occasion. By and large its
effect had been fairly salutary.
Only in October, 1951, it was decided, as a matter of general

policy, to conduct regular, systematic and periodic inspections of
each bank in the country, beginning with those in Karachi, so as to
ensure that the entire banking structure was sound and progressing
on healthy lines. Under the existing legal provisions, directives had to
be obtained from the Government for inspection of each bank.
Thereafter, protracted correspondence with the Government that
followed concerned the submission of inspection report to the
Government etc. To obviate unnecessary procedural complications,
the Government on the State Bank's request, moved the legislature
and secured the following amendment through Act LX of 1952,
called the Pakistan Banking Companies (Inspection) (Amendmertt)
Act, 1952:-
The inspection could be ordered by the State Bank on its own.

In such cases it was left to the State Bank whether or not to send
copies of the inspection report to Government. If, however, an
inspection was ordered by the Government, the State Bank was
bound to send a copy of the inspection report to the
Government.
For ten years to follow, there was no attempt to amend the law
relating to the inspection of commercial banks. The experience
gained during these years, however, necessitated making further
provisions for enabling the State Bank to guide or help improve the
position of banks, which were found unsatisfactory through
inspections.
Standardisation of Inspection
The inspection team of the State Bank was further strengthened

by securing the services of officers working in commercial banks by
offering them better terms of service and promising brighter future
prospects.
In the early years of the inspection by the Bank the set of returns
used by the Reserve Bank formed the basis of information called for
from a bank under inspection. Later, inspecting officers most of
whom came from commercial banks, made necessary additions and
modifications to suit the requirements. Earlier inspection reports
generally described only the adverse features noticed in a bank's
inspection which called for early attention and application of
rectifying measures. The statistical and other information and returns
obtained from the bank were not included in the inspection report,
though those were readily available to the Department for further
use. By 1953, need for standardising and improving the methods of
inspection was strongly felt. Arrangements were made to send
officers for training abroad. Services of two foreign experts were also
secured under the Technical Assistance Programme of the United
Nations. Of these, Neal T. Moore, of the Federal Deposit Insurance
Corporation of U.S.A. assisted the Inspection Division in
standardising the statistical information gathered by inspectors in the
course of inspection on the pattern followed by his own institution.
This method, considered among the best in the world, continued to
be followed by the Inspection Division after suitable modifications to
suit the country's requirements.
Liquidation Work
After identifying the unsound banks and putting them into

liquidation, the State Bank had to assume the responsibility of
liquidation work of such banks as well. The Banking Companies
(Control) Act, 1948 provided for the appointment on application by
the State Bank on itself as the official liquidator of a banking
company. Under this provision the Bank was appointed 'Official
Liquidator' of 9 banks in West Pakistan and 10 in East Pakistan. A
statement showing the details is given at page 148. While the State
Bank was able to make satisfactory progress in the case of banks in
liquidation in West Pakistan the progress was not equally satisfactory
in the case of banks in East Pakistan. The slow progress in liquidation
proceedings in large measures were due to the fact that these
proceedings were governed by the provisions of the Companies Act
relating to liquidation which was most unsuitable for banking
companies. The nature of business of banking is such that its winding
up involves a large number of debtors of a bank and official liquidator
had to file suits against them in several courts of the country. The
involvement of multiplicity of courts, heavy expenses in litigations,
etc. delayed the recovery of loans. Despite these obstacles the State
Bank was able to recover some funds from four banks in West
Pakistan.
f.-'
.J::>.
Banks in Liquidation in East & West Pakistan of which the State Bank of Pakistan was the Official Liquidator 00
Total
Date liabilities Dividend
Sl. Name of the Bank in Liquidation of on the date of paid present Remarks
No. Liquidation liquidation
Rs.
so far
Rs.
Liabilities
Rs.
-
::r:
...,
c;n
0
:;l:l
East Pakistan
1. Allied Bank Limited .. .. 6-6-1952 3,30,428 Nil 3,30,428 -<
2. Bank of Commerce Limited .. .. 25-11-1952 25,96,275 Nil 25,96,275 0
"TJ
3. Calcutta National Bank Limited .. .. 2-12-1952 7,10,312 Nil 7,10,312 ...,
4. Bengal Bank Limited .. .. 8-8-1952 3,18,686 Nil 3,18,686 ::r:
tr1
5. Jessore United Bank Limited .. .. 7-3-1952 69,483 Nil 69,483 c;n
6. Mohanpur Trading Bank Limited .. .. 1-2-1952 30,129 Nil 30,129
7.
8.
Pioneer Bank Limited
Sattar Bank Limited
..
..
..
..
24-2-1955
8-2-1952
59,04,510
80,268
Nil
Nil
59,04,510
80,268
~
tr1
9. Sylhet Loan & Banking Co. Ltd. .. .. 14-12-1951 3,76,799 Nil 3,76,799 c:l
10. Sylhet Commercial Bank Limited .. .. 17-1-1958 1,98,189 Nil 1,98,189
~~
West Paldstan
11. Punjab Commerce Bank Limited .. .. 13-5-1952 - Nil 23,727 0
12. Bharat Bank Limited .. .. 22-12-1959 36,92,869 Nil 36,92,869 "TJ
13. R.B. Kidar Nath & Sons Bank Ltd. .. 7-6-1958 4,38,336 Nil 4,38,157 '1:1
>
14.
15.
Central Exchange Bank Ltd.
Punjab and Kashmir Bank Ltd.

..
..
Prov.
Final
Prov.
Final
10-4-1952
29-5-1952
7-4-1952
28-11-1953
24,28,706
8,39,753
4,78,671
Nil
20,12,764
8,39,753
-~
...,
c;n
>
z
16. National Savings Bank Limited .. .. 24-11-1955 25,711 Nil 25,711
Karachi
17. Bank of Bhopal Limited .. Prov. 27-8-1951
Final 7-4-1952 5,34,003 50,634 4,94,714
18. Sind Commercial Bank Limited .. Prov. 21-9-1951
Final 22-9-1954
19. Safe Bank Limited .. .. 24-8-1954 2,82,001 27,308 2,55,431
6
Credit System and Monetary Management
Pakistan inherited from British a predominantly agricultural

and industrially backward economy. The Britishers had administered
the entire subcontinent as a single economic unit. Free trade within
the whole area, a single tariff and a unified system of currency and
credit, had helped to integrate the economy. This was very aptly
described by the Finance Minister in his first budget speech1 as:
In the first place, I should like to point out that in order to
understand and appreciate fully the economic and financial conditions
now obtaining in PakiStan it is necessary to go back to the history of the
British administration in India. The British policy treated the whole of
India as a political and consequently an economic unit. The
consequences of this approach which cannot but be regarded as having
been basically erroneous, have, in my view, been most unfortunate.
No proper attention was paid to the development of economic
resources in all parts of India with a view to securing a balanced
development of the various natural regions which comprised the
Indian subcontinent. The result is that industrial development, instead
of being properly diffused, was lop-sided and ended in the artificial
concentration of industry in certain areas to the detriment of others,
which in some respects possessed better facilities. As a consequence of
this policy the areas which comprised Pakistan remained
1 Government of Pakistan, Ministry of Finance: Budgets of the Central Government of
Pakistan 1947-48 (August 5 to March 31) and 1948-49, pp.3·5.
149
- ---------------------------------
predominantly agricultural and industrially backward. There are no

jute mills in Pakistan although over 70 per cent of the total jute crop of
the subcontinent is grown here. There are very few cotton mills; inspite
of the fact that Pakistan grows and supplies large quantities of staple
cotton to mills both in India and abroad. The same applies to many
other raw materials such as hides and skins, tobacco, etc. We have thus
inherited lack of industrial development as a legacy of the past. This
means not merely that for a period of time, we shall have to depend on
India and other countries for most of our essential requirements but
also that it will take time to build up a sound and healthy financial
structure.
Financing Jute and Cotton Trade
1. Jute Trade
The relationship between Pakistan and India tbat emerged after
Partition was, by and large, of supplier of raw materials and industrial
producer. In the absence of a worthwhile manufacturing sector,
Pakistan's economy was dependent on the two major cash crops, jute
and cotton. Almost all the jute produced in East Pakistan was sent to
India to be manufactured into hessian and other jute products in jute
mills at Calcutta or baled and shipped from there to foreign markets.
Jute being the most important cash crop of East Pakistan its price was
an important factor in the life of the farmers. All banking facilities,
too, were concentrated in Calcutta, from where credit flowed into
East Pakistan's jute trade. Immediately after Partition, the
Governments of India and Pakistan entered into an agreement th~t
jute from Pakistan may be exported in bonds through Calcutta port.
This agreement worked for sometime. But in September, 1949 when
India refused to recognise Pakistan exchange rate, suddenly the link
with Calcutta was snapped resulting in a lack of banking and
exchange services. The different groups of intermediaries between
the growers and exporters were mainly financed by exporters who
brought out funds from India through the banks.
To avert the collapse of this trade and arrest the dangerous fall
in prices the Government of Pakistan intervened by issuing an
Ordinance on October 22, 1949 to "safeguard international trade in
CREDIT SYSTEM AND MONETARY MANAGEMENT 151
jute", empowering itself to fix minimum support prices and appoint

agents and brokers to purchase, store and sell jute on behalf of the
Central Government. A Jute Board was established to administer
these powers and to supervise all matters concerning storage,
transport and insurance. The State Bank realised the importance and
urgency of creating an indigenous agency which could finance
Pakistani agents and businessmen in the jute market. Accordingly, a
draft bill was prepared for submission to the Constituent Assembly
for setting up a Pakistani bank with the object of taking over
government business from Imperial Bank of India. In view of the
crisis in the jute market, the Governor of the State Bank, wrote to the
Central Government, expressing his apprehensions that, if an official
agency did not enter the field, almost all business would fall into the
hands of Exchange Banks. These, in the first instance, would prefer
the foreign trading houses and, if they did provide any help to the
national agencies, it will be at a higher rate of interest.
It was, therefore, decided to open the bank as already discussed

in the earlier chapter, nearly six monhts earlier than was originally
planned in order to forestall the crisis which threatened to envelop
the jute business, following the dead-lock with India. Instead of
waiting for the Constituent Assembly to meet for the passage of the
bill, the National Bank of Pakistan was launched through an
Ordinance in November, 1949. Within 15 days of the issue of the
Ordinance, the new bank established five branches at important jute
centres, namely, Narayanganj, Mymensingh, Chandpur, Rangpur
and Khulna and took over the financing function. During this period
of emergency the bank was handicapped by limitations of capital,
constitution, accommodation and staff. With the State Bank's active
support and backed by all its influence, prestige and resources in the
provision of staff as well as funds, the National Bank was able to
render valuable services and become an instrument for offering the
much-needed support to stabilise the jute market from the date of its
inception.
The bank was allowed from time to time to make share

allocations to appropriate parties. Permission was granted to accept
time deposits for a minimum period of 6 months. The total value of
shares allotted upto May 1, 1950, including government subscription,

was only Rs.3.86 million. The amount available from time deposits
was also insignificant and the funds available from these sources were
estimated to be roughly Rs.5 million. The Bank had, therefore, to be
furnished with funds to facilitate the performance of its functions.
The only source was the Central Bank of the country which was acting
as its parent institution.
In the first instance, the legal view was that the State Bank
Order did not permit the inclusion of the National Bank on the
Second Schedule of the State Bank of Pakistan as the former was not
a company, as defined in clause 2 of section 2 of the Companies Act,
1913 or a corporation or a company incorporated by or under any law
in force in any place outside Pakistan. Pending the inclusion of
National Bank in the Second Schedule by necessary amendment to
the State Bank of Pakistan Order, 1948 the State Bank allowed the
same remittance facilities to the National Bank as were enjoyed by
scheduled banks but this did not solve its financial problem.
The obvious method of providing credit was by rediscounting

bills endorsed by the National Bank under clause 13A(1)(a) of the
State Bank of Pakistan Order, 1948 as applied in the case of
Promoters' Company. The National Bank could thus make advances
to the jute agents appointed by the Government on the
hypothecation or pledges of the stocks supported by Bills of
Exchange. It would then discount the Bills with the State Bank. The
proceeds of these Bills were to be credited to the National Bank's
account with the State Bank. On this account the National Bank
could directly issue cheques in favour of the borrowers who would
draw the amount from the State Bank's Dacca Office. This procedure
was cumbersome and inconvenient for the borrowers and the
competitive competence of the National Bank was endangered.
At this stage, the legal position was examined again with the
help of Government's legal advisors and it was finally held that the
National Bank was a banking company as defined in the Banking
Companies Control Act, and, therefore, the State Bank could
advance loans to it on such security as it considered sufficient.
Accordingly, an overdraft facility of Rs.100 million was granted at a

concessional rate of 2% on the security of a demand pro-note.
Until June, 1950 the National Bank of Pakistan remained

engaged exclusively in jute operation. With the assistance of the bank
the Jute Board managed to purchase during 1949-50 season 0.85
million maunds of jute valued at Rs.20 million. The Board played an
important role in stabilising the prices of jute by its market operations
from time to time. By June, 1952 it had purchased 6.9 million maunds
by investing Rs.165 million. Prices continued to decline in the face of
bumper 1952-53 crops and minimum prices were reduced from Rs.23
to Rs.17 per maund. In these circumstances the Board incurred a loss
of about Rs. 75 million. However, its effective intervention helped to
stabilise trading conditions. Its purchases saved the new entrants into
trade from bankruptcy and relieved the National Bank of 2 million
maunds of jute with which it was left when borrowers defaulted.
The Jute Board appointed a number of co-operative societies to

buy jute direct from growers all over the province. These soCieties
had been provided with the concession of selling directly to the Jute
Board which made advances to them. By 1954, the crop cultivation
was strictly regulated obviating the need for the Jute Board to enter
the market. However, minimum prices were fixed occasionally.
2. Cotton Trade
Cotton in West Pakistan was the most important cash crop and
shared with jute the distinction of providing a major part of the
country's foreign exchange earnings. The cotton produced by West
Pakistan in undivided India used to be transported by rail to the
centres of textile industry in Ahmadabad and Bombay which, in tum
supplied cloth to Pakistan. But the Punjab disturbances and the
wholesale exchange of population that took place between West
Pakistan and Northern India, disrupted the normal channels of trade
and traffic and violently forced their diversion into other directions.
The movement of cotton from the farms of many small farmers

to the consuming and shipping centres in the country required
financing operations of a sizeable magnitude. Traders and their

banks had to advance substantial amount for the transitional period
of cotton from growers to the final consumers in the domestic market
or to the importer in a foreign country. With the closure of most of the
Indian bank's branches in West Pakistan and en mass migration of
Hindu cotton traders and indigenous money lenders, the cotton trade
was seriously dislocated. Disturbances affected standing crops and
pickings and the shortfall in 1948-49 crops was attributed to its
mishandling by inexperienced East Punjab refugees in cotton farming
on irrigated lands. The traditional credit facilities available for cotton
growers had shrunk, if not fully dried up. Big zamindars and
independent growers were relatively in a better position, but the
tenants and growers were forced to obtain advances from zamindars,
friends and relatives on unfavourable terms. The Governor of the
State Bank, in his capacity as President of the National Bank,
undertook an extensive tour of the cotton growing districts of Punjab
to study the conditions personally in 1950. On his return to
headquarters, he ordered National Bank to immediately open bank
branches at all the important centres so that the required funds could
be provided to cultivators and ginners on the spot.
Prior to Partition, the cotton trade passing through Karachi was

almost entirely controlled by foreign firms, many having offices in
Bombay where a considerable section of the textile industry was
situated. The general evacuation of a greater part of the Hindu
community from Sind and Karachi after Partition brought a radical
change in the composition of cotton trade. Incoming Muslim traders
replaced the Hindu traders who had left the country. Pakistani banks
took the initiative to extend credit facilities to new entrants with the
active co-operation of the State Bank and helped in establishing their
business. Many firms had little experience in judging market trends
since they were deliberately inducted into the trade after Partition
through the export licencing policy. As a result, the market tended to
respond to changing influences with considerable volatility and
unpredictableness.
A crisis occured in October-November, 1950 following a sharp

rise in prices in the wake of Korean War and a shortfall in the crop in
the U.S.A. The situation was met by the Government with the help
of increasing export duty to depress the internal market. However, to
ensure that similar crises were not repeated, a Cotton Ordinance was
promulgated in December, 1950 (replaced by the Pakistan Act,
1951). This empowered the Government to fix minimum prices for
cotton; to regulate ginning and pressing charges; to compel ginners to
buy and pay not less than the minimum prices fixed; to deal in and to
register and regulate the trading and movement of cotton. A Cotton
Board was set up to administer legislation. Government intervention
through the Board became necessary late in February, 1952, as prices
collapsed following the world textile recession. Special measures
were taken by the State Bank and the Government to meet the
situation created by the fall in the prices. These prices started
declining between January 28, 1952 and February 25, 1952, the
decrease in certain varieties was Rs.38 per maund. At this stage, the
Cotton Association closed the market. The reasons for this sharp
decline were partly domestic and partly international. One of the
important factors in this context was that as soon as prices began to
fall, financial stringency appeared both at Karachi and in the
mofussil. Banks began to call in the margins. In consequence weak
parties among the cotton dealers and ginners were compelled to
liquidate stocks in an already sinking market.
In an effort to contribute towards the solution of the crisis, the

State Bank took up this question of margins. Discussions were held
on f:ebruary 24, 1952 between the Governor of the Bank and
representatives of the Cotton Trade, the National Bank, Habib Bank
and Muslim Commercial Bank. Keeping in mind the American
Support Price and the depreciation on resident sterling, it was
realistically assumed that the price of Pakistan cotton would not fall
lower than Rs. 70 per maund at Karachi, while the prices ruling in the
Karachi cotton market were almost at par with American spot
quotations, after taking the depreciation of resident sterling into
account.
The banks were approached to reconsider their attitude. The

meeting with the bankers was followed by a meeting with the
representatives of the Cotton Assocaition, who suggested that banks
should refrain from insisting on additional margins in the event of a

fall in the prices of cotton below Rs.50 per maund. This measure was
expected to have a sobering influence on the market, attract foreign
enquiries and restore confidence. The suggestion was subsequently
recommended by the State Bank and the Habib Bank and the
National Bank agreed to immediately enforce it.
A meeting was held on the February 26, 1952 in which

representatives of the Pakistani banks and those of the Punjab and
Bahawalpur Cotton Ginners and Merchant Associations
participated. They were told that the ginners faced considerable
difficulties because they had purchased cotton at higher prices and
were selling it at a lower level. The situation was intensified by their
inability to hold on to stocks on account of lack of funds. They
suggested that banks should: (a) not call for further margins,
(b) increase advances against unginned cotton upto 90%, (c)
make advances against ginned cotton in the interior and that (d) their
limits in case of commission houses be enhanced. The representatives
were informed that since the banks would not call for margins beyond
25% calculated on the price figure of Rs.90, the commission houses
would be accommodated and that the ginners should discuss the
matter with their commission houses and agree as to the basis on
which the latter would accommodate the ginners.
A meeting with the Foreign Exchange Banks was held on the

same date and the proposal that the banks may treat Rs. 90 per maund
as the lowest price and not call for further margin deposits on
advances granted on this basis, when prices fall below Rs.90, was
made to them. While these banks were not prepared to express any
views as to their acceptance of this measure, and the fact that the
Pakistani banks were prepared to follow it, indicated that the other
banks would have no option but to accept the same. Accordingly, the
State Bank issued a statement to the press explaining the
arrangements. Subsequently, the Government announced its
support scheme, which helped to stabilise the market-a step
welcomed by all the interests concerned.
Issues arising in the wake of rapidly changing situation from
season to season and within each season and relating particularly to

questions of financing cotton, were considered and became the
subject of intensive study in the S~ate Bank. The Governor, at this
stage, took the advantage of the presence in the State Bank of
Morgan H. Rice, Federal Reserve Bank of Dallas, whose services
had been made available as Research Advisor to the State Bank
under the U.S. Technical Assistance Programme. He possessed
detailed knowledge of problems connected with cotton in his own
country and was himself a cotton grower. A study was conducted by
him and Dr. Azizali F. Mohammad, a Research Officer of the
Department of Research of the Bank, in May, 1953.
The two-man team visited important mandies in the Punjab and

Bahawalpur and cotton centres in Sind; held free and frank
discussions with ginners, bankers and representatives of growers at
various places. A comprehensive report was drafted and circulated
for comments to prominent persons in the cotton business of the
country. Useful comments from these quarters were incorporated in
the study. The report was published in July, 1953 under the title
"Marketing and Financing of Cotton". The Governor, in his
foreword wrote:
I wish to acknowledge our indebtedness of Morgan H. Rice who has

since returned to his country for the inspiration and guidance he
provided in conducting and preparing this study. Dr. Azizali F.
Mohammad, our Research Officer has distinguished himself by
conducting this study and writing this report. It has yielded a great deal
of valuable information and has established a precedent and a model
for similar studies in future.
The Report dealt with the subject in depth, covering all possible
aspects which, among other things, contained information about the
cultivation of the crop, its transportation and marketing by growers;
ginning and pressing industry and marketing by ginners; Karachi
Cotton Market, its history and organisation; Price Support Scheme;
financing at growers and the ginners level, financing at Karachi and
export. The report served as a guide to financing of cotton and
enabled the Bank to appreciate and understand all the intricacies of

cotton trade.
Problem of Credit Inadequacies
The problem of inadequacy of credit facilities in the economy

had been realised by the State Bank soon after its inception. Zahid
Husain, in his speech delivered at Third Annual General Meeting of
the Bank on September 28, 1951 stated:
I think that the lack of credit facilities, in the measure in which it exists
in this country, by hampering production and creating bottle-necks in
distribution, acts as an ally of inflationary forces and not of
disinflation. I believe that by judicious and carefully planned
extensions of credit facilities in the country we will remove
impediments to production and open up the channels of distribution
which will help our anti-inflationary campaigns. I, therefore, make no
apology for drawing your attention to the comparative inadequacy of
credit facilities in this country.
I have always had the feeling that Pakistan has been starved in
the matter of credit and the preliminary studies that have been
conducted in the State Bank tend to confirm this feeling. Our studies
prove conclusively that in all sectors of our economy the amounts of
credit actually made available fall very short of what obtains in other
countries of comparable size in respect of production, trade and
general economic importance.
It would not be far wrong to say that the lack of credit is in fact
the measure of our backwardness. Historically, it seems that this
lamentable situation is directly due to the fact that modem banking in
pre-partition India developed under the inspiration and stimulus
provided by the financiers and bankers of the West who started
establishing early in the 19th century what were known as 'Eastern
Banks'. Their object was to finance the trade of dependent countries in
the East, or more precisely the export from these countries of raw
materials and the imports of manufactured goods. Their operations
were, therefore, limited largely to import and export trade and to the
provision of funds for European traders and businessmen in the East.
Production was not their concern nor the internal trade except to the
extent to which it constituted the terminal projections of external

trade.
Indigenous banks were discouraged which is proved by the fact

that even the Presidency banks and the Imperial Bank of India upto
1935 were prevented from entering into foreign exchange business.
The traditions of modem banking in this country thus received very
early in its history an unmistakable stamp of rigid conservation
concealing under the cover of cautious procedures an attitude of
complete indifference to production and internal distribution. Our
bankers having been trained in these traditions, and never having had
opportunities of planning for national objectives must be forgiven if
their methods appear to many to be slow and ultra cautious. These
qualities have their value when foundations have to be laid firm and
secure. But they should always bear in mind that the traditions which
they are following, however sacred they may appear, must be subject
to review and reconsideration in the light of our national
requirements. They must not regard the practices in which they have
been brought up to be immutable like the laws of God. This is one of
the most important problems of banking which Pakistani bankers of
the future will have to deal with.
Credit indeed is one of the primary needs of this country. It must

be supplied in proper quantities, carefully distributed and effectively
supervised and controlled. Pakistani commercial banks need to set up
special departments for agriculture, industries and house building.
Due to lack of experienced staff, unsatisfactory communications and
absence of personal contacts, new specialised institutions are not likely
to be able to tackle the problem speedily, efficiently and on the desired
scale. Such institutions must for a long time remain confined in their
contracts to larger towns catering to the needs of bigger units, moving
slowly under the weight of rigid regulations. Commercial banks, on the
other hand, can operate with greater speed as they have experience
and there is a relationship of mutual confidence and helpfulness
between them and their clients.
In October, 1951 the Bank conducted a study of credit available

for different sectors, namely Agriculture, Industry, Commerce and
House Building. The study, inter alia, included comparison of
facilities available to these sectors in other countries. It came to the
conclusion that except in the field of commerce, which received the

lion's share in commercial bank advances in Pakistan, these were far
from satisfactory. "Of course there are no quantitative figures to
sustain this conclusion but a realistic appraisal of both demand and
supply in the wide range of economic activity tends to confirm the
impression. No consolidated and reliable statistics were available
about the break-up of even the commercial bank advances in
Pakistan. Such figures, however, can be had from a number of
foreign countries and also for India. The percentage of figures for
India can be taken as broadly representative of conditions in Pakistan
also, with this important modification that the figures for Pakistan in
case of industry should be revised downwards substantially as
compared to India, while in the case of commerce estimated higher.
This is due mainly to the paucity of industrial undertakings in
Pakistan". In sum, the study showed that the credit facilities in
Pakistan in the sphere of agriculture were glaringly inadequate and in
the case of industry far from satisfactory.
The demand for industrial credit in the early years of the

establishment of Pakistan was not very large. There were several
factors of diverse nature responsible for this trend. The affluent class
during this period was more interested in commerce than in industry,
as it could more quickly multiply its riches in trade rather than in any
other branch of economic activity. At the same time, there were
many impediments to establishment of industry, particularly the
shortage of cheap power, delay in the import of capital goods,
scarcity of technical know-how inside the country, lack of
coordination in the activities of government departments/agencies
concerned with industrialization, deficiency of iron and coal deposits,
discouraging prospects of getting sufficient accommodation from
existing financial institutions and of floatation of shares and
debentures. The agricultural class in general which is in a
preponderant majority, did not have much of a saving potential and
as for land-owning aristocracy it was interested in wasteful
conspicuous consumption. The middle class was mostly fond of
investment in urban property or building houses or in safe and secure
government debentures. Industrial shares were not popular either,
without a fully developed stock exchange market in the country.
Establishment of Industrial Credit Institutions
1. Pakistan Industrial Finance Corporation
Realising its responsibility the Central Government took the

initiative by announcing a Two-Year Priority Development Plan
which envisaged the direct participation of the State in the sphere of
industry. Out of the total cost of the Plan amounting to Rs.450
million, Rs.230 million were earmarked for industry. Conservative
and selective in their investment portfolio, the commercial banks
were inclined to accord priority to commerce. Establishment of the
Pakistan Industrial Finance Corporation (PIFC) under government
sponsorship on June 15, 1949, with an issue and share capital ofRs.20
million, it partially fulfilled the purpose. The Government also
guaranteed the payment of interest at the maximum rate of 214% per
annum, free of income tax.
The main objective of the PIFC was to make medium and long
term credit available at moderate rates of interest to industrial
concerns and co-operative societies registered in Pakistan and
engaged in the manufacture or processing of raw materials, in mining
or in the generation and distribution of electricity and other sources
of power. The Corporation was designed to run on commercial lines
and required to satisfy itself on the technical feasibility and financial
soundness of the undertaking before sanctioning of a loan. The
management was entrusted to a Board of nine Directors, of whom
three were elected by the shareholders and the remaining six,
including the Managing Director, were nominated by the
Government.
During the period between 1949-50 and 1958-59 the

Corporation rendered assistance to the tune of Rs.142.4 million to a
wide and varied range of industries, financing almost every type of
industry in the private sector. But by far the largest share of funds was
claimed by the cotton textile industry. The regional break-up of the
loans granted by the Corporation indicated that out of its total
allocation Karachi had a share of Rs.51.8 million, West Pakistan
Rs.57.8 million and East Pakistan Rs.32.8 million.
2. Pakistan Industrial Development Corporation

The next step in the development of industrial credit mechanism
in the country was the establishment of Pakistan Industrial
Development Corporation (PIDC) under an Act of the Legislature
which came into force in December, 1951. The main purpose of
creation of this Corporation was to provide industries with equity
finance as distinct from loan finance, because it was found that
private capital was not forthcoming in a measure required to promote
industries which in view of the Government were vital to the security
or economic well being of the State. Specific institutions were to be
developed through satellite corporations sponsored by the PIDC.
The floated capital of the companies was first to be offered to the
public for subscription and the balance of unsubscribed capital was to
be taken up by the Government. Naturally, all schemes of PIDC for
floating companies were first to be sanctioned by the Government.
Government holdings, however, in companies were to be passed on
to the public, as soon as the latter showed willingness to acquire
them. It was not intended to replace private enterprise but aimed at
stimulating it. Starting its operations in 1952, the PIDC completed
nearly 50 projects upto December, 1959 with an investment of
Rs.998.4 million, out of which Rs.270 million were contributed by the
private sector and the rest by the Government.
3. Genesis of Industrial Credit Bank
The State Bank was still not satisfied with the credit facilities
available for industries. The lending operations of commercial banks,
particularly the Pakistani banks, had increased significantly but they
could provide only a small proportion of the total working capital
requirements of industries. The First Five Year Plan estimated that
commercial banks advances contributed only 10.6 per cent of total
working capital invested in industry. The Central Board of Directors
in its meeting, held in December, 1954 considered the proposal of the
Governor, Abdul Qadir, for setting up an industrial credit bank. A
sound development of the Pakistan economy, he believed, required
the acceleration of the pace of industrialisation. Hitherto most of the
major industries had been sponsored and assisted in obtaining
finance from government owned or controlled credit institutions

(PIDC and PIFC). Growing private initiative in the field of
manufacturing had necessitated the existence of a private
organisation which would support venture capital in providing
additional funds and to assist it in obtaining managerial and technical
services.
In the circumstances prevailing in Pakistan, it was realised that

the appropriate way to deal with the problem was to incorporate
under the laws of Pakistan, a privately owned bank to function as an
industrial credit bank. It seemed advisable that the ownership of such
a bank should be spread over as large a number of Pakistani investors
as possible, so as to avoid control by any single group of investors.
The participation, on a minority basis, of non-Pakistani capital
(British, American and European) should, if possible, be secured.
Such a participation would promote the flow of external capital to
Pakistan industry and would assist in obtaining the know-how in the
field of industrial production and management. The bank's finances
were to come from equity and borrowed capital. A conservative ratio
between debt and equity capital should be maintained.
The purpose of the bank, as envisaged, was to encourage and

stimulate the industrial development of Pakistan, by giving financial
assistance primarily to small and medium size productive industries,
owned by private capital. ~his financial assistance could take the
form of loans or equity investment, and of underwriting and
distribution of securities. The bank was to promote the establishment
of new as well as the expansion of existing enterprises. The assets of
the bank were to be diversified in point of numbers and geographic
distribution. The bank was to encourage and promote private
ownership of industrial securities and help in the development of
securities market. The bank was to be a financing agency and not a
holding company for industrial enterprises. Therefore, it had to
arrange its loaning and financing in a way to achieve a maximum turn
over and follow the formal policy of making loans on amortization
basis, to facilitate earliest payment, consistent with the ability of the
borrower. It could dispose of its participation in equity as soon as it
was able to receive a fair price. The bank was not authorised to invest
or acquire a controlling interest in any undertaking which would have

given it the full responsibility for management. If by reason of any
circumstances, it became a controlling stock-holder or creditor, it
could take steps to divest itself of the excess investment compatible
with reasonable business practice. While primary consideration was
to be given to the main objective of contributing to the industrial
development of Pakistan, the affairs of the bank had to be conducted
on sound business lines and the bank had to build out of its earnings,
adequate reserves against possible losses.
The initial finance resources of the bank were to be sufficiently

large to make an impact on development of private industry, taking
into account possible financial needs of industry over the next few
years. Initially, the ordinary share capital was not less than Rs.20
million, including a minority participation of non-Pakistani capital
(British, American and European).
The scheme was discussed at different levels in the Government

and the Governor, State Bank continued to pursue it at every stage.
He informed the Directors of the Board in its meeting, held on
December 15, 1956 that the scheme for the formation of the bank (to
be renamed as a corporation) was well advanced. The Memorandum
and Articles of Association of the Corporation and the drafts of its
agreements with the Government of Pakistan for grant of an interest
free loan of Rs.30 million and to cover foreign exchange risk of the
company in respect of IBRD loan in the initial period of its operations
were nearing finalisation. The State Bank was also requested by the
Steering Committee of the Corporation to enter into an agreement
with this institution in which the general terms and conditions,
subject to which the advance of Rs.20 million was to be made by the
Bank, were to be embodied. The Governor of the State Bank also
participated in the negotiations with IBRD in Washington for
securing a loan for the Corporation.
4. Pakistan Industrial Credit & Investment Corporation

After detailed negotiations between the Steering Committee,
consisting of private businessmen, the Government of Pakistan, the
----·------
State Bank and the International Bank for Reconstruction and

Development, the Pakistan Industrial Credit and Investment
Corporation (PICIC) was organised as a public limited company
under the Companies Act in October, 1957 and commenced business
from November, 1957. Its general management was entrusted to a
Board of 14 Directors, including one Government Director and three
representatives of foreign investors. The main objectives of PICIC
were to help industrial enterprises in the private sector by providing
assistance in the creation, expansion and modernisation of such
enterprises, as well as by encouraging, sponsoring and facilitating
participation of private capital in these enterprises. According to the
policies of this institution, all privately owned industries were eligible
for financial assistance, but preference was to be given to enterprises
which: processed indigenous raw materials; fell within the scope of
priorities fixed by the country's economic development plan; and
were likely to develop an export capacity which could effect a saving
in the country's foreign exchange expenditure.
The authorised share capital of the Corporation was Rs.150
million, of which Rs.20 million was issued and subscribed; 40% of it
was subscribed by the foreign investors. Further, it received loans
amounting to Rs.20 million from the World Bank and the
Development Loan Fund of U.S.A. each and an interest free loan of
Rs.30 million from the Central Government. A low interest rate loan
of Rs.20 million was promised by the State Bank. N.M. Uquaili,
Deputy Controller, Foreign Exchange Department of the State Bank
was appointed Joint General Manager of the Corporation in January,
1958. 2
The Corporation was designed to operate on a commercial
basis, engaging itself both in lending and investing activities. In
addition to providing credit facilities to existing and new industries
both in foreign and local currencies, the Corporation was also
empowered to assist industry by way of share participation and to
help in securing necessary material; technical and administrative
know-how.
2 N.M. Uquaili later took over as Managing Director, PICIC. He was elevated as Finance
Minister in the Presidential Cabinet of General Ayub Khan in 1966.
Starting its operation in late November, 1957, the PICIC had by

December 31, 1959 entered into agreements for the financing of 76
projects for a total amount of over Rs.70 million, whereas the major
share of these loans was in foreign currencies.
5. House Building Finance Corporation
Housing was neglected in the Indo-Pakistan subcontinent. The

demand for accommodation, on the other hand, continued to grow
rapidly on account of increasing population, War time inflationary
pressure and accelerated urbanization. While rent control acts
adopted in various big cities provided relief to middle class urban
dwellers, little incentive was left for new construction or even for
proper maintenance.
On Partition, the uprooting and immigration of millions of

refugees intensified the problem in Pakistan. There were
opportunities in the cities, created by the exodus of middle class
Hindu traders and middlemen which attracted fresh immigrants from
the villages. Moreover, Muslims from all the big cities of India
flocked to the new urban centres in Pakistan. The process of
economic development and industrialisation further contributed to
urbanization. In Pakistan, the rate of progress was accelerated
sharply in the period following Partition. It was a gigantic task for the
Government to find accommodation for such a large number of
displaced persons. The Government spent huge amount of money on
the development of waste lands adjoining the cities and towns in East
and West Pakistan, where the influx of refugees was acute e.g.
Karachi, Lahore, Lyallpur, Hyderabad (Sind), Multan, Sialkot,
Sargodha, Rawalpindi, Dacca and Chittagong. Since the refugees did
not have sufficient funds for the construction of houses and no credit
institution existed in the country for the purpose of financing
construction of houses on such a large scale, the Government set up
a House Building Finance Corporation (HBFC) under an Act,
known as the House Building Finance Corporation Act, (Act
NO.XVIII of 1952). The Act came into force on November 10, 1952
and the Corporation started functioning with a nucleus staff from that
date.
The House Building Finance Corporation entered the field with

a paid up capital of Rs.50 million, fully subscribed by the
Government. Besides, the financial resources of the Corporation
comprised refundable deposits of the Federal Government, sale of
debentures to banks, insurance companies and State Bank. The
Corporation could grant loans upto a maximum limit of Rs.40,000 to
individuals and Rs.l million to co-operative housing societies. The
maximum period of repayment of loans was 20 years. At the end of
1950's, credit facilities were extended to more than 50 cities in both
wings of the country. Upto June 30, 1959 the Corporation sanctioned
loans to the tune ofRs.73.4million, of which Rs.53.9 million were for
construction of houses in the region, including the Federal Capital
Area and the former provinces of Baluchistan and Sind. Another
feature of the sanctioned loans was the concentration of fairly large-
sized loans. Out of the total sanctioned amount, Rs.47.5 million were
given in amounts ranging between Rs.15,000 and Rs.40,000.
Commercial banks played an insignificant role in providing

housing finance in the country. They were generally not in favour of
making advances against immovable property because these loans
were not liquid and security offered was not considered adequate. A
classification of bank advances at the end of September, 1959 showed
that only 1.1% of total bank advances related to construction of
buildings.
The State Bank followed a liberal and unorthodox policy

towards HBFC for meeting its financial requirements. In general, the
Bank did not grant long term credit for the purpose of house building,
since the funds provided to this Corporation were again loaned to the
private sector for a period ranging between 12 and 15 years.
However, the State Bank took the decision to adopt a flexible
attitude in this case, the Government not being in a position to
provide the required resources to House Building Finance
Corporation. In July, 1958 the State Bank purchased debentures of
the Corporation of Rs.lO million carrying interest at 3% and
repayable in 5 years. In December, 1958 the State Bank again
purchased additional debentures carrying interest at 4% upto Rs.lO
million.
Development of Bank Deposits and Advances
1. Bank Deposits
The commercial banks with their expanding net work of

branches in the country continued to mobilise increasing domestic
savings which were used to meet the growing credit requirements of
the economy. Apart from financing of foreign trade and commerce in
late fifties, they started playing an important part in meeting the
requirements of domestic industries as well. The movement in bank
deposits reflected the trend of economic activities in the country.
Starting with Rs.1067 .2 million at the end of July, 1948 the bank
deposits stood at Rs.1714.9 million at the end of December, 1954,
representing an increase of Rs.647. 7 million or of roughly 61% over
this period of six years and a half. The increase was attributed in
general to (a) the revival of economic activity in the country after the
post-partition dislocation, (b) rehabilitation of banking, (c) inflow of
Muslim capital from other countries, (d) increasing tempo of
developmental activity, particularly in the industrial sector and the
consequent growth in money incomes especially in the urban areas,
which had better banking facilities, and (e) a generally favourable
balance of payments on private account.
Though a secular tendency towards an increase in bank deposits

had been apparent eversince July, 1948 the rise was by no means
uniform or regular over the entire period. In fact, bank deposits
registered considerable fluctuations in various periods. These were
not very wide until the end of 1950; since then, however, there had
been marked ups and downs. The period between 1950 and 1954 can
be divided into three distinct phases:-
(a) An almost continuous increase took place in bank deposits

throughout the calendar year 1951. This amounted to as
much as Rs. 337.1 million from Rs .1134. 8 million at the end
of December, 1950 to Rs.1471.9 million at the end of
December, 1951.
(b) This increase was followed by an almost continuous

decrease throughout the calendar year 1952 during which
period bank deposits declined by Rs.112.2 million from
Rs.1471.9 million to Rs.1359.7 million.
(c) This was followed by a period of nearly continuous increase

extending from December, 1952 to December, 1954. An
accretion of Rs.355.2 million over this period raised the
level of bank deposits to a peak figure of Rs .1714. 9 million.
The rise in deposits in the calendar year 1951 may largely be

attributed to enhanced export earnings of the country as a result of
the Korean War boom and a highly favourable balance of payments
on private account approximating roughly to Rs.1080.5 million. The
maintenance of a comfortable cash ratio by the scheduled banks
throughout the year, despite a sharp rise in bank advances and
absence of liquidation in gilt-edged securities, leads to the conclusion
that the increase in bank deposits did not originate primarily from
credit creation but represented, in a large measure, genuine public
savings. The increase in bank deposits in 1951 could be taken as a
rough indication of the fact that the money incomes of certain classes
were increasing and people were saving more than before in money
terms.
The decline in bank deposits in 1952, on the other hand, could

be explained largely in terms of changes that took place in the
country's economy during that period. The reversal in the terms of
trade, fall in export income, high level of imports and the emergence
of a sizeable deficit in the balance of payments necessitated heavy
withdrawals on past accumulations to meet current commitments.
Unsold stocks of cash crops with the merchants locked up a good part
of their resources. But for the release of substantial funds by the
Government in respect of official purchases of cotton and jute under
the price support scheme, the fall in bank deposits could have been
far more steep.
The increase of Rs. 355.2 million in bank deposits during the two
years ending December, 1954 appeared to have resulted from the
following factors: (1) reduced scale of commercial activity, (2)

favourable balance of payments on private account, (3) excess of
Government disbursements inside the country over receipts and (4)
floatation of the share capital of several joint stock companies.
A remarkable feature of this development was the

proportionately higher increase in time deposits than in demand
deposits. Demand deposits increased by only 10.7% over this period,
while the increase in the case of time deposits was as high as 88.8%.
This was attributed mainly to the reduced scale of commercial
business in the country and the rise in interest rates on fixed deposits
in 1952. Another contributory factor was that a large number of
industrial concerns were set up during this period and a part of the
amount received by them by way of share capital was deposited with
the banks for fixed periods with a view to earning interest pending
their utilisation in productive purposes. The deposits that the banks
took from importers against letters of credit, opened for the import of
machinery under the Deferred Payments Scheme were reflected
under time deposits and as they generally result in a certain shift from
demand deposits to time deposits, this appeared to have been an
additional factor responsible for the larger increase in time deposits.
Deposits of the scheduled banks went up by Rs.205 .4 million to

Rs.1995 million during the year 1955-56. This was accounted for by a
rise of Rs.161 million under demand and Rs.44.4 million under time
deposits. The growth in bank deposits was mainly a reflection of the
surplus in the balance of payments and the deficit in government
financial transactions. The up-trend in bank deposits continued
during 1956-57, though at a substantially lower rate. This increase
apparently lagged behind the monetary expansion. The slower
expansion in bank credit was accompanied by a sizeable increase in
bank deposits during 1957-58. Total demand deposits of the
scheduled banks showed an increase of Rs.204.9 million to Rs.1790
million, while time deposits went up by Rs.131.7 million to Rs.741
million. The funds, thus made available to the banking system, found
an outlet in government securities and Treasury Bills offered for sale
during the period.
Bank deposits were subject to fluctuations during 1958-59.

There was an increase of Rs.121.4 million in their volume between
end-June and the first week of October, 1958. This was followed by
a decline of Rs.126.8 million as on December 19, 1958. The decline
was probably a result of the buying spree occasioned by the
precipitate fall in the price of consumer goods after the advent of
Martial Law Regime, losses suffered by trade and tax payments to the
Government. Thereafter, deposits rose appreciably, touching
Rs.2623 million at the end of June, 1959. At this level they indicated
a net increase of Rs.233.6 million over the year. The rise was shared
both by demand and time deposits. The increase in bank deposits
which occurred largely during January-June, 1959 was attributable
mostly to the favourable balance of payments, restricted import
activity and the rise in deposit rates of some of the scheduled banks
following the increase in the Bank Rate.
The uptrend in bank deposits in evidence since the beginning of

1959 continued during the year 1959-60. They increased by Rs.320.1
million to Rs.2943.1 million in 1959-60, as compared with the
increase of Rs.233.6 million in the previous year: of the total increase
60% was accounted for by time deposits. The steep rise in bank
deposits during the year was mainly due to the sizeable surplus in the
country's international accounts. Other contributory factors were the
rise in scheduled banks' deposits rates following an increase in Bank
Rate in January, 1959 and the conversion of hoarded currency into
bank deposits after the declaration of hidden wealth under the
Amnesty Scheme.3
2. Classification of Scheduled Bank Advances
The first attempt to collect statistics of 'Advances by Scheduled

Banks' was made by the State Bank in June, 1951, but unfortunately
this was not successful as the reporting by some of the banks was
found inaccurate and remained unchanged for more than a year.
Meanwhile, the Statistics Department of the State Bank was able to
improve and streamline the system and towards the close of the year
3 This subject has been discussed in detail in Chapter No. VIII on Exchange Control and
Management.
1953, it was possible to compile a comprehensive survey of

'Scheduled Banks Advances' as on December 31, 1952, not only by
major economic groups, but also by banks of different origin
(Pakistan, India and Exchange Banks) as well as distribution
between East and West Wing of the country. The survey was based
on reports collected from 30 banks with 202 branches spread over the
length and breadth of the country.
The survey revealed that out of total advances of Rs.632.1

million, Rs.242 million or 38.3% was made by Pakistani banks,
Rs.140.6 million or 22.2% by Indian banks and Rs.249.4 million or
39.5% by other foreign banks. Although banks incorporated in
Pakistan shared roughly 2/5th of the total, the average advance per
bank for Pakistani banks was larger than that of foreign banks. This
average worked out to Rs.48.4 million for Pakistani banks, Rs.8.8
million for Indian banks and Rs.27. 7 million for other foreign banks.
According to the distribution of advances by nationality of

banks and purpose, the financing of commercial activities which
accounted for a total of Rs.301. 7 million (i.e. 48% of the aggregate)
ranked first in order of importance. This high proportion, depending
mainly upon the country's volume of internal and external trade,
showed the relative profitability of the commercial business and
served to emphasise the scarcity of other outlets where banking funds
could be gainfully employed for short durations. The bulk of
commercial loans, nearly 93.6%, were utilised in financing the
wholesale and retail trade of the country, while the remaining in
other commercial avenues.
Of the total of Rs.301. 7 million of finance provided by

scheduled banks to commerce, the share of Pakistani banks was
Rs.70.4 million or 23.3%, of Indian banks Rs.58.2 million or 19.3%
and of other foreign banks Rs.173.1 million or 57.4%. Obviously,
foreign banks who catered for the short term needs of big export
houses held more than half of the business. The predominance of the
foreign banks had a historical background and their long experience
of association with trade. Their functions were sustained and
strengthened by their world wide connections, the pre-eminent
position enjoyed by them in the London money market, and finally

the drawing of almost all bills in Sterling which conferred a near
monopoly on them in the financing of foreign trade.
The amount outstanding against 'Agriculture, Forestry,

Hunting and Fishing' came to Rs.112.4 million or 17.8% of the total
outstanding advances. More than 90% of this amount was advanced
to finance agriculture and livestock industry. Taking into account the
much propagated 'cautious attitude' of commercial banks against
locking up of their resources and the 'oft-talked poor types' of
securities that agriculturists can offer, the amount appeared to be
substantial. The loans made by Pakistani banks stood at Rs. 78.3
million or 69.6% as against Rs.5.4 million or 4.8% by Indian banks
and Rs.28.7 million or 25.6% by other foreign banks.
An amount of Rs.90.6 million outstanding against

manufacturing industries constituted approximately 14.3% of total
advances. A number of factors may be cited which acted as deterrants
to the free flow of bank credit to industrial channels. The liquidity
criterion combined with scarcity of easily realisable securities could
be seen as a most potent factor. Further, the banks, as a rule did not
make unsecured loans and in cases where they did, it was made
doubly sure that the industry was sufficiently remunerative and well
established. Again, the country was predominantly agricultural and
whatever industrial avenues existed, were mostly on a small scale and
as such the banks tended to take a very conservative estimate of their
creditworthiness. In the industrial sphere, the share of Pakistani
banks was nearly 3/Sth of the total outstanding loans. As on
December 31, 1952 the loans of Pakistani banks stood at Rs.53.6
million (59%), as against Rs.17.2 million or 19% loaned by Indian
banks and Rs.19.8 million (22%) by foreign banks.
Metal products except Machinery and Transport Equipment,

was the largest single outlet that sliced away Rs.28.2 million or nearly
a third of the total advances of Rs.90.6 million. This was followed by
the textiles group which showed a borrowing of Rs.17.1 million.
Next, in order of descending magnitude, came the undefined group
of miscellaneous industries that took Rs.16.8 million. The advances
outstanding against 'Printing and Publishing', 'Food and

Manufacturing', 'Beverage' and 'Leather and Leather Products' and
other industries accounted for a comparatively low figure.
Mining and Quarrying, Construction, Public Utilities,

Transport, Storage, Communications, etc. were not so important in
so far as the total absorption of credit was concerned. Their combined
share amounted to 1/5th of the total advances made to the entire
group. It was observed that Exchange Banks and, to a lesser extent,
Indian banks had specialised in advancing loans to the
aforementioned groups. The chief reason for this was perhaps the
comparative immaturity of the Pakistani banks and the greater
technical competence of foreign banks to deal in the technicalities
inherent in these operations. Further, whereas the interest of
Pakistani banks was concentrated in selected industries, Indian and
other foreign bankers' pattern of advances was more broad-based.
Regional Distribution of Advances by Purpose
The regional distribution of advances by purpose revealed that

with the exception of Agricultural Production and Services that
accounted for Rs.112.4 million and Rs.5.99 million or nearly 1/4th of
the total outstandings, the credits extended in West Pakistan were
considerably higher than those in East Pakistan. A detailed break-up
further disclosed that the net extension of credit for purposes of
commerce in East Pakistan was meagre when viewed in relation to
the size of the population, due to (a) the absence of as efficient credit
facilities as obtainable in the Western Wing; (b) lower absolute as
well as relative volume of imports and exports handled through East
Pakistan ports; and (c) continued existence of local Hindu money
lenders and shroffs.
Considerable divergence existed in the relative importance of

various industries, as reflected in the volume of credit absorbed by
them, between the two wings of the country. Broadly speaking, the
industrial structure was more diversified in West than in East
Pakistan. In West Pakistan, the most important industries were
Metal Products (excluding Machinery and Transport Equipment),
Textiles and Printing Presses. In East Pakistan, the list was headed by
Textiles, Beverages, the rest were much too insignificant to merit
attention. The Textile group at that time was a consolidated amalgam
of all industries based on fibres such as jute, cotton, wool, silk etc.
This grouping precluded the possibility of ascertaining precisely the
amount of credit flowing into cotton and jute, the two principal
nascent industries. Out of a total credit of Rs.17 .1 million, extended
to textile industry as a whole in Pakistan, West Pakistan accounted
for as much as Rs.12.7 million and East Pakistan the balance of
Rs.4.4 million. In other words, East Pakistan claimed about lAth of
the total.
The advances made by the scheduled banks continued to be

reviewed by the State Bank from time to time, to study economic
trends as well as the progress of Pakistani banks vis-a-vis other banks.
The position of the scheduled bank advances by major economic
groups as on June 30, 19554 revealed that the total bank advances
amounted to Rs.723 million. 'Commerce' alone absorbed Rs.377.8
million or 52% of the total. Advances to the 'Manufacturing' group
amounted to Rs.175.7 million or 24% of the total. Manufacturers of
Textiles had a share of Rs.95.6 million or 54% of this total, while that
of Paper and Paper Products stood next in importance, accounting
for Rs.12.6 million or 1.7% of the total. Advances to the
'Construction' group at Rs.26.5 million formed 4% of the total and
'Services' group absorbed Rs.75.1 million or 10%. Agriculture,
Transport, Storage, Communications and other had a share of
Rs.55.3 million or 6.7%.
Total advances granted by Pakistani banks, as outstanding on

June 30, 1955 amounted to Rs.425.2 million or 59% of the total of all
the scheduled banks. The contributions of different sectors were:
Commerce, Rs.189.4 million (45%), Manufacturing group, Rs.122.5
million (29%), Construction group, Rs.13.1 million (3%), and
Agricultural group, Rs.5 million (1% ).
Total advances extended by Indian banks stood at Rs.105.7

4 State Bank of Pakistan: Banking Statistics of Pakistan (1948-57), Karachi 1958, p.109.
million or 15% of the total of all the scheduled banks in Pakistan.

Advances to 'Commerce' amounted to Rs.65.3 million, forming
62%. Advances to the 'Manufacturing' group were to the tune of
Rs.19.6 million, sharing with 19% of the total and 'Services' group
absorbed Rs.1.1 million, with a share of only 1%.
Total advances of the other foreign banks, as outstanding on

June 30, 1955, amounted to Rs.192 million or 26% of the total of all
the scheduled banks in Pakistan. The Commerce sector again
claimed the largest single portion of Rs.123 .1 million ( 64%),
followed by Manufacturing group, Rs.33.6 million (17%),
Transport, Storage and Communications, Rs.l3.9 million (7%),
Services, Rs.3.8 million (2% ).
The total advances as on June 30, 19605 amounted to Rs.1445

million. During the previous years, 'Commerce' alone had a major
share of 43.2%. Next was 'Manufacturing' group (38.3% ), 'Services'
(5.4%) and 'Construction' (1.1% ). These figures indicated that the
trend observed at the end of June, 1955 in scheduled banks advances
by major economic groups, continued. Consequently, the operations
of the commercial banks were largely confined to the financing of
commerce and industry. The Credit Enquiry Commission came to
the same conclusion in their report:-
At the end of March, 1959 the share of these two sectors in total
advances was 84.8 per cent with commercial finance for the movement
and distribution of merchandise claiming the bulk of credit, whether in
absolute terms (Rs.548.8 million) or relatively 46.5% to other sectors.
The combining of advances to the commercial and industrial sectors
conceals, however, a striking rise in the case of industry, where the
absolute figures have risen from Rs.95.6 million in March, 1953 to
Rs.451.8 million in March, 1959 and the corresponding percentages
from 16 to 38. While commenting on the insufficiency of bank
advances to many sectors, it is well to remember that this rapid
extension of credit for meeting the working capital needs of a nascent
industrial sector is an achievement of no mean proportions. 6
s State Bank of Pakistan: Report on Currency and Finance, 1960-61, pp.144-145.
6 Government of Pakistan: Credit Enquiry Commission Report, Karachi, September 1959,
p.94.
Province-wise Distribution of Advances

The regional distribution of bank loans between East and West
Pakistan revealed that East Pakistan, smaller in area, but more
populous than West Pakistan, was not quite as much developed in
industry and commerce as West Pakistan and, therefore, banks made
greater business in West Pakistan than in East Pakistan. Moreover,
West Pakistan included also the Federal Capital Karachi?, an
important commercial and industrial centre. Agricultural sector was
larger in East Pakistan, but farm credit was not the field of
commercial banks in general. However, the growth rate of bank
credit in both the wings recorded increases of over 200 per cent
between 1953 and 1960.
Although the number of bank branches in East Pakistan was less

than in West Pakistan, the loans were made quite liberally in the
former. This was due to the fact that some banks placed special
emphasis on catering to financial needs of business in East Pakistan.
Manufacturing concerns in East Pakistan recorded a relatively small
share of total loans in the country, but commercial loans in this region
were about 40% of loans in Pakistan.
There was a concentration of credit facilities in the few big cities

of East and West Pakistan viz. Karachi, Lahore, Dacca, Chittagong,
Narayanganj and Khulna. Nearly :y§rd of the total scheduled banks'
advances were concentrated in Karachi. The State Bank made a
concerted effort to tackle the problem of regional distribution in
granting permission for the establishment of new bank branches. 8
Creation of Eastern Mercantile Bank
In order to promote economic development of East Pakistan

where banking facilities in the interior were almost negligible and a
large section of the population was starved of its requirements of
credit, it was felt that a local bank with some indigenous capital and
7 The Federal Capital was shifted from Karachi to Rawalpindi/Islamabad in the year 1960.
s This subject has been dealt with separately under "Banks' Branch Licencing Policy" in
Chapter-V.
talent should be organised in the province. The State Bank,

therefore, sponsored the establishment of the Eastern Mercantile
Bank and, with a view to generating sufficient impetus to bring it into
existence, the State Bank not only itself participated in subscribing to
the equity capital of the new bank, but also secured the participation
of the other leading Pakistani commercial banks. The State Bank
subscribed Rs.1 million towards the issued share capital, consisting of
250,000 ordinary shares of Rs.10 each, National Bank of Pakistan
Rs.0.5 million and Habib Bank Rs.0.1 million. The subscription by
the public was Rs.0.926 million from East Pakistan and Rs.0.09
million from West Pakistan. The Board of Directors allotted shares
to all applicants, other than National Bank of Pakistan, in full, which
was allotted shares worth Rs.0.383 million.
The bank was established to achieve the objectives: to provide

banking facilities particularly in areas where commercial banks had
not yet made their appearance, to encourage and stimulate internal
trade, industry and movement of crops by providing financial
assistance primarily to small and middle traders, businessmen and
handicraft workers and to interest and train local people in banking
business. The bank was given the status of a scheduled bank on
August 18, 1959. It started functioning on August 24, with its head
office and first branch at Chittagong. By the end of the year, it was
able to establish five more branches at Dacca, Narayanganj, Cox's
Bazar and Ashuganj. Another branch was added in 1960. After its
expansion the bank was able to mobilise deposits of over Rs.4 million
and make advances of nearly Rs .1. 25 million.
Monetary Management
The rehabilitation and development of banking and credit
system on sound lines was the primary preoccupation of the State
Bank but the smooth functioning of the monetary and credit system
in the short term was also among its major responsibilities. With the
development of banking and extended use of bank credit, the
regulatory function of the Bank was beginning to assume increasing
importance. The first occasion for the State Bank's intervention
arose in August, 1950 soon after the issue of Open General Licence
to prevent overtrading in imports with the help of bank finance.

Pakistan decided, as already mentioned, not to devalue its rupee
when Sterling and several other currencies were devalued in
September, 1949." Then there was a sudden rush for imports.
Influenced by rumours of an impending devaluation, importers
resorted to heavy speculative booking for forward exchange, which
threatened to strain the country's foreign exchange position. It also
resulted in a substantial diversion of funds to the import sector at the
cost of export financing. In August, 1950 the State Bank prohibited
the booking of forward exchange, unless the importers opened
irrevocable letters of credit, supported by a deposit of not less than 35
per cent of the amount of forward cover. Later, the percentage was
increased to 75 per cent in the case of imports under Open General
Licence.
The high level of advances, it was feared, would create scarcity
of funds to finance the export trade. To forestall it, the State Bank
suggested a precautionary measure to the banks, and asked them to
review and revise their credit ceilings for consumer goods where
necessary and exercise caution in sanctioning fresh limits. The
restrictions in respect of marginal deposits against letters of credit
remained in force till March, 1951 when they were withdrawn on
account of comfortable foreign exchange position and subsidizing of
speculative dealings in imports.
On the outbreak of Korean War in June, 1950 there ensued a

general scramble for raw material, pushing up the prices to
unprecedented heights. The cash crops of Pakistan were in great
demand. Exports of cotton and jute were accelerated, resulting in a
large favourable balance of trade and sharp increase in money
supply. At the same time, bank advances registered a steep rise in the
wake of larger exports and higher prices. The balance of payments
position improved and foreign exchange reserves were strengthened.
The Korean boom was followed by a recession which affected

country's foreign exchange earnings. The drain on foreign exchange
reserves continued due to large imports under the Open General
Licence. The balance of payments came under heavy pressure and
there was current account deficit of Rs.440 million during 1951-52.

The foreign exchange reserves suffered a drastic fall to the tune of
Rs.467 .4 million. With a view to arresting the drain on reserves
instructions were issued to the banks not to release foreign exchange
for imports except in the case of items specially or generally
exempted, unless irrevocable letters of credit were opened and
supported by a margin of deposit of at least 50 per cent of goods under
Licence and 75% for goods under O.G.L. In addition, banks were
asked not to make advances against imported goods in excess of 50
per cent of their value, while unsecured advances and those secured
by personal guarantees were completely prohibited. However, these
restrictions did not restrain the flow of imports to the desired extent
and the quarter July-September, 1952 recorded a deficit ofRs.405.6
million. The Government severely restricted the scope of O.G.L. in
August and completely abolished it in November, making all imports
licenceable. This resulted in a reduction of deficit to Rs.70.4 million
in the quarter October-December, 1952, while the two succeeding
quarters registered modest surpluses. In November, 1952 the margin
of deposit was reduced from 50 per cent to 25 per cent and with the
imposition of quantitative controls, the restrictions were totally
withdrawn in March, 1953.
The monetary situation was regularly reviewed by the State
Bank with a view to determining whether any restrictive measures
were called for in the field of credit from 1953 onwards. Meanwhile,
the economic policies of the Government witnessed a change and the
budget deficits, which occurred, were largely covered through
borrowings from the State Bank, resulting in substantial expansion in
money supply. On the other hand, there was a decline in availability
of consumer goods in the wake of restrictive import policy and short
fall in food production. In these conditions Pakistan devalued its
rupee in August, 1955 which helped improve the balance of
payments. This improvement, however, proved short-lived on
account of heavy payment by the Government on import of
foodgrains and continuing deterioration in terms of trade.
Inflationary pressures continued to build up. The monetary situation
under these conditions was reviewed by the State Bank coming to the
conclusion that as incomes were being generated largely by
government financial operations, a general restrictive monetary

policy would not be of much help and might even harm
productivity. 9
The next occasion when the State Bank had to restrain the banks
from making liberal unsecured advances was in June, 1955 when it
came to its notice that there was unusual speculative activity in stock
exchange, particularly on fresh issues. For curbing unhealthy trends
in the share market, the Bank issued a directive prohibiting banks
from making unsecured advances against the security of shares in a
company in anticipation of their allotment, unless borrowers made a
deposit of 50 per cent or more of the application money without the
special and general sanction of the State Bank. 10 In June, 1957 the
State Bank again intervened when the figures of scheduled banks
advances during three months preceding June, 1957 revealed that
their level was much higher than during the corresponding period in
the previous year, 1956. The repayment of advances during these
three months, the slack season, had been very slow. It was expected
that on the termination of the busy season there should have been a
substantial reduction in the total advances. Although there was a
decrease, it was not as substantial as it was feared. It appeared,
therefore, that funds were tending to be locked up in the financing of
imported goods. While the busy export season had not yet
commenced, advances stood at a fairly high level. These factors led to
the conclusion that the banks were making large advances for
financing imported goods. The belief was further strengthened by the
fact that the prices of consumer goods were rising.
As pressure was expected to begin on the banks for financing

jute and cotton which would have coincided with the demand for
financing imports, the State Bank was compelled to impose
restrictions on advances against imported goods. Accordingly, on
June 29, 1957 the State Bank issued a circular, directing the banks to
limit their advances against imported manufactured goods, bullion,
foodgrains and oil seeds to the extent of 60 per cent of the value of
State Bank of Pakistan: Annual Speech of the Governor, State Bank of Pakistan,
delivered on September 7, 1957, p.16.
to State Bank of Pakistan: Report on Currency and Finance, 1954-55, p.38.
such goods and also to limit unsecured advances and advances

secured by guarantees to a maximum of Rs.50,000 to an individual
party, provided that they were not intended to finance imports of
manufactured goods, bullion, foodgrains and oil seeds. The banks
were advised to adjust their outstanding advances to the specified
levels within 3 months from the date of the receipt of the circular.
Simultaneously, the Authorised Dealers were instructed by the State
Bank not to open letters of credit to cover imports into Pakistan,
unless 15 per cent of the amount of credit was deposited with them.
These restrictions remained in force during the year with slight
administrative modifications.
In the restricted category of advances, secured advances came

down to Rs.24.5 million in May, 1958 from Rs.60.1 million in June,
1957. Unsecured advances also declined from Rs.67.8 million to
Rs.44.1 million over this period. Advances against oil seeds at
Rs.16.1 million in May, 1958 represented a decline of Rs.4.8 million
since the imposition of credit restrictions. There were only minor
changes in lending operations against imported manufactured goods
and bullion. In the case of foodgrains, the increase in advances was
entirely due to Government borrowing for its procurement schemes.
As a further measure for curbing speculation, on January 28,

1958 the State Bank issued a directive to all banks asking them to limit
their advances against shares of joint stock companies to the extent of
50 per cent of their market value. The restriction was withdrawn on
April3, 1958.
A close watch was kept on the developing credit situation and

necessary adjustments were made in the credit control policy
whenever warranted. To relieve the strain on the banking system on
account of temporary stalemate in trade and commerce, following
the precipitate fall in the prices of consumer goods in the quarter
October-December, 1958 the State Bank withdrew the credit
restrictions in force since June, 1957. The removal of these
restrictions was also felt necessary because of the severe penalties
prescribed by the new military Government for the offences of
hoarding and profiteering. The question of bank funds being
employed in anti-social activities of these kinds simply did not arise.

An assessment of the impact of such restrictions, during the period
they were in force, showed that bank advances against restricted
categories declined sharply from Rs.299. 7 million to 30.78 per cent of
the total bank advances in June, 1957 to Rs.184.6 million or 17.6 per
cent of the total bank advances in November, 1957.
The State Bank again imposed several credit controls in the

beginning of 1960 in the context of sharp monetary expansion in the
country. During 1958-59 the increase of Rs.197.9 million in money
supply was due largely to expansionary forces originating in the
Government and the foreign sectors. The domestic private sector was
actually contractionary and bank credit to the sector declined slightly
over the year. A complete change of forces became evident in 1959-
60. The foreign sector remained expansionary, the Government
sector became contractionary for the first time, while the private
sector contributed to the increase in money supply by Rs.164.9
million out of the total increase of Rs.296 million in the entire year.
There was a sharp rise in bank credit extended to the private sector
which rose by Rs .357 .3 million over the year. The largest part of this
increase took place from October, 1959 to January, 1960 as total
credit expansion aggregated to Rs.57 million. It climbed to the
season's peak i.e. Rs.1622.9 million in first week of February, 1960.
The expansion was only partly ascribed to real factors such as

the higher level of jute and cotton prices prevailing in the 1959-60
season; the return of foodgrains trade to private hands; the
liberalisation of imports and the consequent expansion of productive
activity generally. It was observed that the expansion of credit was
partially in certain non-essential sectors. There was a noticeable
tendency to finance accumulation of stocks of imported and other
goods with bank funds.
In the closing months of 1959, unhealthy trends had developed

in the share market in the wake of large scale purchases of shares of
newly floated companies, mostly with borrowed funds. Two issues
which came up in the market in December were heavily
oversubscribed. In the case of Asbestos Cement Industries,
subscriptions received were Rs.25 million against the issue of Rs.0.12

million, and subscriptions for Steel Corporation of Pakistan shares
had surpassed all expectations, Rs.80 million against the expected
Rs.2. 7 million. Between November and December, 1959 commercial
bank advances against the security of stock exchange scrips jumped
by Rs.52.6 million, of which Rs.43 million was for shares and
debentures of joint stock companies. This gave clear indication of
heavy bank involvement in new floatations. There was also unhealthy
competition among banks for reduction on margins for such loans.
Erratic fluctuations in scheduled bank advances and deposits from
week to week were an inevitable consequence of this development.
In consultation with the bankers, it was, therefore, agreed on

February 10, 1960 that banks would make advances against shares of
newly floated companies only, if 50% cash was provided by the
intending subscribers out of their own resources. It was also agreed
that advances against shares of already established companies would
be limited to not more than 60% of the market value of the shares.
Advances to the share brokers were, however, exempted from the
40% margin restrictions so as not to hamper their dealings, forming
as they did an important link in the money market. Banks were,
however, cautioned on March 24, 1960 not to raise the limits already
granted by them to the share brokers.
Another sector where bank credit showed a sharp increase was

cotton yarn. Advances against the pledge of the commodity doubled
during the two months ending January, 1960 and this coincided with
an acute shortage of yarn in the local market. The banks were,
therefore, directed to limit their advances against cotton yarn (except
for export) to no more than 60 per cent of the value. Identical
restrictions were simultaneously imposed on advances against
imported manufactured goods which had also risen sharply since
October, 1959. Excluding industrial machinery, iron, steel,
engineering and other metal products, advances in this category rose
from Rs.77.3 million to Rs.115.4 million in a five months period
ending February, 1960. While this was partly due to the liberalisation
of imports, a tendency to the holding of stocks was also noticed. The
margin requirements on imported manufactured goods were not
applied to industrial machinery, iron and steel. Subsequently,

advances upto Rs.25,000 were exempted from the 40 per cent margin
restriction in the interest of the smaller parties. Further, with a view
to removing genuine difficulties of industrial concerns, it was decided
to grant exemption to imported manufactured goods, used as raw
materials which had no ready market for sale and offered no scope for
malpractices. Foreign firms engaged on works of national
importance, and oil companies busy in drilling and exploration of oil,
were also exempted.
In order to make these restrictions effective, it was necessary to

control unsecured advances and advances secured by guarantees.
The banks were, consequently directed not to make, without special
or general sanction of the State Bank, unsecured advances or
advances secured by guarantees beyond the maximum amount of
Rs.50,000 to any one party, provided that the advances were not
intended for financing of imported manufactured goods and cotton
yarn.
Finally, restrictions were imposed since February, 1960 at the

instance of the Government on advances against wheat and rice, as it
was feared that consequent upon the decision to return the grain
trade to private hands, there might be a tendency to raise food prices
by holding stocks. Banks were advised not to make advances against
wheat and rice for longer than six months and to ensure that such
advances did not stick with the borrowers.
Credit Enquiry Commission
In the initial stages, the primary concern of the State Bank was
to create and establish the banking system in the country. It was
followed by expanding the credit structure to meet the requirements
of different sectors of the economy. Then the question of control and
reform of the credit system started assuming importance with the
growth of credit. The Government, then, appointed in February,
1959 a full fledged high powered Credit Enquiry Commission,
headed by Abdul Qadir, Governor of the State Bank. The
Commission was required to examine the scope and working of the
agencies which provided credit facilities to agriculture, business and

industry and to suggest measures to meet the agricultural and urban
credit requirements of the country by improving the available
facilities and creating new ones where necessary, with a special
emphasis on agriculture, small business and industry. The
Commission was also advised to propose special measures on the
credit field to ensure implementation of the land reforms, approved
by the Government and also to examine the training facilities for
banking within the country.
The other members of the Commission were Mumtaz Mirza,

Managing Director, Agricultural Development Finance
Corporation; G.S. Kehar, Member, National Planning Commission;
A. Muhajir, Managing Director, National Bank of Pakistan; Dr.
S.A. Husain, Cooperative and Marketing Advisor, Government of
Pakistan; S.A. Sobhan, Development Commissioner, Government
of East Pakistan; Malik Khuda Bakhsh Bucha, Secretary, Revenue
and Rel)abilitation Department, Government of West Pakistan;
Mulla Abdul Majid C.S.P. (Retired), East Pakistan and M.N. Huda,
Head of the Department of Economics, University of Dacca. Dr.
Azizali F. Mohammed, Deputy Director, Department of Research,
State Bank of Pakistan, was appointed to act as Secretary of the
Commission.
By virtue of the fact that the Chairman and Secretary of the

Commission were working in the State Bank, it served as the
Secretariat of the Commission and had to take the load of data
collection work and compilation of the Report. The Commission in
its introductory note recorded:
We are particularly grateful to the State Bank of Pakistan for the

valuable assistance received from several of its officers for the
background material for our deliberations and the efficient
arrangements made for our tours and meetings. Finally we wish to
place on record our appreciation of the excellent work done by our
able Secretary. But for the hard and sustained labour and that of his
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associates it would not have been possible to complete our Report

within the period of time. 11
The Commission submitted a comprehensive Report, outlining

the major problems in the credit field in September, 1959. It was of
the view that an effective institutional credit system designed for the
direct benefit of the primary producers was yet to be developed in the
country. Another problem was that within the groups, who were in a
position to obtain credit from organised institutional sources, there
was a tendency for credit to gravitate towards the more substantial
element in the community because they could offer adequate
security. The Commission found striking evidence of concentration
of credit and quoted the findings of special survey of the State Bank
that on March 31, 1959, 63 per cent of the total bank credit was locked
up in only 222 bank accounts, ranging between Rs.1 million to Rs.5
million. and above. On the other hand, advances under Rs.25,000
accounted for hardly 6 per cent of the total credit.
Dealing with the co-operative credit movement the Commission

admitted its inability to achieve any measurable success in its mission.
To a large extent, the resources of the co-operative banks had been
exploited by men of influence for personal purpose in complete
disregard of co-operative ideals and objectives. This had resulted uot
only in undermining the movement by the denial of credit to the
primary producer, but also jeopardising the interests of the general
public who had deposited their savings with co-operative institutions.
The Commission also noted that there was lack of uniform control
over the credit structure. While some credit institutions were subject
to the control of the State Bank, others were controlled by separate
agencies. This anamolous position had to be rectified. The
Commission was guided in its deliberations by four main
considerations: (a) credit must percolate to the primary productive
sectors of the economy so as to increase production; (b) credit policy
must work in the direction of promotion of small and medium scale
enterprises in every sector of the economy; (c) extension of credit
11 Government of Pakistan: Credit Enquiry Commission Report, Karachi, September 1959,
p.3.
facilities to neglected sector should take place both through the

redistribution of the existing pool of liquid resources and the
establishment of additional institutional agencies; and (d) savings
were essential for credit expansion, if inflation was to be avoided. 12
In the field of commercial credit, the two main problems were

underlined: (1) inadequate expansion of commercial banking in the
relatively underdeveloped areas of the country; and (2) the acute
concentration of bank credit in a few hands. To solve the first
problem, the Commission recommended that 250 bank branches be
opened by the end of Second Five Years Plan period. To encourage
the banks to open branches in the mofussil areas where branches
might not be remunerative, it recommended that subsidy
arrangements in the agency agreement between the State Bank and
National Bank be extended to other banks with suitable
modifications. To tackle the second it was suggested that the State
Bank should examine the possibility of restraining the banks from
providing credit for purposes of equity, thereby preventing
industrialists from obtaining loans for establishing fresh undertakings
against their personal holdings and shares in existing undertakings
and thus, obviating resort to capital market.
With a view to providing increased credit facilities to the small

businessmen and traders the Commission recommended the
establishment of a Peoples' Finance Corporation. It was also
suggested that commercial banks should explore the possibility of
appointing 'Guarantee Brokers' who would guarantee loans
extended to the small borrowers. Moreover, the State Bank was
advised to consider the establishment of two 'Discount Houses', one
in each wing, with the object of discounting 'Hundis' for small traders
and businessmen. To induce the commercial banks to lend directly to
the small concerns, it was recommended that the State Bank might
prescribe a uniform percentage of deposits which must be earmarked
for small loans upto Rs.25,000 and that the proposed Peoples'
Finance Corporation might administer a guarantee fund for covering
12 The Commission's observations on rural section and its recommendations for extensive
reforms in the rural credit structure have been discussed in the subsequent chapter on
'Agricultural Credit'.
a portion of losses, incurred by the commercial banks on small loans.
1. Industrial Development Bank

Dealing with industrial credit the Commission came to the
conclusion that there was no dearth of credit facilities for the large-
sized industries. They were in a better position to obtain their full
requirements of finance, both short term and long term, from the
specialised industrial finance corporations, the commercial banks
and market sources. The real difficulty in obtaining credit facilities
was faced by the medium, small scale and cottage industries. To meet
their requirements, the Commission recommended the
reorganisation of the Pakistan Industrial Finance Corporation into an
industrial development bank, mainly to cater to the needs of such
industries. Its lending should not exceed Rs.l million except in
certain special circumstances. To augment its resources it should be
encouraged to accept deposits from the general public. The
Commission was of the view that commercial banks would be able to
extend short and medium term credit to small industries, provided
the specialised corporations undertake to give them a technical
appraisal of the scheme to be financed and negotiate guarantee
arrangements to cover 50 per cent of the losses arising out of such
loans.
2. Mortgage Bank
Apart from discussing the credit problems in rural areas,

commercial and industrial sector, the Commission dealt with a
number of problems in the credit field, including the question of
provision of lending facilities for housing and construction. It
suggested the establishment of a mortgage bank with an initial capital
of Rs.20 million to be provided by the Central Government and this
bank would grant loans against the security of land, building and
other real estates.
3. Mining and Inland Water Transport
Of great potential importance for the economy, the necessity of

ptoviding adequate credit to the sector could not be left out of the
Commission's purview. It suggested that Pakistan Industrial Finance
Corporation (PIFCO) be invested with the primary responsibility of
meeting the medium and long term needs of the mining industries.
In view of the vital role of Inland Water Transport in the

economy of East Pakistan, the Commission recommended that
PIFCO might also extend credit facilities to this sector.
4. Control over Credit Agencies
The Commission considered the question of the State Bank's

control over the various statutory credit agencies set up by the
Government; namely, the Agricultural Development Finance
Corporation, Agricultural Bank of Pakistan, National Bank of
Pakistan, Pakistan Industrial Finance Corporation and House
Building Finance Corporation. Out of these institutions, the National
Bank of Pakistan and the Agricultural Bank of Pakistan virtually
treated as banking companies, were subject to the control of the State
Bank. There was, however, no control of the State Bank on the
remaining institutions. The Commission recommended that while in
the matter of administrative and non-credit activities the statutory
credit agencies could remain subject to Government directives, they
must come under the control of the State Bank in respect of credit
policies. The Commission observed that we are convinced that if the
State Bank is to discharge its function of credit control in the country
effectively, it must enjoy adequate powers to coordinate, control and
supervise the operations of all the specialised credit institutions in the
country ... (suitable) provision be made in the statutes of all statutory
credit agencies declaring them banking companies 13 for purposes of
State Bank control.
5. Training Facilities
The Commission recommended the expansion of training

facilities in the two Bankers' Training Institutes, set up by the State
13 Government of Pakistan: Credit Enquiry Commission Report, Karachi, September, 1959,
p.160.
Bank at Karachi and Chittagong, by the introduction of a 'Refresher

Course' for advanced training for a selected number of bank officers
with at least five years service. As regards training in co-operative
credit, it was recommended that the State Bank should take the
initiative in making arrangements for training of the staff of the co-
operative banks.I4
14 A summary of the Report of the Credit Enquiry Commission is available at Appendix.
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7
Agricultural Credit
Central banks even in industrially advanced countries were

concerned about providing assistance to agriculture, in countries
where agriculture was the mainstay of its economy their role could
not be belittled. Pakistan, in this field as in most others, had to make
a beginning, drawing upon the experience of developments in
undivided India where the credit requirements of the farmer had
attracted the attention of the British Government as early as the close
of the last century. Since then numerous commissions and
committees were appointed to examine the problem of rural
indebtedness and its impact on agricultural conditions. Worth
mentioning among them were: Nicholson's Report, 1895; Maclagan
Committee Report on Co-operation, 1914; Report of the Royal
Commission on Agriculture, 1929; Central Banking Enquiry
Committee Report, 1930; and Report of the Cooperative Planning
Committee, 1946. Legislation for control of money lending, initiation
of co-operative movement and assignment of special responsibility to
the central bank of the country, the Reserve Bank, in the provision of
agricultural credit were more significant measures arising out ofthese
reports. The Reserve Bank of India Act 1934 had provided for setting
up of a special Agricultural Department to study the problems of
agricultural credit in consultation with the Central and Provincial
Governments, Provincial Co-operative Banks and a machinery for
coordinating the operations of the Bank.
193
The Department set up on the inauguration of the Bank in

April, 1935 had started functioning with a meagre staff. The studies
carried out by it underlined the need for tendering advice and
guidance for improvement of the co-operative movement and
matters relating to agricultural finance, rather than offering direct
assistance, save as lender of the last resort against securities eligible
under the Reserve Bank of India Act. On the basis of research and
investigation, the Bank steadily expanded its advisory role urging the
Central and Provincial Governments to take increasing interest in
agricultural credit.
Before independence the main anxiety of Government in the

field was to furnish relief to the agriculturist from his burdensome
debt to the private money lender. But after Partition when the money
lenders as a class had disappeared, more emphasis was laid on
extending credit to agriculturists with a view to increasing their
production, strengthening their existing institutions and establishing
new ones. A number of committees and commissions were set up by
the Government of Pakistan periodically for detailed investigations
and suggesting measures to improve their position. Prominent
amongst them were; Pakistan Agricultural Committee, 1950; West
Pakistan Co-operative Inquiry Committee, 1950; the Expert
Committee, 1959; and Food and Agricultural Commission, 1960.
Soon after its inception in July, 1948 the State Bank realised that
under prevalent conditions it would have to meet a very substantial
portion of the credit requirements of the agricultural sector.
Speaking on the occasion of the first Annual Meeting of the State
Bank, held on September 29, 1948 at Karachi, the Governor
remarked:
Agricultural or rural credit may be regarded as a special responsibility

of the State Bank. The traditional money-lender who used to provide
finance to the rural areas had disappeared from the scene after the
Partition. I must express my regret that the State Bank has not been
able to make arrangements for the study of the problems of
agricultural finance, but is not unmindful of their urgency and
importance. However, it is necessary to mention in this context that
AGRICULTURAL CREDIT 195
the State Bank is a Bankers' Bank and a lender of the last resort. It is
not a field organisation in the sense that it does not directly deal with
individuals and has to channelise its operations through other related
agencies. The Bank was empowered under the law to provide loans for
seasonal agricultural operations and the marketing of crops through
Provincial Co-operative Banks.
Agricultural Credit Department
The Agricultural Credit Department of the Reserve Bank of

India had no counterpart in the State Bank of Pakistan. For the
incorporation of corresponding provisions, the Central Board of the
Bank at their first meeting held on July 2, 1948 adopted the following
Resolution:
That while making recommendations to Government regarding

amendments to the State Bank of Pakistan Order it should be
suggested to them that provisions should also be made therein for the
establishment of an Agricultural Credit Department.
Initially, an Agricultural Credit Section was created for the

purpose of studying all the problems relating to agricultural credit
and submit half-yearly reports to the Central Board of Directors on
the improvement of the machinery to deal with agricultural finance
and methods effecting a close co-operation of the Bank. A special
study on jute finance was undertaken. The Bank gave assistance to
the Government in formulating their policies on rural and co-
operative credit. This Section existed within the Banking Control
Department from 1948 to 1951 and afterwards worked as a part of
Research Department upto 1953. In the same year, it was converted
into a separate fullfledged Agricultural Credit Department.
Co-operative Movement Before Partition

Provision of credit facilities to agriculture in the subcontinent
dates back to the origin of the co-operative movement in the early
years of the century. Not that arrangements for its supply however
restricted, did not exist before. Co-operative undertakings in the
form of Nidhis or mutual loan associations were organised towards
the end of the nineteenth century but it was only under official
patronage that institutionalised credit made a beginning after the
enactment of the law for the establishment of co-operative societies
in 1904. The Act provided for the registration of co-operative
societies to combat the growing menace of rural indebtedness.
So deep rooted and widespread were its tentacles that it used to

be said and very correctly, that the peasant was born in debt, lived in
debt and died in debt. To free him from the burdensome
responsibility of repayment was the object of devising a machinery
for the advancement of credit on cheap and reasonable rates of
interest. The potentialities of the co-operative principle in the
improvement of agriculture were soon realised. The Co-operative
Societies Act was passed in 1904 and societies of Raiffeisen pattern
were promoted. The movement, which was confined only to the
credit sector, expanded rapidly. In 1912, the scope was widened
through an amendment of the law and other types of societies such as
sales and supplies were also permitted. With the coming of the
Montague-Chelmsford Reforms in 1919 agriculture had become a
provincial subject. The provinces were now free to enact their own
laws to suit their local conditions and meet their specific
requirements, if necessary, by the amendment of the parent law. Co-
operative societies were established under different Acts in the
provinces which were to form Pakistan. In the Punjab and N.W.F.P.
they were organised under the Co-operative Societies Act of 1912, in
Sind under the Bombay Act of 1925 and in Bengal under the Bengal
Act of 1940.
The co-operative movement remained essentially an official

movement in many parts of India, including the territories now in
Pakistan. Two external shocks proved a major set-back to the
movement. The first was the Depression of Thirties. There were
large scale defaults as agricultural income collapsed and many
societies became defunct. Their own funds were frozen or yviped out
by compulsory scaling down of debts. Agrarian laws were designed to
reduce the burden of rural debt and to avert the growing
dispossession of landlords in a period of falling prices.
Co-operative dues were not exempt from the debt settlement

laws in Bengal and the movement at the base received a set-back from
which it did not recover. The second set-back was administered by
Partition. The co-operative movement in the pre-partitioned Punjab
had been fairly successful, particularly in the credit field. When
Pakistan was established the bulk of the co-operative officials and
workers who belonged to Hindu and Sikh communities, migrated to
India. A great vacuum was left both in the direction and
management. Arrangements were hurriedly made for training
officers and personnel but these could not make up for the deficiency
caused by the Partition. When in the absence of traders, the prices of
rice, cotton and wheat fell very low, co-operatives were asked to
purchase the produce from the growers for which funds were
advanced by the Government. Several evacuee oil mills, rice mills
and cotton ginning factories were allotted to them. These were
emergency measures imposed in the general interest of the country
and not necessarily with a view to supporting or assisting the co-
operatives.
The co-operative credit structure in Pakistan inherited from pre-

partition India continued to function more or less on the same lines as
in the past. In the Punjab and the East Pakistan it was made up of a
three-tier system with the Provincial Co-operative Bank at the top,
the Central bank, the Central Union or the Central Multipurpose
Society at the intermediate level and the Primary Society at the base.
In Sind and N.W.F.P. a two-tier system existed with the Primary
Societies being directly affiliated to apex banks.
At the time of Partition, there were some 36,000 credit societies

on paper in the country. In East Pakistan alone there were about
27,000 such societies but most were on the verge of liquidation. In
West Pakistan, the impact of Depression though serious, was not
equally severe. The Second World War initiated a phase of rising
prices which abated somewhat the demand for credit and shifted the
attention of the Co-operative Department to the use of co-operative
outlets for administering war-time distribution of controlled items of
essential use.
Loans by co-operative societies were advanced in East Pakistan

and Sind against mortgage of land. However, in the Punjab and
N.W.F.P. co-operative loans for short term purposes were mainly
given on personal securities. For medium and long term loans the co-
operative structure provided for Land Mortgage Banks at the base.
There were practically no Mortgage Banks operating in West
Pakistan although a few were in existence before Partition. In E,ast
Pakistan there were 8 Land Mortgage Banks functioning til11959-60.
At the time of independence there were three apex co-operative

banks in Pakistan, one each in the former provinces of Punjab and
Sind and one in Bahawalpur State. East Pakistan started without an
apex bank as the Bengal Provincial Co-operative Bank Ltd. of
undivided Bengal had its headquarters in Calcutta. A new Provincial
Co-operative Bank was, however, established soon after Partition,
under the name of East Pakistan Provincial Co-operative Bank Ltd.
The Punjab Provincial Co-operative Bank started in 1925, was

the oldest apex bank in the country. The Sind Provincial Co-
operative Bank was established in 1919 as a Central Co-operative
Bank affiliated to the Provincial Co-operative Bank in Bombay. In
1934, it assumed the status of a Provincial Co-operative Bank. The
various central banks functioning in Sind at that time were
amalgamated with it. In 1958, another bank known as the Regional
Co-operative Bank Ltd., was set up with its headquarters at
Hyderabad to function as the apex institution for Hyderabad and
Khairpur Divisions. This bank was sponsored by the West Pakistan
Government. The move was prompted by the feeling on its part that
the Sind Provincial Co-operative Bank with its headquarters at
Karachi was not in a position to properly look after Hyderabad and
Khairpur Divisions. In N.W.F.P. a bank known as Industrial Co-
operative Bank was in existence at the time of Partition. The Central
Co-operative Banks at Dera Ismail Khan and Bannu and the Co-
operative Banking Union at Hangu were merged into it in 1948 and
the name changed to "The Frontier Co-operative Bank Ltd." This
institution was intended to serve as an apex bank for the region.
Post Independence Development
After Partition the situation in Pakistan was characterised by a

general dislocation in commerce, industry and banking on account of
migration of Hindu bankers, traders, money-lenders and
industrialists. In West Pakistan in particular, the co-operative banks
were forced to undertake the financing of trade and movement of
crops like rice and cotton to fill the breach caused by the paralysis of
commercial banking. They were also called upon to engage in trading
activities such as the distribution of cotton, sugar, yarn and manage
cotton ginning, flour and rice husking mills. The co-operative banks
thus played a useful role in maintaining the country's economic life in
a critical period. Many of the responsibilities were undertaken by
force of circumstances and at the instance of the provincial
governments. As conditions returned to normal they were divested of
their industrial and trading duties. But even after the commercial
banks began to revive their services, the co-operative banks showed
no tendency towards redirecting their energies and resources to the
co-operative activities. On the contrary, their activities in this
direction were expanding in volume and variety beyond the capacity
of these banks to handle them properly and were being conducted in
violation of well accepted principles of banking and business. Their
combination of banking with trading was highly risky, portending
dangers not only for the co-operative movement but also for the
credit structure of the country.
The primary function of the Provincial and Central Co-

operative Banks was to finance their member co-operative societies
within their areas. Provisions of finance to traders or direct trading
was obviously outside the scope of co-operative banks. Nor were they
expected to run factories and mills. A free hand given to them, if
allowed to continue, would have adversely affected the country's
credit system, especially as co-operative banks were not subjected to
the State Bank's check, scrutiny and control similar to those
applicable to the commercial banks. At the same time, co-operative
movement being a provincial subject, the Central Government could
make no move without the consent of the Provincial Governments
concerned.
The State Bank, therefore, decided first to ascertain the extent

to which commercial banking business was being undertaken by the
co-operative banks with a view to making a report to the Central
Government. In November, 1948 all the Provincial Registrars of co-
operative societies were asked for information on the working of co-
operative banks in their respective provinces. The information so
received revealed that even commercial banking conducted by them
did not conform to the ordinary banking standards. For instance, it
was found that advances made for mercantile transactions had not
only assumed large and unmanageable proportions but were made
promiscuously without a proper appraisal of the means, standing and
integrity of the borrowers. Loans were given freely to parties, directly
or indirectly related to directors or their friends and acquaintances.
These advances were either renewed or their period of currency
indefinitely extended, resulting in the outstandings growing
moribund or becoming semi-permanent. The statistics of loans and
advances by co-operative banks disclosed that out of an amount of
Rs.460 million, Rs.220 million were advanced to co-operative
institutions and the remainder was on account of commercial
lendings. These advances were mostly made against stocks which
were uninsured. It was also revealed that most of the banks carried on
trading in commodities like foodgrains, cloth, sugar and other
controlled commodities, such business being considered by them as
legitimate banking business.
The reports of the Registrars also disclosed that the co-operative

banks were accepting all sorts of deposits from non-members, in most
cases, beyond their limits. The total deposits of the co-operative
banks all over Pakistan in November, 1948 worked out to well over
Rs.200 million. This amounted to nearly one seventh of the total of
banks' deposits in the country. More than 50% of these deposits were
from parties other than co-operative institutions. This was a large
amount and formed a big loophole in the control structure of the
State Bank.
The co-operative banks were neglecting their own

responsibilities and devoting more of their attention to commercial
banking and to no mean extent to direct trading. In East Pakistan and
Sind nearly all the primary credit societies were lying defunct. No
fresh credits were advanced by the co-operative banks and no fresh
efforts were made to revive them. In East Pakistan most of the central
banks were languishing and for a long time had been doing no
business except for occasional trading in jute and rationed
commodities. In Punjab and N.W.F.P. as well, they followed the
same practice.
In a report to the Central Government in December, 1950 the
State Bank expressed its concern over these unhealthy developments
in co-operative banking and stressed the need for finding ways and
means of bringing about improvement:
(i) The attention of the Provincial Governments be drawn to
the undesirability of co-operative banks undertaking
trading in commodities or themselves running factories and
mills. The byelaws of banks should prohibit such activities.
(ii) The State Bank of Pakistan Order, 1948 be amended so as

to make the Provincial Co-operative Banks eligible for
inclusion in the Second Schedule with full obligations as in
the case of scheduled banks.
(iii) The exemption granted in favour of co-operative banks by

Section 2 of the Banking Companies (Control) Act, 1948
should be withdrawn.
(iv) Pending legislation in respect of items (ii) and (iii) above

Registrars of Co-operative Societies in the Provinces and
princely states should issue executive orders to submit to
the State Bank the same information as is required from
other banks under the provisions of the State Bank of
Pakistan Order and the Banking Companies (Control)
Act, 1948. It was explained to Government that without
such control by the State Bank which was responsible for
monetary control an important sector of the economy
purveying credit would be left out, thus making the task of
the State Bank in ensuring healthy credit conditions in the
country difficult.
Government was also informed that one of the greatest

handicaps facing the co-operative banks was that they did not
have staff possessing any knowledge of commercial banking.
Irregular practices resorted to by these banks could be partly
attributed to this factor.
While the Ministry of Finance was in agreement with these

views, the Advisor of the Government on Co-operatives and
Marketing had his reservations. He, too, was opposed to co-
operative banks undertaking large scale non-credit activities and
providing credit facilities to individuals and organisations who were
not its members. At the same time, he firmly expressed the opinion
that the control of the State Bank over co-operative banks was
neither necessary nor desirable since they were already under the
control of the Registrars of Co-operative Societies in their provinces.
He had also argued that Co-operation being a provincial subject, the
Provincial Governments were not likely to agree to the proposal.
In a letter to the Ministry of Finance written on August 31, 1951

the State Bank reiterated its stand on the paramount necessity of
bringing co-operative banks under its control to enable it to
effectively regulate its policies governing the credit and currency of
the country:
(i) The Registrars and their staff do not generally have adequate
knowledge and experience of banking and the control vested in
the Registrars under the various Co-operative Societies Acts was
devised essentially with reference to co-operative finance which
was comparatively simple. The conditions have changed in view
of the fact that co-operative banks have departed from their
domain by accepting deposits and granting commercial loans and
advances. The control exercised by the Registrars has become
inadequate and bears little or no comparison with the banking
control required to be exercised by the State Bank.
(ii) The State Bank's control over co-operative banks as

contemplated, will not be as much a control over their internal
working and administration as control over the position which
the banks occupy in the credit structure of the country by holding
between them one seventh of the total bank deposits in the

country. The absence of any control by the State Bank is a grave
lacuna in the general monetary control which a central banking
institution is required to exercise in its day to day functions.
(iii) A central banking institution is required to exercise effectively

control on credit conditions in the country and for the full
discharge of this duty all banks engaged in commercial banking
should be included in the Second Schedule of the State Bank.
Agricultural Development Finance Corporation
The establishment of a specialised institution for agricultural

credit was first thought of by the Central Government in 1951. It was
then felt that the co-operatives, because of the nature of their
liabilities, were not in a position to provide adequately development
finance of a medium or long term nature. It was, therefore, decided
to set up an institution capable of providing all kinds of finance, but
primarily development loans. An institution, known as the
Agricultural Development Finance Corporation was brought into
existence in 1952 under Central Act. The Corporation was
established to cater to the needs of agriculture (including forestry,
fishery, animal husbandry, poultry farming, dairying) and
development of agriculture including loans for provision of
mechanical equipment, tractor stations, land improvement, purchase
and distribution of seeds, chemical and other fertilisers, agricultural
implements, establishment of seed and other stores. Loans were to be
given ordinarily in kind but could also be given in cash at the
discretion of the Corporation when the circumstances so warranted.
The loans were to be utilised only for the purpose for which they were
meant failing which the borrowers could be called upon to repay the
amount forthwith.
The Corporation faced many initial problems on account of

shortage of trained staff, difficulties in verifying the title of borrowers
to their properties and in the pledge, mortgage, etc. of properties. A
good deal of time was taken up in securing the exemption from
various laws governing land alienation and money lending.
The Corporation's authorised capital of Rs.SO million was

subscribed by the Central Government from time to time, till the
entire authorised capital had been fully subscribed and paid up. The
Corporation's only other source of funds comprised of borrowings
from the State Bank and the Government.
Loans upto Rs.500 were granted against bond with one surety
while for higher amounts borrowers were required to pledge,
mortgage, hypothecate or assign their property. Borrowers were
required to satisfy the Corporation about the proper use of the loans
and the Corporation maintained its own machinery for verification.
Loans in cash were generally allowed in instalments and before the
release of the second and subsequent instalments, the borrowers had
to satisfy the Corporation that the previous amounts had been
actually utilised for the purpose for which they were meant. The
Corporation's loans were recoverable as arrears of land revenue.
The rate of interest charged was 4 per cent for co-operative

societies and 5 per cent for others. However, in 1959, a uniform rate
of 5 per cent was introduced for all types of borrowers. From
November 1, 1960 the rate was increased to 6 per cent.
The Corporation commenced loan operations in March, 1953

and by the year ending 1960 it had advanced Rs.35. 75 million. During
its nearly eight years' existence the Corporation incured cumulative
losses of Rs.1.36 million .I
Economic Appraisal Committee
The Government of Pakistan appointed a high powered

committee, called the Economic Appraisal Committee on August 20,
1952, under the Chairmanship of Minister for Economic Affairs to
review the situation and recommend measures for reinforcing the
economy. The seven member committee of leading businessmen,
university professors and bankers included Zahid Husain, the
Governor of the Bank.
State Bank of Pakistan: Agricultural Credit in Pakistan, Karachi 1962, pp. 87-90.
Apart from the other contributions made by Zahid Husain, as

member of the Committee, the State Bank submitted a
comprehensive memorandum dealing with all aspects of the problem
of agricultural credit in different provinces of Pakistan. A detailed
study of the problem carried out by the Bank was followed by a
memorandum based on its findings. The study had revealed
appalling inadequacy of agricultural credit which was difficult to
quantify because of the dearth of statistical data but was easy to guess
from the state of agriculture and the living conditions of the
agriculturists in a predominantly agrarian society, where few other
avenues of income and employment were available. Excerpts are
reproduced below:
The inadequacy was felt both in the short-term seasonal

operations and long-term permanent development for investment in
equipment and livestock. The most important source of credit was
the village money lender. This source had practically vanished after
the migration of the Hindu Mahajans to India. The co-operative
movement had made some progress only in the Punjab while its
presence was scarcely felt in other provinces. Even in the Punjab
where it had made some headway it provided no more than 10% of
the total credit. The Taqqavi loans were hard to get with all the red
tapism and corruption prevalent in the Government and its petty
officials dealing with land records. The land mortgage banks which
were a source of long-term credit were severally limited in number,
twelve in the Punjab and only two in East Pakistan. Either their funds
were frittered away by the directors for their personal benefit or the
benefit of relations and friends or used for the liquidation of old
debts.
The situation was too alarming for the State Bank to be

complacent. Allowing it to drift would have made it more
complicated. A beginning towards its solution had to be made
through the establishment of Pilot Agricultral Banks, one each in
West and East Pakistan, designed to act as commercial ventures by
making advances against agricultural produce in the warehouses and
on the fields.
Khaikhalashi Banks
The proposal for the setting up Khaikhalashi Banks mooted by

Moazzamuddin Hussain of East Pakistan for financing agriculturists
in the province was welcomed by the State Bank with the primary
purpose of making long-term advances to the small farmers. The
expenses of the banks were to be met out of the income derived from
the rents of the mortgaged lands. The excess of rents over the interest
charged was to be used for making short-term advances to the
borrowers. It was a boon for the small holders except where the
holdings were uneconomical or where portions of large holdings were
free from encumberances to be offered as security to borrow extra
money from the money lenders. There was also an ever present risk
of fraud by petty officials in charge of collecting the bank's share of
the produce. Precautionary measures were, therefore, necessary to
ensure that the funds borrowed were utilised for the specific purpose
and for their utilisation by the small holders to buy more lands to
make their holdings economical, and where the holdings were large,
restraining the borrowers from mortgaging the unmortgaged
portions of their lands to other credit institutions.
Sind
With the exception of co-operative banks there were no

agencies in Sind for the provisions of either long or short-term
finance. Two types of co-operatives were functioning in the province:
the Taluka Banks which provided finance mainly to small holders,
and the Zamindari Banks, organised specially by the big zamindars.
Taluka Banks were organised by the amalgamation of village

credit societies for the provision of short and medium term finance to
cultivators, paying from Rs.SO to Rs.1500 per year as land revenue.
These banks generally charged from 61;2 to 93h per cent interest on
short-term advances and from 41;2 to 5Yz per cent on medium-term
loans with an entitlement to 1;2 per cent rebate for punctual
repayment.
According to the co-operative law in force in Sind, every

application for membership in banks (both Taluka and Zamindari)

had to be accompanied by a declaration specifying the immovable
property on which a charge could be created for the dues. No member
was to be allowed to alienate any part of the property specified in the
declaration. Also, subject to the prior claim of the Crown in respect
of land revenue, the bank had a first claim on the property specified
in the declaration. The amount advanced by the banks to any one
individual was not to exceed one-third the value of the mortgaged
land. The bank was also empowered by the law to attach the
harvested crop of the borrower in the event of default. Apart from
taking over the land in mortgage, it could insist on the execution of an
agreement by the borrower to sell either his total produce or at least
so much of it as would cover the outstandings through a co-operative
sales society.
The Taluka Banks had a promtsmg record of 95 per cent

repayment. Thanks to the special provisions under which they
functioned, the close supervision exercised by the Registrar and the
prohibition of any further advances to the defaulters. Default was not
in the interest of the members since it would have automatically
meant a denial of accommodation in the future.
The Sind Zamindari Banks provided funds to zamindars who

paid rupees one thousand or more as land revenue. There were only
six such banks functioning in the province, and the number ofTaluka
Banks was 16. In 40 out of the 60 Talukas of the province no co-
operative credit facilities were available. Even where facilities were
available, funds were limited and membership was restricted. The
Registrars complained that even credit worthy agriculturists were not
accommodated because of the scarcity of resources.
The following reasons were listed by the Registrar of Sind for

the retarded growth of the Banks:-
1. budget allotment for the Co-operative Department had
been reduced by 50 per cent. As a consequence the
Registrar did not have the staff to organise more banks
and supervise them at the initial stages;
2. there was a shortage of trained personnel who could be

employed as managers of the banks;
3. only limited funds were available from the Provincial

Co-operative Banks, who obtained most of its funds in
the form of current deposits which could not be loaned
out for a period of 10 months to a year required by the
Taluka and Zamindari Banks.
Organising Agricultural Banks in Sind
In the scheme for organising agricultural banks in Sind, Taluka

and Zamindari Banks were useful model. Organised under the co-
operative law, they enjoyed certain distinct advantages if placed
under reasonable central supervision and control for at least technical
purposes. Scarcity of funds and shortage of trained managers were
their main problems. Means had to be found to make both available.
The Taluka Banks which were not authorised to make long term
advances, were to be given permission to do so, and experience
gained in their working could serve as a basis for extending their
scope to the rest of the Talukas until a net work of such banks was
organised in all the 60 talukas of Sind for the provision of finance to
both small holders and zamindars. The possibility of raising their
status to that of the scheduled banks could also be explored, making
them eligible for short-term advances from the State Bank.
Rural Finance in Punjab
According to a study on rural debt made by the Board of

Economic Enquiry Punjab, 60 per cent of the credit needs of the
farmers were being met by relatives who charged no interest, 20 per
cent by traders and shopkeepers, 10 to 15 per cent by zamindars and
well-to-do agriculturists, the co-operative societies' share was barely
3% and the rest by the money lenders. The Punjab farmer, especially
in the canal colonies, was fairly well-off, partly because of high
commodity prices and partly from contributions of their relatives in
the army. In fact, some of them were so well-off that they could
finance both the traders and the ginners.
Agricultural Banks for Punjab

The need for medium-term and long term development funds,
however, continued to be high. Funds were required, especially by
the refugees, for the purchase of animals and equipment, the
construction of wells, drainage and developments on the farm, and
finally for the purchase of land itself. Legislation allowing occupancy
tenants to acquire ownership rights on the payment of compensation
to zamindars had further increased the demand for funds.
Agricultural Banks could be organised in the Punjab with the

object of providing both medium and long-term funds to peasant
proprietors. Credit could be provided by these institutions on the
security of land mortgage after a personal and detailed investigation
of the character and credit standing of the borrower and perhaps on
the surety of one or two people of known reputation in the
neighbourhood. The Bank could secure its loan further by obtaining
a mortgage on the equipment purchased.
Before organizing Agricultural Banks for the Punjab, a detailed

survey on the functioning of Co-operative Land Mortgage Banks in
the province and the reasons for their failure were necessary. All
possible precautions had to be taken to avoid the mistakes previously
committed in the management of these banks.
Sources of Finance in N. W. F. P.
Agriculturists in the N.W.F.P. obtained finances from the

following sources:-
(1) The Provincial Government through

(a) Revenue Departments
(b) Department of Agriculture
(2) Co-operative societies via the Frontier Co-operative Bank
(3) The Premier Sugar Mills and the Takt-Bai Sugar Mill
(4) Private money lenders
(5) Relatives and friends
(6) Dealers and village shopkeepers
The source of finance depended on the crop cultivated. Thus,

the sugar growers, who cultivated around 4 per cent of the total
cultivated acreage, were dependent for their funds on (1) The
Premier Sugar Mill, which received funds from the National Bank of
Pakistan and (2) the Takt-Bai Sugar Mill, which got its advances from
the Frontier Co-operative Bank. It was reported that the two mills
competed for the raw sugar produced in Mardan and were expected
to give favourable terms to the growers, both in price and credit. The
growers also had the third alternative of converting sugarcane into
gur, the demand for which was high. On the above considerations it
was assumed that the sugar growers of Mardan were not in great need
of short term funds. Similarly, the fruit growers, who were generally
large operators, obtained finance either directly from the Frontier
Co-operative Bank or from fruit dealers. In the rest of the cultivated
area, measuring around 1.5 million acres wheat, maize and barley
were grown. Here, the need for short term loans was greater and they
were obtained from Muslim money lenders and shopkeepers who
were known to charge around 50 per cent interest.
Frontier Co-operative Bank
The Frontier Co-operative Bank, which before Partition was

affiliated to the Punjab Provincial Co-operative Bank, reorganised
itself after the independence amalgamating all the central co-
operative banks into a single institution, was functioning through its
seven branch offices in 1947 which increased to 10 in 1952. In several
districts it functioned as a commercial rather than a co-operative
bank. A large percentage of its deposits were commercial deposits, 70
per cent of its paid up share capital was owned by individuals and 80
per cent of the loans were advanced in 1951 to private firms and
individuals.
The Co-operative Registrar as well as the managers of the Bank

recognised that co-operative funds were diverted from agriculture
into industry and trade, and starving the rural areas of their share.
The Department as well as the Provincial Government agreed on the
diversion of more funds towards agriculture; subjection of the
Frontier Co-operative Bank to the supervision, inspection and
control of the State Bank in the same way as were scheduled banks.
Besides training of its staff, supervision, inspection and control of the
State Bank on the lines of the scheduled banks, were measures
considered essential for its rehabilitation.
In the light of these considerations: (1) an experienced officer

was to be deputed to survey the movement in the province and to
submit a report on its progress, (2) the State Bank was to take over
the recruitment and training of the officers of the bank, including
suitable refresher courses for others already in employment, (3) a
plan of operation was to be drawn up for making advances to
agriculturists on a pattern familiar to the people of the province
through the branches of the Frontier Bank and (4) finally, necessary
finance was to be made available, on long-term basis at reasonable
rates of interest, for granting loans to the agriculturists.
The Frontier Co-operative Bank was to function under the

general guidance and supervision of central agency or agencies as an
alternative to organising new banks and duplicating the number of
credit agencies serving the rural people.
The provincial schemes for the organization of agricultural

banks briefly outlined above, required to be worked out in full detail
after investigations of selected areas. However, there were certain
matters of principle which merited attention.
Land Mortgage Banks
In principle, land mortgage banks were intended to meet long-

term credit needs of agriculturists, but the new banks proposed by the
State Bank were also meant to advance short-term credit. This would
have made the loaning machinery more complicated, since the
principles as well as the procedures governing the two types of

advances were distinct. It was, therefore, not considered desirable to
combine long and short-term financing in a single institution.
Ordinarily, it was the concern of the co-operative credit societies to
provide short-term funds, while the Mortgage Banks confined their
activities to long term finance. But as things were, the co-operatives
could not be relied upon to rise to the occasion and meet the short-
term needs of the borrowers. If short-term funds were not
forthcoming from the co-operative banks, the foundations of the
agricultural banks were bound to be weakened as a consequence,
since the borrowers would then tum to other lending agencies and
obtain short-term funds at exorbitant rates. In these circumstances,
insistence on two separate agencies for short and long-term funds
necessitated the organisation of two separate sets of banks, which
would have created difficulties of personnel.
A single agency had, therefore, to be accepted as a means to

economising in personnel, lowering overhead costs and convenience
in dealing, so far as the agriculturist was concerned. These banks
would then be placed in a stronger position in dealing with the
borrowers, holding as they would their land in mortgage. In East
Pakistan it was likely that working under traditional methods of
finance by means of usufructuary mortgage, the banks were making
larger recoveries than they needed while surplus funds supplemented
by borrowings from other agencies could be used for short-term
advances. It was in the interest of the bank to save its customers from
extortionist rates of interest and to help them secure the best possible
price for their produce. This could be done by meeting all their
legitimate requirements for credit, both short and long-term.
All Agricultural Banks have to take special precautions to

ensure that the funds advanced by them are used for sanctioned
purposes only. The misuse of loaned funds was mainly responsible for
the failure of Land Mortgage Banks in the Punjab and had to be
guarded against at all costs. The entire procedure with reference to
repayment required simplification if advances were granted in kind
rather than in cash. If this was accepted in principle, two specific
questions came up for consideration: (1) that the Agricultural Banks
work in close co-operation with the Department of Agriculture and

the Extension Service Organisation, (2) that they have attached
warehouses, where the borrowers' produce was stored on delivery.
Warehouses were also necessary in East Pakistan for the storage of
the bank's share of the produce and in West Pakistan to ensure a fair
price for the borrowers.
Need for Special Legislation
In order to give assurance of success to this venture into the

relatively unexplored field of rural credit, special legislation was
necessary. In some provinces restrictions existed on mortgages of
lands, which required relaxation in favour of the proposed banks. In
Sind the mortgage of holdings of less than 300 acres required the
sanction of Revenue Authorities. These restrictions had to be
reviewed. Simplification of registering mortgage deeds, the
installation of a speedy recovery machinery in case of default, etc.
were equally essential. This involved a detailed study of existing
legislations and the preparation of new legislation perhaps both at the
Provincial and Central level but more importantly at the Provincial
level.
Relationship between Agricultural Banks and A.D. F. C.
It was suggested that Agricultural Banks as proposed should be

the responsibility of the Agricultural Development Finance
Corporation. This Corporation was the logical agency to undertake
the implementation of the scheme since it had been organised for the
purpose of providing finance to agriculture. Expert staff at the centre
specialised in the problems of agricultural finance and competent to
provide the necessary advice and supervision to the bank was a pre-
requisite. The A.D.F.C. was also to be made responsible for the
direct import of machinery, fertilizers, etc. from abroad and,
therefore, equipped to provide these to the agriculturists at
reasonable rates. The Corporation was to construct (or rent)
warehouses in the interior for the storage of improved seeds,
fertilizers, etc. So far as short-term funds were concerned the State
Bank could be approached, either directly by the Agricultural Banks
or indirectly through the Regional Office of the Department.
The proposal for the organisation of Agricultural Banks was

based on a genuine need for funds in the rural areas and as such there
was every reason for their success. A certain 'hands off' attitude has
been created on this subject, due mainly to the failure of the co-
operatives to handle the problem. However; the failure of the co-
operatives was partly the result of their own failings and insufficient
education of the people to manage and run these organisations.
There was no reason why well managed and properly supervised
institutions could not succeed. In many countries, governments have
taken charge of the rural credit machinery and are running it on
profitable lines. This is not only true of prosperous countries such as
USA but also of Mexico, Egypt and Japan where conditions are not
dissimilar to those in Pakistan and where the scale of operations is
also small.
Simplicity in Operations
No spectacular results were expected from these banks in the

first instance. Their primary concern was to collect a considerable
amount of useful data needed to make the plans for opening up the
interior for the collection of savings and provision of credit. The
knowledge about the difficulties as well as the opportunities which lie
for any pioneering enterprise of the type in the interior would be
gathered. It would have also helped in understanding the attitudes
and reactions of the rural population who have to be attracted
towards the banks. If these Agricultural Banks were properly
supervised and run by enterprising young men with a social outlook,
they could blaze the trail for others. An experiment in this direction
had to be made even with the previous knowledge that the going
would be hard and that the project would not prove to be the success
we intended it to be. The experiment had to be undertaken for a
beginning to be made for the provision of rural credit, involving some
losses before techniques and procedures of lending and supervision
were finally determined for the various areas. However, the risk of
failure could be reduced to the minimum if the banks were organised
after a detailed study of local conditions, and if their operations were
properly supervised. The primary aim in view was simplicity in

operations since the institutions were to deal with those who had little
or no previous experience of organised credit.
Objectives
The Agricultural Banks were intended to be an alternative

source of credit and not meant to displace the co-operatives. The
limitations of the movement had prompted their creation in the hope
that these would serve as a stimulant to the re-organisation of the co-
operative banks for improved performance in the field of rural
finance. However, in those provinces where the co-operatives were
functioning efficiently and where it was possible to work out a scheme
within the traditional structure, special agencies were not warranted.
The following criteria were set for the advancement of credit through
either of these sources:
1. The past record of the co-operative banks.
2. Whether these banks enjoyed special privileges which gave

them an advantage over ordinary banks in regard to
security for the loans.
3. Whether the Provincial Government and the Co-operative

Department agreed to central control.
In conclusion, it was emphasised that the solution of the

problem of rural credit was beset with all kinds of impediments and
difficulties. By and large the Memorandum formed the basis of the
recommendations of the Committee for the reorganisation of the co-
operative system in Pakistan. Detailed investigations and surveys
were called for. Special care had to be taken to make the experiment
under as favourable conditions as possible in the matter of clientele,
staffing, supervision and control. The organisers must be ready to
face upsets and disappointments and to modify their plans as
difficulties appear and unforeseen conditions were met with. It was
going to be an uphill task but a great prize awaited the pioneers who
were persevering to ultimately discover the techniques which could

work.
The Committee recommended the setting up of Pilot

Agricultural Banks as a supplementary source of credit so long as the
co-operatives were not fully revived to assume their pioneering role
in rural finance. The pilot projects were to be in turn financed by the
Agricultural Development Finance Corporation both to the
multipurpose societies and agricultural banks and where the two
because of lack of organisation or security, were not in a position to
make credit available, the Agricultural Department of the province
was to step in. It also endorsed the suggestion for the introduction of
Khaikhalashi Banks in the selected areas of East Pakistan. In the
Punjab, land rather than the produce of the land was recommended
as security for long-term loans.
Many other malpractices had crept for want of supervisory

control on the working of co-operative societies. Their staff,
including the Registrars, had no adequate training or knowledge of
banking techniques. There was an ever increasing diversion of funds
to non-agricultural activity. Since their deposits amounted to Rs.200
million, equivalent to nearly one-seventh of the total bank deposits in
the country, their operation on sound lines was all the more necessary
for the soundness of the economy. Against this background the
Committee recommended that the State Bank be invested with the
same degree of control as it exercised on the commercial banks, in
order to improve their financial standing and promote their stability.
Legislation was, of course, necessary to usher in these changes. The
State Bank was to be made responsible for the training of officers of
these banks for which regular cadres had to be established in each
province with provision for recruitment on a centralised basis. The
training was to cover commercial banking, co-operative principles
and practice and co-operative banking, and a training institute was to
be organised for the purpose.
Inspection of Co-operative Banks
With the establishment of a full-fledged Agricultural

Department in the State Bank in 1953 it became more directly

interested in the affairs of co-operative banks. For the first time in
that year inspections of three co-operative banks in West Pakistan
were carried out at the request of the Registrar of Co-operative
Societies. Following these inspections the State Bank was in a
position to press the provincial authorities more vigorously for
reorientating the outlook in regard to operations of co-operative
banks.
Appointment of Foreign Advisors
After 1953 considerable thought was given to the strengthening

and extending of the agricultural credit base. The scope of the State
Bank's own lending operations in the context of a developing
agricultural economy, came in for special review. Conscious of the
inadequacy of agricultural credit facilities in the country, the
Government of Pakistan and the State Bank invited Chafie-El-
Labban, President of the Agricultural Cooperative Bank of Egypt in
1954 to visit Pakistan for studying agricultural credit conditions and
suggesting measures for building a sound agricultural credit structure
in the country. In his report, Labban had suggested the creation of an
Agricultural Bank under the sponsorship of the Central Government
to cover the whole country.
During the year 1954 a senior officer, at one time a Registrar of

Co-operative Societies in the Punjab, was appointed as Director of
Agricultural Credit Department. The services of an officer were also
acquired from the provincial government to assist the Department at
Dacca, in enhancing its usefulness and enabling it to make a better
contribution to the study of problems relating to rural finance. The
Foreign Operations Administration of USA placed at the disposal of
the Government of Pakistan a Farm Credit Advisor for a period of
two years.
The Expert Committee
On the suggestion of the State Bank, the Government of Punjab

set up an Expert Committee in 1955 consisting of the Deputy
Governor, State Bank, Secretary Agriculture, Punjab and the

Registrar, Co-operative Societies, Punjab, with the main objective of
determining the policy towards the co-operative banks as well as to
advise the Government on measures to strengthen the co-operative
banking structure. Sher Jang Khan, the Deputy Governor of the
Bank was entrusted with the task of implementing the
recommendations. He had a rich experience of co-operatives to his
credit, having started his career in the Punjab Co-operative
Department where he had served for ten years before joining
Agricultural Credit Department of Reserve Bank in 1937. The
progress of the working of the Expert Committee was considered by
the Central Board of the State Bank at its meeting on May 27, 1955
after the Committee had held two meetings. The Committee in its
first meeting agreed that:-
(i) At places where co-operative banks function side by side
with the commercial banks, co-operative banks must stop
performing commercial business.
(ii) At other places where commercial banks do not exist, co-

operative banks may continue commercial loans business
but they should gradually reduce it at the rate of 33 per cent
every year so that by the end of three years all co-operative
banks in the province should be free of this responsibility.
At such places during the interim period, the Assistant
Registrar of Co-operative Societies shall be made ex-
officio member of the Managing Committee of the Central
Co-operative Bank concerned. The manager of the Bank
shall be empowered to grant loans upto ten thousand
rupees only, beyond which previous sanction of the
Managing Committee shall be obtained.
For measures necessary to secure financial assistance and
technical guidance from the State Bank the Committee had
proposed:
(i) the officers in the service of the co-operative banks should

get training in commercial banks with the help of the State
Bank;
(ii) the State Bank should help the Co-operative Department

by arranging for the training of officers of that Department
in commercial banks; and
(iii) the State Bank should be further requested to give a rebate

on interest charged by it on its advances to co-operative
banks.
In the second meeting of the Expert Committee the following

decisions were reached:
(i) from the data supplied by the Registrar, Co-operative

Societies, Punjab, regarding Central Co-operative Banks it
was found that the Central Cooperative Banks, Multan,
Pakpattan, Montgomery (now Sahiwal), Bhalwal, Lahore
and Jhang were likely to incur heavy losses on account of
commercial loans business and deficit in these cases was
likely to eat up their entire owned funds. In view of this, it
was decided that Co-operative Banks, Multan (Head
Office), Montgomery (Head Office) and Phularwan
Branch of Bhalwal Central Co-operative Bank should
forthwith stop commercial loans business;
(ii) as regards other banks, they should reduce the business of

loaning on commercial basis gradually at the rate of 33 per
cent effective from September 1, 1954 so that after the
period of three years, reckoning from that date, all the
banks would automatically stop commercial loans
business.
Training of Co-operative Personnel
The State Bank had been emphasising the importance of proper

training for the officers of co-operatives for healthy development of
co-operative banks in the country nght from the very beginning. In
1953 it allowed the Punjab Provincial Co-operative Bank, which had
been borrowing from the State Bank against Government Securities
in the normal course of business, a rebate of 1% on the interest
charged to it, provided that the amount of rebate be utilised on co-

operative education. This arrangement was extended to cover
education and training of co-operative personnel in general and no
specific provision was made for the staff of co-operative banks. The
State Bank paid special attention to this subject in 1955.
Arrangements were made with commercial banks in East Pakistan
and West Pakistan for training, at the expenses of the State Bank, of
the officials of Co-operative Department and banks.
State Bank Legislation
The role of State Bank in the sphere of agricultural finance was

extended significantly in 1955. Under the provisions of the State
Bank of Pakistan Act passed by the National Assembly in 1956,
replacing the previous legislation, the importance of agricultural
credit was recognised, assigning the Bank a special responsibility in
the field. The mamtenance of the Agricultural Credit Department
became a statutory obligation under Section 8(3) of the Act with the
following functions:-
(a) to maintain an expert staff to study all questions of

agricultural credit and be available for consultation by the
Federal Government, Provincial Governments, Provincial
Co-operative Banks and other banking organisations,
(b) to co-ordinate the operations of the Bank in connection

with agricultural credit and its relations with the Provincial
Co-operative Banks and any other organisations engaged
in the business of agricultural credit.
Another important change brought about by the new legislation

was to make co-operative banks eligible for scheduling by the State
Bank. Previously only a banking company as defined in Section 227F
of the Companies Act, 1913 or a Corporation or a Company
incorporated by or established under any law in force in or outside
Pakistan, was eligible for the privilege. Initially, the only agricultural
credit institution to be scheduled was the Agricultural Development
Bank of Pakistan. In terms of Section 37 of the State Bank of Pakistan
Act, 1956, the State Bank could declare any co-operative bank as a
scheduled bank. The conditions on which scheduling could be done
were also less stringent for co-operative banks than for commercial
banks so that the State Bank could make an exception in the case of
co-operative banks in the matter of requirement of minimum paid-up
capital and reserves.
Under the State Bank of Pakistan Order, 1948 the Bank was
authorised to grant accommodation to co-operative banks and other
agricultural credit institutions for financing seasonal agricultural
operations and the marketing of crops for periods not exceeding nine
months. Detailed studies and experience showed that this period was
insufficient to cater adequately to the short-term credit requirements
of agriculturists. The State Bank of Pakistan Act, 1956 had,
therefore, raised the period to 15 months.
The traditional concepts of central banking functions had not
envisaged the granting of long term loans but with the increasing
demand for development finance it had become obvious by 1955 that
in the absence of a developed capital market in the country, the State
Bank had to play a positive role in the extension of long-term credit
to agricultural sector. The State Bank of Pakistan Act, 1956 had
authorised the Bank under Section 17(2)(d) to undertake:-
Purchase, sale and rediscount of bills of exchange and promissory

notes drawn and payable in Pakistan and bearing two or more good
signatures one of which shall be that of a scheduled bank or any
corporation approved by the Central Government and having as one
of its objects the making of loans and advances in cash or kind, drawn
and issued for financing the development of agriculture, or of
agricultural or animal produce or the needs of industry, having
maturities not exceeding ten years from the date of such purchase or
rediscount.
A more far-reaching provision was included in Section 17(6) of

the Act which enables:-
The making to institutions or banks, specially established for the

purpose of promoting agricultural or industrial development in the
country or for the financing of construction of houses in the country or

co-operative banks of advances and loans for such amounts and on
such terms and conditions as the Central Board may decide from time
to time.
Need for Specialised Credit Institutions
While the co-operatives were all along considered by the State

Bank as the most suitable type of agency for reaching the farmer, with
their organisational weakness and restricted resources they could not
deliver the goods. The vastness of the problem underlined the
necessity of an additional agency till such time as the movement was
able to stand on its own feet. The recommendations of Muhammad
Chafie-El-Labban of the Agricultural and Co-operative Bank of
Egypt and other foreign experts reinforced the need for such an
agency. The idea of setting up agricultural banks on a district-wise
basis was first seriously thought of but later abandoned. Both local
and foreign experts came to the conclusion that the new agency had
to be a strong institution with sufficient resources and country-wide
coverage. Such a body, it was further argued, had to be sponsored by
the Central Government. The Centre had already established the
Agricultural Development Finance Corporation in 1952 to provide
development finance only to agriculturists. The need for an
institution that could give short-term loans throughout the country
was urgently felt. The State Bank, too, had put forward the proposal
for setting up of an institution capable of meeting short, medium and
long term credit requirements. This, it believed, would be convenient
to borrowers and easy to operate.
The Central Board of Directors, in its meeting held at Lahore on

September 7, 1956 considered the scheme of setting up an
Agricultural Bank in the country. Abdul Qadir, Governor of the
State Bank, informed the Board that the draft of the scheme which
had already been discussed by him with the representatives of the
Ministries of Finance, Agriculture, Economic Affairs, Planning
Board, International Co-operation Administration, Agricultural
Development Finance Corporation reflected the consensus of all the
concerned organisations. He also informed the Board that the
scheme had been submitted to the Government who had forwarded

to Provincial Governments for elicitating their views. The Central
Board again at its meeting held at Lyallpur (Faisalabad) on
December 6, 1956 approved the final draft of the bill incorporating
minor modifications suggested by the Government.
Agricultural Bank of Pakistan
The Bill was passed by the National Assembly and the

Agricultural Bank of Pakistan was established under the Agricultural
Bank Act, 1957. The management of the Bank was entrusted to a
Board of 14 Directors including representative of the State Bank.
The Bank came into existence on September 9, 1957 in order to
provide either in cash or in kind, warehousing and storage facilities to
agriculturists and co-operative societies and other corporate bodies
of which the majority members were agriculturists, for the purpose of
agriculture or the development of agriculture or the warehousing,
storage or marketing of agricultural products.
The authorised capital of the Bank was Rs.200 million divided

into 2,000,000 fully paid up shares of the nominal value of Rs.100
each. Not less than fifty-one per cent of the shares issued at any time
was required to be subscribed by the Central Government and the
remaining shares, if any, could be offered for subscription to the
Provincial Governments and co-operative societies in such
proportion and on such terms as the Central Government may
determine at the time of issue. Out of Rs.32.5 million issued till1960
as share capital, a share of Rs .30 million had already been subscribed,
Rs.20 million by the Central Government and Rs.5 million each by
the two Provincial Governments. 2
The Head Office of the Bank was established at Karachi with

two Provincial Offices at Dacca and Lahore. Initially, it started with
fourteen branches divided in equal number in the two provinces; but
within a year of its operation the Bank had enlarged its area of
operation and by the end of 1960, 20 branches in both the wings of the
State Bank of Pakistan: Twelve Years of Banking in Pakistan, pp.45-47.

country had been established.
The Bank had to face a number of problems in commencing its

operations, the most difficult being selection of staff. To enable the
Bank to tide over the initial difficulties, State Bank and National
Bank came to its rescue by sparing the services of some of their
employees who after specialised training in agricultural credit could
be employed as branch managers. A few officers were recruited from
other commercial banks.
The Bank started its loan operations in January, 1959 in East

Pakistan and April, 1959 in West Pakistan when it had been
exempted from the restrictive provisions of various land and debt
laws of the provinces. During the first year of its operation loans of
over Rs.9 million to 21,202 agriculturists were approved of which
Rs.7.6 million had been disbursed.
The Bank charged interest at the rate of 6 per cent on loans for
a period of 15 months and 5 per cent on other loans, for all borrowers
except the co-operatives. For co-operative societies for the period
not exceeding 15 months the rate was 2 per cent below the rate
charged by such societies to their members subject to a minimum of
5 per cent and a maximum of 6 per cent.
Revitalisation of Co-operative Movement in East Pakistan
One of the important measures taken by the State Bank in the

field of agricultural credit was the revitalisation of the co-operative
movement in East Pakistan. The co-operatives in that province in the
years following independence had become stagnant, central banks
had practically ceased to play any part in providing rural credit; the
apex bank which had come into being after independence was
engaged almost entirely in the financing trade and commerce. The
credit made available to agriculturists of small amounts was doled out
by the Provincial Government from year to year by way of loan. The
total amount so obtained over a period of 8 years was approximately
Rs .4. 5 million. 3 The Government's attempt to revive the movement

by setting up Union Multipurpose Societies did not meet with success
for want of adequate funds.
In 1957, the State Bank conducted a special study of the

situation to ascertain the extent to which the co-operatives could
channelise loans to agriculturists and to recommend appropriate
measures for this purpose. The main findings of the study were:-
(1) The Provincial Co-operative Bank had become burdened

with frozen debts involving heavy amounts. It had not been
able to repay to the Provincial Government, the sum of
Rs.4.5 million which it had received for financing
agricultural credit societies through the Central Co-
operative Banks.
(2) A vast organisation, though inactive existed in the province

in the form of Central Co-operative Banks and Union
Multipurpose Societies. It could play a valuable part in the
extension of agricultural credit and there were reasonable
chances of its being activated over a period of time through
supply of credit from the Government or the State Bank,
supported with other measures.
The Bank came to the conclusion that more determined efforts

had to be made in the revival of the movement and for its own part,
it was willing to provide the necessary credit facilities. It also tried to
persuade the Provincial Co-operative Bank to take positive steps for
the reorganization of the movement. Important among them being:-
(1) The Provincial Co-operative Bank which had been

financially affected was given support by contribution of
Rs.4.5 million to the share capital by the Provincial
Government through conversion of its loans to it.
(2) Steps were taken for giving better management to the

State Bank of Pakistan: Agricultural Credit in Pakistan, Karachi 1962, p.llS.
Provincial Co-operative Bank. The elected Managing

Committee was superseded and Government assumed
powers for nominating the chairman and members.
(3) The Government agreed to share, in view of the existing

state of the co-operatives, a part of the risk in the loans
granted by the State Bank.
Thus, a beginning was made towards the rehabilitation of the co-

operative credit structure in the province and the State Bank granted
its first loan amounting to Rs.1 million in the year 1956-57.4
Socio-Economic Survey
Apart from conducting its own studies, the State Bank also
secured the services of other agencies for such work. In 1956 it
sponsored socio-economic surveys to be conducted by the Dacca and
the Punjab Universities. These surveys dealt with the credit problem
at some length. The information they collected was of considerable
value. The Bank also kept those interested in agricultural credit
informed of the developments in the field from time to time. It started
bringing out a quarterly under the title of "Credit (Rural and Co-
operative)" from 1953 which was distributed free of cost to interested
individuals and concerned institutions.
Loans of Co-operatives and Specialised Credit Institutions
The State Bank had been granting loans to co-operative banks

since 1951. These loans were advanced against Government
Securities and without any stipulation as to the purposes for which
they could be utilised. Effective lending for agricultural purposes in
fact started in 1957-58. Although a loan of Rs.1 million was
sanctioned for East Pakistan in 1957 and another ofRs.2.5 million for
Sind (the province was merged in One-Unit in October, 1954), the
actual utilisation of these limits took place in 1957-58. The Bank also
started making loans to specialised credit agencies during 1959-60,
State Bank of Pakistan: Agricultural Credit in Pakistan, Karachi 1962, p.l16.
when the Agricultural Development Finance Corporation was

granted a limit of Rs.10 million. 5
Interest Rate Policy

The State Bank was throughout conscious of the need for a
reasonable interest rate structure for agricultural credit. The rate of
interest charged by it for agricultural loans, in its judgement, had to
be lower than on other types of advances. Originally, the Bank's
policy was to charge rate of interest half per cent below the Bank Rate
for loans to Provincial Co-operative Banks. Out of this, it had agreed
to give away 1 per cent by way of rebate to be spent on co-operative
education and training. The rebate was, however, discontinued in
1954, as the Bank decided that it would consider assisting individual
schemes from co-operatives from time to time. The concession of half
per cent, however, continued for several years after 1954 on loans to
co-operative banks. The rate of interest to be charged was in the
future to be one per cent below the Bank Rate instead of half per cent
levied in the past. This reduction was made for ensuring that the
ultimate borrower did not have to pay more than 9 per cent for his
loans. For the Agricultural Bank the interest continued to be half per
cent below the Bank Rate since its advances were made directly to the
individuals unlike the co-operative loans which had to pass through a
number of intermediaries before reaching the farmer.
Deputation of Officers
The State Bank sought to assist the agricultural credit agencies
in other ways as well. Advisors of the rank of senior officers were
deputed to the co-operative banks in both wings of the country.
Officers in managerial capacity were sent to the Frontier Co-
operative Bank, Gilgit Co-operative Bank and The Agricultural
Development Bank of Pakistan. Trained personnel from the training
scheme were provided to the Agricultural Development Finance
Corporation, and the Agricultural Bank of Pakistan. Besides,
officials of the State Bank were nominated on the Boards of
Technical Advisory Committees of Co-operative Banks and
State Bank of Pakistan: Agricultural Credit in Pakistan, Karachi 1962, p.l17.
specialised agricultural credit institutions as their directors and

members.
Credit Enquiry Commission
The Credit Enquiry Commission was appointed in February,

1959 to examine the scope and working of the agencies which were
providing credit facilities to agriculture, business and industry. Its
other terms of reference included suggestions of measures to meet
the agricultural and credit requirements of the country by improving
the existing and creating new facilities.
The magnitude of the problem in a predominantly agricultural

country which affected the lives of millions was colossal. Its
complexity had baffled generations of administrators and public
spirited men. Post-partition studies of agricultural credit situation
including surveys conducted by the Universities of Dacca and the
Punjab, revealed not only the collapse of institutional credit but also
the disappearance of the money lender. Rich relatives, obliging
friends and well-meaning neighbours had come to their rescue in the
emergent situation which was only a stop gap arrangement. The
landlords who used to be a supplementary source of finance had
become wary in the wake of land reforms. In East Pakistan the
reforms were far reaching and even modest reforms in West Pakistan
had a destabilising influence. An increasing dependence on the
market intermediaries was an inevitable consequence of the
development.
How slow and halting the progress of the co-operative

movement since independence was reflected in the number of co-
operative societies which covered less than one seventh of the
population. The entire capital at their disposal, including paid-up
capital, reserve funds, deposits and borrowings, was Rs.62.8 million.
Roughly half of this amount was utilised in current lending
operations. Still, the outstanding and overdues were large enough to
be disturbing except in the province of Sind where these were
recovered as arrears of land revenue. The ratio of recoveries in West
Pakistan as a whole was 57 per cent in the case of unlimited societies.
In East Pakistan there was a decline even in the number of

primary credit societies and also in their membership. Between 1947
and 1957 more than twenty four thousand societies had to be
liquidated and replaced by multipurpose societies at the union level.
The combined membership was 577,000. On the basis of the
population the percentage of coverage was almost the same as in
West Pakistan. Structural deficiencies and weaknesses were
responsible for their stagnation. This stagnation was attributable
partly to such external factors as diversion of co-operative funds to
other than co-operative uses, political intervention, weakening of the
Co-operative Department in the wake of exodus of trained staff after
Partition, frequent transfer of Registrars and poor selection of senior
officials and lack of Government support. Deficiencies internal to the
structure of credit societies included low credit for individual
borrower and gradual shift to the security of unlimited liability and
dependence on untrained staff.
In West Pakistan to a degree the central banks, on the one hand,

were dependent in measure on funds from outside the movement,
and on the other, agricultural finance had ceased to be the primary
focus of their lending operations. In East Pakistan, while a number of
banks were viable and solvent, quite a few were on the verge of
bankruptcy or already insolvent.
The apex banks were in a precarious position. Twenty five per

cent of their debts were either doubtful or bad. So unremunerative
were their investments and fictitious their assets that it could be
justifiably presumed that they would fall short of their liabilities when
the time for reckoning came. It was not unusual to make large
advances without express authority from the boards, issue clean
overdrafts without adequate security or maintaining reliable
information about the credit worthiness of the borrowers. These
malpractices which were brought to light in the inspection reports
were responsible for the heavy losses the co-operatives suffered. In
the case of one urban co-operative three borrowers had monopolised
seventy-nine per cent of the advances. Even office bearers used to
take loans for themselves against security of doubtful value. A state
of affairs such as this, in the Commission's view, could not be allowed
to continue indefinitely without inviting the collapse of the entire

system and loss of public confidence in the co-operative movement.
Reorganisation of the co-operative banks into strong and

autonomous institutions in East Pakistan was essential. It could only
be done after a thorough inquiry by senior and experienced officers
on whose findings the solvent ones among them could be retained and
the insolvent sent into speedy liquidation on the directives of the
Registrars. Even in West Pakistan, the independent existence of the
co-operatives was not considered in the national interest and like the
central banks of East Pakistan they too had to be merged into the
apex banks. The influence of the individuals who had infiltrated into
the societies on the strength of their financial resources and exploited
the resources of the societies had to be removed by the infusion of
new capital from outside-a responsibility which the State Bank
could assume.
Involvement with the Apex Banks
The decision to integrate the central, urban, taluka, zamindari

and other co-operatives into apex banks was expected to result in the
creation of a fairly large institution. It was, therefore, recommended
that the existing apex banks should be allowed to maintain their
identity and separate existence in accordance with the former
provincial boundaries in West Pakistan. However, the Commission
recommended that in view of poor communication in East Pakistan,
the Provincial Government may establish a second apex bank with
headquarters somewhere in North Bengal as soon as properly
qualified personnel could be assembled.
The involvement of State Bank in assisting all the operating

apex banks to improve their management and performance was
necessary. While in the cases of Punjab and Sind Provincial Co-
operative Banks, the Bank's participation was to be confined to the
amount payable to retiring individual shareholder, a greater measure
of assistance to the Frontier Co-operative Bank Ltd. was imperative
to place it on a sound footing. The State Bank could also assist the
East Pakistan Provincial Bank with an initial corpus of Rs.2 million.
A reconstitution of Directorates of the apex banks was necessary for

toning up their management. The nomination of the chairman and
appointment of the chief executive by the Governor of the Province
on the recommendation of the Governor of the State Bank were
additional measures desirable for their improvement. The sense of
responsibility blunted by their preoccupation had to be restored. A
sudden prohibition was likely to create more difficulties than solve
them. In the interest of stability it had to be a phased withdrawal as
the banks had become too dependent on their commercial activities.
The constitution of a Rural and Co-operative Advisory

Committee, consisting of the chief executives of the apex co-
operative banks and the two statutory agricultural credit agencies,
the Registrars Co-operative Societies in East and West Pakistan or
the Co-operative and Marketing Advisor to the Government of
Pakistan was yet another measure recommended for the
rehabilitation of the system under the auspices of the State Bank.
Concessional Interest Rate
The rate of interest to the ultimate borrower at the union or

village level was not to exceed 7 per cent. In order to allow adequate
spread between the borrowing and lending rates of interest of the
apex banks the Commission recommended that the State Bank
should be willing to lend to the apex banks for short and medium term
needs at concessional rate of 1 per cent below the Bank Rate of 3 per
cent.
Rural Credit Fund
In order to enable the State Bank to provide medium and long

term credit a separate fund was to be constituted in the State Bank
with contribution from the Bank and Central Government. An initial
corpus of Rs. 50 million was to be constituted and recurring
appropriations of Rs.lO million per annum made from the surplus
profits of the State Bank which were transferred to the Central
Government. The recommendation made by the Credit Enquiry
Commission to establish Rural Credit Fund was accepted by the
Government and the Fund was set up by the State Bank in 1960 in
terms of requirement of an amendment (section 17A) to the State
Bank of Pakistan Act. The responsibility of initial contribution of
Rs.50 million by the Government and the State Bank to be shared
was assumed by the Bank with the Government's reluctance to
participate in raising the fund because of its financial constraints.
Remittance Facilities
The State Bank extended remittance facilities to co-operative

banks on most favourable terms. The Provincial Co-operative Banks
which joined the Remittance Facilities Scheme were required to
maintain 1 per cent of their time liabilities and 2¥2 per cent of their
demand liabilities with the Bank as against 2 per cent and 5 per cent
respectively for scheduled commercial banks. Unlike the commercial
banks which had to maintain balances with the State Bank on the
basis of deposits of all branches, Provincial Co-operative Banks were
required to keep balances on the basis of their own deposits, although
the benefit accrued to all the affiliated banks.
- -- ----~----------------
8
Exchange Control and Management
Exchange Control owes its ongm in the Indo-Pakistan

subcontinent to the outbreak of World War-II on September 3, 1939
when the Governor-General of India promulgated the Defence of
India Rules. The term "Foreign Exchange", mentioned in Rule 91 of
the Rules was defined as: "(1) ~ny currency other than the currency
which is legal tender in British India or Burma, (2) any bill or
promissory note payable otherwise than in rupees, and (3) any credit
or balance otherwise than in rupees". Rule 91(2) debarred any
person resident in British India from acquiring any foreign exchange
or transferring any rupees, gold coin or bullion or securities with a
view, directly or indirectly, to the acquisition of any foreign
exchange. The main provisions of the Defence of India Rules were:-
(i) restrictions on purchase of foreign exchange,
(ii) acquisition by the Central Government of foreign

exchange,
(iii) restrictions on purchase and export of securities,
(iv) acquisition by the Central Government of foreign

securities.
233
Exchange Control, as commonly understood, is used as an

instrument for the acquisition by the government of all foreign
exchange, earned by a country; its accumulation into a central pool
and the rationing of the holdings in the pool for such purposes, as the
government may consider essential in the larger interest of the
country. However, Exchange Control, introduced in British India
was not intended for these purposes but mainly followed the
objective to control dealings in foreign securities, gold and silver,
bullion and other foreign securities. Exchange Control also did not
apply to transactions, then known as Empire Currencies (with certain
exceptions) and was applicable only to dealings in Non-Empire
Currencies. A foundation was, however, laid on a system of
Exchange Control, on which its present form has been built and is
now assuming paramount importance in the economic structure of
the country.
By a Notification issued on September 4, 1939 the Central
Government authorised the Reserve Bank of India to deal in foreign
exchange and also empowered the Bank to authorise, on its behalf,
other persons to deal in foreign exchange, gold coin and bullion. The
Governor of the Reserve Bank assumed the functions of the
Controller of Foreign Exchange, assisted by Deputy Controller and
Assistant Controllers.
Promulgation of Foreign Exchange Regulation Act, 1947
The Defence of India Act (the Defence of India Rules) were

repealed when the Defence of India Act came into force from
September 29, 1939) and the Rules made thereunder remained in
force for the duration of the War and 6 months thereafter, expiring on
September 30, 1946. Under the Emergency Provisions
(Continuance) Ordinance, 1946, the Financial Provisions of the
Defence of India Act which dealt with restrictions on gold, purchase
of foreign exchange and the other analogous provisions remained in
force up to March 25, 1947, till the promulgation of Foreign Exchange
Regulation Act, 1947 (VII of 1947).1
The contents of this Chapter are largely based on 'Exchange Control in Pakistan' (1948-
1962) by Said Ahmad, Controller, Foreign Exchange, State Bank of Pakistan, 1964.
EXCHANGE CONTROL AND MANAGEMENT 235
It would be relevant to mention here in brief, the reasons behind

the introduction of the Foreign Exchange Regulation Act, 1947. The
Draft Bill of the Foreign Exchange Regulation Act was published in
November, 1946 with the Statement of Objects and Reasons:
A system of Exchange Control was set up in India on the outbreak of

War in September, 1939 for the purpose of conserving and directing to
the best uses the limited supplies of foreign exchange available. The
Control was made effective through a series of Rules under the
Defence of India Act, 1939. The shortage of foreign exchange is likely
to continue in view of the disruption of the internal economy of so
many nations and the interruption of established channels of trade. It
is, therefore, necessary that the system of Exchange Control should be
continued in the general interest of the country. Also the adherence of
India to the International Monetary Fund requires her to take certain
measures to regulate transactions in foreign exchange in order to fulfil
the obligations of membership. Legislation is, therefore, necessary to
give the Central Government powers to continue to control
transactions in foreign exchange securities and gold. The Act
embodies the Financial Provisions of the Defence of India Rules
relating to Exchange Control with certain modifications and
amendments which experience over the past 6 years has shown to be
desirable in the interest of clarity and effectiveness and also certain
additions such as the section relating to the import of currency and gold
and control over the proceeds of exports which are essentially
Exchange Control matters, although administered by the Collectors of
Customs for practical convenience. The provisions of the Act have
been provided in such a manner that the degree of restrictions on
foreign exchange transactions can be relaxed or increased by executive
orders, either general or for particular foreign currency, in accordance
with the needs of trade, financial or international agreements thus
ensuring that flights of capital or wide speculations which proved
injurious to foreign trade in the period between the two Wars can be
immediately controlled.
The Foreign Exchange Regulation Bill was introduced in the

Indian Legislative Assembly on November 6, 1946 and came up for
consideration on November 12. Liaquat Ali Khan, Finance Minister
in the Interim Government of India at that time, piloted the Bill. He
explained that after very careful consideration the Government had
come to the conclusion that it was imperative to continue exercising

control over foreign exchange transactions. It was not only in India's
own interest to optimise the utilization of foreign exchange resources
in implementing the Government's programme of industrialisation
and development, but also by virtue of her position as a member of
the I.M.F. to promote exchange stability and to maintain orderly
exchange arrangements.
The Draft Bill of this Act, however, did not have an easy passage
through the Legislature and was referred to a Select Committee. Its
report was presented to the Central Legislative Assembly on
February 3, 1947. The Finance Minister, while speaking on the
second reading of the Bill, observed that the exchange control system
would be operated so as to permit nearly all transactions of a current
nature subject to certain restrictions as to amount to ensure that
capital is not being transferred in the guise of a currency payment and
in addition to allow moderate transfers of capital where such amounts
are required for trade purposes such as for the establishment of
overseas branches of Indian trading firms and for banking and
insurance operations. 2 The Bill was passed by the Assembly on
February 10, 1947 and as an Act came into force by Government
Notification on March 25, 1947. With effect from September 1, 1947
Exchange Control was also introduced with countries in the Sterling
Area.
The Act was called the "Foreign Exchange Regulation Act" and
not "Foreign Exchange Control Act", as known in the United
Kingdom. The preamble to the Act reads as follows:-
Whereas it is expedient in the economic and financial interests of India
to provide for the regulation of certain payments, dealings in foreign
exchange and securities and the Import and Export of currency and
bullion it is ...
The objective of the Act was, therefore, to regulate certain
monetary transactions to the best advantage of the country. This Act
was adopted by the Government of Pakistan after the creation of the
country. The Reserve Bank of India continued to be the common
Finance Member (Liaquat Ali Khan's) speech on February, 1947 during the second
reading of Foreign Exchange Bill-History of Reserve Bank of India (1935-51), first
published April, 1970, p.639.
currency authority and Central Bank of both the countries. The

Pakistan (Monetary System and Reserve Bank) Order, 1947 inter
alia, contained the provision that "The Management of the Public
Debt and Exchange Control was to be taken over by the Government
of Pakistan from the Reserve Bank of India from April1, 1948". The
period of functioning of the Reserve Bank of India in Pakistan was
subsequently reduced from September 30, 1948 to June 30, 1948. As
stated in earlier Chapters, it was also arranged that the Reserve Bank
of India should continue to manage the Exchange Control and Public
Debt on behalf of the Government of Pakistan until June 30, 1948.
No separate allocation of foreign exchange for the two countries

was made upto December, 1947 and the foreign exchange earnings of
both the countries as well as the foreign exchange expenditure were
deposited and met from a common account. It was settled between
the Central Governments of India and Pakistan, as from January 1,
1948 to retain their own foreign exchange earnings separately and to
meet their foreign exchange expenditure from their own resources.
Simultaneously, it was also agreed that there would be no Exchange
Control between India and Pakistan and transfer of funds and
securities from India to Pakistan and vice-versa would be freely
permitted. However, this system of free transfers excluded the
movement of gold and silver between the two countries.
The State Bank of Pakistan, after its establishment took over all
central banking functions for Pakistan from the Reserve Bank of
India which also included the operation and management of the
Exchange Control in the country. The system of Exchange Control
continued almost unchanged as inherited, except that the
notifications of the Reserve Bank of India and the Government of
India had to be replaced by a new set of Notifications promulgated on
July 1, 1948 by the Government of Pakistan and the State Bank of
Pakistan. While Pakistan foreign exchange accounts were being
maintained by banks operating in West Pakistan, in view of lack of
banking facilities at Chittagong, in East Pakistan, Pakistan accounts
were being maintained at banks in Calcutta. This was an interim
arrangement to facilitate negotiations of bills by banks in Calcutta in
respect of shipments from Chittagong. With the development of
banking arrangements at Chittagong it was possible to bring the

Calcutta arrangements to a close on June 30, 1948 and no fresh
business was, therefore, permissible on these accounts.
Emergence of Black Market
After the establishment of the State Bank on July 1, 1948

although there was complete monetary separation, there was no
exchange control between India and Pakistan. Therefore, a
Payments Agreement was concluded between the two countries to
regulate monetary transactions, the salient features of which have
been mentioned in Chapter-IV. Remittances from one country to the
other were free of exchange restrictions and cover was provided by
the Central Banks of the two countries to banks for the purchase and
sale of each other's currencies, at rates based on the parity between
the two rupees. This position continued till September, 1949 when
the Pound Sterling was devalued and Pakistan decided not to devalue
its currency while India devalued its rupee. The Reserve Bank
announced on September 21, 1949 that it would not quote any rate for
the sale and purchase of the Pakistan rupee.
As a consequence, transactions between the two countries came

to standstill, leading to the emergence of an unofficial market outside
the banking system. The emergence of 'black market' was a
phenomenon common to all the countries suffering from shortage of
foreign exchange. The position became all the more complex for
Pakistan whose economy was still integrated with India. The long
common border with India both in East Pakistan and West Pakistan
further added to the difficulties of Pakistan Government m
effectively enforcing exchange control in the country.
A very large number of administrative measures were taken

which, however, failed to curb this black market effectively. The
Foreign Exchange Regulation Act, 1947 had to be amended
repeatedly to close legal lacunae as and when they came to notice.
But the "racketeers" were always one jump ahead and, in the end,
reliance had to be placed on more and more severe administrative
measures to keep the activities of these persons in check. The penal
provisions of the Foreign Exchange Regulation Act were made more

severe but experience showed that this Act, being after all a mere
"regulation" Act, was no match for the ingenuity of the person who
wanted to make a fast buck on the "black market".
The State Bank, unlike a central bank, had to assume the role of
a Government agency, using the services of police to enforce its
instructions and instituting prosecution cases in the competent courts
of law against those individuals and institutions who violated any of
the provisions of Foreign Exchange Regulation Act, 1947. In many
cases legal battles were fought in higher forums of justice viz. High
Courts and Supreme Court. Instructions issued by the Bank had to be
couched in legal language and simple application forms for obtaining
foreign exchange became more and more replete with legal jargons,
enough to scare even the most legal minded persons. The first edition
of the Exchange Control Manual, issued by the Reserve Bank of
India in 1940, contained 50 pages and about 14 application forms. At
that time, Exchange Control had been in operation in India for hardly
10 months. The Governor of the Reserve Bank of India, while
introducing the Exchange Control Manual, remarked that " ... these
(instructions) have been supplemented from time to time by
Exchange Control Circulars, Questions and Answers etc ... have
grown to such an extent that they are now somewhat difficult to
follow".
Since then, with the passage of time and multiplication of

controls on the economy of the country, the operation of Exchange
Control became increasingly complicated and cumbersome. One
could, therefore, easily visualise the lot of the person in 1960 who
tried to find his way through the maze of F.E. Circulars, E.C.D.
Circulars, S.P.A. Circulars, Notices to Exporters, Press Notes,
Government's and State Bank's Notifications and various other
missiles that were launched by the Exchange Control Department
from time to time in the direction of the individuals, banks, trade and
industry.
The Department issued on an average about 150 circulars every

year and the Exchange Control Manual, in use in 1960, contained 182
closely printed pages besides about 210 application forms. The

Manual was last revised in 1959. Within a period of the next one year
a number of application forms were added, and with changes in the
economic scenario and government foreign exchange reserves
position, old instructions had to be amended and fresh ones were
added.
A large organisation had to be built both at the centre and the

branches. The organisation started with a strength of 18 officers and
other staff on the formation of the State Bank, swelling to over 400
officers and other staff by the year ending 1960. The phenomenal
growth of the Exchange Control Department reflected not only the
rise in the exchange transactions, resulting from the expansion of the
country's economy, but also the maze of the rules and regulations
which had grown with the passage of time.
All this was enough to discourage less stout hearted persons

from writing a history of the Exchange Control Department but an
attempt has been made in the preceding paragraphs to narrate only
important events influencing the economy of the country. If an effort
were to be made to record each and every measure, taken by the
Exchange Control Department to plug known holes in the leakages,
this itself would make a separate volume.
Anglo-Pakistan Financial Agreement
During World War II, undivided India, alongwith several other

countries, accumulated large balances in the United Kingdom,
known as "Sterling Balances". They originated in favourable
balances of trade of undivided India and in large disbursements that
had to be made in India by the United Kingdom and other Allies in
connection with the War. Owing to their growing magnitude such
balances became an important problem for the United Kingdom, by
the pressure exercised by them on her economy. The United
Kingdom, therefore, adopted the policy of negotiating agreements
with the countries owing these balances in order to specifying the
amounts of withdrawals by each country from period to period. In
accordance with this policy, the first Sterling Balances Agreement
between the Governments of U.K. and undivided India was signed

on August 14, 1947. It contained certain working principles together
with provisions for the release of specified amounts for expenditure
during the period ending December 31, 1947.
This Agreement served as the Principal Agreement which was

extended each time after negotiations were completed for releases of
Sterling for a further period. Under this Agreement, all balances
were transferred to an account, known as Account No.2 which
contained all blocked Sterling. Amounts which were agreed to be
released as a result of negotiations were transferred from Account
No.2 to Account No.1, available there for expenditure. In addition to
the releases from Account No.2, crediting of Sterling earned and
debiting of Sterling spent were also maintained under Account No.1.
India and Pakistan had common accounts upto December 31,

1948 after which a separate Account No.1 was opened by the Bank of
England for Pakistan under the Principal Agreement which became
automatically applicable to Pakistan. This Account was opened with
a sum of £6 million for expenditure during the six months ending June
30, 1948 and £10 million as working balance. From July 1, 1948 after
establishment of the State Bank, a complete separation took place
and an Account No.2 was also opened in the books of the Bank of
England for Pakistan in addition to Account No.1. By an agreement
reached between Pakistan and U.K. two amounts were released for
expenditure by Pakistan for the year from July 1, 1948 to June 30,
1949: (1) a sum of £5 million for ordinary expenditure, and (2)
additional amounts not exceeding £5 million for special requirements
in connection with the settlement and rehabilitation of refugees.
Negotiations for the year 1949-50 resulted in an agreement,

which was signed on August 5, 1949 and provided for the following
releases:-
1. An amount to the tune of £12 million for ordinary
expenditure.
2. A sum of £5 million for special requirements in connection
with the settlement and rehabilitation of refugees.
242 HISTORY OF THE STATE B.ANK OF PAKISTAN
3. Remittances made for capital investments were allowed to

be retained in Account No.1 until the aggregate of such
remittances reached a certain figure. In the event of such
figures being reached, provision was made for further
consultation between the two Governments. Formerly,
only 331;3% of such remittances used to be eligible for
retention in the free Sterling Account.
At the Conference of the Commonwealth Finance Ministers,

held in London in July, 1949 it was agreed that in view of the heavy
drain on the gold and dollar reserves of the Sterling Area, all
Commonwealth Governments would restrict their dollar expenditure
during the period July, 1949 to June, 1950 to the level of 75% of their
dollar expenditure during the calendar year 1948.
The year 1948 was, however, not a normal year in the case of
Pakistan. During the earlier part of the year, trade and banking were
still suffering from the aftermath of Partition and recovery came only
in the latter half of the year. The period from July, 1948 to June, 1949
was accordingly adopted as base year in the case of Pakistan for the
calculation of the 75% limit. In pursuance of this Agreement,
Pakistan's dollar expenditure during the year from July, 1949 to June,
1950 was restricted to £65 million.
Grant of Allowances
1. Travel Allowance
In September, 1946 the Reserve Bank of India had announced

that the Government of India was prepared to allow the sale of
moderate amounts of foreign exchange for travel to countries outside
the Sterling Area for reasons of convenience. There was no exchange
control with Sterling Area countries and persons could obtain any
number of travellers cheques expressed in Pound Sterling.
In September, 1947 exchange control was also extended to the

Sterling Area and scales of travel quota were revised and continued
to be fairly liberal. However, in October, 1947 on account of the

shortage of U.S. Dollars and the necessity of conserving expenditure
in non-Sterling Area currencies, it was decided to abolish basic travel
quota for countries in the Continent and America.
In addition to the separation of Foreign Exchange Accounts of

India and Pakistan from January, 1948 the old scales of the basic
quota were also abolished. Pakistan started with more liberal travel
quota than India, in particular for persons visiting Sterling Area
countries. This liberalisation reflected the confidence of the new
country in its comfortable foreign exchange position. In June, 1949
the scales were further liberalised and the distinction between
Pakistani nationals and foreign nationals was also annulled. This
facility, however, could not last long and with the devaluation of
Pound Sterling in September, 1949 basic quota, inter alia, fell victim
to the changed circumstances.
Meanwhile, it was discovered that some persons misused this

facility by drawing the basic quota more than permitted. In many
cases such individuals did not proceed to the countries for which the
travel quota was drawn, but they were disposing of the exchange so
acquired in the "free market" in Pakistan. It was decided to withdraw
the facility of drawing the quota for countries like Iran, Iraq, Saudi
Arabia, etc. in the absence of passport and making the presentation
of passport or pilgrim pass as a precondition. Mere vigilance of the
Bank was not enough and the entire policy was reviewed including
travel facilities extended to all categories of travellers comprising
Government servants, employees of foreign companies and pilgrims
travelling by air, sea and land routes for private or official purposes
to different countries. The privilege of foreign travel enjoyed by
employees of foreign companies at the company's cost, inherited by
Pakistan as a legacy from the British Government, was also reviewed
and brought in conformity with the national policy. The size of
travelling quotas was drastically curtailed and the procedure of issue
of foreign exchange was streamlined. As a result, the basic travel
quota, fixed at £1000 per adult in June, 1949 was reduced to £150 in
October, 1952. This limit continued with slight variations till the end
of 1956,
The period between February, 1957 and May, 1960 was of very
considerable strain for the Exchange Control Department.
Restrictions on travel were further tightened. For example, the
various travel quotas were abolished (there was no basic travel quota
by August, 1958 for any country). Moreover, the Exchange Control
Department imposed severe conditions regarding release of
exchange for travel abroad for different purposes, for which
applications were now required to be made. Although the imposition
of these restrictions was fully justified in view of the dwindling foreign
exchange position of the country, it was not always possible to satisfy
the applicants. They got the impression that their cases were not
being appreciated by the Department and an uncalled for rigid
control was practised. The Department, however, withstood these
pressures quite successfully.
By late 1959, however, it was realised that severe restrictions

had been in force a little too long and with the gradual improvement
in the country's foreign exchange position, some relaxation was
called for. Accordingly, a reference was made by the Exchange
Control Department to the Ministry of Finance in November, 1959
suggesting the revival of the basic travel quota for the convenience of
the public. The restrictions on private travel had not only caused
considerable hardship to the people but it also gave rise to certain
malpractices. The International Monetary Fund also exhorted its
members to hasten removal of the exchange restrictions. The team of
the I.M.F., which visited Pakistan in 1959 to hold their annual
consultations, was also critical of the exchange restrictions in general
and on travel in particular. In May, 1960 it was, therefore, decided to
allow exchange facilities to a limited number of Pakistani nationals
for travel abroad to countries other than India, Afghanistan, Nepal,
Tibet and Burma for reasons of "personal convenience".
2. Business Travel
For the promotion of internal trade and industry liberal

exchange facilities were extended to members of the business
community. As already mentioned, the migration of a large number
of non-Muslim traders and industrialists in the wake of Partition had
created a vacuum which was filled by Muslim businessmen coming

from all parts of India. The need for travel abroad by these
businessmen was fully recognised by the Government and every
facility was provided to enable them to establish their business
contacts abroad. This liberal policy continued till 1957 when
exchange facilities for arranging imports into Pakistan were
discontinued. However, businessmen intending to import capital
goods or machinery for industries could avail of this facility.
The Export Bonus Scheme (subsequently discussed) was

introduced with effect from January 15, 1959 and in view of the
specific provisions contained in this Scheme, one per cent of the net
FOB value of the exports made, could be utilised for business visits
abroad by representatives of firms earning bonus. The State Bank
notified that persons, associated in any form with a firm or company
exporting goods under the Bonus Scheme, would be allowed
exchange facilities only by the surrender of bonus vouchers and upto
the extent of one per cent of the net FOB value of exports made by
them during the preceding 12 months and upto a maximum of
Rs.50,000 per annum.
3. Education Allowance
Liberal exchange facilities were provided to Pakistani students

proceeding abroad for prosecution of studies, aiming at promoting
education in the country. Initially, there were no restrictions of any
kind on selection of courses for a student and the only requirement to
be fulfilled was to secure admission in an institution abroad. The
student was also obliged to furnish a declaration that he would come
back to Pakistan after completion of his studies. The scale of
allowance admissible to students in the U.K. and other countries of
the Continent was fixed at £700 per annum and in U.S. A. and Canada
at $3,120 per annum. This policy continued till the middle of 1954,
when for the first time, a general restriction on school education in
foreign countries was imposed, except for the children of foreign
born wives of Pakistani nationals and also of Pakistani officers,
posted abroad, but transferred back to Pakistan during the course of
studies of their wards.
As improved educational facilities became available in the

country, it was considered not justified to pursue such a liberal policy.
After a thorough examination of expenditure involved, the Bank
advised its offices in June, 1956 to scrutinise the applications very
carefully and allow exchange only for such higher technical subjects,
for which facilities were not available in Pakistan. In August, 1958 as
the country's foreign exchange position deteriorated, these facilities
were further restricted and permission for school education and
undergraduate courses was discontinued. The position was again
reviewed by the State Bank and the Ministry of Finance and a
comprehensive procedure was drawn up for sanctioning exchange for
education abroad.
4. Allowance for Medical Treatment Abroad
Upto March, 1951 exchange for the purposes of medical

treatment in foreign countries was released on the basis of the
recommendation of the Civil Surgeon of the district concerned. It
was, however, felt that this facility of allowing exchange for medical
treatment abroad merely on the recommendation of the Civil
Surgeon was open to certain abuses. Therefore, a decision was taken
in April, 1951 that henceforth exchange for medical treatment
abroad would be allowed only on the recommendation of the
Director General of Health, Government of Pakistan. This system
worked till October, 1958 when it was announced that all the
applications for medical treatment abroad would be examined by a
Board of 3 doctors, to be set up by the Government in important
centres of the country. This Board was required to submit its
recommendation to the Provincial Medical Authorities, who were
empowered to recommend release of exchange upto £400 in any one
case. If the amount of exchange recommended exceeded £400, such
a document was to be countersigned by the Director General of
Health, Government of Pakistan.
Exchange for Pilgrimage to Saudi Arabia
Prior to the devaluation of the Pound Sterling in September,

1949 the import of Pakistan currency notes into the country was
allowed freely and could also be repatriated to Pakistan by foreign

banks and other agencies against payment in foreign exchange.
Consequently, pilgrims proceeding to Saudi Arabia were allowed to
take with tliem Pakistan currency notes upto certain limits for their
expenses and these notes were subsequently repatriated to Pakistan
against payment in foreign exchange. Immediately after the
devaluation of the Pound Sterling and the . following restrictions
imposed on the import of Pakistan currency notes, it was observed
that after the Haj of 1949 a disproportionate amount of Pakistan
currency notes was being repatriated to Pakistan by the Saudi
Monetary Agency against payment in foreign exchange. Detailed
examination of the matter revealed that even if every single Haji had
taken with him the maximum permissible amount in Pakistan
currency notes and spent in Saudi Arabia, the total value of such
notes received from Saudi Arabia exceeded this amount.
It was, therefore, established that there were elements who had

resorted to the smuggling of Pakistan currency notes to Saudi Arabia
for the sake of obtaining foreign exchange abroad. With the
devaluation of the Pound Sterling, restrictions had been imposed on
the import of Pakistan currency notes from foreign countries and the
repatriation of the same against payment in foreign exchange was
stopped. The only exception was the repatriation of Pakistan
currency notes from Saudi Arabia.
A very large number of Pakistan currency notes was being

received from Saudi Arabia and its only explanation was that the
Pakistan currency notes from the surrounding countries, particularly
from the Persian Gulf were finding their way to Pakistan via Saudi
Arabia. The problem to be solved was, therefore, two dimensional.
The Haj pilgrims from the year 1950 were to be financed, but in a way
that no smuggling of currency takes place through Saudi Arabia. The
obvious solution was that the pilgrims should be allowed to take with
them foreign exchange in the standard form of travellers cheques or
bank drafts etc. This was, however, not found practicable, since a
very large majority of pilgrims was illiterate and could not sign their
names in English. Moreover, they could not afford to purchase the
travellers cheques, which could have increased their rupee

expenditure.
The problem was, therefore, examined in considerable detail

and it was ultimately decided to issue special type of currency notes,
called "Special Pilgrim Notes", for use in Saudi Arabia only by
Pakistani pilgrims. The State Bank of Pakistan Act was consequently
amended. These Notes were essentially of the nature of bearer
travellers cheques and constituted an innovation in monetary
practice. It was announced that such Notes would be accepted by the
State Bank from banks etc., in Saudi Arabia against payment in
foreign exchange. The Special Pilgrim Notes were issued at par to the
pilgrims, thereby eliminating the question of extra payment by way of
commission by the pilgrims. Their issuance started in 1950 and was in
force till the end of 1960.
Authorised Money Changers
Under the Exchange Control Regulations, foreign currency

notes and other foreign currency instruments could be encashed only
with Authorised Dealers. In the beginning, State Bank had
authorised only the commercial banks to transact foreign exchange
business. This provision caused great inconvenience to some of the
foreign tourists in encashing their foreign currency holdings, since the
banks were not always situated in the neighbourhood of the hotels.
Additionally, this arrangement offered a good opportunity to
unauthorised agencies, which offered to encash foreign currencies on
the spot and at a premium. To eliminate such malpractices and
primarily to provide on the spot money changing facilities to the
foreign tourists, all important hotels, airports and seaports in the
country were authorised to offer money changing facilities.
Important shops and stores were also permitted to convert foreign
currencies for foreign tourists to make purchases. These
arrangements helped to increase country's foreign exchange earnings
from the foreign tourists, who in the absence of adequate money
exchanging services used to either abstain from making purchases, or
sell foreign currencies to unauthorised agencies.
Specialised Trade Agreements
1. Commercial Relations with Afghanistan
(a) Trade with Afghanistan
Commercial relations with Afghanistan were regulated by the

Anglo-Afghan Trade Convention of 1923 and the Anglo-Afghan
Treaty of 1929 which, inter alia, provided that no impediment would
be put on the import of any goods required for the progress and
welfare of Afghanistan. These arrangements, inherited from the
British Government of India by Pakistan, for export of goods to and
import of goods from Afghanistan, as also the in-transit trade of
Afghanistan via Pakistan continued uninterrupted.
Imports from Afghanistan into Pakistan remained free of all

import trade control, exchange control restrictions and did not
qualify for any remittance facility from Pakistan. Imports from
Afghanistan mainly consisted of fresh fruits and timber, which
together, on an average amounted to over Rs.20 million per annum,
whereas the exports from Pakistan were insignificant. These
arrangements, therefore, resulted in an imbalance of trade against
Pakistan and were mainly responsible for worsening the rate of the
Pakistan rupee vis-a-vis the Afghan currency, leading to various
exchange malpractices. In the absence of any payment arrangements,
settlements were usually made through the free market in violation of
the Foreign Exchange Regulation Act. The State Bank, therefore,
recommended in May, 1960 to the Government to introduce partial
exchange control with Afghanistan and drew up an appropriate
procedure. This was not accepted by the Government on political
grounds. However, it was decided by the Government to intensify
anti-smuggling measures at the Pakistan-Afghanistan border to
eradicate malpractices arising from this free trade.
(b) In- Transit Trade of Afghanistan
Being a landlocked country Afghanistan's trade with other

countries had to pass through Pakistan. The Anglo-Afghan
Convention of 1923 and Anglo Afghan Treaty of 1929, referred to

earlier, also regulated the in-transit trade of Afghanistan. Before
Partition, the Government of undivided India had provided the
necessary foreign exchange for in-transit imports into Afghanistan.
At that time, the rupees required for payment against these imports
were largely acquired by the Afghan parties through sale of hides and
skins and wool to the Indian merchants, who then used to ship them
to the United States and obtained dollars for India. Whenever
Afghanistan was short of Indian rupees for the purchase of foreign
goods from India, they sold dollars and other currencies to obtain the
Indian rupees.
It was, thus, presumed that against export of foreign goods to

Afghanistan, which initially were paid for in foreign currency by
India, she received at least an equivalent amount in foreign currency
either by export of Afghan products or by surrender of dollars from
Afghan resources. After Partition, this pattern of financing in-transit
imports to Afghanistan was restricted to imports by Afghanistan
from the soft currency countries only and for goods which were on
import O.G.L. of Pakistan. In the case of imports from the dollar
area, the State Bank insisted on surrender of dollars from Afghan
sources. After withdrawing the facility completely in June, 1950 it
was decided that in-transit imports for Afghanistan could be financed
by Pakistan intermediary, provided an equivalent amount in dollars
was surrendered to an Authorised Dealer in Pakistan, from Afghan
sources,
In the early stages the control on in-transit trade was somewhat

loose and there was no certainty that the goods which were imported
into Pakistan in-transit to Afghanistan were not retained in Pakistan.
Similarly, there were reports that Pakistani products were being
exported in the disguise of in-transit exports from Afghanistan.
While retention of goods in Pakistan, imported from outside as in-
transit goods for Afghanistan, exerted an adverse pressure on the
free market rate of Pakistan rupee, the export of Pakistani products
in the disguise of Afghan goods, resulted in the loss of foreign
exchange. It, otherwise, would have accrued to the country, if the
goods were shipped from Pakistan as her produce. These were the
disquieting features of the in-transit trade of Afghanistan. The

Government was, therefore, requested to tighten up the control and
to streamline the procedure to safeguard against either of the two
eventualities mentioned earlier.
A procedure was finally evolved in May, 1948 under which in-

transit exports from Afghanistan were sealed at the border and it was
ensured that the seal remained in tact at the time of its export from
Pakistan to foreign destinations. This was a protective device against
smuggling of Pakistani products to Afghanistan for eventual export
from that country as part of its foreign trade. A similar procedure was
adopted for in-transit imports for Afghanistan ensuring that goods
which were imported in-transit for Afghanistan left Pakistan's
Customs border and were not retained in Pakistan. For this purpose,
information was exchanged between Customs check posts at the
point of entry and the point of exit. These administrative measures
helped to eradicate, to a large extent, malpractices prevailing in the
in-transit trade of Afghanistan.
2. Trade with Iran
While imports from Iran by sea were governed by the existing

import trade control regulations, imports over the land route were
exempt from such restrictions by administrative instructions, upto
June, 1954. These imports were also practically exempt from
payment of customs duty and sales tax and, at the same time,
remittances facilities were admissible to importers. These
arrangements easily lent themselves to widespread misuse of the
remittance facility. For this reason the entire work relating to
remittances against imports from Iran over the land route was kept
centralised with the State Bank. Instructions were issued to the
Authorised Dealers not to make any remittance against these imports
without the prior approval of the State Bank.
In June, 1954 new arrangements were made, barring a few, all

overland imports were also subjected to import licence. The intention
was to facilitate border trade without involving any remittance of
foreign exchange. The specified goods could be imported from Iran
without a licence and without any remittance entitlement. The rupee

proceeds acquired on the sale of these goods could be utilised for
financing export from Pakistan of goods which were on O.G.L. Since
no payment in foreign currency was envisaged it was expected that
exports to and imports from Iran would be on a self balancing basis.
These expectations were, however, belied and it was observed that
while imports from Iran under the border arrangements consisted of
items like medical herbs, fruits and vegetables, spices and carpets,
which were not of much economic significance to Pakistan, the bulk
of exports from Pakistan to Iran consisted of items like jute, jute
manufactures, hides and skins, tea and wool, which were basically
foreign exchange earners. In other words, imports of inessential
items were being paid for in foreign exchange. It was apprehended
that commodities like jute, jute manufactures, wool, hides and skins,
etc. were being re-exported from Iran to other countries, thereby
depriving Pakistan of valuable foreign exchange. These
arrangements were, therefore, periodically reviewed. Wool was
withdrawn from the free list of export in November, 1955; jute
manufactures and hides and skins in October. 1959. After the
withdrawal of these commodities from the land route trade with Iran
practically ceased.
Even these arrangements of border trade on the restricted scale

gave rise to certain exchange malpractices, which were difficult to
eliminate and were not actionable either. The State Bank, therefore,
suggested to the Government that the arrangements be withdrawn
and the trade over the land route should also be subjected to the
prevalent import and export trade control restrictions. The
Government, however, did not agree with the suggestion as it
apprehended that any further reduction of the border trade would
have proved detrimental to Pakistan's friendly relations with Iran.
3. Barter Trade
The Government entered into Barter Trade Agreements with a

number of countries in Europe in 1950's and 1960's without
consulting the State Bank at the stage of negotiations or at conclusion
of the agreements. Nevertheless, the Bank did consider it necessary
to bring to the notice of Government its views on barter trade. A

communication was addressed to the Ministry of Finance, tracing the
origin of such transactions in the context of country's foreign trade:
Barter transactions constitute an inferior method of conducting the

country's foreign trade and are resorted to only when the normal
channels for multilateral trading are impeded by international
dislocation such as the Depression of the 'Thirties' or the aftermath of
the Second World War, or mismanagement of the economy by
individuals who priced their goods out of proportion to prevailing
trends in the world market. A multilateral trading framework
maximises the benefits derived from international trade viz. the sale of
a country's exports and the purchase of its requirements on the best
possible terms. These terms encompass not only prices at which sales
take place or purchases are made, but also such matters as delivery
dates, quality preferences, shipping and credit arrangements and
assurance of stable markets over the long term. Apart from the
economic implications of bilateralism, there are certain strategic
aspects which can not be lost sight of. Where bilateral trade develops
on a large scale and becomes embedded in the country's trade and
exchange policies, unhealthy dependence on the bilateral trading
partners becomes inevitable. Where the trading partners happen to be
stronger countries, they might sell deliberately to distort our pattern of
trade by offering uneconomic prices of our products than are available
in world markets merely in order to serve their own ends, political or
economic. Therefore, barter deals are desirable only in exceptional
cases where countries insist upon bilateral arrangements and will not
deal with us on any other terms or we may agree, if long-range political
and economic conditions appear to be in our favour, e.g. an agreement
for exchange of iron-ore from Portuguese Goa for Pakistan rice.
Alternately, we may contemplate bilateral deals for introducing new
products in the export market or for the disposal of burdensome
surpluses of specific items, especially where the same are likely to
deteriorate in storage.
This communication produced the desired effect and the

Government, as a matter of policy, decided that barter deals in future
should be finalised in consultation with the Ministry of Finance and
the State Bank.
Imports
1. Conditions Prevailing After Partition
At the time of Partition the import trade of Pakistan was mostly

concentrated in the hands of a few companies, majority of whom
were of foreign origin. The import policy, as a whole, was very liberal
and nearly all goods could be freely imported and were on O.G.L.
However, import of a few items was banned and some others could be
imported only under specific import licences. There was no formality
of registration of importers. Authorised Dealers were empowered to
allow remittances against imports into Pakistan, without the prior
approval of the State Bank, but subject only to report on a prescribed
form, provided the import documents, viz. the bills of lading,
invoices and drafts were received through them. The importers in
such cases were not required even subsequently to produce
documentary evidence to the State Bank about the arrival and
clearance of goods for consumption in Pakistan. However, in cases
where import documents were received by the importers directly and
not through the Authorised Dealer, it was imperative to submit the
application for remittance of foreign exchange to the State Bank.
Such an application was to be duly supported by the exchange control
copy of the Bill of Entry, invoices and exchange control copy of the
import licence, if the import of goods was subject to import licence.
Under the procedure existing at the time of Partition and soon

after, there was no check that the goods for which remittance had
been made directly by an Authorised Dealer, were actually received
into the country for consumption. Possibility of remittances being
made through banks against faked import documents was not ruled
out. Such transactions could not come to the notice ofthe State Bank,
as there was no system of matching the remittance with the exchange
control copy of the Bill of Entry for consumption. Similarly, it was
conceivable that an importer, after effecting remittance through an
Authorised Dealer, could submit the exchange control copy of the
Bill of Entry to the State Bank and claim a second remittance against
the same import. The banks were not directed to effect remittances or
sponsor applications only in respect of those clients known to them
and who were traceable in case such a need arose. Subsequent

experience showed that remittances were realised against false
documents and in some cases double remittance was made against the
same import, but the banks were unable to trace the importers.
All authorised imports into the country, whether under 0. G .L.

or against import licences, carried an automatic remittance
entitlement. The State Bank was charged with the responsibility of
ensuring that remittances were made only in exchange for goods,
imported against valid import licence, O.G.L. or specific, and that
the goods were received and cleared for consumption in Pakistan.
Additionally, it was the duty of the State Bank to check that the
remittance conformed to the valuation of the goods as assessed by the
Customs Authorities, i.e. the imports were not over-invoiced.
2. /AlP-Procedure
To plug the loopholes in the import trade and to discharge its
obligations, the State Bank introduced with effect from September
25, 1950 the "IMP-Procedure" for remittances in exchange for
imports. Under this procedure the importers were obliged to
complete an IMP-form in quadruplicate, giving full details and
descriptions of the goods to be imported; the particulars of the
overseas suppliers; those of import licences, and their own addresses
in Pakistan. In this Form the importer had to give an undertaking to
submit to the State Bank, exchange control copy of the Bill of Entry
within two months from the date of remittance in the case of imports
from India and within four months in the case of other countries.
Authorised Dealers, who effected remittance on receipt of

import documents through them, reported the transaction to the
State Bank on the original copy of the IMP-form. This form remained
outstanding in the State Bank until receipt of the exchange control
copy of the Bill of Entry with the triplicate copy of IMP-form. The
State Bank pursued every case where these documents were not
received within the prescribed period. If the Authorised Dealer or
the importer failed to furnish any satisfactory explanation for the
non-submission of the Bill of Entry, the case was referred to the
Special Police Establishment for investigation and report. The IMP-

Procedure, thus, kept the State Bank informed of all cases where the
parties failed to submit documentary evidence to the effect that the
goods had been received and cleared for consumption in the country
covered by the remittance which was made directly through the
Authorised Dealer without the prior approval of the State Bank. This
procedure was meant to prevent double remittance against the same
import, as the Customs Authorities issued only one copy of the Bill of
Entry for exchange control purposes.
The Customs Authorities assessed the value of the goods at the

time of their entry into Pakistan. Such an assessment was indicated on
the exchange control copy of the Bill of Entry. This assisted the State
Bank to verify that the remittances effected against imports, as
reported by the Authorised Dealers, were not in excess of the value,
as assessed by the Customs Authorities. Cases of excess remittance,
representing over-invoicing of imports, which came to notice as a
result of verification of the Bill of Entry, were individually handled by
the State Bank with the importers. If considered necessary,
investigations were made even through the agency of the Special
Police.
To check over-invoicing the State Bank added to the IMP-form

a declaration to be signed by importer, mentioning the market prices
of the goods on the date of the contract. In other words, the onus was
thrown on the importer to prove that he had not over-invoiced the
goods. This measure helped reducing cases of over-invoicing.
Further steps were taken to ensure that the importers submitted their
copies of the Bill of Entry/Certified Invoices within the prescribed
period to the State Bank. The importers had to deposit a fee along
with IMP-form, refundable if the necessary requirement was
fulfilled. The fee was later withdrawn as the Bank had no legal
backing, but it had the desired effect on importers.
3. Registration of Importers
The liberal import policy, allowing majority of items to be

imported on O.G.L. by any person, led to a number of malpractices
Central Board of Directors
(Standing from left to right) J. N. Dutta, Mohammad Ali Khan, Mohammad Ismail, Kassim Dada, Mr. F.M. K. Kazi
(Sitting) Noor Mohammad Khan Malik, Vaqar Ahmed, Syed Maratib Ali Shah, Abdul Qadir (Governor), Hatim A. A/vi,
Sherlang Khan (Deputy Governor), Mr. Wahiduz-Zaman
Dacca Office housed in a school building
including imports of spurious items of no value. The importers

disappeared and were not traceable even by Authorised Dealers
through whom remittances were made.
With a view to eliminating such bogus importers, the Bank

suggested to the Government that all imports into Pakistan, in the
private sector should be channelized through registered importers.
This suggestion was accepted and the Registration of (Importers and
Exporters) Order was promulgated in 1952. According to this Order,
no person could enter into import business, unless he was duly
registered with the Chief Controller of Imports and Exports.
Instructions were also issued to the registration authorities to verify
the bonafides of the applicants before issuing them any registration
certificate. These authorities were advised to lay greater emphasis on
the financial standing of the applicants and their financial stake in the
country.
The Authorised Dealers were also directed not to effect any

remittance or sponsor application to the State Bank, unless they had
satisfied themselves thoroughly about the bonafides of the
applicants. Moreover, the Authorised Dealers would be able to trace
the applicants, should the need arises. These measures proved
effective in eliminating the mushroom growth of importers from the
scene.
4. Streamlining of Import Policy
Liberal O.G.L. facilities had been mainly responsible for the

decline of the country's foreign exchange reserves in the year 1952
and for giving rise to various malpractices in connection with imports.
Even the import licences were being issued very liberally for all sorts
of commodities without establishing any priorities. There was an all
round demand for adopting a more restrictive import policy. Pending
decision on the overall issue of import policy, it was decided by the
Government in June, 1952 to curtail imports by imposing financial
restrictions. As a result, all imports, whether under O.G.L. or
against specific import licences, were subject to compulsory opening
of Letters of Credit. Authroised Dealers were simultaneously
advised not to open Letters of Credit, unless importers deposited a

margin of 75 per cent in the case of imports under O.G.L. and of 50
per cent for imports under specific licence. In March, 1953 the
requirements of compulsory Letter of Credit and marginal deposits
were withdrawn. Subsequently, with change in import policy the rate
of marginal deposits was also altered from time to time.
Some of the import licences were issued on ordinary paper. As

these licences were easy to tamper with, which could cause serious
loss of foreign exchange, the Government was pressed to issue all
import licences on security paper to safeguard against possibilities of
forgery. Pending implementation of this suggestion, the State Bank
offices were instructed to seek reverification from licence issuing
authorities, of licences which were not printed on security paper. This
measure was taken to prevent the possibility of approving any
remittance against a forged licence. To protect against utilization of
forged or stolen import licences, it was arranged that the licence
issuing authorities would forward to the regional offices of the State
Bank a complete list of all the import licences issued by them.
Whenever any remittance was reported by the Authorised

Dealer or approved by the State Bank against any import licence, a
reference was required to be made to the list received from the
licence issuing authorities to determine the genuineness of the
licence. The procedure for payment of commission to indenting
agents was streamlined to ensure that it was paid to genuine persons
in an appropriate manner. This helped in curbing the activities of
importers in retaining their commission abroad.
The export-import trade of Pakistan was, in the beginning,

concentrated in a few hands and majority of them were foreign
companies. They had to pay substantial bank charges, if they
received proceeds against their individual exports and remitted
against their individual imports. On the request of these companies,
therefore, they were allowed to avail of Round Sum Remittance
Facility Scheme. Under this Scheme, foreign companies were
permitted to retain the export proceeds abroad and to utilise the same
for financing imports into Pakistan. Only the balance in excess of the
prescribed limit could be repatriated to Pakistan. In case there was a

remittable balance, the foreign companies could similarly make
round sum remittances at periodic intervals instead of making
remittances against each individual transaction. They could, thus,
avoid bank charges on frequent remittances to and from Pakistan on
account of individual exports and imports. This facility was availed of
mainly by branch offices of foreign firms in Pakistan and provided
them a trading advantage over the Pakistani firms who were
struggling to establish themselves. This Scheme was, therefore,
withdrawn gradually from the year 1955 and foreign firms were
placed on the same footing as the Pakistani firms.
For some years after 1947, overseas firms used to sell the goods
in Pakistan and remit the sale proceeds, after deducting therefrom
their commission and other out of pocket expenses like Customs
duty, clearing charges, storage charges, etc. Thus, under this
arrangement, remittance was being made not only of the C. I .F. value
of the goods, but also of profits. Considering this as an undesirable
practice the facilities for imports on consignment account were
cancelled, the importers in Pakistan were allowed to import the
goods on their account and to remit to the overseas suppliers only the
C.I.F. and C. &F. orF.O.B. valueofthegoods.
Until1957, imports into Pakistan could be on C.I.F. basis. As a

result of this facility, these were insured by the overseas suppliers
with non-resident insurance companies and the remittances in
exchange for such imports were inclusive of the insurance premia.
Beside the loss of foreign exchange, the insurance companies
operating in Pakistan had hardly any share of the import insurance
business. It was, therefore, decided in 1957 that all imports into
Pakistan should be on C. & F. and not C.I.F. basis and, thus, be
insured with insurance companies operating in Pakistan.
5. Aid Imports
Assistance to Pakistan under the U.S. Mutual Security Pact of

1954, commenced under a bilateral agreement, signed on January 11,
1955. Payment for goods imported under this Agreement was to be
made in Pakistan rupees, which were deposited in a Special Account

of the Pakistan Government, maintained with the State Bank. This
accumulation was utilised by mutual consent of the Governments of
Pakistan and the U.S.A. for furtherance of the purpose of the
bilateral agreement. Aid imports were made under Surplus
Agricultural Commodities (Public Law 480 Title I and II). These
were also paid for in Pakistan rupees, which were credited to special
account, maintained with the State Bank for the purpose.
As soon as the size and aid allocation was known, a list of the
essential commodities needed in the country and which could be
acceptable for the U.S. financing was drawn up by the Government
of Pakistan. Once a Procurement Authorisation was issued by AID,
Washington, the Government had to allocate the amount of the
Procurement Authorisation amongst various designated banks in
Pakistan and the U.S. The procedure for AID imports was also
streamlined by the State Bank for the convenience of banks and
importers and, at the same time, it was ensured that AID business
was allocated to Pakistani banks as fixed by it.
6. Import of Capital Goods and Machinery

under Deferred Payment Arrangements
To meet the needs of the country for capital goods for stepping
up industrial and economic development and in view of the difficult
foreign exchange position, the Government negotiated agreements
with the Governments of Japan, U.K. and other countries in 1953 for
import of capital machinery on deferred payment basis. Under these
arrangements, payment was staggered usually over a period of 3 to 5
years. The State Bank made provision for forward exchange facility
for extended period for imports under such arrangements and
streamlined the procedure.
7. Arrangements with India
(a) Import of Perishables
Prior to the year 1952, import of perishables from India was on

O.G.L. and remittances in payment thereof could be made by the
Authorised Dealers without prior approval of the State Bank, in

cases where import documents were received through them. In early
1952, information reached the State Bank that such imports were
being heavily over-invoiced and causing serious drain on the
country's foreign exchange resources. To put a check to the
malpractice, the Government, at the State Bank's instance, issued
instructions on March 15, 1952 to Customs Authorities to carefully
verify the prices of all imports from India including perishable goods.
After finalization of these arrangements the State Bank in May, 1952
withdrew the powers delegated to the Authorised Dealers for
allowing remittances in payment of import of perishables from India.
They were advised to forward all such applications to the Exchange
Control Department along with the exchange control copies of Bills
of Entry. Authorised Dealers were also directed not to open Letters
of Credit for the import of perishables.
These measures worked as an effective check on over-invoicing

of import of perishable goods from India. In August, 1952 the import
of perishable goods from India was also removed from 0. G .L.
(b) Limited Payment Agreement
The Governments of Pakistan and India entered into Limited

Payment Agreement for barter trade in specified commodities for
one year with effect from December 3, 1959. Commodities offered
for export by Pakistan under the Agreement did not command
favourable market under the normal pattern of trade. This
Agreement provided for special payment arrangements, under which
all payments in respect of sale and purchase of specified commodities
upto a fixed limit were to be made by Pakistan and India in non-
convertible Indian rupees. The National Bank of Pakistan, Local
Principal Office, Karachi were to maintain a special non-convertible
Indian Rupees Account with the State Bank of India, New Delhi for
the purpose.
On March 21, 1960 another Trade Agreement was signed

between the two Governments for two years providing for barter
trade in specified commodities upto certain limits. The payment
arrangements were similar to those made in the first Agreement, with

an additional clause that non-convertible Indian Rupees Account of
the National Bank of Pakistan with the State Bank of India, New
Delhi should be self balancing with a swing limit of Rs.5 million on
either side. When the outstanding amount in the said account
exceeded the swing limit, the country running an import surplus
could suspend its imports temporarily, while the country incurring an
import deficit would take steps to expedite imports so that the
imbalance was rectified.
Exports
The State Bank continued to operate the same procedure for

exports, as inherited from te Reserve Bank of India, at time the latter
was respdnsible for managing exchange control on behalf of
Government of Pakistan after independence. It was previously
agreed between the Governments of India and Pakistan that each
country would retain separately its own foreign exchange earnings
and its expenditure would be debited against its own earnings with
effect from January 1, 1948. In order to maintain separate accounts of
Pakistan, the Reserve Bank of India prescribed separate forms for
declaring goods exported by sea and air from Pakistan to all countries
except India, Afghanistan, Nepal and Tibet. With effect from
February, 1951 exchange control was introduced on all transactions
between Pakistan and India and all exports from Pakistan were
brought within the pale of controls. However, payments for exports
to India were settled, in the first instance, in Indian rupees under the
Trade And Payments Agreement between Pakistan and India and
ultimately by the central banks of the two countries in Sterling.
After the introduction of exchange control with India, when

export of jute was resumed, it was discovered that large scale capital
transfer was going on from East Pakistan to India and some
unscrupulous elements were not repatriating their export proceeds.
In order to check non-repatriation of proceeds, the State Bank, in
consultation with the Government, made the export of jute subject to
the Letter of Credit procedure.
1. Export Price Check
To ensure that the goods were exported at prices not less than
the prices obtaining in the international market, 'Export Price Check'
(E.P.C.) was introduced in December, 1950 in connection with the
export of raw cotton. A large scale under-invoicing was apprehended
when the prices of raw cotton shot up during the Korean Boom in
1950-51 and the export of raw cotton suddenly picked up. The State
Bank, therefore, issued instructions in December, 1951 that all
exporters of raw cotton should file with the Bank, certified copies of
the original contracts entered into with foreign buyers. The Bank,
after verification that the contract price was in alignment with the
market price, ruling on the date of contract, approved the EPC-form.
Authorised Dealers at the time of negotiation of bills were required
to satisfy that the prices mentioned in the invoice were in conformity
with the approved EPC-form. This procedure was extended to jute
and other items of exports as well.
2. Export Promotion
(a) Export Incentive Scheme
In order to exploit the foreign exchange earning potential of

primary and manufactured goods, which were either not moving or
were being exported in negligible quantities, the Government
announced in June, 1954 the "Export Incentive Scheme". It was
based on the assumption that scarcity of imported goods in the
economy should be exploited for export promotion. Under the
Scheme, exporters of specified primary commodities as well as
articles of Pakistan manufacture were allowed to receive import
entitlement vouchers upto 30 per cent of the value of exports made by
them. These vouchers were exchangeable on application to the Chief
Controller of Imports and Exports for import licences of equal value
for any of the items specified under the Scheme.
The commodities and goods which could be imported by the

holders of the import entitlement vouchers were such as second hand
clothing 7 art silk fabric, cotton piece goods, fents, biri leaves, etc. and
were in short supply in 1954 in the country. The profits made on sale
of these imported goods enabled the exporters to export the primary
commodities and articles of Pakistan manufacture at international
competitive prices, even in cases where the cost of production of such
goods was in excess of the international prices.
The State Bank played an important role in the operation of the

Scheme, as the responsibility for issue of import entitlement vouchers
rested with it. The Bank issued vouchers upto the extent of 30 per
cent of the total value of the net exchange received, certified by the
Authorised Dealers on the relative export forms. These vouchers
were printed in the denomination of Rs.lOOO and Rs.5000 and were
issued by the Exchange Control Department through its branches
located at Karachi, Dacca, Lahore, Quetta, Chittagong and Khulna.
The import entitlement vouchers were not transferable. The

Government, however, exempted importers having obtained import
licence under the Scheme from registration under the Registration of
Importers and Exporters Order, 1952. In December, 1954 the Export
Incentive Scheme was extended upto September 30, 1955 covering
more items for export.
(b) Export Promotion Scheme
In October, 1955 the Government announced another scheme,

known as "Export Promotion Scheme". While the basic idea of this
Scheme was the same as of the Export Incentive Scheme, namely the
exploitation of scarcity of imported goods in the economy for export
promotion, it divided the various exportable commodities in two
groups for the purpose of grant of import entitlement vouchers at the
rate of 15 per cent and 25 per cent, instead of a uniform rate of 30 per
cent provided in the previous Scheme. In the first group 67 primary
commodities viz. cotton, rice and jute were included. Exporters of
commodites in this group were entitled to receive import entitlement
vouchers upto 15 per cent of the foreign exchange earned by their
export. The second group covered 53 articles of Pakistan
manufacture including carpets, sports goods, surgical instruments
and cutlery. Exporters of commodities in this group were eligible for
import entitlement vouchers upto 25 per cent of the foreign exchange

earned. The reason for fixing different percentages for grant of
import entitlement vouchers was to provide incentive to the extent,
necessary for the movement of various types of commodities. Since
primary commodities like castor seeds could be more easily sold in
foreign market and at prices not much different from its cost of
production as compared to the effort required for selling Pakistani
manufactured goods abroad, the Government considered it
necessary to provide greater incentive for export of goods covered by
the second category.
Like import entitlement vouchers issued under the Export

Incentive Scheme, import entitlement vouchers under the Export
Promotion Scheme were issued by the branches of the State Bank,
after thoroughly examining the net receipt of foreign exchange as
certified by the Authorised Dealers on the relative export forms. To
distinguish such vouchers from vouchers issued under the Export
Incentive Scheme, different types of import entitlement vouchers of
various denominations were printed. The Scheme which covered
quite a large number of primary commodities and manufactured
goods, not only opened avenues for new entrants in the export
business, but also enabled those who were not holding categories for
receiving regular import licences to obtain import licences by
exporting commodities under the Scheme. In October, 1956 the
Government made some important changes in the Scheme to
increase its usefulness. While this Scheme provided an incentive for
export of the commodities which were either not moving at all, or, if
moving, their volume was insignificant, its impact on the overall
foreign exchange earnings of the country was not perceptible. The
reason could be seen in the fact that the total earnings from
commodities included in the Scheme constituted a small percentage
of the total earnings from the country's traditional and non-
traditional exports. Due to worsening of terms of trade and fall in
value of Pakistan's exports, her earnings of foreign exchange from
exports dwindled.
(c) Export Bonus Scheme
At the time of imposition of Martial Law in October, 1958 the
country's export trade had reached its lowest ebb. The foreign
exchange reserves held by the State Bank had touched the low level
of Rs.422.1 million as on October 7, 1958. The country had drawn
heavily on her foreign exchange reserves for meeting the continuous
deficits in her balance of payments. The level of the reserves was
seriously impairing its credit rating in the financial centres of the
world. In order to give the maximum boost to the country's export
trade as well as to create an area of free import trade, the
Government introduced the "Export Bonus Scheme" in January,
1959.
Dr. Wilhelm Vocke, an eminent German economist, who had

been invited to advise the Government on the economic and financial
problems formulated proposals for an Export Bonus Scheme which
were adopted by the Government. While the previous two Schemes
viz. the Export Incentive and the Export Promotion Schemes
covered a limited number of exportable commodities, the Export
Bonus Scheme embraced nearly all commodities barring Raw Jute,
Raw Cotton, Hides and Skins, including lamb skins, but excluding
furs and reptile skins, Wool, Rice other than Basmati, Permal and
Begumi and Tea. In addition to raising the scale of bonus on import
entitlement voucher, it was also made transferable. As a result, these
vouchers started commanding a premium in the market. The short
supply of goods which could be imported in the country either on the
restricted licensable list or were not licensable at all, helped to further
raise the rate of premium on voucher in the market. The premium
thus earned, enabled the exporters to sell their goods abroad at
competitive prices, even if their costs were higher than the prices at
which they sold abroad.
As in the case of Export Incentive Scheme and the Export

Promotion Scheme, the State Bank was responsible for issue of bonus
vouchers to exporters according to prescribed percentages of net
FOB value, earned by export of commodities, eligible for bonus. In
order to guard against forgeries of bonus vouchers these were printed
on specially water marked and sensitized paper.
The Scheme gave a fillip to the export of both primary and

manufactured goods. It also provided incentive particularly to the

export of those commodities whose exports were either stagnant or
negligible.
However, in February, 1960 the following three points were

raised by the business community against the Scheme:-
(1) Freedom for sale of bonus vouchers amounted to disposal

of earnings of foreign exchange in the black market.
(2) Bonus vouchers purchased at high premium for import of

machinery and raw materials for industries in Pakistan
would increase the cost of production of goods.
(3) Serious consequences would follow for the country, if the

Scheme was suddenly abolished, as exporters in the
absence of this help would find themselves unable to
compete in the foreign markets.
The Government referred the case to the State Bank for eliciting
its views which were communicated to the Government:
(1) Exporters had been given freedom to sell vouchers in the

free market to provide incentives and to compensate them
for exporting articles either at a very nominal profit or even
at a loss. Premium received on sale of vouchers was, in fact,
a subsidy which an exporter received to enable him to
export goods to foreign markets at competitive price. The
existence of a premium was, therefore, inherent in the
Scheme and without such a premium the support which the
exports in fact received would not have been forthcoming.
Besides, only a small portion of bonus vouchers was
actually sold. The major portion was utilised by the original
exporters for importing their own requirements. In such
cases the exporters did not earn any premium. The bonus
vouchers only helped them to expand production by
importing machinery and raw materials. In short, the
disposal of the vouchers in the free market was not a black
market transaction. In fact, the question of black market of

foreign exchange did not arise because once the sale of
bonus vouchers was made permissible, this was a legitimate
and not a black market activity.
(2) The reason why certain industries buy bonus vouchers for
obtaining their import requirements, was prima facie
evidence of the fact that they expected to sell their goods to
the consumers at prices that will cover the premium paid.
In the absence of the facility provided by the Bonus
Scheme the industry would not have been able to obtain
the import at any price, i.e. the cost of foreign exchange to
such an industry would have been infinite. Further, major
portion of the vouchers was utilised by the original
exporters for importing raw material and machinery for
their own requirements. In this case the question of
inclusion of premium in the cost of production did not
arise. However, it was possible in case of industries which
produce luxury goods, import raw material against bonus
vouchers purchased by them at a premium. Industries
engaged in producing essential goods were provided
licences for raw material on a very liberal scale. The cost of
production of luxury goods affected a particular class of
consumers and in any case did not influence the prices of
goods in use by the common man.
(3) There was little doubt that abandonment of the Bonus

Scheme might hinder the export of some of the minor
products. However, if the withdrawal of the Scheme
followed upon an improvement in the price/cost situation
in the country, the export items may well remain
competitive. In any case, the foothold which they had been
able to gain as a result of the incentive provided by the
Bonus Scheme would continue to be exploited even after
the Scheme had been withdrawn. Moreover, the ultimate
object of the Scheme was to increase production. This
would, in the long run, bring down prices in general and
improve the ability of Pakistani exporters to maintain their
exports with decreasing reliance on the assistance provided

by the Bonus Scheme.
3. Export Earnings
Measures taken by the Government with the coordination and

assistance of the State Bank, as described in the preceding
paragraphs, to promote exports from Pakistan had, as a whole, a
positive effect. The following table shows the trend in exports (f.o. b.)
since 1948:-
EXPORTS F.O.B.
July-June Rs. in million
1948-49 804.6
1949-50 869.6
1950-51 2271.7
1951-52 2137.2
1952-53 1297.5
1953-54 1268.1
1954-55 1180.3
1955-56 1812.3
1956-57 1621.4
1957-58 1425.3
1958-59 1440.5
1959-60 1759.4
(Source: State Bank of Pakistan: Pakistan's Balance of Payments July 1948---June 1959 and
July 1959-June 1960).
It is obvious from the above table that the declining trend in

exports, which began in 1951-52, continued unarrested till1954-55.
Export receipts fell sharply from Rs.2271.7 million in 1950-51 to
Rs.1180.3 million in 1954-55. Under the impact of devaluation of
Pakistan rupee in July, 1955 the exports revived to Rs.1812.3 million
during the next financial year. A downward trend was again
noticeable after 1956-57 which continued till 1957-58. The
introduction of the Export Bonus Scheme in January, 1959 pushed up

the exports from Rs.1425.3 million in 1957-58 to Rs.1759.4 million in
1959-60. As a whole, export receipts realised in the year 1950-51 on
account of the Korean Boom remained the highest during the period
under reference and this level was never reached again.
Holdings of Foreign Exchange
1. Declaration and Surrender of Illegal

Holdings of Foreign Exchange- Martial Law Regulation No.45
In terms of Section 9 of the Foreign Exchange Regulation Act,
1947 and the notification issued thereunder, citizens of Pakistan and
other nationals of other countries residing continuously for six
months or more in Pakistan, who became the owner of any foreign
exchange, whether held in Pakistan or abroad, were obliged to offer
such foreign exchange for sale to an Authorised Dealer within one
month of ownership of these assets. In fact, however, substantial
amounts of foreign exchange holdings acquired by illegal transactions
before the promulgation of the Martial Law, remained concealed
from the Exchange Control Authorities. After the imposition of
Martial Law representations were made to the Government for
giving an opportunity to persons in possession of illegal foreign
exchange holdings to surrender these to the State Bank or to other
banks, authorised to deal in foreign exchange. Consequently, the
President and Chief Martial Law Administrator promulgated Martial
Law Foreign Exchange (Surrender and Declaration) Regulation,
1958 on November 3, 1958. The Regulation provided that:
(a) Any person resident in Pakistan who held any foreign
exchange abroad and who had reasons to believe that such
holding was not lawful, must surrender it to an Authorised
Dealer or declare it to the State Bank before the first of
December, 1958. This date was subsequently extended to
January 15, 1959 on public request.
(b) Persons who were outside Pakistan on the date of

promulgation, must surrender or declare their holdings
within 30 days from the date of their entry into Pakistan.
(c) Any person wishing to surrender his holdings in

accordance with this Regulation was entitled to a
certificate from the Authorised Dealer concerned as to the
amount surrendered.
(d) No action of any kind, whatsoever, should be taken against

a person in respect of holdings so surrendered or declared
and no tax of any kind should be levied on the amount
surrendered or declared.
(e) Any person who was found to be holding any foreign

exchange in contravention of the law and who had not
surrendered or declared it in accordance with this
Regulation, was liable to punishment with rigorous
imprisonment extending upto 7 years and with confiscation
of whole or part of his property in Pakistan. Similar penalty
was also prescribed for those who declared the foreign
exchange to the State Bank under this Regulation but did
not surrender it when called upon to do so by the Bank.
In pursuance of this Regulation instructions were issued to the

Authorised Dealers to report to the State Bank the foreign exchange
surrendered to them. The offices of the State Bank which had
received a large number of declarations of holdings of cash balances,
shares and securities etc., were advised to take action on these
declarations by issuing directives to the declarants to surrender their
cash holdings as also to make arrangements for repatriation of
dividends, interest etc. on investments abroad. The total amount
surrendered within the amnesty period, i.e. upto January 15, 1959
amounted to Rs.40.6 million. A further sum of Rs.32.88 million was
declared to the State Bank, excluding the declaration relating to
shares, securities and other assets to the tune of Rs.60 million.
2. Liquid Assets of Non-Residents in Pakistan
Immediately after the promulgation of Martial Law Regulation

No.45 it was brought to the notice of the State Bank and the Central
272 HISTORY OF THE STA1E BANK OF PAKISTAN
Board of Revenues that persons who were non-resident in Pakistan

under Foreign Exchange Regulation Act and the Income Tax Act,
maintained liquid assets in Pakistan. These were held in safe deposit
lockers, with friends and relatives or in bank accounts in their own
names with local address or in the names other than their own. It was
represented on behalf of these holders that a considerable portion of
these assets was in fact capital brought from abroad and did not
represent income earned in Pakistan. The declarants were instructed
to just deposit such funds in a bank in any name with local address.
The State Bank then forwarded the details to the Income Tax
Authorities to determine any tax liability on these funds. On the basis
of income tax clearance certificates obtained by individuals, the State
Bank declared these as resident-funds which could be utilised freely
within the country, i.e. for investment in securities in Pakistan.
However, it was stipulated that no part of the capital or income
accruing thereon would qualify for transfer outside Pakistan. As a
result of this arrangement, substantial amount of hidden capital, held
by non-residents, was officially employed in the country.
3. Examination of Declaration
The total number of declarations received in terms of Martial

Law Regulation No.45 numbered 2801 regarding cash balances, held
in banks or with private parties in foreign countries and 2077 in
respect of foreign shares and securities etc. These declarations were
received by offices of the State Bank at Karachi, Dacca and Lahore.
In 1959, the Bank decided to centralise the work relating to the issue
of notices and directives to the declarants and maintenance of
relevant statistics at Karachi. A special section was established within
the Exchange Control Department to examine each and every
declaration, to issue directives to the declarants for repatriation of
the funds and to scrutinize evidence in the shape of bank certificates.
With regard to the shares and other investments held abroad, the
holders were instructed to lodge the shares with Authorised Dealers
with a mandate to collect dividends. The task was by no means easy
as in most cases the Bank had to enter into lengthy correspondence
with the declarants. This was, however, completed after sustained
efforts extending over a period of 3 years. All balances in U.K. and
Pakistan laying the
President of Islamic Republic of
Major General Iskander Mirza, Building at Dacca
foundation stone of State Ban k
Face
Rs.S. Pakistan started printing of its own notes at Pakistan Security Printing
Corporation in 1953.
Back
Continental countries, U.S.A. and generally in those countries,

whose Exchange Control Regulations did not restrict transfer of
funds to other countries including Pakistan, were entirely repatriated
except in a very few cases, where the declared amounts were proved
to be disputed claims.
4. Martial Law Regulation No.58
Apart from the promulgation of Martial Law Regulation No. 45,

which dealt with foreign exchange held abroad, a further
regulation-Martial Law Regulation No.58-was proclaimed which
prohibited any person from taking or attempting to take Pakistani
currency out of Pakistan without a permit. This Regulation also
prohibited conversion of Pakistani currency into a foreign currency
or foreign assistance, direct or indirect, in the transfer of money,
shares and securities etc. from Pakistan to any foreign country.
5. Imports Against Foreign Assets
The directives issued by the State Bank for repatriation of the

balances declared, applied only to the cases, where liquid assets were
held in countries from where they could be repatriated without
difficulty. In regard to the capital assets such as investments in shares
and securities, the arrangement was to call upon the declarants to
repatriate their income through normal banking channels. For
inducing such persons to transfer their capital holdings, a special
facility was offered by the Government. It was announced that
holders of assets which were duly declared to the State Bank under
the Martial Law Regulation, would be allowed to import into
Pakistan industrial machinery, motor vehicles for personal use, taxis,
trucks and bus chassis for commercial purposes. Applications
received in pursuance of this announcement were examined by the
State Bank to ascertain that the funds proposed to be utilised did not
represent liquid assets and that the assets in question were declared
in terms of the relevant Martial Law Regulation.
As already indicated, an amount of Rs.40.6 million at the

prevalent exchange rate was surrendered during the amnesty period.
Of the total, liquid assets declared were equivalent to Rs.32.88

million as on January 15, 1959. Nearly 50 per cent of the liquid assets
had been realised by the Bank by the end of 1960. A sum ofRs.12.27
million was allowed to be retained mostly in countries like India,
Burma and Ceylon, whose exchange control did not permit capital
transfers. Declarants were also allowed to retain small amounts in the
U.K. and U.S.A. to the extent permissible under the law. With
regard to declarations concerning non-liquid assets, it was ensured
that the dividends on foreign shares and securities were regularly
repatriated by the holders and evidence to that effect produced to the
State Bank.
Regulation and Control of Foreign

Exchange Expenditure
In December, 1958 the Government of Pakistan took up for

serious consideration the question of eliminating the wide disparities,
prevalent in the foreign exchange earnings and expenditure of the
country. As a first step in this direction it was considered necessary to
determine the overall outstanding liabilities in foreign exchange as on
December 31, 1958. The State Bank was approached to work out the
outstanding commitments on the basis of information furnished by
the Authorised Dealers concerning payments due on imports, made
prior to that date as also the Letters of Credit opened for further
imports. This exercise was to serve as the basis to revise the
procedure for budgeting of foreign exchange expenditure, so that it
could be brought in conformity with the overall resources of the
country. Dr. Vocke proposed, inter-alia, a scheme of Foreign
Exchange Accounts to be maintained by the State Bank. These
Accounts were to be fed continuously out of the foreign exchange
earning~ of the country in predetermined proportions with a view to
utilising the accumulated balance in each account for a specific
purpose.
According to this proposal 10 per cent of the overall earnings

from exports as well as on invisible account were to be directly
transferred to the general reserves, with the stipulation that the
amount so transferred to the reserves could not be made available for
meeting any expenditure at all. Of the remaining 90 per cent, an

amount equivalent to 20 per cent or 40 per cent, as the case may be,
of the proceeds resulting from exports under the Export Bonus
Scheme, was proposed to be transferred to an" account, to be called as
the "Foreign Exchange Account No.1", to be subsequently utilised
for issue of bonus licences under the scheme, prepared by Dr. Vocke.
The remaining amount was proposed to be appropriated towards
Foreign Exchange Accounts No.2 and 3 in the ratio of 30 to 40. The
balance in Account No.2 was to be made available for imports and
other expenditure of the public sector and that of Account No.3 for
the overall expenditure of the private sector.
Dr. Vocke's Scheme followed mainly the objective that

adequate provision was made not only for steady increase in the
country's general reserves but also for expenditure in the various
sectors, before this expenditure was actually budgeted. In other
words, the suggestion was to establish a system which precluded any
advance commitments unless availability of resources was first
secured.
The Scheme was examined by th~ State Bank in consultation

with the Government of Pakistan, but it was found that its
implementation would create serious practical difficulties. Dr.
Vocke's contention that payments or commitments would be possible
only, if balances were available in the respective foreign exchange
accounts, was likely to create chaotic conditions in the import trade
of the country. For example, for the smooth functioning of the
economy, imports of items like drugs and medicines, motor spares
and petroleum etc. could not be left to the vagaries of the accrual of
foreign exchange. The rate of foreign exchange earnings during the
slack season, occurring generally during the months of July to
October, was extremely low and there would be limited prospects of
building up sufficient balances in the proposed accounts in this
period. The smaller holdings in these accounts would, therefore,
permit only spasmodic import licensing, causing the flow of imports
to become jerky and unsettled. A large part of the industrial
production in the country depended on regular imports of raw
material fuel and spares. If payments were restricted to the
availability of receipts in the relevant account, the entire economy

might be convulsed by periods of shortage, leading to decline in
production, stalled transportation and unemployment. It was,
therefore, concluded by the State Bank that the Scheme of Foreign
Exchange Accounts, proposed by Dr. Vocke, could not be
introduced without exposing the country's economy to serious risks.
In addition to the rejection of the Scheme under reference, the

State Bank also advised the Government that the objectives of the
Scheme could be achieved without exposing the country to such a
primitive device. The State Bank suggested that instead of waiting for
realisation of foreign exchange receipts, as proposed by Dr. Vocke's
Scheme, the Government should budget for the expenditure and
decide the allocations for various sectors well ahead of the budget
period. While preparing the budget and fixing allocations for various
agencies, the Government should estimate, with precision, the
foreign exchange receipts likely to accrue in the budget period, on the
basis of current trends of export earnings as well as the actual receipts
of similar periods of the preceding years. In this context the Bank
further recommended that the Government should not altogether
exclude accumulations in the general reserves, which could be drawn
upon in case of need. The scheme drawn up by the State Bank was
accepted by the Government of Pakistan and the Ministry of Finance
announced it in March, 1959.
Under this Scheme, known as the "Scheme Relating to

Regulation and Control of Foreign Exchange Expenditure on
Imports and other Payments" the State Bank was responsible for
maintaining an account of the foreign exchange allocation of each
spending agency of the Government: the semi-Government
institutions and the private sector. The commitments entered into by
the agency concerned were to be recorded, primarily with a view to
ensuring that no commitments were made by any individual agency in
excess of the quantum of foreign exchange allocated to it. Moreover,
the Bank had to record in the individual accounts the payments made
against the commitments of each agency so that the amount of
undischarged commitments could be ascertained on a given date.
Consequently, as many as 35 different running accounts of foreign
exchange commitments and payments were opened by the State

Bank.
Since the intention was to ascertain whether or not each

individual commitment was discharged during its period of validity, a
rather exhaustive system of code numbers had to be introduced, in
order to match the payments made against individual commitments.
In practice, the adopted procedure provided that all foreign exchange
commitments would be registered by the Bank by giving a distinct
code number, indicating the agency making the commitment and the
month and year in which the commitment was made. Letters of
Credit opened through the State Bank of Pakistan by the spending
agencies of the Government were individually registered by the
offices of the State Bank at Karachi, Lahore, Chittagong and Dacca.
This arrangement took care of the direct purchases of the
Government Departments for which payments were made through
normal banking channels.
As regards indirect purchases of the Government, i.e. purchases

made through local intermediaries or indenting houses for and on
behalf of the Government, it was envisaged that the Government
should issue import licences to these intermediaries, registered with
the State Bank, before opening Letters of Credit or entering into
import contracts. A similar procedure was also contrived for semi-
Government institutions, which normally purchased by obtaining
import licences against the allocated ceilings placed at their disposal.
A time limit of 45 days was prescribed for registration of all licences
and each such registration was valid for a period of 6 months. This
condition served the purpose that if any commitment was not finally
discharged within 6 calendar months, following the date of its
registration, no payment could be made unless the registration was
revalidated by the State Bank. In the private sector the importers
were informed by means of a notice that they should have their
import licences, both special licences as well as licences issued under
the Export Bonus Scheme, registered with the Bank within a period
of 45 days.
Apart from the above arrangements for registration, provision

was also made for bringing payments made on behalf of the

Government by the embassies in London and Washington within the
purview of the Scheme. A special return was prescribed for these two
Missions, wherein they had to report all payments made on behalf of
the different spending agencies of the Government. The
commitments registered at the offices of the State Bank as well as the
payments made by Pakistani Missions in London and Washington
were reported to a Central Exchange Accounts Unit, set up at the
Central Directorate of the Bank. This Unit maintained the final
accounts of the commitments and payments of various purchasing
agencies. The arrangements enabled the Bank to record
commitments arising from imports only.
Since the allocations sanctioned by the Exchange Control

Committee also covered payments for invisibles, it was necessary that
all releases made to spending agencies of the Government for
purposes, other than imports, should also be reflected in the accounts
maintained by the Bank. The offices of the State Bank at all the
centres were, therefore, given instructions to report to the Central
Exchange Accounts Unit all releases of foreign exchange agency-
wise. This put the Bank in a position to ensure that releases did not
exceed the allocations made to agencies for their invisible payments.
The Audit Offices of the Government, which authorise expenditure
in foreign exchange on account of leave salary and travelling
expenses of officers proceeding abroad, were also directed to report
all such sanctions to the State Bank.
The new Scheme was circulated to the Authorised Dealers in

foreign exchange with a clear directive, specifying the part they had
to play in its implementation. The most important function assigned
to them was to correctly report each payment by quoting the
registration number of the relative commitment to the State Bank so
that the Central Exchange Accounts Unit could set off payments
against individual commitments.
Shortly after the introduction of the Scheme, a number of

difficulties were encountered. For instance, it was found that the
requirements regarding the registration of import licences and the
reporting of individual payments thereagainst could not be applied to

imports by oil companies. These companies had been enjoying a
facility to submit a monthly account of their total imports of oil and
allied products and after satisfying the Bank in respect of their foreign
exchange entitlement, made round sum remittances out of the
accumulated entitlement. These bulk remittances made by the oil
companies could not be related to individual import licences, i.e. to
particular registration numbers and, therefore, they were granted
exemption from registration.
A slightly different arrangement was, however, devised to bring

the commitments and payments of the oil companies within the
purview of the Scheme. The companies were directed to split up their
monthly statements into two parts; the first part related to physical
imports made into the country and the second dealt with payments
for invisibles. The commitments relating to their imports were
recorded on the basis of figures of licences, furnished by the Chief
Controller of Imports and Exports directly to the State Bank. In case
of recording of payments the information was supplied by the
Authorised Dealers, quoting special code number which was to be
used in the case of all releases allowed for the import of petroleum,
oil and lubricants.
A further observation made in this context was that the

commitments registered on behalf of certain Government
Departments were too low as compared to their respective
allocations. In an enquiry undertaken to find out the reasons for this
disparity, it transpired that the Licensing Department of the
Government took as much as 2 to 4 months to issue import licences
against contracts made by the Department. In other words, although
a commitment had already been made, it was not reflected in the
Bank's account for the simple reason that the relevant licence had not
been issued, and consequently, was not registered with the State
Bank. An off-shoot of this problem cropped up while this enquiry was
under way, that some of the licences which were registered by the
Bank on behalf of the Government agencies, pertained to
commitments made in the preceding periods. These were not actually
related to the allocations of the shipping period during which they

were issued and registered.
This situation was remedied by revtsmg the method of

registration of commitments of Government imports. Moreover, it
was laid down that instead of waiting for the registration of the import
licences, the commitments should be registered as soon as the
purchase contracts were finalised by the Department concerned.
Under this arrangement the purchase orders themselves were
required to be presented to the State Bank for registration and the
numbers given on these documents were then copied by the Licensing
Department on the import licence. Additionally, in order to
minimise mistakes in copying the registration numbers, it was
provided that the Authorised Dealers, before opening the Letters of
Credit on these licences, must have the registration numbers verified
from the State Bank of Pakistan.
It has been stated earlier that the registrations done by the State
Bank were valid for a period of 6 months during which the payment
was expected to be made. The intention behind this condition was to
write off such commitments which were not liquidated within that
period. In practice, this period was found to be too short, since a large
number of import licences for industrial raw materials or capital
goods required Letters of Credit valid for as long as 12 months. With
the validity of the registration restricted to 6 months, it was not
possible for the Authorised Dealers to open Letters of Credit valid
for more than six months. The limit was later raised to twelve months.
In December, 1959 i.e. hardly after eight months following the

introduction of the Scheme, the Ministry of Commerce, under a
directive from the Presidential Cabinet, decided to reorganise their
licensing procedure in order to eliminate delays in licensing. The
revised procedure, drafted in consultation with the State Bank, made
a fundamental departure from the old procedure. Instead of the
licences being written out and prepared by the office of the Controller
of Imports and Exports, the importer himself was invited to work out
his entitlement on the basis of his category for different items and, in
accordance with the percentages announced by the Licensing Board
for a particular shipping period, to fill in the licence form himself.

After writing out the licence, the importer was obliged to submit his
application through his banker to the Licensing Office. The
concerned banker was expected to check entries made in the form
and attest the signatures of the importer. The Import Control
Department had only to scrutinise these forms and, if in order, put
their stamp and signature. The document so completed for which a
special form was devised, itself served the purpose of an import
licence.
An important stipulation in this Scheme was that the import

licences would be delivered to the forwarding bank after registration
by the State Bank. This necessitated that the Bank should establish
registration units within the offices of the Import Control
Departments at Karachi, Lahore and Chittagong. Consequently, the
State Bank provided necessary staff at these licensing centres all
round the year. The new set up was widely acclaimed by mercantile
community.
The State Bank's Scheme of Exchange Accounts proved quite

successful and turned out to be a very effective instrument in the
hands of the Government for the control of overall expenditure of
foreign exchange. The Central Exchange Accounts of the Exchange
Department started submitting a comprehensive monthly statement
indicating agencywise allocations, commitments, payments and
outstanding commitments to the Ministry of Finance to keep them
fully informed. This helped the Ministry to fix overall expenditure
budget for the next period and the individual allocation of spending
agencies.
Foreign Investment
1. Repatriation of Invested Capital in Pakistan
In April, 1948 the Government made a Statement of Industrial

Policy, announcing that Pakistan would welcome foreign capital
seeking investment from a purely industrial and economic
consideration without claiming any special privileges. The Statement
also explained the conditions under which foreign capital could be

invested in Pakistan. These conditions were, however, reviewed by
the Government in November, 1954 aiming at providing greater
facilities to foreign investors.
The following concessions were made:-
(a) capital investment after September 1, 1954 in projects

approved by the Government of Pakistan may be
repatriated at any time thereafter, to the extent of the
original investment to the country from which the
investment originated;
(b) any part of the profits derived from investment and

ploughed back into approved industrial projects with the
approval of the Government may be treated as
investment for the purpose of repatriation;
(c) appreciation of any capital in (a) and (b) above may also
be treated as investment for repatriation purposes;
(d) repatriation facilities would be subject to exchange

control regulations as were in force from time to time
and would not apply to:
(i) purchase of shares on the Stock Exchange unless it
is an integral part of an approved investment
project; and
(ii) capital investment in Pakistan before September 1,
1954.
Moreover, it was stated that in case any undertaking was

nationalised, just and equitable compensation would be paid to the
dispossessed owners, freely remittable to the country of residence of
the foreign owners concerned.
The Policy Statement also specified that foreign participation

would be permitted upto 60 per cent of the total investment in
approved industries. The cases of public utility concerns were to be
considered on merit and the percentage of foreign investment to be

decided separately in each case. It was, however, laid down that all
applications for investment or foreign capital in companies to be
registered in Pakistan should be made to the Controller of Capital
Issues. If foreign capital was sought to be invested in industries
outside the specified list, application for extension of repatriation
facilities was also to be submitted to the Controller of Capital Issues.
On January 7, 1955 the Government declared that repatriation
guarantee would apply to any of the 27 industries, mentioned in the
Schedule to the Development of Industries (Federal Control) Act,
1949. Furthermore, the Government would consider on merits,
applications for similar facilities to foreign investments in other
industrial concerns. Such applications were to be addressed to the
Controller of Capital Issues, if any industry, other than the 27
industries, sought repatriation guarantee.
A feeling had developed among the parties concerned that

investments in any of the 27 approved industries carried automatic
repatriation guarantee. This misunderstanding was, however,
removed by a subsequent clarification that their eligibility would be
decided in each case on merit. As such in the case of all industries
including the 27 industries, applications should be submitted to the
Controller of Capital Issues specifically for repatriation guarantee.
Only in those cases where this permission was given, the guarantee
for repatriation of capital would be available.
In February, 1959 Government made another detailed

Industrial Policy Announcement, repeating that foreign capital in
approved industries established after September, 1954 would qualify
for repatriation at any time to the extent of the original investment.
Any appreciation of capital investment, ploughed back into
approved industry, would be treated as investment for the purpose of
repatriation. The Announcement also provided that there would be
no rigidity about the participation of Pakistani capital in any industry
where foreign investment had been approved by the Government.
The Government would normally expect that the required local
expenditure would be met from local equity capital.
Repatriation facility was, thus, available to investments made

after September, 1954 in approved projects. This facility did not
include the capital invested in the pre-September, 1954 period, as
also the investments made in unapproved projects after September,
1954.
2. Settlement Regarding Repatriation of U.K. Capital
The U.K. capital stood on a separate footing. Under the Anglo-

Pakistan Financial Agreement, which expired on June 30, 1957 the
Government of Pakistan was committed to allow repatriation of
U.K. capital without any restrictions or limitations.
The justification for this concession in favour of U.K.

investments existed in a provision in the Financial Agreement that
the U.K. Government would release from Pakistan blocked Sterling
balances, an amount corresponding to the amount of capital
repatriation. The blocked No.2 Account was finally liquidated in the
year 1957. Thereafter, all capital transfers to U.K. had to be financed
out of the country's current resources, as in the case of transfers to
other countries. There was, therefore, no ground for allowing
unfettered repatriation of capital to the U.K. Besides, these facilities
were causing embarrassment to the Government vis-a-vis other
investors, who were allowed repatriation only in respect of capital
invested after September 1, 1954 in approved industries only.
With the expiry of the Financial Agreement the U.K.

investments came at par with other foreign investments in matters of
repatriation facilities. This caused a lot of concern to the business
circles in that country. The matter was taken up by Westminster on
diplomatic level with the Government of Pakistan. The British High
Commission urged that requests for repatriation of U.K. investments
should be considered sympathetically in accordance with the
assurance, which, according to them, was given at the expiry of the
Financial Agreement in 1957. The matter was examined in detail by
the Government in consultation with the State Bank and the
following principles were jointly formulated, in November, 1959 for
dealing with the cases of U.K. investments:-
(i) Restrictions may not be placed on the transfer of the

amounts which represent genuine savings of British
nationals who resided in the territory now constituting
Pakistan regardless of the fact whether these savings
may have been invested in shares, securities and
immovable properties and also regardless of the fact
whether the original owner has died and the assets have
been inherited by a resident in the U.K.
(ii) In cases where funds were brought into Pakistan for the
purchase of gilt-edged securities, or shares of local
bodies etc. necessary repatriation facilities may be
allowed as the funds were brought under an implicit
understanding that there would be no bar on
repatriation.
(iii) Requests for transfer of capital in cases where

investment was made before 1954 when the decision
about repatriation of capital was obscure may be
considered sympathetically. There was little justification
for allowing repatriation of capital invested after
September 1, 1954 in unapproved industries when
Pakistan Government had made the policy declaration
to the effect that repatriation would be allowed only in
cases where investment was made in approved
undertakings.
(iv) In a number of cases requests for obtaining repatriation

of capital were initiated by the companies concerned
during the currency of Financial Agreement. The
applications could not, however, be finally disposed of
before the expiry of the Agreement. This technical
defect may not be regarded as a serious disqualification
for the entertainment of such requests.
(v) In cases which involved repatriation of a large amount,

the remittance may be staggered over a period; the first
instalment may consist of Rs.50,000 and the balance
may be repatriated in half yearly instalments of

Rs.50,000 or less.
3. Repatriation of Remitted Funds
Restrictions on repatriation, enumerated in the preceding

paragraphs, relate to the funds already invested in Pakistan. Some
enquiries were received from foreign investors whether capital
transferred to Pakistan through official channel would qualify for
repatriation, in case the persons transferring capital were not in a
position to invest such funds in business or industry in Pakistan.
Responding to these enquiries the State Bank issued a clarification in
January, 1960 confirming that capital received from abroad through
normal banking channel which was deposited in a non-resident
account with an Authorised Dealer in Pakistan, and which was not
withdrawn from the non-resident account, might be repatriated.
Funds withdrawn from the account and invested in business or
industry in Pakistan would, however, be governed by the general
regulations relating to capital repatriation.
In October, 1960 a Government press note was issued regarding

investment of overseas funds in Government bonds and/or shares and
their repatriation. It was notified that the funds remitted to and
invested in Pakistan within a year from the date of issue of the press
note, would qualify for repatriation facility, provided the funds were
remitted to Pakistan through normal banking channels. The
repatriation facility would be available to persons of Indo-Pakistan
origin, settled abroad, as also to other foreign nationals, but would
not be extended to Pakistani nationals temporarily residing abroad.
The repatriation of capital would be permitted any time within two
years from the date of investment or any time thereafter. This was
subject to the condition that in the latter case the investments were
liquidated and proceeds credited to a private non-resident account
immediately after two years from the date of investments and the
funds were not withdrawn subsequently from the account.
Investments in bonds and shares could continue even beyond

the period of two years but in such cases repatriation of capital would
not be admissible. Interest or dividend accruing on such investments

would be allowed to be remitted subject to a maximum of net 5 per
cent per annum for a maximum period of two years from the date of
such investment. Earnings in excess of 5 per cent per annum and any
capital appreciation of such investments would not qualify for
repatriation and were required to be credited to a private non-
resident account of the investors without any right of remittance. The
repatriation of capital and remittance of interest dividend in such
cases was normally allowed to be remitted to the country from which
the funds were originally transferred to Pakistan.
4. Arrangement for Repatriation of Indian Capital
There were no restrictions on transfer of funds of any nature to

India till September, 1949. Capital funds could freely move to and
from India. In September, 1949 when the Government of Pakistan
decided not to devalue its currecny, a monetary dead-lock with India
suspended all remittances to this country. Exchange Control was
introduced with India on February 27, 1951. With no reciprocal
arrangements, a ban was imposed on all capital transfers to India
including transfer of savings of Indian nationals.
The Foreign Exchange Regulation Act prohibited any person

from taking out or sending out any security to any place outside
Pakistan. By a special notification issued on July 1, 1948 the State
Bank granted a general permission for taking or sending out of
Pakistan to India any Pakistani or Indian securities. This exemption
continued till October, 1954 when another notification was issued,
giving general permission for export to India, of shares registered in
India and expressed in Indian currency. This exemption was also
withdrawn on June 2, 1956. Thus till October, 1954 Pakistani and
Indian securities, including shares could be exported to India without
any limitation. Between October, 1954 and January, 1956 only
Indian shares could be exported to India without the State Bank's
prior approval. After January, 1956 no securities (which term also
included stock, shares, debentures etc.) whether Pakistani, Indian or
foreign, could be exported to India without the prior approval of the
State Bank.
The State Bank, by a notification issued on July 1, 1948 had

granted a general permission for transfer of a security or to the
creation or transfer of any interest in a security to or in favour of a
person resident in India. As a result, Pakistani securities as well as
foreign securities could be freely transferred. This development was
not favourable to the Government of Pakistan. Therefore, the State
Bank in July, 1951 revised the notification and restricted the transfer
of securities of Indian origin only in favour of resident of India.
Transfer of any other security whether Pakistani or foreign other than
Indian in favour of a non-resident including, required the prior
permission of the State Bank. However, complete information about
the foreign securities owned by Pakistani nationals or others
residents in Pakistan were not available to the Bank.
In August, 1956 the Government issued a Notification directing

all persons resident in Pakistan, who were or who might thereafter
become the owners of any securities of which the principal, interest or
dividend were payable in the currency of any foreign country, should
submit a return to the State Bank within one month. This period was
subsequently extended upto December 31, 1956. The response to the
Notification was not encouraging.
5. Regulations Concerning Foreign Companies
With a view to ensuring that foreign nationals invested funds out

of their genuine savings in Pakistan or by receipt of funds from
abroad, necessary safeguards were made with the collaboration of
Controller of Capital Issues against misuse of this facility. Some of
the foreign companies enjoyed the facility of importing goods on
consignment basis and repatriated to their parent companies the
entire amount of sale proceeds, also including the element of profit
on the sale of goods in Pakistan. In other words, there was practically
no control on their profit entitlements. The facility for import of
goods on a consignment basis was withdrawn from 1955. The
procedure was streamlined and all foreign companies were brought at
par in the matter of remittances of their profits. They had to apply to
the State Bank for remittances of their profits as distinct item, duly
supported by their audited Balance Sheets and Profit and Loss

Account.
During the early years after independence, majority of foreign

companies used to submit their consolidated Balance Sheets and
Profit and Loss Account which did not disclose separately the
position of their operations in Pakistan. These documents did not
serve any useful purpose, as the State Bank could not form any idea
of their assets and liabilities in Pakistan and profits accrued to them
on their operations in the country. The companies were, therefore,
directed to prepare separate Balance Sheets and Profit and Loss
Account for their operations in Pakistan, otherwise their applications
for remittances of profits were not be considered.
Enforcement Section
Until the beginning of 1950, there was no special agency or unit

functioning within the overall organisation of the Exchange Control
Department in the State Bank to take care of and effectively deal with
the attempted violations and contraventions of the provision of law.
In fact, contraventions of the law upto the end of 1949 were only a few
and, therefore, the insignificant number of such evasions did not
warrant the creation of any such agency. As mentioned in earlier
Chapters, devaluation of Pound Sterling in September, 1949 and
Pakistan's decision not to devalue the Pakistani rupee, as also the
introduction of Exchange Control with India, with effect from
February 27, 1951 brought in their wake the imposition of severe
exchange control restrictions. The balance of payments position
which had made a significant improvement due to the Korean War
boom, started declining and after a short while there was
considerable disequilibrium in the foreign exchange receipts vis-a-vis
payments, warranting curtailment in foreign exchange expenditure.
Prior to this, releases of exchange were made on a liberal scale. The
import policy was also very liberal and most of the items were on
O.G.L. The severity of the control and attendant circumstances
provided inducement to the miscreants to indulge in exchange
malpractices. Wide disparity prevailed in the official rate and free
market rate of Pakistan rupee vis-a-vis Sterling and other currencies.
Thus, high premiums were available to the operations of illegal

exchange transactions, which met the unsatisfied demand for foreign
exchange.
All these factors led to an alarming rise in the number of cases,

involving contraventions of the Foreign Exchange Regulation Act,
such as unauthorised sale of foreign exchange released to a person
under Basic Travel Quota for pleasure trips or pilgrimage etc., under-
invoicing of exports and over-invoicing of imports; transfer of capital
in the shape of spurious imports into Pakistan; Hundi transactions
involving compensatory deals in which foreign currency was acquired
abroad against payment at black market rate in rupees in Pakistan.
To combat this situation and to prevent leakage of foreign

exchange, a unit called Enforcement Section, under a Deputy
Assistant Controller, was set up in the Exchange Control
Department with effect from June 7, 1950. Simultaneously, it was
considered essential to secure the services of a Police Agency to help
the State Bank in the investigation of such cases. The Government
was also approached to provide the services of the requisite police
staff. Therefore, a nucleus of the Special Police Establishment was
formed in July, 1950 at Karachi, entrusted with the responsibility of
prevention and investigation of offences connected with the
provisions of the Foreign Exchange Regulation Act, 1947 under the
charge of a Deputy Superintendent of Police.
The Government of Pakistan, Ministry of Interior, on July 11,

1950 issued a Notification directing the Special Police Establishment
to investigate offences under the Foreign Exchange Regulation Act,
1947. At the same time, the State Bank issued notification on July 15,
1950 authorising the Chief Administrative Officer, Central
Directorate, Karachi and the Chief Officer, Banking Control
Department, Karachi to approve prosecution under the provisions of
sub-section 2 of Section 23 of the Act.
Similar Enforcement Branches were also set up at the State

Bank's offices of Lahore and Dacca, but initially no separate police
staff was allocated. However, with the passage of time and
considering the volume of work involved, it was more expedient to

establish units of the Special Police with necessary police staff under
a Deputy Superintendent of Police separately at Dacca and Lahore.
These Units attached to the Enforcement Branches at Dacca and
Lahore, started functioning in November, 1952 and September, 1955
respectively.
Subsequently, the post of a Superintendent of Police for the

Special Police, State Bank at Karachi was sanctioned to head the
organisation and to coordinate and guide the activities of the three
Special Police Units, attached to the Bank at Karachi, Lahore and
Dacca. The Special Police was to work under the overall guidance of
the State Bank and maintain close liaison with it. Foreign exchange
offences being non-cognizable (some of the offences were later
declared cognizable), no prosecution in a court of law could be
launched by the Special Police and in all cases the complainant before
the Court used to be the State Bank. Thus, by the end of the year
1955, a well-knit organisation with streamlined functions had been
formed to detect evasions of the provisions of Foreign Exchange
Regulation Act and to take remedial actions whether legal or
administrative.
Some of the important functions of the Enforcement Section

were to (a) investigate offences, committed under Foreign Exchange
Regulation Act, by making close enquiries directly and, when
necessary, with the assistance of the Police, Customs and other
Government Departments; (b) collect evidence in regard to cases of
evasion and to guide the Police so as to secure conviction for the
offenders from the court of law; (c) issue show cause notices calling
upon the alleged accused to explain evasion; (d) suggest measures for
prevention of evasion. Moreover, this Section had to watch that
Authorised Dealers, Travel Agents, Carriers, Stock Brokers and
other persons, authorised by the State Bank to do anything in
pursuance of the Act, carry out their responsibilities in strict
compliance with the instructions issued by Exchange Control
Department from time to time.
With the introduction of Exchange Control in the country

innumerable ways of circumventing, avoiding and evading the

instructions, issued by the State Bank under Foreign Exchange
Regulation Act, 1947, were resorted to by unscrupulous individuals.
When the scale of foreign exchange travel quota was liberal, this
facility was abused by professional racketeers by exploiting poor and
innocent people and financing their trips to Middle East countries.
The cost of passage to and from, and a small maintenance allowance
for the hired persons, used to be much less than the premium which
the racketeers obtained on the sale of foreign exchange in the free
market. To eliminate the chances of malpractices, the scale of
releases was progressively reduced and, at the same time, Police were
alerted to intensify their campaign to haul up the offenders and to
send up important cases for prosecution as a deterrent to others.
Non-Muslims migrating to India and other foreign nationals, who
were unable to secure transfer of their assets through official
channels, resorted to large scale smuggling surreptitiously, taking
away with them securities, articles of gold, Pakistani currency and
foreign exchange.
After becoming aware of such cases, the State Bank issued a

notification in August, 1956 directing all residents of Pakistan to file
a return with the Bank in respect of foreign securities, held by them
within a period of one month of becoming owner thereof. The rigid
enforcement of the limits were laid down for taking out of or bringing
in Pakistani currency, precious stones and gold and jewellery through
the Customs.
According to an estimate, over eighty thousand Pakistanis were

working in U.K. alone during mid fifties, but their remittances
through official channels never exceeded £0.225 million per month or
about £2.80 per worker. Obviously, most of their savings were
diverted through free market. Since these emigrants were getting a
premium of about 40 per cent, no amount of appeal to their sense of
patriotism could induce them to transfer their savings through
banking channel. Another potential source of these market
transactions was the border trade agreement with Iran, in terms of
which export and import of certain specified commodities between
the two countries by land route was free from Exchange and Import
Trade Control Regulations. The balances of the traders held in either

country, generated as a result of these trade transactions, though
meant to finance only the import and export of specified
commodities, were actually utilized for making all types of
unauthorised payments.
The absence of exchange control with Afghanistan further

helped the illegal operation of exchange transactions and
investigations into certain cases revealed that funds were transferred
from other countries via Afghanistan to Pakistan. Under Foreign
Exchange Regulation Act no person resident in Pakistan could retain
any balance abroad without the permission of the Bank. However, in
terms of Government Notification issued in July, 1948 balances held
in all countries except U.S.A. and the Philippines were exempted
from this restriction. Later in June, 1952 the scope of exemption was
restricted, but still sixteen countries continued to enjoy the
exemption facilities. Such relaxation was a constant source of
leakage.
All this led to establishment of black market in the country

operated by crafty elements in collaboration with their partners
abroad. The Police were asked to keep the activities of the currency
racketeers in Pakistan and abroad under surveillance and to trace
others engaged in such business. The conviction of some persons by
the court, constituting Foreign Exchange Tribunal, had discouraging
effect on persons indulging in illegal activities. The Government was
moved to review the existing border trade arrangements with Iran
and Afghanistan with a view to bringing them within the scope of
Foreign Exchange Regulations.
As the loop-holes in the working of exchange arrangements in

the export came to the notice of the Bank, immediate steps were
taken to plug such leakages. During the Korean crisis, the Pakistani
exporters reaped full advantage of the situation and built up secret
balances abroad out of the export proceeds. When such cases
increased, warranting punitive action against defaulting exporters, it
was discovered that action under Foreign Exchange Regulation Act
was not possible. The concerned authority had till then not
prescribed in legal form the manner and the period for realisation of
export proceeds. To rectify this situation, the Government was
approached by the State Bank to issue necessary instructions
authorising it to realise the value of goods exported. Prosecution for
contravention of the provisions of Foreign Exchange Regulation Act
were successfully launched for exports made after January, 1953 in
which the exporters had failed to realise the export proceeds.
A few cases were reported to the Bank where exporters, after

making the exports under fictitious names, had disappeared. Such
cases were thoroughly examined and instructions pertaining to them
were revised and issued to Authorised Dealers, eliminating the
chances of fraud, inherent in the arrangements previously made.
However, the nature of problem of export differed from commodity
to commodity. According to the prevailing rules, the ·exporters of
perishables from West Pakistan and East Pakistan were allowed to
send the documents of the title to goods direct to the importer in India
and not through an Authorised Dealer. The misuse of this relaxation
and absence of the condition of Letter of Credit or advance facilitated
the commission of the offence. The Pakistani exporters conspired
with Indian importers in holding proceeds in India, in order to
misappropriate the amount for unauthorised purposes. The number
of such cases multiplied and over Rs.lOO million were outstanding as
exports proceeds for realisation from India upto the end of 1958.
The Bank, therefore, started prosecutions under Foreign

Exchange Regulation Act on a large scale. This brought about a spate
of appeals to the Bank and Government from the alleged exporters,
pleading ignorance of law and their complete innocence in the alleged
crimes. As a measure of clemency the Government decided to drop
all prosecutions in which the total outstanding export proceeds
relating to perishables against an export did not exceed Rs.0.5
million. On the whole, this exercise yielded the desired results.
The most common practice resorted to illegal acquisition of

balances abroad and misappropriating for unauthorised purposes
had been under-invoicing of goods by exporters and over-invoicing of
goods by importers. To stop the drain of foreign exchange through
these sources, a series of steps were taken in collaboration with the

Government. This included the registration of importers and
exporters with the Chief Controller of Imports & Exports;
submission of an elaborate form, duly filled in by importer/exporter,
to the State Bank, incorporating all relevant details to help trace the
defaulting trader and to proceed against him, if necessary. In the case
of jute and cotton, the two principal commodities exported from
Pakistan, price check procedure was introduced. A close liaison
between the State Bank and Customs Authorities was established
and a Bank official was attached to the latter. A Valuation Branch
was opened under Customs Department to make an expert
assessment of the value of goods exported from or imported into
Pakistan. The arrangements for issue of permits for travel abroad
were also tightened occasionally.
Restrictions on travel abroad had to be enforced as an integral

part of the overall drive to reduce foreign exchange expenditure. The
negligence or, at times, connivance on the part of travel agents, and
air companies made it possible for passengers to travel abroad,
contrary to the State Bank's instructions. After imposition of severe
restrictions on the issue of passport for U.K. by bogus parties posing
as travel agents, exploited innocent and illiterate persons, promising
employment abroad. The air line and steamship companies involved
in contravention of State Bank directives were put on black list and
passage cost of irregular bookings blocked. At times, they were
warned to exercise more care in the scrutiny of documents so that
bookings were not made on forged documents. Legal action was also
resorted to against gangs operating as passport and travel agents and
arranging transportation of labour to the U.K. on forged and fake
documents.
This development led to litigation in courts bringing into light

legal lacunae which were removed by issuing necessary notifications/
amendments. Under the Foreign Exchange Regulation Act a
Magistrate (Ist Class) could sentence a person for contravention of
the provision of the Foreign Exchange Regulation Act to a maximum
punishment of R.I. of two years, in addition to a fine, confiscation of
currency, gold or silver or goods or other properties involved. Inspite
of this, there was an alarming increase in the number of foreign

exchange offences. The then existing penal provisions were
considered inadequate to meet the requirements of the situation. It
was realised that Magisterial courts which were already heavily
burdened with the criminal cases, could not do full justice to these
cases which required exclusive attention, as Foreign Exchange
Regulation Act was a special and highly technical law. The Act was
consequently amended providing for the setting up of Foreign
Exchange Tribunals, consisting of District and Sessions Judges and
Adjudication Officers to exclusively try and adjudicate offences
under the Foreign Exchange Regulation Act. The new law invested
additional powers in the Tribunal. While the former could impose the
sentence upto two years R.I. and unlimited fine, including
confiscation of property involved, the latter could only impose fine
not exceeding the value of the goods and confiscation of goods/
property involved. It was left to the discretion of the State Bank to file
the prosecution either in the District or Sessions Court or before the
Adjudication Officer according to the gravity of the offence.
The Special Tribunal consisting of one man as Adjudication
Officer in East Pakistan started functioning towards the end of 1955.
The Tribunal moved between East Pakistan and West Pakistan for
trial of offences under Foreign Exchange Regulation Act, according
to the jurisdiction of the court where the offences were committed.
The mobility of the Tribunal had the discouraging effect on those who
indulged in foreign exchange evasion, for they knew that they could
be hauled up and quickly brought to book. This system, however,
could not last for long as Supreme Court in a case held that the
amending Act of 1956 introduced an element of discrimination in as
much as it vested the Executive with the power to effectuate the
jurisdiction of the court as between the Tribunal consisting of District
and Sessions Judge having much wider powers in regard to
punishment and the Adjudicating Officer having powers to impose
only a limited fine. The Supreme Court declared that the provisions
hit the fundamental right as enshrined in the Constitution and were,
therefore, ultra virus and could not be acted upon. To meet this
extraordinary situation an amendment of relevant section to remove
lacuna in the law was immediately promoted through an Ordinance,
published in the Gazette of Pakistan Extra Ordinary, dated August

15, 1957.
The Special Police, from time to time, suggested to the

Government for declaring offences under Foreign Exchange
Regulation Act as cognizable offence by the Police as this would in
their opinion go a long way towards curbing the offences. The State
Bank, however, was not in favour of delegating the authority to the
Police to unduly interfere in the business and trade activity of the
country. In 1957, the Ministry of Interior, without consulting the
Ministry of Finance and the State Bank issued a Notification,
authorising Inspectors of Pakistan Special Police Establishment to
obtain search warrants from the court. The issue of this Notification
was objected to by the State Bank on the same principle on which the
Foreign Exchange Regulation Act offences had remained non-
cognizable offence by the Police. The State Bank was not happy with
this position and constantly pressed the Government for its
withdrawal which was ultimately secured.
The responsibility to seek justification of allowing prosecution

under the Foreign Exchange Regulation Act rested on the State
Bank. Every case was examined carefully in the light of police
investigation report and enquiries undertaken by the Bank
independently before sanctioning the prosecution so that no action
was taken against any innocent persons on flimsy grounds.
'
2
9
Bank and the Government
The importance of central banks in the maintenance of

monetary and credit mechanism of the economy, both in the
developed and developing countries is universally recognised. What
is not universally accepted is the precise nature of relationship that
should obtain between them and the governments. Perceptions and
practices differ from country to country. At one end of the scale,
there is a body of opinion that would seek to minimise their functions,
and on the other, a school of thought that would strive to accord them
a positive and dynamic role. Wherever the line of demarcation is
drawn, there is a general agreement that the kind of responsibilities
entrusted to their care, demand a freedom of action in the specialised
field of operation.
The functions assigned to the central banks in different

countries do not conform to s'et pattern or a formula, and even the
degree of independence to each of these functions, is subject to
variation. Nevertheless, there is a wide consensus of their separate
and distinct identity from the rest of the financial institutions which,
in fact, operate under their supervision. For the objective
formulation of policies they have to be independent of any
extraneous interference or control. Economic considerations alone
must, in the final analysis, weigh in the decision-making process.
299
The need for keeping central banking free from interference was
realised as early as 1920 when a resolution to guarantee their
independence was adopted at the Brussels Conference. Two years
later the Geneva Conference, held under the auspices of the League
of Nations, gave expression to a similar view. In 1933 the MacMillan
Commission also recommended that they should be free from
political control in their sphere of operations without an infringement
of the ultimate sovereignty of the state. A special constitutional
position for the bank was implicit in its ability to create cash which is
"a standing temptation to improvident governments. The advantages
such governments enjoy when they resort to easy finance at the
central bank are immediate and obvious; the disadvantages are not so
readily perceived, but in the long run they are cumulative and can be
disruptive. In recognition of this, most of the developed countries did
not favour the idea of reducing their central banks to the position of
an ordinary department. The need to integrate the policy of the
central bank with the broad economic policy of the government was
generally accepted but the central bank was allowed to retain a
special status which is something rather more than freedom to
conduct its daily techincal operations unhindered. 1
The freedom of action the banks enjoy is subject to variation

depending on the socio-economic environment and character of
political societies in which they operate. A document published by
the Congress of the United States spells out the role of the Federal
Reserve System by which the country's central banking system is
known. The American political system is based on the distrust of the
executive power and a trust in its legislative branch, which is
considered a more trustworthy guardian of state rights. Its unit
banking system is in a sense a reflection of decentralisation of state
authority. It was, therefore, natural for the Congress to outline and
articulate the kind of relationship that should exist between the
government and the Federal Reserve System:-
The Board of Governors has been recognised as an independent

establishment of the Government. The Federal Reserve Act
Sayers, R.S. :Modern Banking, Oxford 1967, p. 67.

BANK AND THE GOVERNMENT 301
prescribes the responsibilities of the Board and indicates that the

Board is to act upon the basis of its own best judgement. However, the
Bank's important functions especially in the credit and monetary
fields, are closely affected by those of other agencies of the
Government. Accordingly, in taking any important action the Board
gives careful consideration to policies indicated by the Executive or by
the various government agencies in order that its policies and those of
the government as a whole may be integrated to the fullest extent
practicable in the light of the system's statutory responsibilities.
The final aim, of course, is not that the Federal Reserve System
should be independent, but that the country should have a sound
economic policy. The independence of the Federal Reserve System is
a relative, not an absolute concept. It is good in so far as it contributes
to the formation of a sound policy and bad in so far as it detracts from
it. Measured by this standard the Sub-Committee is inclined to believe
that a degree of independence of the Board of Governors about equal
to that now enjoyed is desirable ........ the Board of Governors like all
other parts of the Government must play as part of a team, not as
outside umpire, and must ultimately abide by the decision of the
Congress.
In the United Kingdom with its unitary form of government and

a branch banking system, the Bank of England had to have a tighter
control on the monetary mechanism and the credit policies. The
Bank of England Act of 1946 lays down the ground rules of its
operation. It provides that "the Treasury may from time to time give
such directions to the Bank after consultation with its Governor that
it feels necessary in the public interest". 2 In other words, the
Governor has a statutory right to prior consultation but no power to
veto the directive after it is issued. The Governor has a right to be
consulted on all major issues, and on minor matters he has his say.
The affairs of the Bank are managed by the Court of Directors in the
light of its own judgement and perception of the national interest.
Moreover, the appointment of all the high functionaries of the Bank,
including that of the Governor, the Deputy Governor and the Court
of Directors by the Crown, which means by the Cabinet and not the
Chancellor of the Exchequer, is indicative of its priviledged position.
Sayers, R.S.: Modern Banking, Oxford 1967, p.70.
In the language of a distinguished occupant of the office of its chief

executive: "The Central Bank has the unique right to offer advice and
to press for its acceptance to the nagging point but always of course
subject to the supreme authority of the government". 3
In France the regulatory power of the central bank is not an

exclusive preserve of the Bank of France. It is a collective
responsibility of the National Credit Council, the Banking Control
Commission and the Bank of France. The Commission's duties are
mainly supervisory and not a detailed regulation of the banks. The
National Credit Council representing a variety of economic, financial
and government interests, is the main policy-making and consultative
body, while the Bank of France is the executive authority whose task
is the implementation of policy. The Governor of the Bank of France
appointed by the Government is the Vice-President of the National
Credit Council and is its de facto Chairman. The Governor is also the
President of the Banking Commission. "It is thus in the person of the
Governor that the trinity of controlling bodies finds its unity and
likewise it is through close contacts of officials of the three bodies that
this apparently elaborate machine works with tolerable smoothness
to make the banking system conform to the monetary policy for
which Ministers take responsibility". 4
In Australia, the Commonwealth Bank was required to keep the
Treasury regularly informed of its monetary and banking policies.
Under legislation enacted in 1950, if the Treasurer and the
Commonwealth Bank fail to reach agreement, the Board of the Bank
would furnish the Treasury with a statement of its views on the matter
in dispute. The Treasurer may then submit his recommendations to
the Governor-General who can decide on the policy to be adopted by
the Bank but also the Government's acceptance of the responsibility
for its adoption. The legislative branch is the last institution to be
taken into confidence.
In New Zealand, the law of 1936 laid down that the general
function of the Reserve Bank within the limit of its powers was to give
Sayers, R.S.: Modern Banking, Oxford 1967, p.67.
Ibid., pp.77-78.
effect as far as might be to the monetary policy of the Government,

periodically communicated to it by the Minister of Finance. In 1950,
the House of Representatives assumed the power of informing the
central bank of resolutions regarding its functions and business which
should be regarded as a way of resolving policy differences between
the Treasury and the central bank. The Minister of Finance or the
Government is not empowered to issue instructions to the Reserve
Bank.
The relationship between the Bank of Canada and the

government has varied from time to time. While the preamble of the
Bank of Canada Act gives the Bank a set of general instructions to
regulate credit in the best interest of the economic life of the nation
and refers more specifically to the goals of external and internal price
stability, it is scrupulously silent on the matter of government
responsibility for monetary policy. The position was clarified by the
Finance Ministers of the day in the Parliament. In 1934, the Finance
Minister declared that the Bank of Canada was not subject to
government dictation since government financing requirements
could conflict with a wise monetary policy. In 1936, a shift in opinion
occurred. The new Finance Minister was of the view that while the
Bank had to resist temporary outbursts of popular feeling in the short
term, in the long run it m~st be responsive to public opinion and be
responsible to government. In 1956, the then Minister was able to
deny or disown any official responsibility for the Bank's policy-that
responsibility being placed on the Bank-although he admitted that
government was kept informed of monetary developments. The next
Finance Minister went a step further and rejected categorically any
suggestion that he was responsible for monetary policy in any way
and the official interpretation continued to be that only Parliament
had a direct responsibility for the Bank and the Minister had no part
to play.
By 1961, however, events had shown that this position was

unrealistic and untenable. The new Governor upon assuming office,
therefore, gave a statement emphasising that in the ordinary course
of events, he believed, the Bank of Canada had the responsibility for
monetary policy, but that if the government disapproved that policy
it had the right and responsibility to direct the Bank to own and
implement policies pursued by the government.
There is, however, no universal agreement on what exact relationship

between the two bodies should be. It does not necessarily follow that
because the Bank is a policy arm of government it should be made a
department of government. Indeed most of the 100 central
banks-apart from totalitarian countries-are separate institutions in
fact as well as in form precisely because experience has shown that the
objectives of society can best be met by an arrangement which leaves
some measure of independence to the monetary authority. 5
The State Bank of Pakistan Order, 1948 was drafted in the

overall perspective of the theory and practice of central banking in
other countries, particularly the Commonwealth countries. The task
assigned to the Bank in the preamble of the State Bank of Pakistan
Order, 1948 was to "regulate the issue of bank notes and keeping of
reserves with a view to securing monetary stability in Pakistan and
generally to operate the currency system of the country to its
advantage". These objectives of central banking operations which
were mainly of regulatory rather than of developmental nature, were
taken from the Reserve Bank of India Act 1934, and were in
consonance with the prevalent thinking on the role of central bank at
that time. The legislation, amongst other things, had also provided
for the setting up of a Board of Directors to be entrusted with the
"general superintendence and direction of the affairs and business of
the Bank". It was authorised to "exercise all powers and do all acts
and things which may be exercised or done by the Bank" excepting
those specially directed or required to be done in a general meeting.
The strength of the Board of Directors was nine, of whom six

were to be nominated by the Central Government and three to be
elected. One of the nominated Directors was to be a Government
official. The law did not make it obligatory to secure representation
of various economic interests on the Board but in practice efforts
were made to ensure representation of a broad category of persons
with awareness of the economic and credit needs of the country.
Report of the Royal Commission on Banking and Finance, 1964, pp.540-541.
However, in the nomination of the Local Boards of the Bank,

regional/local or economic interests especially agricultural and co-
operative banks, had to be accommodated.
With a view to minimising political interferences in the working

of the Bank, members of Central and Provincial legislatures were
declared ineligible for the office of the Director of the Central Board.
The Chief Executive authority of the Bank, the Governor, was vested
with the power to direct and control the affairs of the Bank, on behalf
of the Central Board except the business specially reserved for the
Central Board or a general meeting of the shareholders. The Central
Government was given the authority to appoint the Governor on
such terms and conditions of service as it might determine. By a
subsequent legislation (State Bank of Pakistan Act, 1956) neither the
salary of Governor nor his other terms and conditions of service could
be varied to his disadvantage after his appointment.
The central banking institution of a country occupies a pre-

eminent position in providing well-informed disinterested advice and
guidance to Government not only in financial matters but also on
economic policy. The State Bank, which came into existence after the
country attained independence, was advantageously placed to tender
advice to the Government in the shaping of its economic policies
which were still in their formative phase. Another important factor
which helped the Bank secure a special standing was the appointment
of Zahid Husain as its Governor.
Zahid Husain was held in high esteem in official and business

circles alike. He was among the few eminent financial experts who
had held high positions in British India Government and also served
as Finance Minister in the premier princely state of Hyderabad
(Deccan) which had its own currency. He had a personal equation
with the Finance Minister of the country, Ghulam Mohammad.
Moreover, he was intimately known to the future Prime Minister of
Pakistan, Nawabzada Liaquat Ali Khan, with whom he had worked
closely during the crucial period preceding the birth of Pakistan and
afterwards. After the creation of Pakistan, Zahid Husain even while
he was the Governor of the State Bank, was often invited to the
Cabinet meetings for consultation and advice particularly in the

absence of the Finance Minister from the country. There was not a
committee or a commission set up to examine the financial and
economic problems of the new State of which he was not a chairman
or a member.
The State Bank's responsibilities for conducting government

business, as expounded in SBP Order, 1948 and subsequent
amendments included acceptance and collection of all moneys for
accounts of Central Government, Provincial Governments and to
make payments upto the amount standing to th~ credit of their
accounts respectively as well as to undertake their exchange,
remittance and other banking transactions and management of public
debt. The Central and Provincial Governments in their turn were
obliged to deposit free of interest all their cash balances with the
Bank and entrust it with all their moneys, remittances and other
banking transactions in Pakistan, inclusive of management of public
debt and issue of new loans to be governed by such terms and
conditions as might be agreed upon between the Bank and the
Government concerned. The Government was not debarred from
carrying on monetary transactions at places where the Bank had no
office branch or agency or from holding balances required by it at
these places. In the event of a deadlock arising from Bank's refusal to
agree to the conditions acceptable to the Government, it was the
Government's view that prevailed.
As Banker to the Government, the State Bank was permitted to

make advances to the Central and Provincial Governments,
repayable within a period of three months. The Bank was also
authorised to undertake purchase and sale of securities of any
maturity of the Central and Provincial Governments or of such
securities of a Local Authority as were specified in this behalf by the
Central Government, on the recommendations of Central Board.
The amounts of such securities held in the Banking Department were
not allowed to exceed at any time, a certain fixed percentage,
depending upon the maturity period of securities, of share capital,
reserve fund and deposit liabilities of the Banking Department. The
securities fully guaranteed as to principal and interest by the Central
HISTORY OF THE STATE BANK OF PAKISTAN 307
Government were required to be treated for the purpose of such sales

and purchases as secu{ities of that Government.
Further the Bank was authorised to undertake sale and
rediscount of treasury bills and to draw, accept, make and issue, on
its own account or on acocunt of Central Government, as the case
may be, with its prior approval, any bill of exchange, hundi,
promissory note or engagement for payment, within or outside
Pakistan of foreign or Pakistan currency payable to a banker or to a
bearer on demand.
The Bank could also act as agent to the Central Government,
any Provincial Government, or Local Authority in transacting the
business of purchase and sale of gold or silver or approved foreign
exchange, securities or shares in any company, the collection of the
proceeds, whether principal, interest or dividend on any securities or
shares; the remittance of such proceeds, at the risk of the principal,
by bills of exchange payable either in Pakistan or elsewhere.
Administration of exchange control under the Foreign
Exchange Regulation Act, was the responsibility of the State Bank. 6
The Section 25 of the Foreign Exchange Regulation Act reads:
For the purpose of this Act the Central Government may from time
to time give to the State Bank such general and special direction as it
thinks fit and the State Bank shall in the exercise of its functions under
this Act comply with any such directions.
The intention of the law obviously was that the Central
Government should give to the State Bank general directions on
matters of policy and principle leaving the day to day administration
and control in the hands of the Bank.
The State Bank worked in close co-operation with the
Government in formulating important economic policies of the
country. The Bank had the advantage of having a well organised
economic intelligence and research service to help tender advice to
the Government. The Research Department of the Bank had
become one of the most important centres for collecting, processing
The subject has been dealt with in detail in Chapter No. VIII.
and analysing financial and economic data. While at the highest level
the Governor was being associated with all the important policy
decisions on financial and monetary matters the bureaucrats, lower
down, started questioning the autonomy of the Bank even on issues
that did not impinge on governmental authority. The competence of
the Bank to appoint a Legal Advisor was questioned and the
appointment already made was requested to be cancelled. It was
urged to utilise their Legal Division. After an interval the Bank
received another letter, this time from the Ministry of Finance,
objecting to the pay scales in Bank, which were higher than those
obtaining in the Government and, therefore, called for a downward
revision.
Again, in August, 1950 the Ministry, in a formal communication
asked the Bank to supply detailed information about the expenditure
under the heads: 'Establishment', 'Remittances', 'Security Printing'
and 'Miscellaneous Expenses' in different periods and also reasons
for their variations. The Ministry of Finance on yet another occasion
in October, 1951 took notice of a circular issued by the Karachi Office
about the pilferage of notes and advised the Bank to submit a full
report to them. The Deputy Governor called on the Finance
Secretary and explained to him that such circulars were issued by the
Managers concerned of the offices of the Bank and the Central
Directorate take full care of the working of all offices. The point of
view of the Bank did not meet with the approval of the Ministry of
Finance who insisted on submission of a full report, including the
findings of the Enquiry Committee appointed for this purpose.
When such instances kept multiplying the Governor thought it

was high time to bring to the notice of the Board the uncalled for
interference by the Ministry of Finance in the working of the Bank.
A detailed and well argued Memorandum was submitted to the
Board in its meeting held on September 4,-1952 bringing out boldly
the powers vested in the State Bank by the State Bank of Pakistan
Order, 1948, Banking Companies (Control) Act, 1948 and Banking
Companies (Restriction of Branches) Act, 1946. Drawing upon its
clauses the Memorandum recorded that "the State Bank was an
autonomous body fully empowered to deal with all matters arising in
field allotted to it. This general position was subjected to the

provisions in enactments themselves under which either the State
Bank was required to take order on any matters from some other
authority or where the authority itself was vested with the power to
issue any general or specific orders. It was clear, however, that the
State Bank was not a subordinate office or department of the
Government in the sense, the Audit and Accounts Department was.
In conducting the important business which was allotted to the Bank,
its authorities had themselves to maintain close contacts with the
Government and its authorities. "
The Memorandum quoted the clause 30 of the State Bank of

Pakistan Order, 1948 which provides "that the Bank shall sell to or
buy from any authorised person who makes a demand in that behalf
foreign exchange in such amounts at such rates of exchange and on
such conditions as the Central Government may, from time to time,
by general or specific order determine". The regulations framed by
the Central Board on certain matters were subject to the approval of
the Central Government. The Government also had the power to
supersede the Central Board if the former was of the view that the
Bank had failed to carry out any of the obligations imposed on it
under the State Bank of Pakistan Order. But at the same time, there
were clear provisions where the Government was to issue
instructions. In other matters, the Board exercised unrestricted
authority except that in the event of mismanagement it was liable to
supersession.
Under the Banking Companies (Control) Act the Government

had not been vested with power to issue any orders to the State Bank.
It was under this Act that the State Bank issued orders to the
commercial banks for the regulation of credit and for controlling their
operations.
Section 26 of the Foreign Exchange Regulation Act reads:
For the purpose of this Act the Central Government may from
time to time give to the State Bank such general or special
directions as it thinks fit and the State Bank shall in the exercise
of its functions under this Act comply with any such directions.
The purposes of the Act as laid down in the preamble to the Act
were:-
Regulation of certain payments, dealing in Foreign Exchange

and Securities and the import and export of currency and bullion
in the economic and financial interests of Pakistan.
The Memorandum further stated:
The State Bank has been entrusted by Government with

the responsibility for administering Exchange Control. The
intention of the law obviously is that the Central Government
should give to the State Bank general directions on matters of
policy and principle leaving the day to day administration of
control in the hands of the State Bank. Specific directions are
apparently intended to cover cases which are important for
political or other reasons.
The Governor observed that the wide powers conferred on

the Bank, were a proof that the intention of the Government
and the Legislature was that the State Bank should function as
a separate and autonomous statutory body. However, in
practice this basic position tended to be over-looked and the
State Bank was made to appear as a subordinate office.
The Memorandum listed some of the instances of

interference in the normal working of the Bank by the officials
of the Ministry of Finance. One instance which, according to the
Governor, served to defeat the purpose of establishing the State
Bank, concerned the exercise by the Bank of its functions and
powers in the field of monetary regulations and control. In
September, 1950 the State Bank found it necessary, having
regard to the credit conditions prevailing at that time, to impose
certain restrictions under which a deposit of 75 per cent was
required to be made for imports under the 0. G .L. and of 50 per
cent for imports under licences, provided the importers wanted

to book foreign exchange. These restrictions were preceded by
a personal discussion between the Minister of Finance and the
Governor. Thereafter, it seemed that credit control was treated
as part of its own sphere of operations. Later when the State
Bank felt that the time had come to remove the restrictions,
difficulties and delays arose in obtaining the approval of the
Government. Even in minor cases the Government called for
explanations. In explaining the reasons attention of the
Government was drawn to the dangers of the developments that
were taking place.
The Governor brought to the notice of the Board the letter

addressed by him to the Finance Secretary on February 12,
1951. The text of the letter was:
The imposition of margins for the purpose of bpoking forward

exchange was purely a monetary measure within the competence of
the Central Bank of the country and was intended to meet a temporary
emergency. I trust that it is not the desire of Government that their
orders should be obtained in a formal manner, not only at the time
monetary measures are taken but also for any variations therein that
might be considered necessary from time to time. They have the
authority, if they so wish, to reserve to themselves powers in the
monetary field which should rightly be exercised by the Central Bank,
but it would not be in the interest of the country, and it would not be
a proper distribution of functions. The exercise of such powers,
particularly when the orders proposed to be issued are likely to
produce widespread repurcussions may and should take place by
formal or informal consultations with certain officers of the Treasury
nominated for this purpose. This is the recognised procedure in all
countries and I feel that it would be a mistake to make monetary
measures pass through ordinary government channels. Some countries
have Monetary Boards consisting of officers of the Central Bank and
the Treasury. In others, it is left to the Central Banks to consult the
Secretary of the Treasury and/or the Minister, but nowhere is it
considered right and proper to treat monetary measures as a subject fit
for the exercise of ordinary governmental authority. I think that a
deviation from what is undoubtedly a sound procedure will place the
Ministry of Finance as well as the Minister in an embarrassing position.
The sphere of monetary control would then become a matter in which

the Government as such and not merely the Ministry of Finance, will,
therefore, be well advised to maintain that it is a sphere in which the
State Bank exercises final authority.
The subject of relations of the Bank with the Government was
discussed in the Board meeting. Some of the Directors felt strongly
that the issue be taken up with the Prime Minister or personally with
the Finance Minister. The Governor thought it was not appropriate
to approach the Finance Minister formally since the State Bank has to
deal with the Ministry of Finance. The proper course was to forward
the Memorandum to the Ministry for its functionaries to examine the
matter which would pave the way for fruitful discussion with the
Ministry as well as the Finance Minister.
Channelisation of Bank's
Correspondence to the Government
A glaring evidence of the desire to restrict the autonomy of the

Bank was the Finance Ministry's insistence that all correspondence
between the Government and all its Ministries and Departments be
routed through its channels and not directly undertaken by either
side. The State Bank did not subscribe to this view and instead
suggested its classification into three categories: The first category
included correspondence of a routine nature conducted with those
Departments of the Government with which the Bank had direct
dealings. For instance, correspondence with the Estate Office
relating to residential accommodation for the Bank's staff. Similarly,
the Bank had to exchange letters with the Ministry of Interior or the
Karachi Administration for the grant of permits etc. for the Bank's
staff proceeding to India. The volume of this correspondence
conducted with a number of Government Departments was quite
large. It had no bearing on policy matters, covering as it did questions
of permits for staff, accommodation, passports, postal facilities and
so on. It was futile to impose any restrictions on correspondence of
this nature whose speedy disposal was bound to be impeded.
The second category of correspondence with the Government

Departments and Divisions related to subjects connected with the
day to day business of the Bank. The correspondence with the

Accountant General or the Auditor General could be cited as an
example which involved no policy matters. The State Bank was
required to endorse to Ministry of Finance copies of all such direct
communications to Ministries, Divisions, etc. except those addressed
to the Civil Accountant General and Auditor General.
There was a third category of correspondence which related to

important policy matters. This covered, inter-alia, socio-economic,
financial and monetary problems with which the Government was
directly concerned. Papers dealing with them were invariably routed
through the Ministry of Finance.
The Ministry of Finance informed the State Bank in February,

1952 that in addition to the correspondence relating to the matters
mentioned in the first category, the State Bank may correspond
directly with the Ministries, Divisions, etc. of the Government of
Pakistan on non-controversial issues falling in the second category
covering to subjects connected with the day to day working of the
Bank. It was, however, suggested that the State Bank should endorse
to this Ministry copies of all such direct communications to
Ministries, Divisions, etc. except those addressed to the Civil
Accountant General and Auditor General in cases of the second
category. All correspondence in the third category relating to policy
matters with which the Government was directly concerned, it was
conceded, should continue to be routed through the Ministry.
A list of cases falling under the category of day to day business

was prepared and sent to the Ministry of Finance in March, 1952.
Were its voluminous correspondence a fairly lengthy one to be
endorsed to the Ministry of Finance, it would be an irksome
procedure for the Bank. So far as the Ministry of Finance was
concerned, it would serve no useful purpose except the multiplication
of unnecessary paper work in the Ministry. The Ministry of Finance
informed the State Bank in April, 1952 that they did not desire to
have copies of all the correspondences pertaining to the subjects
indicated in the list received, but if there was any thing of importance,
the Ministry should have its copy. In other words, the proposal made
by the State Bank was accepted by the Ministry of Finance and all the
Heads of Departments of the Bank were advised to deal with the
correspondence accordingly in the future.
As Banker to Central and Provincial Governments

As the Central Bank of the country the State Bank under the law
was a Banker to the Central and Provincial Governments which were
directed to entrust the Bank with all their moneys, remittances and
banking transactions in Pakistan. They were also obliged to deposit
free of interest all their cash balances with the Bank. The State Bank,
therefore, entered into agreements with the Central and Provincial
Governments in which terms and conditions were laid down subject
to which the Bank would carry on all their banking transactions.
Particularly, it was stipulated that the State Bank shall accept moneys
for account of the Central and Provincial Governments and make
payments upto the amount standing to the credit on their accounts
and would carry out their exchange, remittance and other banking
transactions, including the management of Public Debt at all such
places where the Bank had its own branches or branches of its agency
(the National Bank). The Central and Provincial Governments were,
however, free to operate their money transactions through their own
agencies in places where the Bank had neither a branch of its own nor
a branch of its agent. It was required to maintain government
accounts at its offices and branches in such manner as was required by
the Government from time to time. It received no remuneration for
its services it rendered to the Central and Provincial Governments
except for such advantages as accrued to it from holding cash
balances free of interest.
During the first few years the behaviour of the accounts of the
Central Government and Provincial Governments remained
satisfactory. From 1953 onwards, the financial position of both the
Central and Provincial Governments started deteriorating showing a
continued decline in their balances. This put the State Bank in a very
difficult situation. On the one hand, it could not precipitate action by
refusing to honour bills and cheques of the Government, even though
there was no credit balance standing to their account; on the other, it
could also not be a silent spectator to the unrestricted flow of money

injected into the economy through Government borowings from the
Central Bank.
The Governor of the State Bank in his Annual Speech in 1953

stated:
The recession in commodity markets has hit their (Provincial
Governments) revenues; and some of them have recently been taking
increasing recourse to the State Bank for ways and means advances.
Ways and means advances are meant specifically for bridging
temporary shortfalls between the accrual of receipts and actual
expenditure. The Provincial Governments' indebtedness to the State
Bank, however, has not only increased but has also persisted as
reflected in their balances with the State Bank. This mode of financing
on the part of some Provincial Governments is likely to aggravate
pressure and requires serious consideration.
Although section 17(5) of the State Bank of Pakistan Act, 1956
permits the Bank to make advances to the Central and Provincial
Governments without any limit on amount, at the same time it
restricts the period of currency of such advances to three months. The
purpose underlying this restriction on the duration of the loans is to
ensure that the Governments take advances only for a limited period
to meet their temporary difficulties. In contravention of this healthy
principle, while the Central Government of Pakistan started
borrowing from the State Bank by selling Ad hoc Treasury Bills to it,
the Provincial Governments, without entering into any financial
arrangements with the Bank, began over-drawing their accounts.
During the years between 1953 and 1957 the borrowings of both
the Central and Provincial Governments increased considerably. The
borrowings by the Central Government against Ad hoc Treasury
Bills jumped from Rs.150 million in 1953 to Rs.775 million in 1957,
while the maximum debit balance in the account of East Pakistan
Government increased from Rs.65 million to Rs.135.58 million and
for West Pakistan from Rs.56.75 million to Rs.83.39 million during
the same period.
This high amount of deficit financing naturally had serious

repercussions on the economic situation in the country. The Bank

had, therefore, to caution both the Provincial and Central
Governments to tighten the control on their expenditure so as to
reduce the amount of deficit financing. In his letter to the Finance
Minister, the Governor invited the attention of the Government to
section 17(5) of the State Bank of Pakistan Act which reads:
The making to the Central Government, Provincial Governments or

Governments of such acceding states as may be approved by the
Central Government, of advances repayable in each case not later than
three months from the date of the making of the advances ... You will
appreciate that this assistance is intended to be strictly of a short-term
character to tide over temporary financial difficulties. It appears that
this instrument of short-term finance is being used as a method oflong-
term finance for meeting government expenditure. This is against the
spirit of the Act under which such advances are made. The Board
doubts the advisability of such heavy deficit financing and the
propriety of the method under which short-term finance is converted
into long-term finance.
May I in this connection invite your attention to the World Bank

Report on current economic position and prospects of Pakistan,
wherein it is stated that in recent years, the expansion in money supply
has undoubtedly been too large and has probably created, even after
allowing for the intervening rise in prices, a monetary overhang in the
form of excessive purchasing power which calls for great emphasis on
the need to avoid inflationary financing in the years immediately
ahead.
In the case of the Provincial Governments, the Bank was forced

to impose a penal interest on their overdrawing the accounts. They
were also advised that if they did not set their house in order, the
Bank would have to devise ways and means to put a check on this
unrestricted borrowing.
During the year 1956-57 the magnitude of Government

borrowings had increased so enormously that the State Bank was
obliged to draw the attention of the Government to this subject. On
January 1, 1957 the Governor of the State Bank addressed a letter to
the Finance Minister underlining the extent of Government's deficit

financing operations, after the problem had been discussed by the
Executive Committee. This communication sought to bring to the
notice of the Government the high rate of its borrowings from the
State Bank during fiscal year 1956-57. It was requested that the
question be reviewed in the interest of overall monetary stability.
This letter went up to the National Economic Council.
At the end of April, 1957 the Bank analysed in a note the

implications of East Pakistan Government's proposal to leave a part
of the revenue deficit uncovered. The note expressed the opinion that
"there is no justification for the Provincial Government to meet any
part of their budgetary deficits with the help of external money." The
note was considered by the Executive Committee on April22, 1957
and was also forwarded to the Secretary Finance, Government of
Pakistan. Towards the end of the month the Governor addressed
another letter to the Finance Minister on the subject of creation of Ad
hoes by the Government and the legal limits to the amounts of such
Ad hoes that could be held at one time by the State Bank. Its
concluding remarks were:
It is needless to emphasise that the capacity of the Bank to create fresh

money is limited. It underlines the imperative need for the Central and
Provincial Governments not only to control their non-develoment
expenditures but also development expenditures.
The Governor also publicly emphasised the necessity of

restraining the expenditure of the Central and Provincial
Governments in his speech delivered at the 7th Annual General
Meeting of the Bank held on September 7, 1957. He said:
A survey of Government expenditure in past years would reveal a

rising trend both in the Central and Provincial spheres. Unless Central
and Provincial Governments try to manage their administrations
within their resources, stability can never be ensured. Efforts should
be made to curtail Government expenditure. Non-development
expenditure should be kept to the minimum and all expenditures
should be carefully scrutinized with a view to effecting such economies
as are not likely to detract from efficiency.
It was only after the promulgation of Martial Law in the country

in October, 1958 that the gravity of the situation was realised by the
Government and conscious efforts were made to reduce the quantum
of Government borrowings. In his Annual Speech at the 11th Annual
General Meeting, the Governor observed on September 12, 1959
that in sharp contrast to the pattern of previous years, the budgetary
operations of the Government in the current fiscal year were
expected to exercise a net contractionary influence on money supply.
The practice of borrowings from the State Bank to meet a part of the
budget expenditure had been completely abandoned. According to
the Annual Speech for the year 1960, the Governor pointed out that
"the rise in money supply occurred inspite of the fact that for the first
time in several years the Government sector did not add to it. This
was a development of great significance. It was the outcome of the
policy of Governments to live within their means and to avoid
borrowing from the State Bank.
Interest Rate on Government Borrowings
The Ad hoc Treasury Bills created by the State Bank to

accommodate the Central Government carried interest at half per
cent per annum. This rate was fixed in 1949 when the first block of Ad
hoes was created. At that time, in view of the prevailing cheap money
market rate, the rate of half per cent was not considered
unreasonable for short-term borrowing by the Central Government.
Since then, there had been pronounced increases in the money
market rates in the country. The rate of half per cent per annum,
therefore, bore no relation to the money market rate in the late
fifties. Moreover, the major portion of the Ad hoc Treasury Bills
purchased by the Bank remained outstanding for a considerably long
time. This borrowing had, therefore, ceased to be of short-term
character. In the light of this development in 1953 the Bank proposed
to raise the interest rate on Ad hoc Treasury Bills from half per cent
to 2 per cent per annum - a proposal with which the Government did
not agree mainly on the ground that it would have resulted in uncalled
for inflation in Government interest charges and would also bring
about an artificial increase in the profits of the Bank. It argued that
although the enhanced expenditure of the Government on account of
higher interest charges would be counter-balanced by increased

earnings in the form of surplus profits of the Bank and there would be
no adverse effect on the Government budgetary position, it would
still be undesirable to inflate these figures unnecessarily.
The arguments advanced by the Government were not

convincing. After all, while acting as Banker to the Government, the
relationship between the Bank and the Government was that of a
banker and a customer. It was, therefore, completely justifiable for
the Bank to charge interest on its loans to the Government at a rate
which had reasonable relation to the prevailing market rates. The
question of surplus profits being transferable was not relevant in
fixing the interest payable by the Government. Even public bodies
and quasi-Government Organisations like Posts and Telegraph
Department, Railways, etc. whose profits go to the Government
revenues, charge for services rendered by them to the Government at
the rates they charge the public. There was, therefore, no reason to
make an exception in the case of the State Bank on the interest rate
chargeable by it on Government borrowings.
It was pointed out that the prevalent Bank Rate was 4 per cent
per annum and so was it the money market rate. The loans floated at
that time by the Central Government earned interest at 4 per cent per
annum. Taking all these factors into account half per cent of interest
on Ad hoc Treasury Bills, the increase of at least 2 per cent per annum
was justifiable and realistic. If this was not done, the income of the
Bank would not be commensurate with its investment portfolio and
a doubt was likely to rise in the public mind about the correctness of
the investment policy of the Bank. If the interest on Ad hoc Treasury
Bills was raised to 2 per cent per annum, the rate was still favourable
to the Central Government, compared to what the Bank charged to
the Provincial Governments. For, in the case of Ways and Means
Advances to the Provincial Governments interest was charged at 3
per cent per annum while in the case of advances granted to the West
Pakistan Government against collateral of Government Securities
interest was charged at 4 per cent per annum.
Moreover, the system of Ad hoc Treasury Bills was devised

mainly to provide short-term accommodation to the Government.

The Government had, however, made very liberal use of this facility
and the Bills had been allowed to remain outstanding for exceedingly
long periods. Since the major portion of the Ad hoc Treasury Bills
was outstanding in the books of the Bank for over 8 years now and
there was no chance of their retirement by the Government in the
foreseeable future, they should be treated as long-term borrowing by
the Government. It was, therefore, suggested that 80 per cent of the
outstanding Ad hoc Treasury Bills be converted into funded debt
carrying a more realistic rate of interest. It was also mentioned that
the same policy was adopted by the Government of India in respect
of Ad hoc Treasury Bills held by the Reserve Bank. The
Government, however, did not agree to the Bank's proposal.
Inflation
Soon after the establishment of the Bank efforts were made at

various levels to identify the economic problems of the country and
recommend measures to the Government where possible. The
Bank's views, however, were expressed publicly on rare occasions
like Annual General Meetings of the Board of Directors and
meetings with representatives of the business community. In his first
speech at the first Annual General Meeting held on September 29,
1949, the Governor after~having reviewed the progress made in
different sectors of the economy concluded:
Our economy has palpable elements of weakness, such as dependence

on agriculture and almost total absence of industries; our reliance of
foreign exchange on raw materials whose prices are particularly liable
to fluctuations in changing conditions; shortage of experienced
industrialists, managers and technicians; our limited control over
banking and the weakness of banking services particularly in the
interior, both in quantity and quality; weakness of administrative
structure due to shortage of experienced men; our failure to study and
develop our markets again due to lack of properly trained personnel
who can conduct studies and investigations in foreign countries and
several other similar factors. Our greatest wealth lies in the unbounded
enthusiasm and patriotism of our people, their faith in their future
destiny and their willingness to put their shoulder to the wheel. It is an
asset of inestimable value of which any country would be proud. Let us

therefore work for and look forward to an era of progress and
prosperity for our country and with the country is bound up the future
of our Bank.
Monetary stability was naturally the primary concern of the

Central Bank. It never missed an opportunity to remind the
Government of the need for vigilance. The year 1950 witnessed a
boom in the world primary commodity market, following the
outbreak of the Korean War. As a result, Pakistan's Balance of
Payments position vastly improved and the country had a substantial
surplus budget because of large revenues from export duties. The
situation was marked by increasing difficulty in importing both
capital with which to augment the supply in the home market and
essential consumer goods to match the excessive money demand in
the economy. Reviewing the economy at the Third Annual General
Meeting of the Bank in September 28, 1951 the Governor observed
"our aim should be to reduce the aggregate money demand in the
economy without throwing a burden on those who are least able to
bear it. .. As a matter of general principle we must aim at surplus
budgets and fiscal measures should play a predominant role in our
anti-inflationary campaign." Two years later on a similar occasion,
after reviewing the outstanding developments in the perspective of
world economic trends he pointed out "that most of the actual and
potential causes responsible for the present inflationary pressure are
not of a purely monetary character. In order to fight the rising level
of prices it would be desirable to take action on these fronts: (i) an
effort to increase the effective supply of goods in the country by
stepping up domestic production; (ii) an effort to check hoarding and
speculation to ensure proper distribution; (iii) an effort to reduce the
volume of aggregate money demand in the country by means of cuts
in consumption and increased savings."
On 'Anti-Inflationary Measures Committee' appointed by

Government in 1954, a representative of State Bank also acted as
Member-Secretary. He made a major contribution to its
deliberations. Taking note of the inflationary situation arising out of
the rapid increase in money demand and the consequent pressure on
the price level the Committee recommended a comprehensive list of

measures that could be adopted, including adequate reduction of
deficit financing operations of the Government.
The Governor's concern found renewed expression in his

speech to the Annual General Meeting of the Bank's shareholders in
1954:-
On this occasion last year, I had drawn attention to the inflationary

pressure in the economy. Since then there has been an increase in the
aggregate money supply in the country, while there has been a further
decline in the supply of consumer goods. The State Bank on its part has
kept a vigilent eye on the situation. Careful consideration has been
given to the matter whether in view of the recent trend in money
supply, it would be necessary and desirable to impose any restrictive
credit measures. Such measures are warranted when banks are
indulging in excessive credit creation or when their operations are
inordinately increasing the country's money supply.
In December, 1954 the Governor addressed a communication to

the Finance Minister on the subject of currency expansion and the
contribution Government operations made to the expansionary
process.
Under persistent promptings of the Governor, the Government

undertook a more detailed examination of the problem by setting up
a group of experts in 1955, a Technical Group representing the State
Bank, Planning Board and the Ministry of Finance. The Group
concluded its deliberations in February, 1956 and came to the
conclusion that there was considerable inflationary potential in the
economy which was too large to be belittled. The risk of inflation was
enhanced from the "supply position not keeping pace with the
expansion of internal purchasing power." The increase in purchasing
power was a direct consequence of deficit financing operations of the
Government. The findings of Technical Group were specially sent to
the Government before the finalisation of the budget for the year
1956-57.
In June, 1956 when the Planning Board submitted the Draft Five
Year Plan, the Bank had clearly indicated through its various
Memoranda and representatives in inter-departmental committees
that it considered the size of the Plan in excess of the available
resources. The Bank had called attention to the dangers inherent in
excessive spending and large scale deficit financing. In fact, as a result
of the stand taken by the Bank and the efforts of its representatives,
the estimate of resources contained in the Plan was critically
scrutinised and the Finance Ministry's representatives agreed that
Planning Board had over-estimated the extent of available resources.
The impending threat of inflation was once again underlined by

the Governor in his Annual Speech in 1956 with added emphasis. The
warning was clear and unmistakable. "It is necessary to hold the price
level if living standards are to be protected and development is to
proceed smoothly. In case this problem is not tackled firmly,
inflationary pressures may get stronger and lead to serious
consequences." On November 1, 1956 the Governor of the State
Bank forwarded a note to the Ministry of Finance on the monetary
and price situation which had earlier been discussed at the meeting of
the Executive Committee on October 30, 1956. Developments with
regard to currency expansion and inflation during 1956 were analysed
in Memorandum of February 4, 1957 for the information of the
Board. The contents of this note were also conveyed to the Finance
Minister with a request that he may bear them in mind when framing
his budget proposals.
As the price situation continued to deteriorate, the Bank

expressed its point of view with renewed emphasis during 1957. In
April, 1957 the Bank provided working papers for the meeting
convened by the Finance Minister to discuss the problem. The
implications of financing revenue deficits through created money and
the propriety of subsidising the sale of imported rice through
borrowings from the State Bank were analysed in special notes. A
paper on the experience of selected foreign countries which had
suffered from inflation was brought to the attention of the
Government.
The case for arresting the process could not have been more
forcefully and concisely put: Inflation invariably depressed the living

standards of the masses and redistributed income in favour of the
few, that it led to widespread tax evasion and black-marketing,
destroyed confidence in the country's currency, generated political
discontent and defeated the purpose of economic development by
lowering the capacity to save, distorting the pattern of investment in
favour of less productive projects, and by making impossible cost/
benefit calculations which were at the basis of rational planning.
As a result, the Finance Minister called a meeting on April 6,
1957 to re-examine the problem of inflation in the country and devise
action to be taken to control it. The State Bank prepared an upto-
date survey of the inflationary situation and a separate note outlining
measures to check it. It was decided in this meeting that the Bank
should undertake a further study of the implications of financing
revenue deficits through created money and the propriety of
subsidising the sale of imported rice through borrowing from the
State Bank. Notes on these subjects were forwarded to the Ministry
of Finance on April24, 1957 expressing strong disagreement of the
State Bank with any suggestion to use created money for financing
revenue deficits.
On May 28, 1957 the Minister of Finance called another meeting

to consider the inflationary impact of the development expenditure
and the counteracting measures. The Governor attended the meeting
and urged reduction in Government expenditure and less deficit
financing. In the note sent to the Cabinet, summing up the
conclusions, it was explicitly stated that "the Governor of the State
Bank was strongly opposed to the Central Government drawing upon
the Bank without any limit."
In a Cabinet meeting on May 31, 1957 the Governor was asked

to attend, he pleaded with the Government to reduce its dependence
on the State Bank. Subsequently, Director Vaqar Ahmed who was
the Government nominee on the Board and the Governor proceeded
to Dacca with the Prime Minister, where they met the East Pakistan
Cabinet and urged upon it the imperative need of living within their
means and avoiding resort to inflationary methods of finance.
The Governor personally presented the Bank's view to the

National Economic Council in January, 1958. The Council agreed in
principle that there should be no more deficit financing and
appointed a high-powered Committee under the Chairmanship of
Governor, State Bank to continue the search for a solution. The
Committee submitted its report in May, 1958. It concluded that the
problem of inflation called for early and effective remedial measures,
including the elimination of deficit financing during the remaining
period of the First Five Year Plan, the stepping up of agricultural,
especially food production, the banning of further investments by
Government (except in purely strategic cases) in any field where
private enterprise was available, the securing of surpluses in revenue
budgets by increasing taxation and reducing non-development
expenditure and the reviewing of development outlays to ensure that
they were not beyond the real resources which were available or
could be diverted from consumption to production.
In August, 1958 the State Bank informed the Finance Secretary

that the advice of the National Economic Council against further
deficit financing had not been heeded. In the annual speech of the
year, the Governor pointed out that the money-creating deficit in
government transactions during 1957-58 was the highest on record for
any single year. Continued monetary expansion in the face of an
almost static supply situation had led to a further rise in prices. A
warning was sounded that it would be dangerous to allow pressures to
accumulate and, if corrective measures were delayed, it would
become increasingly difficult to control them. With the installation of
the new Government in October, 1958 the dangers of expansionary
fiscal policy were recognised and deficit financing was abandoned.
The Bank Rate
The question whether the raising of the Bank Rate could

counter the growing inflationary pressures in the economy and
contribute to the improvement of the overall economic situation was
examined by the State Bank several times since its inception. The
Governor informed the Central Board, in its meeting held in June,
1958 that the anti-inflationary impact ·Of a rise in the Bank Rate was
likely to be of no great significance on the state of Pakistan economy.

Bank advances hardly formed 5 per cent of our total national income
and unlike developed industrial countries of the West, the rate of
investment outlays in the private sector was not unduly high. A
change in the Bank Rate which was supposed to work through its
effect on the level of bank advances was, therefore, unlikely to prove
of much use in restraining inflationary pressures. The imperfections
of the money market further reduced the efficiency of the Bank Rate
weapon. Banking system was not yet widespread. Several financial
institutions were outside the control of the State Bank. Currency
rather than bank money formed the major portion of domestic money
supply.
In the absence of a well-developed short-term money-market

and an extensive chain of commercial banks, the utility of the Bank
Rate to produce the desired result was very limited. On account of
the unorganised nature of the money and capital markets and lack of
integration between the two, small changes in the Bank Rate were
unlikely to produce appropriate adjustments in interest rates
generally and sufficiently so as to exercise the necessary check on
consumption and investment demand. On the other hand, a very
sharp rise in the Bank Rate could not be contemplated on account of
the nascent stage of the gilt-edged market and the disruptive effects
of a steep decline in the market values of fixed-interest bearing
securities on the country's financial structure. Similarly, as regards
the effects of higher rates of interest on savings, small increases were
likely to be ineffective while large increases were not affordable on
account of the adverse impact of gilt-edged prices and the inability of
banks to sustain heavy losses.
The Governor further stated that as there was no evidence of

undue credit expansion, measures like the Bank Rate designed to
produce a credit squeeze would obstruct the smooth functioning of
the economy. The marketing and movement of our export crops was
likely to be affected adversely, for the bulk of the bank credit in
Pakistan was extended for this purpose. At the same time, it might
deter domestic production as agriculture and industry were already
suffering from inadequacy of credit facilities. On the other hand, it
would act as an undue deterrent to desirable private investment and

cause disturbances in long-term development plans. It would also
raise the cost of Government borrowing and make the internal
finance problem more difficult.
He further emphasised that quantitative credit restrictions at

that stage through the raising of the Bank Rate might also come into
direct conflict with the long term objectives of developing the
institutional framework through which a flexible monetary policy
may work. The securities market was still largely dependent on the
banking system for basic support and transactions were extremely
limited. Restrictive monetary policies of a traditional nature, if
pressed far, might therefore have a highly stabilising effect on this
nascent institution. On the other hand, a rise in the Bank Rate would
not only put the gilt-edged market in serious difficulty but also force
the banks to bear losses arising out of the decline in value of the
securities. Besides, the State Bank would not be able to absorb all the
effects in the event of large-scale unloading of government securities.
Moreover, if the State Bank were to continue its support in the gilt-
edged market, it might result in a wholesale transfer of government
securities to the State Bank and may thus have an effect quite the
opposite of what was intended.
In October, 1958 with the induction of the new regime the

economic policies changed radically. The Government vowed to
follow sound fiscal policies, thereby eliminating recourse to deficit
financing. A series of fiscal measures were initiated as part of the
overall stabilising programme to set the economy in order. To lend
support to the policies of the Government, the Governor decided
that monetary policy should also operate in unison with the fiscal
policy. The Governor informed the Board that now the time had
come when the Bank Rate should be raised, as it would:
(a) curb excessive investment activity by putting all investment

projects to the test of a higher interest rate. The impact will
be sharper in the case of long-term unproductive
investment such as house-building. In fact, it would give
much needed stimulus to quick yielding projects which will

have a healthy effect on the price level;
(b) encourage savings by offering a more attractive return;
(c) divert resources to the banking system through their higher

deposit rates;
(d) encourage response to the government loan floatations

frotn non-institutional investors;
(e) remove the rigidity in the economic system which might

have resulted from the Bank Rate remaining fixed at 3%
such as the inflexibility in the insurance premia rates;
(f) work for a flexible monetary policy as an instrument of

economic control calculated to curtail aggregate demand as
against the use of physical controls;
(g) demonstrate our earnestness to adopt corrective measures

for stabilising the economy and thereby creating a
favourable environment for foreign investment as also to
exercise a favourable psychological effect on international
opinion as represented by the IMF and the World Bank.
The Bank Rate was raised from 3 per cent to 4 per cent in
January, 1959. This was the first time since the establishment of the
State Bank that it had been raised. The reversal of the policy of deficit
budgeting by the new Government placed the question of monetary
policy in a totally new setting. The task of countering the effects of an
expansionary fiscal policy gave place to the need for reinforced fiscal
action designed to curb excess demand. The rise in the Bank Rate was
followed by a rise in the advance rates of commercial banks and
certain other credit institutions. Deposit rates of commercial banks
and other savings institutions·also went up. The higher interest rate
pattern in the country intended to serve an anti-inflationary purpose
by stimulating savings and discouraging the demand for credit for
relatively inessential purposes.
The Governor's repeated reminders to the Government to

check inflationary trends were again articulated in his speech
delivered at the 12th Annual General Meeting on September 10,
1960: The present state of monetary imbalances was partly the result
of past excesses which can well continue to distort the economy for
sometime to come. This called for the utmost care to contain the
destructive forces which were sent in train, years ago and to reverse
them as soon as possible. If the present monetary situation was
characterised by excess liquidity, this only confirmed that there
already existed a potential threat to financial stability. The fact that
money supply had risen by about Rs.300 million during 1959-60, of
which only Rs.l26 million was accounted for by the rise in foreign
exchange reserves should serve as a warning. The increase in money
supply had taken place inspite of Government's efforts to desist from
obtaining Central Bank credit. In fact, the consequences were
apparent in the pressures on the price level which had been witnessed
during the year. It was, therefore, necessary to ensure that the
situation did not deteriorate further.
Development Planning
Even before the publication of the First Five Year Plan, in the
Annual Speech for 1955, the Governor while discussing the role of
the State Bank in relation to economic development observed that as
capital accumulation and investment could be encouraged on sound
lines only in the framework of monetary stability, central banking
policies designed to achieve this objective played a vital role in
promoting economic development. The Central Bank's role would
not be merely to regulate the monetary and credit situation but would
be more positive towards economic development to ensure that the
various sectors of the economy were provided with adequate credit
facilities. At the same time, it did not necessarily mean that the
Central Bank would follow an expansionary monetary policy at all
times. Its functions as an agency for directly providing funds could at
best be extremely limited, for such financing would add to the
inflationary pressures already inherent in the process of rapid
development.
When the First Five Year Plan was released for discussion, the
State Bank actively participated in the various Working Parties set up
by the Government for examining the resource estimates and drew
the attention of the Government to the over-estimation of financial
resources. It was pointed out that the projected magnitudes of the
private and public savings and of foreign exchange likely to be
available for development purposes during the Plan period were not
realistic and likely to fall short of expectations. The acceptance of this
resource picture as the basis of the Plan could lead to one of the two
consequences: either the development programme would have to be
cut half way or there would occur an accentuation of inflationary
pressure and lowering of living standards.
It was emphasised that maintenance of a reasonable general

level of prices was of crucial importance for the implementation of
the development programme itself. The State Bank cautioned that
the First Five Year Plan was to be implemented against the
background of already existing inflationary pressures and there had
been an acute imbalance between the rate of increase in monetary
outlay and the supply of consumer goods, which had built up
considerable inflationary potential in the economy. The fact that
according to the Evaluation Report published by the Planning
Commission, 95 per cent of the Plan was fulfilled in financial terms
but much less in real terms because of the intervening rise in prices,
vindicating the position taken by the State Bank.
While stressing the need for realistic resource estimation and for
relating the size of the Plan to the real resources likely to be available
during the Plan period, the State Bank extended whole-hearted
support to the Plan. Addressing the Annual General Meeting of the
Bank in September, 1956 the Governor said that it was incumbent on
every one of us, whether in business, service, field or factory, to
regard its fulfilment as a personal obligation. He trusted that the
nation would rise as one man to meet the challenge of economic
development.
In April, 1957 the Bank received the Planning Board's

Memorandum outlining "Development Performance for 1957-58".
The comments made by the Bank were:

(a) Foreign exchange is likely to prove a serious bottleneck in
the implementation of development programme of the order
recommended by the Planning Board; (b) Internal resources are
not available to finance development expenditure of this
magnitude; (c) Deficit financing this year will be made higher
than Rs.250 million and may exceed Rs.660 million; (d)
Economy is exposed to grave hazards of inflation; (e) It would.
not be possible to carry out the programme and (f) Gold and
foreign exchange reserves are going down and are not adequate.
Drawing down the reserves is not advisable.
With the deterioration in the economic situation in subsequent
years, the Bank impressed upon the Government the need for utmost
caution. In the Annual Speech of 1957, the Governor was of the view
that the soundness of a development programme was not to be judged
from the number of factories that may spring up or the number of
dams that may be under construction but from the effect it produced
on the standard of living of the masses. In all democratic countries the
purpose of planned economic development was not to provide
windfall gains for any particular group or groups of the population
but the increase in general productivity and the real income of the
entire community. Exactly the reverse of this will happen if
inflationary tendencies were allowed to gain ascendency in the
economy. The main aim of the economic policy should be to strike a
balance between development and stability. It was pointed out that
an attempt to expand too fast would be inconsistent with the objective
of balanced economic growth as it would result in inflation and create
a number of excesses and distortions in the economy. The Governor
emphasised that there was no inherent fundamental incompatibility
between economic stability and economic development. The
problem was mainly one of achieving the right balance. Once this was
done, the two objectives were more apt to complement each other
rather than be in constant conflict. The objective before the country
should be that of a dynamic expanding economy.
However, it was necessary to ensure monetary stability to
facilitate economic growth itself at the highest rate and to sustain it
over a period of years. The policy of resistence to inflation that the

State Bank was advocating, intended not to slow down economic
progress but to stimulate it by creating conditions more favourable
for sustained economic growth and removing those which interfered
with the smooth functioning of the economy. It was, therefore,
suggested that the tempo of development from year to year should be
regulated, keeping in view the facts of the economic situation.
As inflationary pressures and balance of payments deficits

continued to mount, the Governor, reverted to the subject again in
1958 in his Annual Speech to the shareholders' meeting. He pointed
out that deterioration in both these sectors was traceable to a single
source: the claims on account of consumption, defence and
investment were exceeding the resources currently available. He
argued that the way to develop was to find real resources and to
release them from non-developmental sectors and emphasised the
need for a more comprehensive review of all spending plans, whether
current or prospective and their arrangement in a system of priorities.
The State Bank had all along stressed the need for relating the
size of the Plan to the resources which could be made available,
including those which were generated as development proceeded. It
had been in favour of the largest development programme that was
consistent with the availability of real resources and had urged their
maximum diversion from non-development uses through taxation
and by encouraging of genuine savings for promoting economic
development in the environment of economic stability. The Bank was
convinced that in the long-run the maximum rate of growth could be
achieved only by ensuring that short-term programmes did not
overstrain the economy by inflicting on it the mounting tensions of a
continually rising price level and of recurrent foreign exchange crises.
Savings were maximised when people were confident that a rupee in
the future would have the same value as a rupee the day they save it;
inflation corroded this confidence and reduced both the ability and
willingness to save voluntarily. It would thus cut at the root of the
development process which could be accelerated only through a
rising volume of savings in the economy.
The State Bank had always been of the view that over-
estimation, however unintended, of the resources which could be
mobilised for development led to a false sense of complacency about
the size and intensity of the effort required for putting the programme
through. What was more, it inveigled the Government into
undertaking commitments which turn out to be insupportable by real
resources, thereby forcing it to cover up the shortfall through resort
to created money in order to keep up a predetermined rate of
spending. Needless to say, such a course could only be self-defeating
for it frustrated the development effort which it professed to foster.
The State Bank had been advising the Government on

numerous policy matters sometimes on its own initiative and at others
when its views were sought. The value of its counsel had been publicly
recognised by the Government of the day. In a speech to theN ational
Assembly on September 9, 1958 the Finance Minister said that "while
preparing his budget in 1957 he had consulted experts of the Planning
Board, the State Bank and the Ministry of Finance on the quantum of
development budget. The Planning Board advocated for a figure of
Rs.2000 million; the State Bank recommended Rs.1200 million and
the Minister of Finance came up with a figure of Rs.1300 million. He
weighed all the arguments and presented a development budget of
Rs.1600 million. Later he found the conservatively minded right
because this increased expenditure proved to be a surcharge on the
economy of the country" .1 In November, 1958 the Finance Minister
also recognised the soundness of the views which the State Bank had
sought to impress upon successive governments in the past. 8 The
steps that were taken by the Government clearly vindicated the
Bank's counsels on some of the vital issues facing the country.
External Balance
With the termination of the Korean War boom, the country's

foreign exchange situation deteriorated rapidly and began to figure
Speech by Finance Minister, National Assembly, September, 1958.

Speech by Finance Minister, Seventh Annual Meeting of Institute of Bankers in Pakistan,
Karachi, January, 1959.
prominently in the advices given by the State Bank to Government

from the beginning of 1952. In order to meet crisis conditions in jute
and cotton market, the Government had introduced Price Support
Schemes in 1951-52 as discussed in Chapter-VI. The State Bank
argued that the schemes had arrested a natural adjustment process in
the balance of payments by sustaining internal income at a high level
and had retarded exports since the support prices were out of tune
with international prices. The State Bank also impressed upon the
Government the need for the tightening of import restrictions of a
quantitative character. The position continued to deteriorate during
1952-53 partly due to a continued decline in export receipts. The
strain was intensified by the need to make large imports of
food grains.
By the middle of 1954, the decline in reserves had assumed

alarming proportions and in a series of communications to
Government, the State Bank urged for early action to control
expenditure, specially on Government imports. In the Annual
Speech for 1954, the Governor warned that the decline in reserves to
an unduly low level had serious implications for the country's
economy, particularly for its development programme, and
emphasised the need to restrict payments in coming years well within
estimated receipts. With the devaluation of the rupee in July, 1955
the external situation improved perceptibly.
However, the problem was once more brought into prominence

in the beginning of 1957 by the emergence of a deficit in the first
quarter of 1957, which normally registered a surplus, during this part
of the year. Later in the year, attention was drawn to the
deterioration in the balance of payments position during 1956-57
compared with the previous year. The foreign exchange reserves
continued to decline and in the beginning of 1958, the Governor
invited the attention of the Finance Minister to the decision of the
Cabinet earlier made that reserves should not be allowed to fall below
Rs.100 million and warned that the dangerlimit was being reached.
By the middle of 1958, the situation had deteriorated to such an
extent that the State Bank was compelled, in successive
communications to the Finance Minister and the Prime Minister to

warn that the country would be reduced to the position of a defaulter
in international payments in case corrective action was long delayed.
As a result, the Prime Minister set up a high-powered

Committee under the Chairmanship of the Governor, State Bank in
July, 1958 to suggest remedial measures. In an interim report
submitted in the same month, the Committee observed that the
critical foreign exchange situation was the result of excessive
Government expenditure and that bankruptcy could be avoided only
by a sharp reduction in payments on Government account. In the
Annual Speech in 1958 the Governor interlinked the problems of
inflation and the balance of payments. The consequences of the
former were already manifesting themselves in the latter.
Excess demand in the domestic market was diverting to home

consumption output which could otherwise have been exported. The
need for large food imports could similarly be attributable in part to
higher intake of food by those who were recipients of higher money-
incomes generated by increases in purchasing power unmatched by a
corresponding rise in output. Inflation also had adverse
repercussions on the ability to export by raising cost of production in
export industries and thereby weakening their competitive power in
foreign markets. Appropriate measures to arrest the deterioration in
the country's foreign exchange earnings and reserves were
contemplated by the Government.
10
Building Projects
Like the administrative apparatus the locus of economic power

in the undivided subcontinent was the union territory. In Pakistan
both had to be built from scratch. Barring the Punjab, New Delhi was
the seat of one and Bombay of the other, which was also the
headquarters of the Reserve Bank. Elsewhere its main offices were
located besides Delhi in Madras, Calcutta, and Cawnpore. In the
Pakistan areas, Lahore was the only city to have a respectable office.
On the banking map of the subcontinent Karachi which subsequently
became the centre of commerce and industry of the new State, had
occupied a minor and insignificant place with a modest office housed
in modest premises in Boulton Market.
The State Bank did not even have a building of its own to
accommodate its Central Directorate, which had to be temporarily
located in Victoria Museum whose collection of antiques were moved to
the Frere Hall on Victoria Road through the courtesy of the Karachi
Municipal Corporation. it had to have a building which would
symbolise the economic sovereignty of the state and proclaim its pre-
eminently national character. Emphasising its importance the
Governor of the State Bank, while addressing the Central Board
meeting in October, 1951 said:
The main building of the Central Bank of the country must be built to
337
proper standards and must be suitably sited. It would be one of the

most important national buildings of the country. Posterity will judge
us, among other things, from the buildings we construct. Having
formed a State Bank for a country which we rightly claim to be the fifth
largest in the world and the first largest among Muslim countries and
having laid claim to build it as a laboratory for Islamic way of life, we
must bring up our thinking and planning to the appropriate level and
must rise above the ordinary municipal town level. Our national
buildings must rightly express our ambitions and embody our ideals.
This was followed by quest for a renowned architect. Names of

several architects from India and elsewhere were suggested for the
preparation of the designs of the main Bank building in Karachi. The
employment of an architect with permanent headquarters outside
Pakistan was at first not considered desirable. It was also intended to
enlist the co-operation of an architect from a Muslim country for
collaboration with the principal architect. On the advice of the
President of Central Engineering Authority of the Government, it
was decided by the Bank to employ Messrs M.R.V. (Pakistan), who
were working as consulting engineers to the Government of Pakistan,
for this purpose. The Authority of the Government was asked to
commission them to prepare the designs and later to supervise the
construction. The firm agreed to undertake the assignment in April,
1949.
The Egyptian Ambassador in Karachi was also requested to
help the Bank in securing the services of a noted Egyptian architect
to advise the consulting engineers. The Egyptian Government
willingly placed the services of the country's well-known architect
Mahmoud Riad who had planned the New Auqaf City near Cairo.
The Egyptian Government also decided as a gesture of friendliness
for Pakistan to pay his fee. In consultation with Mahmoud Riad,
Messrs. M.R.V. (Pakistan) submitted 3 designs in early 1950. One of
the designs was initially approved by the Central Board, Finance
Minister and Prime Minister. Unfortunately, this design could not be
used with the change of architect subsequently.
The vacant site on McLeod Road, taken over by the State Bank
from the Reserve Bank of India was considered by the architects to be
BUILDING PROJECTS 339
inadequate and unsuitable for a building of national importance and

architectural beauty, because of too small an area, narrow road, the
noise, smoke and dirt etc. The Bank, therefore, had to obtain expert
opinions on the selection of a suitable site in or near the commercial
area of the city.
After considerable search and investigation the experts selected

the site between the Jinnah Courts and the Ingle Road (a major
portion of which was occupied by the Muslim Gymkhana). It
possessed adequate setting and the experts were of the opinion that
it will bring into prominent relief the architectural characteristics of
the building which had been planned. Their findings were referred on
December 18, 1950 to the Government of Pakistan for a decision.
Early in April, 1951 the authorities of the Muslim Gymkhana, having
got the wind, registered their opposition to it and worked up an
agitation in the press. In their representations to the Government
they suggested alternative sites; (i) the Polo Ground, (ii) Y.M.C.A.,
(iii) Sadiq Traders, McLeod Road, (iv) the Hindu Gymkhana, (v)
Royal Hotel, McLeod Road, and (vi).Burns Garden for the Bank's
building.
On the request of the Ministry of Finance received in June,

1951, these sites, in addition to the one situated behind the
Constituent Assembly Building, were inspected by the Bank's
architect and a detailed report on their suitability or otherwise was
sent to the Government on August 25, 1951. In this report the
architect reaffirmed their view that the Muslim Gymkhana location
was ideal for the Bank's building in the neighbourhood of the
commercial area of the Capital. The Muslim Gymkhana site which
was perhaps the most suitable venue had to be dropped for political
reasons.
In the year 1953 the Government offered an alternative site

situated in the Artillery Maidan, near the Constituent Assembly
Building and adjoining the multistoreyed building on Kingsway. The
site was inspected by the members of the Executive Committee on
November 4, 1953. It covered an area of about 5 acres and was,
therefore, fairly spacious. It was also excellently located with a
dominating frontage and being near to the city and business area. The
Executive Committee was in favour of accepting the offer. The Board
also expressed its agreement with the Executive Committee's
recommendation to buy the land at a price fixed by the Government
and let the Central P.W.D. put up barbed wire to enclose the plot. In
addition, the Government was to be approached for the allotment of
the vacant plot in the vicinity of the site.
Since the main building of the State Bank had to be a prestigious

structure, serious efforts were made to appoint an architect of
international repute for this purpose. Particulars of 12 renowned
architects of the subcontinent and abroad were collected and
submitted to the Board's Committee. After a thorough examination
of the expertise and experience of the competing firms, the Executive
Committee at its meeting, held on June 28, 1954 decided "that J.A.
Ritchie, Chartered Architect, who had been commissioned by the
Reserve Bank of India to design several of their buildings, be
sounded for designing and planning the Bank's main building at
Karachi". Accordingly, Ritchie was invited to Karachi for
preliminary discussions.
Meanwhile, a Works Committee was constituted to assist the

Governor in making arrangements for the construction of the
building, headed by Governor, Abdul Qadir with Deputy Governor,
Sher Jang Khan and Director Syed Maratib Ali Shah, Hatim A. Alvi
and Kassim Dada as Members. The Committee met on July 14, 1954.
Special invitation was sent to Ritchie to attend the meeting. The pros
and cons of location of both the sites, one on McLeod Road and the
other on Kingsway which had been seen by the Architect, were
discussed. The Architect observed that he was not impressed by the
Kingsway site as it was lacking in depth. He was strongly in favour of
erecting a combined building of Central Office and Local Office on
the McLeod Road. However, this suggestion was not in conformity
with the earlier decision of the Central Board, to have the main
building located on the Kingsway and the Local Office building on
the McLeod Road. The opinion of the Architect had, therefore,
raised a fundamental issue.
Another meeting of the Expert Committee was convened and

the objections raised against the siting of the combined main building
on McLeod Road .by the members were discussed with Ritchie. His
detailed answers to each objection, raised individually as well as
collectively by members of the Expert Committee, convinced them
that the McLeod Road site was not only adequate in size but also
ideally situated. One of the most serious objections was that the size
of the plot was too small for the combined building of the Central
Office and Local Office. Ritchie cited the example of the building of
the Calcutta Office of the Reserve Bank which was being built on a
small plot. This new building of the Reserve Bank in Calcutta would
have accommodation not only for the local office but for the Central
Directorate and will also provide rooms for the Governor, the
Deputy Governor and the Central Board. He further added that he
was associated with the purchase of the plot by the Reserve Bank and
on that occasion he had advised the Reserve Bank that the plot was
too large for their requirements. The Reserve Bank, however,
purchased the plot as the owner was not agreeable to sub-divide it.
In July, 1954 the Architect was asked to prepare rough plans for
the main building making the best use ofthe space. The plan took the
final shape in early 1955 after a series of discussions with the
Architect and was formally approved by the Central Board on April
4, 1955. The building was designed in modern functional style.
The Board approved the selection of 14 firms of contractors for
the construction of the main building in January, 1956 for inviting
tenders. The tenders received were despatched to Ritchie for
examination and comments. The Architect recommended the
acceptance of the lowest tender submitted by Sheikh Guizar Ali. The
Central Board accepted the tender of Sheikh Guizar Ali amounting
to Rs.7.89 million, at its meeting held on October 29, 1956.
According to the original plan a building consisting of 12 storeys

was to be constructed. Total office space requirement, inclusive of
expansion for the next few years, was assessed to about 1,57,000
square feet. The Governor informed the Central Board, in its
meeting on July 22, 1959 that the total office space provided so far in
the main building, inclusive of ground· floor measured 2,24,000

square feet approximately, having a surplus space of nearly 67,000
square feet for future expansion of the Bank to accommodate the
Local Office and Central Directorate. Meanwhile, the Government
had decided to transfer the Capital of the country from Karachi to a
place near Rawalpindi. Although the decision did not affect the
Bank's activities and requirements in Karachi, most of its future
expansion was certain to shift to the new Capital. The Bank no longer
required 67,000 square feet for its expansion in Karachi. The
Governor, therefore, suggested that the construction of two top
storeys covering 29,000 square feet from the tower portion of the
main building could be dropped conveniently, the Bank would still be
left with about 38,000 square feet for future expansion in Karachi.
In addition to the main building an annexe with total

accommodation of about 40,000 square feet mainly for storage of
forms, stationery, etc., and for residence of caretaking staff was also
to be constructed. Besides this, the Central Board had approved the
acquisition of a plot of evacuee land at the rear of the Bank's main
building site, providing about 3 acres ofland, a part of which could be
used for putting up an additional building to meet any future
requirements of the Bank in excess of 38,000 square feet provided for
in the main building after reduction of the two storeys as proposed. In
consequence of the reduction, the cost of the building could be
reduced by about Rs.2 million. The matter was also discussed with
the Architect who agreed to this proposal and assured that the
contractor would have no objection. This proposal was approved by
the Board and the construction of main building was reduced to 10
storeys.
Bank Premises in East Pakistan
The Dacca Office of the Bank was housed in a school building.

Many additions and alterations were carried out in this building to
make it suitable for the Bank at heavy cost. With the growing
requirements of the Bank and the inadequacy of the space, more
particularly for the convenience of the members of the public, it was
realised that to serve them adequately, extensive additions and

alterations were necessary. Therefore, negotiations were started with
the East Bengal Government, who owned the building, for its sale to
the State Bank. The building was purchased at a cost of Rs.1 million
on January 1, 1951. It was also decided to construct a new three
storeyed building block to its south with the object of providing
additional accommodation to the Dacca Office to meet its growing
needs. This work was completed in 1954-55, at a cost of nearly half a
million rupee, covering floor area of 17,000 square feet.
In the meantime, Government of East Bengal had taken a

project in hand for developing a new commercial area in which they
invited the State Bank to purchase a plot for constructing its building.
Accordingly, a plot was allotted to the State Bank in 1955. At the
same time, efforts were made to finalise the construction of the new
building for Dacca Office in the new commercial area. By the end of
1955-56, most of the preliminaries viz. acquisition of land and the
selection of an architect were completed. The foundation stone of
Dacca Office in Motijheel Commercial Area was laid by the
President, Major General Iskander Mirza on April 26, 1958. The
construction work of the building was completed after 1960.
Office accommodation in Chittagong, too, was far from

satisfactory. Therefore, the Central Board in March, 1950 approved
the proposal to purchase the building occupied by the Exchange
Control Department of the State Bank and the premises attached to
it from the Education Committee, Chittagong, at a price to be
mutually agreed upon the basis of the ruling market prices in
Chittagong. Moreover, a plot of land measuring 1.44 acres on the
slope of the Court Hall was purchased from the Government for a
price of Rs.1,44,000 to construct the office building in Chittagong.
For reasons of urgency, the construction of this three storeyed
building with ground floor area of 23,320 square feet was entrusted to
the provincial Public Works Department. Starting from January,
1952 it took some two years to complete it. The building was formally
inaugurated on November 29, 1953 by the Governor, East Bengal,
Chowdhary Khaliquzzaman.
Necessary steps were also taken in 1954-55 to construct a new

office building of the State Bank in Khulna on a plot of land
measuring 1.26 acres acquired for this purpose.
Bank House for the Governor
According to the conditions of his service the Governor of the

State Bank was entitled to a free furnished house. The first Governor
of the State Bank, Zahid Husain, when he was appointed as Officer
on Special Duty in the Ministry of Finance, was allotted a
requisitioned house by the Government of Pakistan, which he was
allowed to retain after his appointment as Governor of the State
Bank. At the time of the establishment of the Bank the Estate Officer
was advised to derequisition the house and to hand over its
responsibility to the Bank. Action on this request was delayed and
after several months the house was derequisitioned and allotted to
the Governor. The suggestion that the responsibility of the house be
taken over by the Bank was made to avoid the difficulties, generally
experienced in getting even small jobs executed by the P.W.D. and
also because it was felt that the responsibility of Governor's House
should rightly be assumed by the Bank, instead of its remaining with
the Government.
The house was not suitable as a residence of the Governor, but

he decided to stay in the same house till the construction of a new
house for his residence. Miscellaneous costs for maintenance,
repairs, renovation and alterations were borne by the Bank.
In view of the difficulties faced in the absence of an official

residence for the Governor and Deputy Governor, the Central Board
in its meeting held on July 30, 1953 appointed a Committee,
consisting of Hatim A. Alvi and Kassim Dada to negotiate and
purchase suitable houses for both the Governor and the Deputy
Governor. After a thorough examination of the different sites
available, in 1954 a plot of land on Burns Road (now Fatima Jinnah
Road) was purchased for construction of a house for the Governor.
The old structure on the plot was demolished and the construction
started in 1955. This house was completed in 1956.
Residential Accommodation for all Cadres

In 1949 the Bank secured a plot of land opposite the Parsi
Industrial Home near Preedy Street, at Karachi for construction of
residential flats for supervisory and clerical staff. However, it took
quite sometime to organise its construction. It was towards the
middle of 1957 when the construction of seven blocks, containing 86
residential flats for the officers class-I and -II was completed and the
flats occupied.
A plot measuring 40 acres of land was acquired from the Karachi

Improvement Trust in their North Nazimabad Development Scheme
in 1954 for the construction of quarters for the clerical and
subordinate staff. Soon the construction started. By 1958, 96 quarters
for clerks and 48 quarters for peons had been built in North
Nazimabad and occupied by the staff. On the same site, 48 bachelor
type flats were constructed in 1960.
In 1957-58 four flats for senior officers, on Queens Road, were

built and allotted to the concerned officers. The construction of two
semi-detached bungalows on Queens Road was also completed
during the next year. In addition, five plots of land measuring 2000
square yards each were purchased in the Karachi Improvement
Trust's Drigh Road Town Expansion Scheme for constructing houses
for senior and principal officers.
Dacca
Like Karachi, Dacca and Chittagong suffered equally from the

shortage of residential accommodation. The East Bengal
Government constructed a colony for Government employees at
Dacca and agreed to reserve a block of quarters for the employees of
the State Bank. It was envisaged to build staff quarters in both the
cities. The Government of East Bengal earmarked plots of land for
Central Government requirements at Dacca, out of which 5 acres of
land were reserved for the State Bank in 1950-51. This area, however,
was found insufficient and negotiations were started with the East
Bengal Government for acquisition of approximately 6Vz acres more
land for this purpose.
Initially, four quarters for class-I officers were constructed and

handed over to the staff in Dacca in 1955-56. After a period of two
years the work for construction of 24 additional flats for clerks and 8
for officers was completed.
Chittagong and Khulna
In Chittagong, the State Bank was allotted a plot of land,
measuring 2 acres to partly meet the housing demands of its staff. The
pace of construction work in respect of residential accommodation
for the employees of State Bank was faster in Chittagong as
compared with Dacca. For example, 106 staff quarters of various
categories were completed by mid-fifties in this city. Initial work viz.
acquisition of land and preparation of plans for construction of
quarters for the staff was also carried out in Khulna upto 1960.
Lahore
In the beginning, the problem of residential accommodation
was not so acute in Lahore, as in Karachi. Therefore, it was not
considered necessary by the Bank to take special measures for this
purpose immediately. In mid 1958, 42 kanals of land in Gulberg
Scheme No.3 and 30 acres of land near Wahdat Colony of the Lahore
Improvement Trust were acquired for construction of quarters for
the Bank's staff. Construction work was undertaken soon but had to
be extended beyond 1960.
N.W.F.P.
The Government of the North West Frontier Province
volunteered to place a number of houses at the disposal of the Bank
in 1949-50 for the accommodation of the staff transferred from
Lahore to the Issue Office at Peshawar. Without this assistance from
the Government, it would have been extremely difficult, if not
altogether impossible, for the State Bank to open its office at
Peshawar so soon after its inauguration. This was one of the reasons
why no early steps were taken to provide office and residential
accommodation in Peshawar. However, some land was acquired
during mid 1960 for construction of staff quarters to meet the
expanding demand.
---------------
11
The Bank as an Employer
The Bank started its career with a skeleton staff for reasons
which have been repeatedly emphasised in earlier chapters. For its
effective functioning as the central bank of a new country, it had to
have both the manpower and material resources besides an
organisational set-up. Deficient and deprived in each of the three
sectors vital to its operation, it was a time-consuming and painstaking
process to build up an institution that could command prestige c:tnd
inspire confidence of the people in the economy, of which in a sense
the Bank was a caretaker and custodian.
The Bank had a long way to go to establish its credentials. With

only four departments in its Central Directorate manned by eleven
officers and one hundred and twenty five staff members, it had to
increase its strength for sustaining the tempo of growth and
expansion of its activities. By the end of 1960, the departments had
increased to ten, officers to 122 and the number of clerks on its pay
roll to 848. After the inception of the Bank in 1948 four offices had
become functional in the important cities of Karachi, Lahore, Dacca
and Chittagong. In the following twelve years five more offices had
been added at Peshawar, Quetta, Lyallpur (Faisalabad), Rawalpindi
and Khulna.
The rapid expansion of the Bank was accompanied by an equally
347
-- ~-- ---------~ -------------~-------- --

rapid multiplication of its problems. Fortunately, for the future of the

Bank employer-employee relations in the early years were imbued
with a spirit of service and sacrifice, characteristic of the whole
society. Employees of all cadres from the highest echelon to the
bottom of the scale worked with unabated enthusiasm and tireless
energy. Most of the officers remained till late in the office and so did
the supporting staff.
Zahid Hussain, the first Governor of the State Bank, never

spared himself. His unremitting application and sense of duty was
exemplary beyond description. Whether in office or at home, he was
on duty during his waking hours. He set the tone and temper of the
operations, encouraging his subordinates at every stage and step and
ungrudgingly acknowledging their contribution to the
accomplishment of the task he considered sacred. He gave them a
handsome tribute at the first Annual General Meeting of the Bank
held in September, 1949:
We take this opportunity of placing on record our sense of
appreciation of the loyal and devoted service which the State Bank in
the first year of its life has received from its officers and staff. The
progress made by the Bank would have been impossible without their
loyal and willing cooperation. They always cheerfully responded to the
calls made upon them and it gives me great pleasure to record our
sense of obligation to them for the manner in which they have
performed their allotted task.
On the occasion of the second Annual General Meeting he

reiterated his deep appreciation of their performance in these words:
For the considerable amount of work done, I wish to publicly

acknowledge the debt of gratitude which I and the country owe to the
loyal and enthusiastic band of officers and staff in the State Bank. I
wish, however, to tell them that there is still a great deal to be done,
and we cannot afford to be complacent and indifferent. Our goal may
be visible but it is still very far on the horizon. We must continue to
labour without being lured or distracted by those whose sole object is
to cause frustration and breakdown. There is a great future for banking
in this country and I can see it unfolding itself before me, and I am sure,
you also see it before you.
THE BANK AS AN EMPLOYER 349
While the Governor's appeal to their patriotism had evoked a

spontaneous response, he was not oblivious of the need to devise and
develop a service structure in which merit and hard work would find
their remuneration and reward. He knew as well as any high
functionary of the state ought to know, and his own rich experience
in management and administration had taught him, that the
foundations of progress could well and truly be laid on the discovery
of talent and its training. Provision of incentives and opportunities for
advancement were essential for the achievement of professional
excellence and integrity. So minimal was the share of Muslims in the
banking services in undivided subcontinent that they were almost
strangers in the field. The State Bank had not only to equip itself for
discharging the functions of a Central Bank but as a Banker's Bank to
promote the organisation and development of the emerging banking
profession and industry in the country on sound lines not through
directives or dictates but by its advice and their consent.lt could serve
as a source of inspiration by setting an example of efficiency and
honesty.
The structural organisation of the Bank was partly inherited and

partly an adaptation to the new environment in which it had to
function. A wholesale adoption of the system existing in pre-Partition
period was neither desirable nor practicable. Innovations were,
therefore, inevitable, which the Bank readily made to achieve the
objectives it had set before itself.
Classification of Staff
To streamline the administrative structure of the institution, one

of the earliest steps taken by the Bank in May, 1949 was to classify its
staff on scientific lines. The Bank inherited the following
classification from the Reserve Bank of India:-
Class I Officers
Class II Staff Assistants, Superintendents, Deputy
and Assistant Treasurers and other
employees on grades whose starting pay
exceeded Rs.200 p.m.
Class III Clerical and Cash Department Staff

Class IV Subordinate Staff
Treasurers were accorded the status of employees in class-I and given

the very same concessions admissible to officers under the staff
regulations, to be decided by the Governor.
In class-11 the Reserve Bank had grouped a number of

categories of staff which had very little in common with each other,
except their pay scale. The classification of staff was primarily
determined by the duties and responsibilities of different categories,
each category including employees who performed duties similar in
nature and exercise more or less equal powers on behalf of the
institution. "It seems unscientific to me that superintendents who hold
signing powers on behalf of the Bank and can commit the Bank to
varying extent should be grouped with assistant treasurers or others
belonging to grades the starting salary of which exceeds Rs.200 who
have no signing powers and whose responsibilities can in no way be
compared with those of a superintendent", the Governor observed at
the meeting of the Central Board of Directors, held on May 10, 1949.
A superintendent in the State Bank had a special position. He

was the immediate administrative head of the secion concerned,
responsible for its smooth and efficient working. By virtue of his
assignment and the pay scale on which he was borne, a
superintendent was in fact an officer of the Bank possessing certain
signing powers. To an outsider the designation 'superintendent'
conveyed a wholly erroneous impression of the status and duties of
this post. The Governor, therefore, recommended that
superintendents should be classed as officer of the Bank, the exact
gradation depending on the extent of signing powers. Accountants
and assistant accountants who possessed important signing powers
should be known as 'officers class- I'. Those who were then known as
superintendents should be designated 'officers class-II'. Among the
superintendents at that time there were two categories (a) sub-
accountants and (b) superintendents. The sub-accountants, who
were usually permanent superintendents, possessed greater signing
powers than the superintendents. This distinction was to be
maintained in the revised classification. The sub-accountants were to

retain their designation but the superintendents were to be called
'junior accountants'.
The assistant treasurers and others belonging to grades with a

starting salary exceeding Rs.200 were to be grouped under 'Category
B - supervisory staff'.
'Category C - clerical staff' were to include all clerical staff of

general side and Cash Department staff excluded from the
category B.
Category D - subordinate staff - were to include all

subordinate staff.
The classification of staff was thus made as follows:
A. Officer Class I i. accountants and

ii. assistant accountants
Officer Class II i. sub-accountants
ii. junior accountants
B. Supervisory Staff Assistant treasurers or others belonging to
grades the starting salary of which exceeded
Rs.200 p.m. not included in category
A. Cases in which there were doubts as
to whether an employee fell in category A
or B to be decided by the Governor
C. Clerical Staff All the clerical staff including Cash
Department staff not covered by
category B
D. Subordinate Staff All subordinate staff.
The Governor revised the classification of senior officers as

well. The senior posts were divided into two categories viz. (a)
principal officers, (b) senior officers. The following were designated

as principal officers:
1. chief accountant
2. deputy controller exchange
3. inspector
4. secretary to the Central Board
5. chief officer, B.C.D.
6. branch managers of Karachi, Dacca and Lahore.
The remaining posts of (1) deputy chief accountant, (2) deputy

chief officer, B.C.D., and other posts, if created later in the scale of
Rs.1000-50-1250, such as deputy managers of branch offices were
classed as senior officers and designated as such. The post of deputy
director (statistics) was not intended as a permanent feature of the
cadre and, therefore, treated as a post created outside the cadre.
The other classification given to the accountants, banking

officers, etc. as officers class-! and to sub-accountants and junior
accountants as officers class-II were, however, to continue.
Recruitment of Officers
Initial recruitment of officers in the formative stage of the Bank

has already been dealt with in Chapter-III. With ever increasing
requirements of the Bank special measures had to be taken to secure
the services of trained and experienced staff when brought to the
notice of the Bank or in response to advertisements released to
newspapers. In these circumstances a few experienced and qualified
officers were recruited directly with the approval of the Central
Board in each case. Before appointment these candidates were
interviewed by a special committee set up for the purpose.
Almost all the candidates recruited through this procedure

belonged to the banking profession, having considerable experience
in the field and in some cases had held key positions in the profession.
A few of the officers selected, had served in the Hyderabad State
Bank (in pre-Partition India), bringing with them also the experience
of currency management. Had this step not been taken by the State
TIIE BANK AS AN EMPLOYER 353
Bank, some of these candidates might have been lost to the

profession to the detriment both of the interest of the State Bank and
banking industry in general, which was in a state of complete
dislocation in the early years of Pakistan. The training schemes
launched by the Bank, the first of the series being introduced in
August, 1948 were another source of recruitment. (Discussed in
detail in Chapters II and III).
In February, 1951 the officers cadre ofthe State Bank comprised

13 princip~ officers; 2 senior officers, 65 class-I officers (general) and
10 class-! officers (miscellaneous). After the staff position· had
improved, the stage was set for standardising and rationalising the
recruitment policy.
The Central Board in its meeting, held on May 19, 1952

approved the formation of a Selection Board for a period of two years
for the following purposes:
1. recruitment of class-I officers in State Bank of Pakistan;
2. promotion to class-I officers from the Bank's lower grades;
3. selection of candidates under the Bank's Training Scheme.
The Selection Board was constituted as under:-
(a) Deputy Governor Chairman
(b) One of the ·Government Directors on the

Board or the Executive Committee Member
(c) One non-official Director Hatim A. Alvi Member
The Board was reconstituted each time the need for recruitment
arose.
Recruitment Policy for Clerks

Recruitment for clerical posts was done by the Central
Directorate through open competition. Every year an advertisement
was inserted in the press, inviting applications for vacancies. After
their scrutiny, eligible candidates were called for written tests and
interviews. As recruitment was made on an all Pakistan basis, tests
were held at all the offices of the Bank throughout the country. The
question paper was set at the Central Directorate and answer books
were examined at the same centres. The names of the successful
candidates were placed on a waiting list in order of merit. The waiting
list was prepared in two parts; one part comprising candidates from
East Pakistan. Selection for appointments was made from the waiting
list, which remained valid for one year subject to the extension of its
validity for another year.
Promotion Policy
The Bank had set a policy for promotion from lower grade to
higher grade. Seventy-five per cent of the posts of junior accountants
were filled in by promoting clerks grade-I on the basis of seniority and
suitability of the incumbent. Their suitability was judged on the basis
of confidential reports. The remaining 25 per cent were filled on
merit, irrespective of the position of incumbent on general seniority
list. For determining suitability of an employee against this merit
quota, academic and professional qualifications, etc. (passing of
Bankers' Institute Examination) and Confidential Report were taken
into account. An additional inducement for acquiring academic and
technical qualifications the Bank offered monetary benefits in the
scale of pay and also honorarium to members of the lower staff.
Appointment of Children of the Subordinate Staff
If any child of a member of the subordinate category passed the

Matriculation Examination, he was appointed as clerk grade-II in the
Bank in preference to the candidates on the waiting list, prepared on
the basis of clerical recruitment test. The policy served a dual purpose
of educating their wards and subsequent employment.
General Service Conditions
The Governor took personal interest in the welfare of the staff

and never hesitated to meet their representatives. During the visit to
East Pakistan in September, 1951 he met the office bearers of Clerical
Staff Associations who ventilated their grievances to him over the
extraordinary rise in the cost of living and insufficiency of
emoluments to meet their elementary needs. Similar dissatisfaction
was reported from other offices of the Bank also. It was, therefore,
considered necessary and desirable to examine their grievances and
devise means for redressing them.
A sub-committee was appointed in December, 1951 by the

Governor, comprising Deputy Governor as Chairman and two
Directors of the Central Board, Hatim A. Alavi and Mohammad
Ismail as its members to scrutinise the pay scales of the clerical staff.
It was to determine the adequacy or otherwise of the prevalent scale
of emoluments drawn by the Bank's clerical staff with a view to
bringing them in line with the remuneration offered to this class of
employees in commercial banks. At the very outset the Bank had
adopted the pay scales which were in force in the Reserve Bank with
some adjustments in the case of officers. The Government felt that
the emoluments were higher than the scales prevalent in its own
service. At one stage the Bank was asked to reconsider its policy to
avoid resentment among government servants. It, however,
expressed inability to reduce its staff salaries because of the nature of
duties Bank employees had to perform.
The Memorandum of demands received from various offices of

the Bank showed wide divergencies in pay scales as well as
allowances, reflecting substantial difference in the cost of living at
various centres. In making their demands the representatives had
also taken into account the pay and allowances admissible to
government servants and employees of other banks at their centres.
Summarising the demands, it was observed that apart from pressing
for a revision of the existing pay scales, the clerical staff had pleaded
for an increase in dearness allowance, extension of medical facilities,
removal of bar as to age and years of service for the grant of family
allowance, grant of house allowance and provision of quarters to the

staff who could not afford the exorbitant rents of accommodation.
The sub-committee after examining the demands carefully came

to the conclusion that the prevailing scales of pay for the clerical staff
were adequate and there was no justification for any increase.
However, it favourably considered the case for an increase in
dearness allowance and revised the minimum limit for all the
categories of clerical and subordinate classes with effect from April1,
1952. In addition, the Bank introduced local allowance effective also
from the same date, initially for 'C' category of staff only to meet the
high cost of living at important centres, namely Karachi, Lahore,
Dacca and Chittagong. Later, not only the rate of allowance was
raised but its scope was also extended to other centres, such as
Rawalpindi, Lyallpur and Quetta.
In 1948, scales of pay of senior staff in the State Bank were fixed
in confirmity with the general policy of the Government. Since young
and comparatively inexperienced officers were to be appointed to
high positions, it was considered advisable to be cautious in the
determination of their emoluments. Subject to these considerations
the Bank tried to maintain the structure handed over to it by the
Reserve Bank.
The Reserve Bank revised the pay scales of several senior posts
in the early fifties, giving higher emoluments to junior officers than
the counterparts of their seniors transferred to Pakistan were
receiving in the State Bank. Moreover, the Central Government had
also revised its own policy in respect of salaries of senior officers,
which it had followed in 1948. The Governor, therefore, suggested to
the Board in October, 1952 that senior officers had, during the last
four years, acquired experience and a measure of maturity, justifying
a review of the position and a consequent revision of their salaries.
He proposed to carry out an examination of the pay scales for senior
posts in the Bank and to collect all the relevant data. This proposal
was approved by the Central Board. Ultimately, in July, 1957 the
Board appointed a sub-committee, consisting of Deputy Governor as
Chairman and Directors, Vaqar Ahmad and Kassim Dada to
examine the grievances of the Clerical Staff Association. In June,

1958 the terms of reference of this committee were enlarged to
include the class-I, class-II officers and the subordinate staff as well.
The sub-committee had several meetings. It visited Lahore and

Dacca offices of the Bank and heard representatives of Staff
Associations in these places, and at Karachi. Enquiries were also
made about pay scales and allowances prevalent in other banks,
commercial institutions and government departments. Tentative
decisions were then taken about the recommendations to be made.
However, these could not be finalised earlier because it was
considered advisable to wait for the Government's decision on the
reports of the Pay Enquiry Commission and the Pay and Service
Commission which were successively appointed to look into the
emoluments and service conditions of their employees. The first
Commission having been disbanded and.· the second not having
commenced its work, there was no knowing when the Government's
decision would be available. Meanwhile, the Bank's employees of all
categories were feeling restive and pressing hard for early acceptance
of their demands. In the interest of smooth and efficient
administration of the Bank, it was decided that the sub-committee
should go ahead and finalise its recommendations. The final meeting
took place on December 10, 1959. The recommendations made were
to be effective from January 1, 1960.
The improvements effected from January 1, 1960 did not satisfy

the staff. Individual as well as collective representations continued
pouring in. The staff not only represented against the anomalies
which resulted from the revisions of 1960 but also continued to press
for those demands which had not been accepted either partially or
fully. The matter was reconsidered by a Committee of Principal
Officers appointed in 1960. Some improvements were effected in the
terms of service of the employees later.
House Building Advance
Most of the employees of the State Bank came over from India,
had to fend for themselves in the matter of accommodation of which
there was an acute shortage in the country. Advances for house

building purposes had, therefore, become imperative. The scheme
prepared by the Bank allowed them to draw upto 18 months' pay
recoverable in 72 monthly instalments. The high cost of building
material and labour, forced the Bank to raise the limit for the low-
paid employees in 1954 from 18 to 24 months' pay repayable in 120
instalments. With the gradual increase in the cost of land and
construction costs under inflationary pressure even this enhanced
limit of advance was found to be inadequate. It was, therefore,
decided to raise it further to 36 months' pay, spreading its recovery
over a period of 15 years.
The scheme also permitted an outright purchase of ready made

houses. To save the staff from paying higher interest rates, advances
secured from other sources, e.g. commercial/co-operative banks,
House Building Finance Corporation, etc., loans were also granted
for repayment of such debts. The Bank charged interest on house
building advances at the prevalent Bank Rate of 4 per cent per annum
from all employees other than staff in category 'C', in whose case
interest was levied at 1 per cent below the Bank Rate.
By the end of 1960, nearly Rs.5 million had been disbursed by

the Bank to 592 employees working in the Central Directorate and
other offices, including Karachi, Lahore, Dacca, Chittagong,
Rawalpindi, Khulna, Peshawar, Quetta and Lyallpur.
Medical and Other Facilities
Initially, the Bank allowed ordinary medical attendance to the

employees on the same terms to which optees from the Reserve Bank
were entitled prior to their transfer to Pakistan. Ordinary medical
attendance included the availability of the Bank's Medical Officers
services and the dispensary facilities provided by the Bank. This,
however, did not include hospitalisation expenses and specialist's
fee, etc. which could be paid by the Bank under exceptional
circumstances at the discretion of the Governor or the Central Board.
By the end of year 1948 the Bank was able to establish

dispensaries on a modest scale at Karachi, Lahore, Dacca and

Chittagong. While at Karachi, initially a whole-time medical officer
was appointed, at other centres where the number of employees was
limited the services of part-time medical practitioners were made
available.
Medical facilities continued to receive the attention of the Bank

at the highest level. The Bank's dispensaries became, over the years,
better equipped to extend prompt and efficient service to the
employees. However, the patients in need of specialists' treatment or
hospitalisation were put to great inconvenience since their claims for
reimbursement had to be referred in each case either to the Governor
or to the Central Board. Therefore, the Governor in his
Memorandum dated January 1, 1954 to the Board suggested that:-
There is no provision for running the Bank's dispensaries except that

we can retain the services of Medical Officers and for the
reimbursement of the expenses incurred by the staff on medicines etc.
It would be seen that the Regulations prescribed that claims of staff
below the rank of officer class-I in respect of hospital fees etc. have to
be submitted to the Governor, while the claims of staff of the rank of
officers class-! and above are required to be submitted to the Board for
sanction, however small the amount may be. This condition delays the
disposal of the claims. In order to remove the defects and difficulties
mentioned above, it is proposed that the Regulations may be
amended.
The Board at its meeting held on January 25, 1954 approved

these proposals. The amendments were also approved by the Central
Government and the scheme for medical facilities was consequently
enlarged. The employees of the Bank were entitled to benefits
provided by the Government to its own employees except that while
families of Government servants were also entitled to free medical
attendance and treatment, in the Bank's scheme these were at first
restricted to the employees only and later were extended to the family
members of clerical and subordinate staff in 1955.
Welfare and Medical Section
With the gradual expansion in the Bank's organisation in the

Central Directorate and at Karachi Office and with the revision of the
Labour Policy of the Government in 1959, the necessity of having a
full-fledged Welfare Section, headed by a class-! officer was keenly
felt. Accordingly, the services of a retired Government officer with
experience of labour laws were obtained and a full-fledged Welfare
and Medical Section was created in 1960. Prior to this, the work was
being looked after by the Establishment Section. An officer of the
Bank was sent for training in the Ministry of Health, Labour and
Social Welfare. On completion of his training, he was placed in the
charge of the Welfare and Medical Section.
The main functions of the Welfare and Medical Section were; to

maintain liaison between the staff and the management and create a
feeling of goodwill and better understanding between them; to watch
the working of the scheme and suggest improvements; to arrange
supply of medicines for the dispensaries of the Bank and arrange
hospitalisation of employees in Government and approved hospitals
and to deal with claims of employees for reimbursement of medical
expenses and arrange payment of bills of specialists, druggists and
chemists, etc.
The facilities provided by the Bank were intended to give best

possible treatment to the employees and their families, including
dependent parents within the resources available to the Bank. This
had an added advantage to the institution as employees in sound
health and less domestic worries, were able to give a better out-turn
of work.
One of the important features of the scheme was the absence of

any discrimination on the basis of status and rank. The nature of the
disease was the sole criterion for deciding the type of medical aid
required to be given.
By the end of 1960 at Karachi, there were three whole-time male

doctors and one whole-time lady doctor, besides 5 compounders and
one female nurse. For the convenience of the families of the staff
residing in the Bank's colonies at Preedy Street and North
Nazimabad, separate dispensaries had also been established at those
places.
Patients who were able to attend the dispensaries were treated

there. Those unable to attend were allowed to call for approval of the
officer-in-charge. If the Bank's Medical Officer was not available and
the case was emergent, the employees were permitted to consult
private doctors and the fees paid were promptly reimbursed.
A panel of specialists was approved by the Bank to whom

Bank's Medical Officers were allowed to refer complicated cases for
advice and treatment where necessary. Besides, specialists,
pathologists and radiologists were also placed on the approved list.
In the early fifties when the incidence of T .B. was quite

widespread, special attention was paid to the treatment ofT .B. cases,
and where necessary, sanatorium treatment was also arranged.
Arrangements were also made for hospitalisation of T.B. patients at
other hospitals where beds were kept reserved for Bank employees.
The objectives before the Bank were to maintain a reasonably

high standard of health of its employees and their families and to this
end the Bank had been trying to improve its medical facilities scheme
from time to time, within its resources. This was evident from the rise
in the Bank's total expenditure on medical facilities from Rs.2.18
million in 1957-58 to Rs.4.24 million in 1960-61. Every effort was
made to see that the facilities were utilised to the best advantage of
the employees and that these were not abused.
Provident Fund
A scheme of Provident Fund for the benefit of the employees

was introduced from July 1, 1948. It required every permanent
employee of the Bank to contribute not less than 5 per cent of his pay
to the Fund. For the purposes of computation, the term 'Pay'
included substantive pay, overseas pay, special pay, deputation pay,
family allowance and acting allowance. Temporary employees could

also subscribe to the Fund, if permitted by the chief accountant. The
rate of subscription, once fixed, could subsequently be altered by the
subscriber with written intimation to the Bank.
In the case of permanent employees, the Bank contributed to

the Provident Fund a sum equal to that subscribed by the employee
but not exceeding 10 per cent of his pay. No such contribution was,
however, made by the Bank in the case of the temporary employees,
but on confirmation the Bank contributed an amount equivalent to
that subscribed by him during his temporary service, but ·not
exceeding 10 per cent of his pay.
The Provident Fund was administered by Administrators
composed of the Executive Committee of the Bank, together with
one representative of the officers and one of the clerical staff,
nominated by the Governor. In July, 1948 the Bank had hardly 500
accounts of the subscribers, but with the number of accounts
appreciably increased and stood at nearly 3000 by the close of 1960.
The Bank paid interest on the Provident Fund balance standing

to each subscriber's credit at a rate determined at the end of each
year, being equivalent to the average redemption yield throughout
the year on Pakistan Government securities of 20 years maturity or
thereabout rounded off to the nearest one half per cent above. The
rate of interest, as worked out on this basis, was approved by the
Government and then circulated to all offices for information.
Interest was paid on the monthly products of the balances

standing in the individual accounts and credited to the accounts half-
yearly as on March 31, and September 30. In the event of resignation,
dismissal and termination of service of the subscriber, interest was
paid upto the date he was in the service of the Bank. In the year 1948,
the rate of interest on Provident Fund was fixed at 3 per cent per
annum and was raised to 4~ per cent per annum in 1960 owing to
higher redemption yield on Government securities.
According to a scheme introduced by the Bank in 1951, the

subscribers to the Provident Fund were allowed to pay premia on

their Postal Life Insurance Policies from their Provident Fund
balances on condition that the subscribers assigned their policies in
favour of the Bank. The periodical premium payable was debited to
the individual's Provident Fund Account. The total premia payable
during a particular period on accounts of all the subscribers was paid
py the Bank through a cheque, issued in favour of the Post Master,
City Post Office, Karachi. The Bank later extended this facility to
subscribers in respect of insurance policies taken out by them from
private companies.
In 1956, a scheme was introduced for giving advances to the

subscribers from their Provident Fund balances to meet unforeseen
contingencies. Ordinarily, the amount of advance was restricted to 50
per cent of the subscriber's own contribution, but in exceptional cases
of hardships upto 50 per cent of the total contribution could be
advanced with the sanction of the Deputy Governor. In no case,
however, the amount of advance could exceed 4 months' pay of the
borrower. The advance was granted by debit to the Provident Fund
Account of the borrower, recoverable in monthly instalments spread
over a period not exceeding 3 years. No fresh advance could be made
to an employee so long as one previously taken by him remained
outstanding. While no interest was charged on loans given from the
Provident Fund Account, the borrower had to lose interest on his
Provident Fund Account on his borrowing. The total amount of
advances sanctioned from the Provident Fund Account between 1956
and 1960 was about Rs.1.133 million to 1479 borrowers.
The accounts of the Provident Fund were closed every year on

March 31, and an annual balance sheet was drawn up. On being
audited by the Bank's Auditors, the balance sheet was submitted to
the Administrators for their approval in a meeting which was held by
August 31, each year. Copies of the approved balance sheet were
supplied to the offices for circulation among the subscribers. At the
same time, each subscriber was supplied with an annual statement of
his individual account as on March 31, showing the opening balance
of the year concerned, the total contributions made by the subscriber
and the Bank during the year, interest accrued, advances granted and
recoveries effected and premia paid on the Postal Life Insurance

Policies.
Guarantee Fund
The Bank created a Guarantee Fund as a security against losses

occasioned by the dishonesty or negligence of an employee. The
Fund was administered by Administrators composed of its Executive
Committee, one representative of the officers and one of the clerical
staff, nominated by the Governor.
All employees in the General Department drawing a salary of

Rs.lOO/- per month or more and all employees in the Cash
Department except subordinate staff were required to make
contributions to the Fund to build up the requisite security. The
amounts of security required from different categories of the staff
were as follows:
Tellers Rs.4,000
Assistant Treasurers Rs.5,000
Deputy Treasurers Rs.lO,OOO
Other Staff"
For salaries exceeding Rs. 30

but not exceeding Rs. 40 Rs. 500

but not exceeding Rs. 80 Rs. 1,500

but not exceeding Rs.lOO Rs. 2,000
For salaries exceeding Rs.lOO

but not exceeding Rs.150 Rs. 3,000
For salaries exceeding Rs.150

but not exceeding Rs.200 Rs. 4,000
For salaries exceeding Rs.200

but not exceeding Rs.SOO Rs. 5,000
For salaries exceeding Rs.SOO

but not exceeding Rs.750 Rs.10,000
For salaries exceeding Rs.750 Rs.25,000
Contributions to the Guarantee Fund were realised from the

salaries of the staff half-yearly in advance on March 31, and
September 30 each year, at the rate of 5/8th per cent per annum of the
amount of the guarantee. The rate of contribution was reduced by 10
per cent to 9/16th per cent after ten half-yearly payments, by 30 per
cent to 7/16th per cent after twenty half-yearly payments and by 50
per cent to 5/16 per cent after thirty half-yearly payments.
Gratuity Fund
The payment of gratuity to the staff of the Bank was regulated

by the State Bank of Pakistan (Payment of Gratuity to Employees)
Regulations. No employee could claim gratuity as a matter of right
but it was granted to him or his family at the discretion of the Central
Board on his ceasing to be in the Bank's service owing to retirement,
resignation, death, etc. The payment of gratuity to an employee was
subject to the following conditions:-
(i) His service to the Bank must be continuous and must, in
the opinion of the Central Board, be good, efficient and
faithful.
(ii) He must complete permanent service for a mm1mum

period of 10 years. This minimum length of service was,
however, relaxable on ex-gratia basis by the Central Board
on the recommendation of the Governor. Relaxation was
generally allowed in the following circumstances:-
(a) when the employee died while in the service of the

Bank, leaving behind him a family;
(b) when his services have been terminated or he has

retired or has been required to retire on account of
certified permanent incapacity due to bodily or
mental infirmity not caused by irregular or
intemperate habits;
(c) when his services have been terminated or he has

been required to retire owing to the abolition of his
post on account of reduction in the establishment.
(iii) No gratuity is paid to an employee who is dismissed from

the service of the Bank or who leaves, resigns or
discontinues the service without the permission of the
Bank.
Subject to the above conditions gratuity was paid to ex-

employee equal to one month's substantive pay or one month's
average pay, whichever is higher, for each completed year of service
in the Bank subject to a maximum of Rs.25,000/-.
Allowances and Welfare Benefits
Whenever the general price index warranted increase in the

emoluments of the staff the Bank was not reluctant to revise the pay
scales, enhance the rates of their allowances, liberalise the scope of
amenities and extend relief in times of emergency. Some of the major
benefits granted were: cost of living allowance initially meant for the
clerical carde was extended to subordinate staff as well, Expatriation
Allowance for officers from East Pakistan posted in West Pakistan
and vise versa was made available to employees in the lower grade
with higher percentage; Leave Fare Concession in the beginning
admissible to class-! officers was made accessible to all employees
even within the province if the place of posting was away from the
place of domicile; Family Allowance for the education of children
and award of scholarships as well; Bonus to all members of the staff
upto class-II, amounting to half monthly salary; advances to victims
of flood and rain havocs in both provinces and of cyclones in East
Pakistan.
The loans were granted against security of the Provident Fund at

1% above the Bank Rate repayable in ten monthly instalments; short
term advances were made in 1948 to the employees who had suffered
losses during the communal disturbances in the wake of Partition; car
allowance advance to which at first only the Principal Officers were
eligible was extended to other officers as well; motor cycle advances
to junior officers and cycle advance were made to the subordinate
staff. Acute shortage of transport particularly in the cities had made
the extension of this provision unavoidable; a welfare fund for the
promotion of sports and physical culture besides libraries and reading
rooms for their mental and intellectual pursuits; canteens and
cafeterias for meals at subsidised rates within premises of the Bank.
Soon after independence even grain shops were opened for the
supply of essential commodities at subsidised prices, which were later
closed down and the concession was converted into an increased
percentage of dearness allowance for the subordinate staff. These
were some of the amenities the Bank provided to all categories of
staff on its own initiative.
Bank Employees Associations
While a fair and impartial system of recruitment, a rational

rewarding salary structure and a just and progressive promotion
policy combined with a variety of allowances and amenities were
designed to create a sense of belonging to the Bank and of fulfilment
to its employees. These, however, could not by themselves dispense
with the necessity and importance of organisation characteristic of
modern industrial and commercial establishments including the
central bank which is the pivot of the economy. Discipline on its
employees or for that matter, of the employees of all the banks could
not be imposed from above without causing widespread
dissatisfaction that might have led to the disruption of economic
equilibrium of society. Pakistan, as in most other countries in a
similar stage of development, had been prone to associate trade
unionism with strikes and agitation, ignoring its real objective of
generating a climate of cordiality and concord between management
and labour.
A fraternity of workers became a basic condition of establishing

affinity with management through the instrumentality of collective
bargaining, whenever disputes of a serious nature arose that called
for joint consultation for their peaceful resolution. A spirit of
cooperation was as much an essential of peace in industry as it was
indispensable for harmony in the banking sector. The management of
the State Bank had shown far sightedness not only in reducing the
area of tension by its policies of accommodation but also m
recognising the need for avoiding possible conflicts in the future.
That probably was one of the principal reasons why its working
had been extraordinarily smooth and free from turbulence that had
vitiated many a vital segments of the country's nascent economic
organisation. Precisely for this purpose it had taken appropriate steps
to encourage the formation of employees associations. The Central
Board, in one of its meetings, held on November 24, 1948 approved
their formation. The principles governing the recognition of
Employees Associations were circulated amongst the members of the
staff through a circular dated May 16, 1949. Under these principles
the employees of the Bank at each place were to have separate
associations, each association representing a distinct class of
employees. Three staff associations, representing officers class-II,
clerical staff and subordinate staff (class-IV employees) at different
offices of State Bank were recognised during the fifties.
The question of registration of the Associations under the Trade

Unions Act, 1926 was thoroughly examined in the Bank and after
obtaining the opinion of Legal Advisor of the Bank, the Ministry of
Finance and the Ministry of Labour, these Associations were allowed
to get themselves registered under the Act. By the end of 1959 several
staff associations viz. Clerical Staff Associations at Lahore, Dacca,
Chittagong and Khulna and Subordinate Staff Associations at
Karachi and Peshawar, were registered by the Registrar's of Trade
Unions.
------------------- - -
APP END ICES
APPENDIX-I
THE PAKISTAN (MONETARY SYSTEM AND

RESERVE BANK) ORDER, 1947
THE GAZETTE OF INDIA EXTRAORDINARY, AUG. 14, 1947
SECRETARIATE OF THE GOVERNOR-GENERAL (REFORMS)
NOTIFICATION
New Delhi, the 14th August, 1947.
No.G.G.O. 21.-The following Order made by the Governor-General is

published for general information:
In exercise of the powers conferred by section 9 of the Indian Independence

Act, 1947, and of all other powers enabling him in that behalf, the Governor-General
is pleased to make the following Order:-
PART I
Introductory
1. (1) This Order may be called the Pakistan (Monetary System and Reserve
Bank) Order, 1947.
(2) It shall come into force on the 15th day of August 1947.
2. In this Order, unless there is anything repugnant in the subject or context,-
(a) "the Bank" means the Reserve Bank of India;
371
(b) "India notes" means currency notes of the Government of India and
bank notes of the Bank, other than Pakistan notes;
(c) "Pakistan notes" means bank notes of the Bank inscribed in the manner
provided in sub-section (2) of section 5 of Part II of this Order;
(d) "India rupee coin" means rupee coin which is for the time being legal
tender in India and includes one-rupee notes;
(e) "India subsidiary coin" means coin of a lower denomination than one
rupee which is for the time being legal tender in India;
(f) "Reserve Bank Act" means the Reserve Bank of India Act, 1934;
(g) "section" means a section of the Part of this Order in which the word
occurs;
and other expressions have the same meaning as in the Reserve Bank Act.
PART II
Provisions to have effect as part of the Law of Pakistan
1. The provisions of this Part shall have effect as part of the law of Pakistan.
2. Subject to the provisions of this Part, the Bank shall, until the 30th day of
September, 1948, manage the currency of Pakistan and carry on the business of
banking in Pakistan.
3. Until the Pakistan Legislature otherwise provides, the standard monetary unit
of Pakistan shall be the India rupee.
4. (1) Until the 30th day of September, 1948.-
(a) the Bank shall accept moneys for account of the Government of
Pakistan and the Provincial Governments in Pakistan, make payments
up to the amount standing to the credit of their accounts respectively,
carry out their exchange remittance and other banking operations,
including the management of the public debt, and generally afford to
them similar facilities to those which the Bank affords to the
Government of India, or as the case may be, the Provincial
Governments in India;
(b) the Government of Pakistan and each Provincial Government m

APPENDICES 373
Pakistan shall entrust the Bank with the management of the public debt
and with the issue of any new loans;
(c) the Government of Pakistan and the Provincial Governments in

Pakistan shall entrust the Bank with all their money, remittance,
exchange and banking transactions in Pakistan, and in particular, shall
deposit free of interest all their cash balances with the Bank;
Provided that nothing in this sub-section shall prevent the Government of

Pakistan or any Provincial Government in Pakistan from carrying on money
transactions at places where the Bank has no branches or agencies and from holding
at those places such balances as they may require;
Provided further that the provisions of this sub-section, so far as they relate to
management of the public debt, the issue of new loans and exchange operations,
shall not have effect after the 31st day of March 1948.
(2) The conditions on which the Bank shall perform the functions mentioned
in this section shall be the same as those regulating similar transactions between the
Bank and the Government of India, or as the case may be, a Provincial Government
in India, subject however to such adaptations and modifications as may be agreed
upon between the Government concerned and the Bank, or as may, in default of
agreement be prescribed by the Governor-General of Pakistan.
5. (1) India notes shall, until the 30th day of September 1948, be legal tender at
any place in Pakistan in payment or on account of the amount expressed therein.
(2) On and after the 1st day of April1948 the Bank may issue in Pakistan bank
notes of the Bank inscribed with the words "Government of Pakistan" in English and
Urdu, and such notes shall be legal tender in Pakistan in payment or on account of
the amount expressed therein;
Provided that notwithstanding anything contained in any enactment or rule of

law to the contrary, the Government of India shall not be deemed to be liable to pay
the value of any notes so inscribed; neither after the 30th day of September 1948 shall
the Bank be so liable.
(3) The Bank shall, up to the 30th day of September 1948, have the sole right
to issue bank notes in Pakistan, and before the expiry of that day, the Government
of Pakistan shall not issue any currency notes.
(4) No person in Pakistan other than the Bank shall draw, accept, make or
issue any bill of exchange, hundi, promissory note or engagement for the payment of
money payable to bearer on demand, or borrow, owe or take up any sum or sums of
money on the bills, hun dis or notes payable to bearer on demand of any such person;
Provided that cheques or drafts, including hundis, payable to bearer on

demand or otherwise may be drawn on a person's account with a banker, shroff, or
agent.
(5) Notwithstanding anything contained in the Negotiable Instruments Act,

1881, no person in Pakistan, other than the Bank, shall make or issue any promissory
note expressed to be payable to the bearer of the instrument.
(6) Any person contravening the provisions of sub-section (4) or sub-section

(5) shall be punishable with fine which may extend to the amount of the bill, hundi,
note or engagement in respect of which the offence is committed.
(7) No prosecution under this section shall be instituted except on complaint

made by the Bank.
6. (1) Notwithstanding anything contained in any enactment or rule of law to the

contrary, no person shall of right be entitled to recover from the Bank or the
Government of Pakistan the value of any lost, stolen, mutilated or imperfect India
note or Pakistan note.
(2) The Bank may with the previous sanction of the Government of Pakistan
prescribe the circumstances in which, and the conditions and limitations subject to
which, the value of lost, stolen, mutilated or imperfect Pakistan notes may be
refunded as of grace.
(3) The value of lost, stolen, mutilated or imperfect India notes may be
refunded as of grace in Pakitan in the circumstances and subject to the conditions and
limitations prescribed for the time being in that behalf as respects India under section
28 of the Reserve Bank Act.
Coinage
7. (1) India rupee coin and India subsidiary coin shall continue to be legal tender
in Pakistan to the like extent and subject to the same conditions as immediately
before the 15th day of August 1947 for such period or periods, not expiring, in the
case of any coins, sooner than one year from the introduction of corresponding
Pakistan coins, as the Government of Pakistan may determine.
Provided that India one-rupee notes shall not be legal tender in Pakistan after
the 30th day of September 1948.
(2) No Pakistan coins shall be issued except in pursuance of a law of Pakistan,

and before the 1st day of October 1948, no Pakistan coin shall be issued of a
denomination different to that of India coin in circulation at the commencement of
this Order.
APPENDICES 375
8. During the period in which the Bank is managing the currency of Pakistan-
(a) any Pakistan coins issued shall on demand be supplied by the

Government of Pakistan to the Bank against payment of their nominal
value in such quantities as will, in the opinion of the Bank, be required
for circulation in Pakistan, and the Government of Pakistan shall not put
any coins in circulation in Pakistan except through the Bank in
pursuance of a demand made under this clause;
(b) the Bank may deliver to the Government of Pakistan any Pakistan coins
which will not in its opinion be required for circulation in Pakistan
against payment of their nominal value, and no Pakistan coins shall be
disposed of by the Bank otherwise than for the purposes of circulation
or by delivery to the Government of Pakistan under this clause;
(c) the Bank shall on demand issue India or Pakistan rupee coin in exchange
for legal tender notes;
Provided that, if any Pakistan coins have been issued, the Bank shall not,
after the 31st day of March 1948, issue India coins, except to the extent that
Pakistan coins are not, in the opinion of the Bank, available in sufficient
quantities for the purposes of circulation;
(d) the Bank shall on demand issue legal tender notes in exchange for legal
tender coins;
(e) the Bank shall in exchange for legal tender notes of five rupees or
upwards supply legal tender notes of lower value or legal tender coins in
such quantities as may in the opinion of the Bank be required for
circulation;
(f) if the Government of India or, as the case may be, the Government of
Pakistan, at any time fails to supply coins to the Bank, the Bank shall be
released from its obligations under clause (c) or clause (e) to supply such
coins to the public.
9. Notwithstanding anything contained in any enactment or rule of law to the

contrary, the Government of India shall not be liable to pay the value of any one-
rupee note inscribed with the words "Government of Pakistan" in English and Urdu.
10. (1) The Indian Coinage Act, 1906, shall, until other provision is made by a law
of Pakistan and subject to the provisions of this Order, apply to Pakistan, and in such
application-
(a) for section 1 there shall be substituted the following section, namely:-
"1. Short title and extent.-(1) This Act may be called the Pakistan Coinage
Act.
(2) It extends to the whole of Pakistan.";
(b) references to the Central Government shall be construed as references

to the Government of Pakistan.
(2) Rules made under the Indian Coinage Act, 1906, and in force immediately
before the commencement of this Order shall be in force in Pakistan until they are
modified or rescinded under that Act as in force in Pakistan.
Duties of Bank regarding exchange
11. Up to the 31st day of March 1948, the Bank shall sell to or buy from any
authorised person who makes a demand in that behalf at its office in Karachi foreign
exchange at such rates of exchange and on such conditions as the Government of
Pakistan, in consultation with the Government of India, may, from time to time by
general or special order determine;
Provided that no person shall be entitled to demand to buy or sell foreign

exchange of the value of less than two lakhs of rupees.
Explanation.- In this section "authorised person" means a person who is

entitled by or under the Foreign Exchange Regulation Act, 1947, to buy or, as the
case may be, sell the foreign exchange to which his demand relates.
Control of scheduled banks, etc.
12. (1) Every Pakistan scheduled bank shall maintain with the Bank a balance the
amount of which shall not at the close of business on any day be less than five per cent
of the demand liabilities, and two per cent of the time liabilities, of that bank in
Pakistan as shown in the latest return made under sub-section (2).
Explanation.- For the purposes of this section liabilities shall not include the
paid-up capital or reserves, or any credit balance in the profit and loss account of the
scheduled bank or the amount of any loan taken by it from the Bank.
(2) Every Pakistan scheduled bank shall send to the Bank a return signed by
two responsible officers of the scheduled bank showing-
(a) the amounts of its demand and time liabilities, respectively in Pakistan,
(b) the total amount held in Pakistan in India notes and Pakistan notes,
respectively,
APPENDICES 377
(c) the amounts held in Pakistan in India rupee coin, India subsidiary coin
and Pakistan rupee and Pakistan subsidiary coin, respectively,
(d) the amounts of advances made and of bills discounted in Pakistan,

respectively,
(e) the balance held at the Bank,-
at the close of business on each Friday, or where Friday is a public holiday under the
Negotiable Instruments Act, 1881, at the close of business on the preceding working
day, and the return shall be sent not later than two working days after the date to
which it relates;
Provided that where the Bank is satisfied that the furnishing of a weekly return
under this sub-section is impracticable in the case of any Pakistan scheduled bank by
reason of the geographical position of the bank and its branches, the Bank may
require such bank to furnish in lieu of a weekly return a monthly return to be
despatched not later than fourteen days after the end of the month to which it relates,
giving the details specified in this sub-section in respect of such bank at the close of
business for the month.
(3) If at the close of business on any day before the day fixed for the next
return, the balance held at the Bank by any Pakistan scheduled bank is below the
minimum prescribed in sub-section (1), such bank shall be liable to pay to the Bank
in respect of each such day penal interest at the rate of three per cent above the bank
rate on the amount by which the balance with the Bank falls short of the prescribed
minimum, and if on the day fixed for the next return such balance is still below the
prescribed minimum as disclosed by this return, the rate of penal interest shall be
increased to a rate five per cent above the bank rate in respect of that day and each
subsequent day on which the balance held at the Bank at the close of business on that
day is below the prescribed minimum.
(4) Where under the provisions of sub-section (3) penal interest at the
increased rate of five per cent above the bank rate has become payable by a Pakistan
scheduled bank, if thereafter on the day fixed for the next return the balance held at
the Bank is still below the prescribed minimum as disclosed by this return.-
(a) every director and any managing agent, manager or secretary of the
Pakistan scheduled bank, who is knowingly and wilfully a party to the
default, shall be punishable with fine which may extend to five hundred
rupees and with a further fine which may extend to five hundred rupees
for each subsequent day on which the default continues.
(b) the Bank may prohibit the Pakistan scheduled bank from receiving after
the said day any fresh deposit,
and, if default is made by the Pakistan scheduled bank in complying with the
prohibition referred to in clause (b), every director and officer thereof who is
knowingly and wilfully a party to such default or who through negligence or
otherwise contributes to such default shall in respect of each such default be
punishable with fine which may extend to five hundred rupees and with a further fine
which may extend to five hundred rupees for each day after the first on which a
deposit received in contravention of such prohibition is retained by the Pakistan
scheduled bank.
Explanation.- In this sub-section "officer" includes a managing agent,

manager, secretary, branch manager and branch secretary.
(5) Any Pakistan scheduled bank failing to comply with the provisions of sub-
section (2) shall be liable to pay to the Bank a penalty of one hundred rupees for each
day during which the failure continues.
(6) The penalties imposed by sub-sections (3) and (5) shall be payable on
demand made by the Bank, and in the event of a refusal by the defaulting bank to pay
on such demand, may be levied by a direction of the principal Civil Court having
jurisdiction in the area where an office of the defaulting bank is situated, such
direction being made only upon application made in that behalf to the Court by the
Bank with the previous sanction of the Government of Pakistan.
(7) The Government of Pakistan shall, by notification in the official Gazette,

declare to be a Pakistan scheduled bank any bank which carries on the business of
banking in Pakistan and which-
(a) has a paid up capital and reserves of an aggregate value of not less than
fivelakhsofrupees,and
(b) is a company as defined in a clause (2) of section 2 of the Indian

Companies Act, 1913, or a corporation or a company incorporated by or
under any law in force in any place outside Pakistan.
and a bank so declared shall be a "Pakistan scheduled bank" within the meaning of
this section and shall be a like notification direct that any Pakistan scheduled bank
the aggregate value of whose paid-up capital and reserves becomes at any time less
than five lakhs of rupees, or which goes into liquidation or otherwise ceases to carry
on banking business, shall cease to be a Pakistan scheduled bank;
Provided that no bank shall be declared to be a Pakistan scheduled bank if it

is a scheduled bank within the meaning of the Reserve Bank Act.
(8) The Bank may, with the previous sanction of the Government of Pakistan,
APPENDICES 379
make regulations to provide for-
(a) the relations of Pakistan scheduled banks with the Bank and the returns
to be submitted by Pakistan scheduled banks to the Bank;
(b) the regulation of clearing-houses for Pakistan scheduled banks.
(9) The provisions of this section shall have effect only up to the 30th day of
September 1948.
13. (1) The Bank may, until the 30th day of September 1948, require any Pakistan
provincial co-operative bank with which it has transactions under section 17 of the
Reserve Bank Act to furnish such returns as are referred to in sub-section (2) of
section 12 of this Part, and while such a requirement is in force the provisions of sub-
sections (5) and (6) of the said section 12 shall apply so far as may be to that co-
operative bank as if it were a Pakistan scheduled bank.
(2) In this section "Pakistan provincial co-operative bank" means-
(a) the principal society in a Province in Pakistan which is registered or

deemed to be registered under the Co-operative Societies Act, 1912, or
any other law for the time being in force in Pakistan relating to co-
operative societies and the primary object of which is the financing of
other societies in the Province which are or are deemed to be so
registered:
(b) any other central co-operative society declared for the time being by a
Provincial Government in Pakistan to be a Pakistan provincial co-
operative bank for the purposes of this Order.
Miscellaneous
14. (1) The Bank shall not be liable for the payment of any stamp duty in Pakistan
in respect of Pakistan notes or India notes.
(2) The Bank shall not be liable to pay Pakistan income-tax or super-tax on any
of its income, profits or gains:
Provided that nothing in this sub-section shall affect the liability of any
shareholder in respect of Pakistan income-tax or super-tax.
(3) For the purposes of any provisions of the Indian Income-tax Act, 1922, as
in force in Pakistan, which relate to the levy and refund of income-tax, any dividends
paid under section 47 of the Reserve Bank Act shall be deemed to be "Interest on
Securities".
15. (1) The Reserve Bank Act shall cease to be part of the law of Pakistan, and the
status of the Bank in Pakistan shall be that of a corporation existing only by virtue of
the law of India and capable of suing and being sued as such in Pakistan; and
accordingly effect shall be given to the said Act by Courts in Pakistan only in so far
as under the rules and principles of law determininig the cases in which law other than
Pakistan law is to be applied in Pakistan, the proper law to be applied is the law of
India.
(2) Nothing in the Indian Companies Act, 1913, shall apply to the Bank.
16. (1) If any person in Pakistan makes a false declaration in any declaration
furnished by him in pursuance of a requisition under sub-section (1) of section 56 of
the Reserve ,Bank At, he shall be deemed in Pakistan to have committed the offence
of giving false evidence defined in section 191 of the Indian Penal Code, and shall be
punishable under the second paragraph of section 193 of the said Code.
(2) Nothing contained in any declaration furnished under the said sub-section
(1) shall operate to affect the Bank with notice of any trust, and no notice of any trust
express, implied or constructive shall be receivable by the Bank.
17. The Banking Companies (Restriction of Branches) Act, 1946, and the
Banking Companies (Inspection) Ordinance, 1946 shall until the 30th day of
September 1948 apply also to the whole of Pakistan, and in such application
references to the Central Government shall be construed as references to the
Government of Pakistan and for clause (b) of sub-section (1) of section 5 of the said
Ordinance, the following shall be substituted, namely:-
"(b) notwithstanding anything contained in sub-section (7) of section 12 of

Part II of the Pakistan (Monetary System and Reserve Bank) Order,
1947 the Government of Pakistan shall refuse to declare the banking
company to be a Pakistan scheduled bank, or if the banking company
has been so declared, shall by notification in the Official gazette, cancel
such declaration:"
PART III
Provisions to have effect as part of the Law of India
1. Until the 30th day of September 1948, the Reserve Bank of India Act, 1934
shall have effect as if-
(1) to section 2 the following clauses were added, namely:-
"(f) "Pakistan scheduled bank", "Pakistan provincial co-operative

APPENDICES 381
bank" and "Pakistan notes" have the same meaning as in the

Pakistan (Monetary System and Reserve Bank) Order, 1947;
(g) "bank notes" and "currency notes of the Government of India" do

not save as is expressly provided include any notes which are
Pakistan notes;
(h) "local authority" includes a local authority in Pakistan.";
(2) in sub-section (3) of section 4,-
(a) after the word "Indian" wherever it occurs except in the

expression "Indian Companies Act, 1913." the words "or
Pakistan" were inserted;
(b) after clause (c) the following clause was inserted, namely:-
"(d) a company or co-operative society registered in Pakistan

under any law relating to companies or co-operative
societies, or a Pakistan scheduled bank,";
(3) in section 6. after the word "India" the words "or Pakistan" were
inserted;
(4) in sub-section (1) of section 10, after the word "India" in both places
where it occurs the words "or Pakistan" were inserted;
(5) in sub-section (5) of section 11.-
(a) for the words "the Federal Legislature, the Indian Legislature, a
Provincial Legislature or the Coorg Legislative Council" the
words "any Legislature in India or Pakistan" were substituted;
(b) the words "or Council" were omitted;
(6) insection17-
(a) in clauses (1), (5), (8) and (11) there were included references to
the Government of Pakistan and to the Provincial Governments
in Pakistan;
(b) in sub-clause (a) of clause (2)-
(i) for the words "and payable in India" the words "India or
Pakistan and payable m India or Pakistan" were

substituted;
(ii) after the words "scheduled bank" the words "or a Pakistan
scheduled bank" were inserted;
(c) in sub-clause (b) of clause (2)-
(i) for the words "and payable in India" the words "in India or
Pakistan and payable in India or Pakistan" were
substituted;
(ii) for the words "or a provincial co-operative bank" the words
"a Pakistan scheduled bank, a provincial co-operative bank
or a Pakistan provincial co-operative bank" were
substituted;
(d) in sub-clause (c) of clause (2)-
(i) for the words "and payable in India" the words "in India or
Pakistan and payable in India or Pakistan" were
substituted;
(ii) after the words "scheduled bank" the words "or a Pakistan
(iii) after the words "Provincial Government" the words "or the
Government of Pakistan or a Provincial Government in
(e) in sub-clause (a) of clause (3), after the word "banks" the words
"and Pakistan scheduled banks" were inserted;
(f) to sub-clause (b) of clause (3) the words "or in Pakistan except
with a scheduled bank or a Pakistan scheduled bank" were added:
(g) in clause (4)-
(i) after the words "co-operative banks" the words "Pakistan

scheduled banks, Pakistan provincial co-operative banks"
were inserted;
(ii) to sub-clause (a) the words "or Pakistan" were added;

APPENDICES 383
(iii) in sub-clause (d), after the words "co-operative bank" the

words "or Pakistan scheduled bank or Pakistan provincial
co-operative bank" were inserted;
(h) in clause (14)-

(i) after the word "India" where it occurs for the first time, the
words "or Pakistan" were inserted;
(ii) after the words "scheduled bank" the words "or Pakistan
(iii) after the word "India" where it occurs for the second and
third times, the words "and Pakistan" were inserted;
(i) to clause (15) the following were added, namely:-

"and the making and issue of Pakistan notes in accordance with
the provisions of the Pakistan (Monetary System and Reserve
Bank) Order, 1947".
G) to clause (16) the words, brackets and figures "and the Pakistan
(Monetary System and Reserve Bank) Order, 1947" were added;
(7) in section 18-
(a) after the word "India" the words "or Pakistan" were inserted;
(b) in clause (1), after the words "co-operative bank" the words "or a
Pakistan scheduled bank or a Pakistan provincial co-operative
bank" were inserted;
(8) to sections 23 and 34 the following sub-section were added, namely:-
"(3) In this section references to bank notes include references to Pakistan

notes.";
(9) in section 29, after the word "notes" the words "or Pakistan notes" were
inserted;
(10) in sub-section (1) of section 30, after the words "by or under this Act"
the words, brackets and figures "or the Pakistan (Monetary System and
Reserve Bank) Order, 1947," were inserted;
(11) in sub-sections (1) and (3) of section 33, for the words "rupee coin" the
words "India rupee coin, Pakistan rupee coin" were substituted;
(12) in section 40, after the words "by general or special order determine,"
the words "in consultation with the Government of Pakistn and" were
inserted;
(13) after section 40, the following section were inserted, namely:-
"40A. Remittance between India and Pakistan.- The Bank shall, until the 31st
day of March 1948, provide any person who makes a demand in that behalf with
remittance at par between its offices in Pakistan and such office or offices in India as
may be prescribed by the Bank, in such amounts and subject only to such rate or rates
of commission as may be approved by the Government of India and the Government
of Pakistan."
(14) in section 42-

(a) in sub-section (1), after the word "India" the words "and
(b) in sub-section (2) after clause (e) the following clauses were
inserted namely:-
"(f) the amounts of its demand and time liabilities, respectivley,

in Pakistan,
(g) the total amount held in India in Pakistan notes,
(h) the total amount held in Pakistan in currency notes of the

Government of India and bank notes,
(i) the total amount held in Pakistan in Pakistan notes,
U) the amounts held in Pakistan in rupee coin, subsidiary coin

and Pakistan rupee coin and Pakistan subsidiary coin,
respectively,,
(k) the amounts of advances made and of bills discounted in

Pakistan, respectivley,";
(15) to section 43 the following were added, namely:-

"and from Pakistan scheduled banks under the corresponding provision
of the Pakistan (Monetary System and Reserve Bank) Order, 1947".
(16) in section 54,-
(a) in clause (a), for the words "provincial co-operative banks" the
APPENDICES 385
words "the Government of Pakistan, the Provincial Governments

in Pakistan, provincial co-operative banks, Pakistan provincial
co-operative banks" were substituted;
(b) in clause (b), after the words "co-operative banks" the words
"Pakistan provincial co-operative banks" were inserted;
(17) in the First Schedule,-
(a) in Part II, for the words "the Bengal Presidency" the words "East
Bengal, West Bengal" were substituted;
(b) in Part III, for the words "the Punjab" the words "East
Punjab, West Punjab" were substituted:
Provided that the modification made in section 40 of the Reserve Bank Act by
clause (12) of this section shall have effect only up to the 31st day of March 1948.
2. Until the 30th day of September 1948, the Government of India shall send as
soon as may be to the Government of Pakistan notice of any proposal to introduce,
or move an amendment to, a Bill in the Indian Legislature which affects the coinage
or currency of India or the constitution or functions of the Bank.
PART IV
Adjustments between governments and other

miscellaneous provisions
1. (1) In this section "Government's Bank Profits" in respect of any period means
the sum of-
(a) any amounts payable in respect of that period to the Government of

India by the Bank under section 47, or sub-section (2) of section 37 ,of
the Reserve Bank Act, and by the Issue Department under sub-section
(2) of section 34 of that Act, and
(b) any other profits accruing in that period to the Government of India by
reason of any revaluation of the gold held by the Bank,
less any amount debited to the Government of India in that period under sub-section
(2) of the said section 34:
Provided that the Governments's Bank profits in respect of the period

commencing on the 1st day of July 1948 and ending on the 30th day of September
1948 shall be deemed to be one-quarter of the said profits in respect of the year
ending on the 30th day of June 1949.
(2) The Government of India shall pay to the Government of Pakistan that
portion of the Government's Bank profits in respect of the period commencing on
the 1st day on July, 1947 and ending on the 30th day of September, 1948 which bears
to the total of such profits in respect of the said period the same proportion as the
total value of the Pakistan notes in circulation in Pakistan on the 30th day of
September 1948 plus the total value of India notes returning from circulation in
Pakistan in the period commencing on the 1st day of October 1948 and ending on the
31st day of March 1949 bears to the total value of India and Pakistan notes in
circulation in India and Pakistan on the 30th day of September, 1948:
Provided that if a declaration is made by or on the authority of the two

Governments to the effect that they are agreed that on or about the 1st day of
January 1949 India notes are still returning from circulation in Pakistan to a
considerable extent, the provisions of this sub-section and of sub-section (2) of
section 4 shall be construed and shall have effect as if for the references in those
provisions to the 31st day of March 1949 there were substituted references to the 30th
day of September 1949.
2. (1) In respect of the period commencing on the 15th August 1947 and ending
on the 30th September 1948 the Government of India shall pay to the Government
of Pakistan the profit, as calculated by the Auditor General of India, on the net
amount of India subsidiary coins which are actually passed into circulation in
Pakistan during that period less the loss, as calculated by the Auditor General of
India, on the destruction of any India subsidiary coins returned from Pakistan during
that period and destroyed as not being fit for reissue.
(2) If in respect of the period mentioned in sub-section (1), the amount of India
subsidiary coins returning from circulation in Pakistan exceeds the amount of India
subsidiary coins actually passed into circulation in Pakistan during that period, the
Government of Pakistan shall pay to the Government of India the loss attributable
to that fact, as calculated by the Auditor General of India, together with the loss, as
calculated by the Auditor General of India, on the destruction of any India
subsidiary coins returned from Pakistan during that period and destroyed as not
being fit for reissue.
3. (1) Any India coins other than one-rupee notes retired from Pakistan (whether
from circulation, from the Bank's balances, from Treasury balances, or from small
coin depots) by reason of the introduction of corresponding Pakistan coins shall be
disposed of as follows:-
(a) Coins, other than nickel brass and quaternary silver coins, shall be
accepted against payment to the Government of Pakistan of their
APPENDICES 387
bullion value. In addition, so long as the issue of such coins continues in

India, the cost to India of minting the same amount of coin in the same
form shall be paid to the Government of Pakistan.
(b) Nickel brass and quaternary silver coins shall be disposed of by the
Government of Pakistan for their bullion contents direct.
(c) The Government of Pakistan shall not dispose of any coins as coin but
may dispose of their bullion contents in any other manner desired by
them.
(2) One-rupee notes of the Government of India shall be exchanged into
Pakistan notes before the 30th day of September 1948, and the Pakistan Government
shall return the notes so exchanged to the Government of India without payment.
4. (1) As soon after the 30th September 1948 as practicable and subject to the
provisions of sub-section (3), there shall be transferred from the Issue Department
of the Bank to the Government of Pakistan assets, which, as valued for the purposes
of the Reserve Bank Act, have together a value equal to the total liability in respect
of the Pakistan notes outstanding on that day.
(2) India notes which may be legal tender in Pakistan on the 30th September
1948 or in respect of which the rights of encashment in Pakistan exist on that date
shall be accepted by the Government of Pakistan at par until the 31st March 1949,
and there shall from time to time on the demand of the Government of Pakistan be
transferred from the Issue Department of the Bank to the Government of Pakistan
assets which as valued for the purposes of the Reserve Bank Act, have together a
value equal to the amount of notes accepted by the Government of Pakistan under
this sub-section.
(3) In transferring assets under this section, Pakistan rupee securities and the
advances, if any, taken by the Government of Pakistan from the Bank shall first be
set off against the liability for Pakistan notes and India notes accepted by the
Government of Pakistan, and only in respect of the balance of that liability shall the
other assets of the Issue Department, consisting of gold, sterling securities, India
rupee coin, Pakistan rupee coin and Government of India securities, be transferred
in the proportions in which assets of those classes respectively may be held by the
Issue Department on the 30th day of September 1948.
(4) Any India rupee coin transferred under the foregoing provisions of this
section shall be disposed of in accordance with the provisions of section 3 as if it were
retired rupee coin, and any Pakistan rupee coin remaining with the Bank after the
transfers under this section shall be made over to the Government of India for
disposal otherwise than as coin.
(5) The Government of Pakistan shall, if the Bank so desires, take over from
the Bank all or any of the property held by the Bank in Pakistan for the purpose of
carrying on its business against payment of the value of that property as shown in the
books of the Bank.
(6) The Government of Pakistan shall be entitled to-
(a) the same fraction of the amount of the Reserve Fund of the Bank as on
the 30th day of September 1948 which would accrue to the Government
of India if the Bank went into liquidation on that date, as the fraction of
the uncovered debt of the Government of India for which the
Government of Pakistan becomes liable on the 15th day of August 1947;
(b) the same fraction of the other surplus assets of the Bank which would
exist on the 30th day of September 1948 if the Bank went into liquidation
on that date remaining after deducting therefrom the sums payable for
a proportionate period in respect of the financial year of the Bank
current on that date to the Government of India and the shareholders of
the Bank, as the fraction of the assets of the Issue Department which the
Government of Pakistan takes over:
Provided that any payment due under this sub-section shall be credited as a
capital payment in reduction of the debt, if any, due by the Government of Pakistan
to the Government of India.
5. The agreement made in pursuance of section 45 of the Reserve Bank Act

between the Bank and the Imperial Bank of India shall, so far as the context so
permits, have effect subject to the following adaptations, namely:-
(a) references to India and British India shall be construed as including

references to Pakistan;
(b) references to the Governor General in Council in relation to his general
banking business, his accounts, and sums due to or from him, and
references to Government in relation to receipts and disbursements
dealt with on account of Government shall be construed as including
references to the Government of Pakistan and to the Provincial
Governments in Pakistan;
(c) references to banks included in the Second Schedule to the Reserve
Bank Act shall be construed as including references to Pakistan
scheduled banks.
MOUNTBATTEN OF BURMA,
Governor-General
K.V.K. SUNDARAM,
Officer on Special Duty
APPENDIX-II
FINANCIAL AGREEMENT BETWEEN Tli:E

GOVERNMENT OF THE UNITED KINGDOM A:NI> THE .
GOVERNMENT OF INDIA
The Government of the United Kingdom of Great Britain and Northern

Ireland (hereinafter referred to as "the Govermrient of the United Kingdom") and
the Government of India, being desirous of making a temporary arrangement for
dealing with the sterling balances of India, have agreed as follows:
Article I.- For the purposes of this Agreement the sterling assets· of the Reserve
Bank of India shalJ be taken at the figure of £1,160 million.
Article II. ...: (1) The Reserve Bank of India shall open With the Bank of England a
new account (hereinafter referred to as the ••No.2 Account';}; ·to which the baliffice
of the total assets referred to in Article I above, remaining at the close of business on
the date of the signature of this Agreement; shall be transferred:,
· (2) The Ne.2 Account ofthe Reserve Bank oflndia shall be operated upon in
accOrdance with the provisions of Article VI of this Agreement and any sums
standing to the credit of the said Account shall be available only for the purposes
prescribed in that Article.
Article IIL-(l) There shall also be established at the Bank of 'England in the name
of the Reser-ve Bank of India a new account (hereinafter referred to· as the "No.1
Account") to which any sterling received after the date of this Agreement by the
Reserve Bank of India in respect of current transactions ·and any sums transferred
from the No.2 Account shall be credited.
·.. (2) The Government of the United Kingdom shaH not restrict the availability
of sterling standing to the credit of the No.1 Account for payments·for current
389
transactions in any currency area or for the purpose of any payment to residents of
the sterling area.
Article IV.-(1) There shall be transferred forthwith from the No.2 Account to the
No.1 Account £35 million less the amount by which the total of the Reserve Bank of
India's sterling assets, as established by Article I of this Agreement, exceeds the
amount transferred to the No.2 Account in accordance with paragraph I of Article
II of this Agreement.
(2) Tllc&r!'J sha)l also be transferred from the No.2AccounttotheNo.1 Account

the et:tuivalen'r of auy SUillS paid from the No.1 Account after the 15th July, 1947, in
reSpeCt Of~;,,/ L < ' ;, ' o' ''
(i) the transfer of ownership of military stores, equipment and fixed

assets in India from the Government of the United Kingdom to the
Government of India on the 1st April, 1947;
(ii). tht; ,&ettle~nt of <lilY matters outl'tal}ding under the Defence

Bxpen,diture Pla~ mid. of apy <;>tlier,accoun~s ~~el_atip.g to transactions which
were connected ..
w~t!i- the
' ..
War
.. '
'
amJ
.-.
took...placepr~or
' ~ . -. . . to the 15th July, 1947;
~'
(iii) payment; ~utsid~India as a res~itof Agree~~ni:sfor the release of

assets which wen; yested in the Indi<tn <;::ust?dian of Enerp.y l',roperty;
(iv) pensions paid ~utside India by'o~ on.beh~lf ofth~ Government of

India. or any. Prpv,incjal G<;>verm;11ent ~n. n;~p7ct o£. which an ,eventual
capitalisation scheme)s cdntel11plated; ' ' ' '
(v) such other itelllS. as, ih,e)wo Gov.ernmep.ts may' ~gree.
• . {3) There shall be trarisfeired from:the NO'.lAccountto the Nol2A.ccount the

equivalent .of any sums pakhmto the No,l .Account after the loth ·July, :1947, in
respect of:- .. J .,,
(i) the settlement of any matters outstanding under the Defence

· Expenditure Plan .and oi. any: other acrounts:.teHtting to ,transaetions.Jwhich
wete connected with.the· War.and took place priotto the 15th July,:l9H;;
' ~ i
(ii) such. other it.ems.as·the two Governments niay.agree ..: ., ·
Article V.- ( 1) In addition to the transfer provided in paragraph 1 of Article II of this

Agreement, there shaU.aJso.bcttransferred forth with from·the·No:Z.Accoutit. to the
Nod Account a sum,of£30 million as a working balance which may:be'dr.awn·upon
APPENDICES 391
from time to time to meet any temporary shortage in India's available means of
payment abroad.
(2) The level at which the working balance provided for in this Article has been
maintained during the currency of this Agreement shall be taken into consideration
in the consultation referred to in Article XI of this Agreement in the light of such data
as may then be provided.
Article VI.-(a) the No.2 Account referred to in Article II of this Agreement shall
be credited with-
(i) the assets referred to in Article II of this Agreement, including the

proceeds thereof at maturity or on realisation;
(ii) the proceeds at maturity or on realisation of any investments

purchased in accordance with established custom with funds standing to the
credit of the No.2 Account;
(iii) the transfers from the No.1 Account being transfers provided for in
paragraph 3 of Article IV and paragraph 2 of Article VIII of this Agreement;
(iv) such other transfers as may be agreed between the two

Governments.
(b) The No.2 account shall be debited with-
(i) transfers in accordance with paragraphs 1 and 2 of Article IV,

paragraph 1 of Article V and paragraph 2 of Article VIII of this Agreement;
(ii) payments in respect of investments made in accordance with

established custom;
(iii) such other transfers as may be agreed between the two

Governments.
Article VII.-The Government of India shall not restrict-(a) the acceptance by

residents oflndia in settlement of payments for current transactions, of sterling at the
disposal of residents outside India; (b) the availability of any Indian rupees arising
from permitted current transactions and accruing to residents of the sterling area for
any payments inside India or for the purchase of sterling.
Article VIII. -(1) Such transfers of capital from India to the rest of the sterling area
and vice versa as may be agreed between the Reserve Bank of India and the Bank of
England shall be subject to the provisions of paragraph 2 of this Article.
(2) The Reserve Bank of India and the Bank of England shall consult together
at agreed intervals in order to establish by reference to the best statistical data
available to them the net capital movement from India to the other countries of the
sterling area, or vice versa as the case may be, resulting from the agreed transfers of
capital. Thereafter an amount equal to the net capital movement so established shall
be transferred from the No.2 Account to the No.1 Account if the movement is one
from India to the other countries of the sterling area, or from the No.1 Account to
the No.2 Account if the movement is in the reverse direction.
(3) Notwithstanding anything in this Article the two Governments shall not
restrict transfers of capital from India to the United Kingdom representing-(a)
remittances of savings belonging to persons of United Kingdom origin leaving India
in order to take up permanent residence in the United Kingdom; and (b) the
voluntary repatriation of investments by persons regarded as resident in the United
Kingdom for purposes of exchange control in the United Kingdom.
Transfers of capital falling within the description in sections (a) and (b) of the
preceding paragraph shall be included in the computations for which paragraph 2
provides.
Article IX.-(1) The two Governments shall as often as may be necessary consult
together with a view to ensuring the smooth working of the present Agreement.
(2) The Reserve Bank of India and the Bank of England shall be entrusted with
the technical execution of this Agreement and shall consult together as often as may
be necessary in order to ensure its smooth working.
Article X.-For the purpose of the present Agreement-
(a) in relation to events happening on or after the 15th August, 1947,

references to the Government of India shall be construed as references to the
Governments of both the new Dominions set up by the Indian Independence
Act of 1947, or to the Government of either of them, as the circumstances
require and the expression "India" shall continue to denote the territories
included in that expression immediately prior to the 15th August, 1947;
(b) the expression "sterling area" shall have the meaning from time to
time assigned to it by the Exchange Control Regulations in force in the United
Kingdom. After the coming into force in the United Kingdom of the Exchange
Control Act, 1947, the expression "sterling area" wherever it occurs in the
present Agreement shall be deemed to have been replaced by the expression
"scheduled territories" which shall have the meaning from time to time
assigned to it in the aforesaid Exchange Control Act, 1947;
(c) the expression "payments for current transactions" shall have the
APPENDICES 393
same meaning as in Article XIX (i) of the Articles of Agreement of the

International Monetary Fund;
(d) in paragraph 2 of Article IV the expression "pensions" shall have the

meaning assigned to it in the Indian Independence Act, 1947.
Article XI.- The present Agreement shall come into force on the 14th August, 1947.
It shall terminate on the 31st December, 1947. Further consultations shall be held
before the termination of this Agreement with a view to extending it or replacing it
by another Agreement or other Agreements.
In witness whereof, the undersinged being duly authorised thereto by their

respective Governments, have signed the present Agreement.
Done at London this Fourteenth day of August, 1947 in duplicate.
For the Government of the United Kingdom- WILFRED EADY.
For the Government of India- V. NARAHARI RAO.

APPENDIX-III
THE PAKISTAN MONETARY SYSTEM AND

RESERVE BANK (AMENDMENT) ORDER, 1948
MINISTRY OF LAW
(Reforms)
NOTIFICATION
New Delhi, the 31st March, 1948.
No. G. G. 0. 42.- The following Order made jointly by the Governors-General

of India and Pakistan is published for general information:-
Whereas in the exercise of the powers conferred by section 9 of the Indian

Independence Act, 1947, the Governor General oflndia was pleased to make on the
14th day of August 1947 the Pakistan (Monetary System and Reserve Bank) Order,
1947 (hereinafter referred to as "the principal Order");
And whereas an agreement has been reached between the Dominions of India
and Pakistan that the provisions of the principal Order should be modified and
supplemented in certain respects;
And whereas sub-section (5) of section 19 of the Indian Independence Act,

1947, provides that any power conferred by that Act to make any Order includes
power to revoke or vary any Order previously made in the exercise of that power;
Now, therefore, in the exercise of the powers aforesaid and of all other powers
enabling them in that behalf, the Governor-General of India and the Governor-
General of Pakistan, acting jointly, are pleased to make the following Order:-
394
APPENDICES 395
1. (1) This Order may be cited as the Pakistan Monetary System and Reserve
Bank (Amendment) Order, 1948.
(2) It shall come into force at once.
2. In section 2 of Part I of the principal Order, after clause (e), the following
clause shall be inserted, namely:-
"(ee) 'Pakistan rupee coin' means rupee coin which is for the time being legal
tender in Pakistan, and not in India, and includes the one rupee notes referred to in
section 9 of Part II of this Order;".
3. In Part II of the principal Order.-

(1) in section 2, sub-section (1) of section 4, sub-sections (2) and (3) of section
5, sub-section (9) of section 12, sub-section (1) of section 13 and section 17, for the
word "September" wherever it occurs the word "June" shall be substituted;
(2) in sub-section (1) of section 4, the second proviso shall be omitted;
(3) to section 6, the following sub-section shall be added, namely:-
"(4) The provisions of this section shall have effect only up to the 30th day of
June, 1948.";
(4) in sub-section (2) of section 7, for the word "October" the word "July" shall
be substituted; and
(5) in section 11 for the figures and words "31st day of March" the figures and
words "30th day of June" shall be substituted.
4. In Part III of the principal Order,-

(1) in section 1, in the opening paragraph for the word "September" the word
"June" shall be substituted, in clause (13) for the figures and words "31st day of
March" the figures and words "30th day of June" shall be substituted, and the proviso
shall be omitted; and
(2) in section 2, for the word "September" the word "June" shall be
substituted.
5. In Part IV of the principal Order,-

(1) in section 1,-
(a) in sub-section (1) the words "in respect of any period" and the proviso
shall be omitted, and for the words "payable in respect of that period"
the words and figures "payable in respect of the year ending on the 30th
day of June, 1948" shall be substituted:
(b) for sub-section (2) the following sub-section shall be substituted,

namely,':-
"(2) The Government of India shall pay to the Government of
Pakistan an amount which bears to the Government's bank profits the
same proportion as the total value of Pakistan notes in circulation in
Pakistan on the 30th day of June, 1948 plus the total value of India notes
returning from circulation in Pakistan in the year commencing on the 1st
day of July, 1948 bears to the total value of India notes and Pakistan
notes in circulation in India and Pakistan on the 30th day of June,
1948.";
(2) in sub-section (1) of section 2 for the word "September" the word "June"
shall be substituted;
(3) for sub-section (2) of section 3 the following sub-section shall be

substituted, namely,:-
"(2) There shall be added to the debt due by the Government of Pakistan to the
Government of India an amount equal to the amount of one-rupee notes of the
Government of Pakistan issued up to the 30th day of June, 1948.
(3) The Government of India shall have no liability whatsoever in respect of

the one-rupee notes of that Government circulating in Pakistan after the 30th day of
June, 1948.
(4) The Government of Pakistan shall exchange at par all one-rupee notes of
the Government of India returning from circulation in Pakistan after the 30th day of
June, 1948, and shall return to the Government of India all notes so exchanged.
(5) The debt due to the Government of India by the Government of Pakistan
shall be deemed to be reduced by an amount equal to the amount of the notes
returned under sub-section (4) of this section before the 1st day of July, 1948, or to
the amount mentioned in sub-section (2) of this section, whichever is less.";
(4) in section 4-
(a) for the word "September," whereverit occurs, the word "June" shall be
substituted;
(b) in sub-section (2), for the words and figures "until the 31st March, 1949,
APPENDICES 397
and there shall from time to time on the demand of the Government of
Pakistan" the following shall be substituted, namely,:-
"until the 30th day of June, 1949, and on the delivery of such notes
to the Bank from time to time in instalments of not less than five crores
of rupees each, there shall";
and for the words "amount of notes accepted" the words "amount of
notes delivered" shall be substituted;
(c) in sub-section (3), for the word "accepted" the word "delivered" shall be
substituted, and after the figures "1948" the words "and in accordance
with the following provisions of this Part" shall be added; and
(d) sub-section (4) shall be omitted;
(5) sub-sections (5) and (6) of section 4 shall be made a separate section andre-
numbered respectively as sub-section and before the said sections 14 and 15 as sore-
numbered, the following sections shall be inserted, namely,
"5. All transfers of gold under the provisions of section 4 shall, except in the
last instalment, be in such number of gold bars as do not exceed in value the amount
due to be transferred in gold in that instalment.
6. For the purpose of determining Pakistan's share of sterling securities and

Government oflndia securities under the provisions of sub-section (3) of section 4.-
(a) the amount of sterling securities held in the Issue Department of the Bank
on the 30th day of June, 1948, shall be deemed to be reduced, and the amount of
Government of India securities so held on that day shall be deemed to be increased
by the amount by which the amount of sterling held in the Banking Department of
the Bank on that day falls short of the aggregate of-
(i) the amounts payable in sterling to the Government of the United Kingdom
in pursuance of any agreement that may be reached as to the final settlement of the
sterling balances,
(ii) the amounts payable in sterling to the Government of Pakistan and the
Provincial Governments in Pakistan under the provisions of section 11, and
(iii) the amount of the balance at the credit ofthe Bank's account No.I with the
Bank of England; and
(b) the increase in each kind of Government of India securities under clause
(a) shall bear the same proportion to the total increase as the amount of that kind of
securities held in the Issue Department of the Bank on the 30th day of June, 1948,
bears to the total amount of Government of India securities so held on that day.
7. Any one-rupee notes of the Government of India transferred to the

Government of Pakistan under the provisions of section 4 shall be returned by that
Government to the Government of India without payment, and any other India
rupee coin so transferred shall be disposed of by the Government of Pakistan in
accordance with the provisions of sub-section (1) of section 3 as if it were retired
rupee coin.
8. Any Pakistan rupee coin remaining with the Bank after the transfers have been
effected in accordance with the provisions of section 4 shall be made over to the
Government of India for disposal otherwise than as coin.
9. (1) The Government of Pakistan shall, as expeditiously as possible, return to

the Bank at its office in India all India notes, India rupee coin and Pakistan rupee
coin held in the currency chests ofthe Bank in Pakistan on the 30th day of June, 1948,
and no such notes or coins shall be put into circulation from those currency chests in
Pakistan after that day.
(2) Notwithstanding anything contained in the preceding sections of this

Part,-
(a) no assets of the Issue Department of the Bank shall be transferred to the
Government of Pakistan until so much at least of the notes and coins referred to in
sub-section (1) of this section has been delivered to the Bank as reduces the value of
the remainder held in Pakistan to an amount equal and or less than the value of
Pakistan notes in circulation on the 30th day of June, 1948; and
(b) the Bank shall be entitled to withhold from the value of all or any of the
assets to be transferred thereafter to the Government of Pakistan from the Issue
Department of the Bank an amount equal to the value of the remainder of the said
notes and coins which are for the time being held in Pakistan.
10. (1) The cost of remittance from Pakistan to India of any notes or coins under
the provisions of section 9 shall be borne by the Bank.
(2) The cost of remittance of any notes, coins, gold and securities under the
provisions of sections 3 and 4 shall be borne by the Government of Pakistan.
11. (1) The amounts standing to the credit of the Government of Pakistan, or any
Provincial Government in Pakistan, with the Bank on the 30th day of June, 1948,
shall be paid by the Bank-
(a) in Pakistan currency, to the extent that such currency is available in the
APPENDICES 399
Banking Department of the Bank on that date; and
(b) the remainder, by transfer from the balance in the Bank's Pakistan account
with the Bank of England, and to the extent that such balance is insufficient, by
transfer from the Bank's No.II account with the Bank of England.
(2) Any amount that banks in Pakistan may require the Bank to transfer to the
Government of Pakistan out of their deposits with the Bank in order to comply with
the requirements of any law for the time being in force in Pakistan shall, if the
transfer is to be made after the 30th day of June, 1948, be paid by the Bank by
transfer from its No.II account with the Bank of England.
12. The transfer to the Government of Pakistan of the Government's Bank profits
under the provisions of section 1 and of the assets of the Issue Department of the
Bank under the provisions of section 4 shall be provisional pending the settlement of
Burma's claim to a share of the Bank's profits and assets and shall be subject to
readjustment when that claim is finally settled.
13. Unit! 30th day of June, 1948, there shall be no exchange control as between
India and Pakistan, nor shall any restriction be placed on the transfer of funds or
securities from one Dominion to the other, whether such transfers are on capital
account or current account."; and
(6) in section 15, as renumbered by clasue (5) above, after the words "the
context so permits" the words and figures "and until the 30th day of June, 1948,"
shall be inserted.
M.A. JINNAH, MOUNTBATTEN OF BURMA,

Governor General, Pakistan Governor General, India
K.V.K. SUNDARAM,
Officer on Special Duty
APPENDIX-IV
THE STATE BANK OF PAKISTAN ORDER, 1948
Promulgated by
THE GOVERNOR-GENERAL
On the 12th May, 1948.
G.G.O. No.ll- Whereas in accordance with the provisions of the Pakistan

(Monetary System & Reserve Bank) Order, 1947, as amended by the Pakistan
Monetary System & Reserve Bank (Amendment) Order, 1948, the Reserve Bank of
India constituted by the Reserve Bank of India Act, 1934 (II of 1934) shall cease to
operate as Pakistan's currency authority and Central Bank after the thirtieth day of
June, 1948;
And whereas it is necessary to provide for the constitution of a State Bank to
regulate the issue of bank notes and the keeping of reserves, with a view to securing
monetary stability in Pakistan and generally to operate the currency and credit
system of the country to its advantage;
Now, therefore, in exercise of the powers conferred by Section 9 of the Indian
Independence Act, 1947, and of all other powers enabling him in that behalf, the
Governor-General is pleased to make the following Order:-
Short title extent and commencement
1. (1) This Order may be cited as the State Bank of Pakistan Order, 1948.
(2) It extends to the whole of Pakistan.
400
APPENDICES 401
Definitions and interpretation
2. (1) In this Order unless there is anything repugnant in the subject or context,
(a) "the Bank" means the State Bank of Pakistan constituted by this Order;
(b) "the Central Board" means the Central Board of Directors of the Bank
constituted under clause 6 of this Order;
(c) "scheduled bank" means a bank included in the Second Schedule to this
Order;
(d) "rupee coin" means silver rupees, nickel rupees and one rupee notes
which are legal tender in Pakistan;
(e) "approved foreign exchange" [means currencies notified under clause

14 of this Order;]!
(f) "Governor" and "Deputy Governor" means respectively the Governor

and Deputy Governor or Deputy Governors appointed under clause 8
of this Order;
[(g) "Provincial co-operative Bank" means the principal society in a

province which is registered or deemed to be registered under the Co-
operative Socieites Act, 1912, or any other law for the time being in
force in Pakistan relating to co-operative societies and the primary
object of which is the financing of other societies in the province, which
are or are deemed to be so registered;
Provided that in addition to such principal society in a province, or
where there is no such principal society in a province, the Provincial
Government may declare any central co-operative society in that
province to be a Provincial Co-operative Bank within the meaning of
this definition. F
(2) The General Clauses Act (X of 1897), as adapted by the Pakistan

(Adaptation of Existing Pakistan Laws) Order, 1947, applies for the interpretation
of this Order as it applies for the interpretation of a Central Act.
Establishment and incorporation of the Bank
3. (1) As soon as may be after the commencement of this Order, steps shall be
Substituted for the words "means such foreign currencies as may be notified under clause 14 of this
Order".
Inserted.
taken to establish, in accordance with the provision ofthis Order, a bank to be called
the State Bank of Pakistan, [or Bank-e-Daulat-e-Pakistanp for the purposes of
taking over as from the first day of July, 1948, the management of the currency from
the Reserve Bank of India, and carrying on the business of Central Banking.
(2) The Bank shall be a body corporate by the name of the State Bank of
Pakistan [or Bank-e-Daulat-e-Pakistan]4 having perpetual succession and a common
seal, and shall by said name sue and be sued.
Offices and Agencies
4. (1) The head office of the Bank shall be situated in Karachi.
(2) The Bank may establish branches, offices and agencies in Pakistan, or, with
the prior approval of the Central Government, elsewhere.
Capital and Shares
5. (1) The capital of the Bank shall be three crores of rupees:
Provided that the capital may be increased by a resolution of the Central Board
subject to the approval of the Central Government.
(2) The capital shall be divided into three hundred thousand shares of nominal
value of one hundred rupees each, which shall be fully paid up, and of which no less
than fifty one per cent shall be issued to the Central Government.
(3) The balance of the share capital remaining after deducting the amount of
the shares to be issued to the Central Government under sub-clause (2) shall be
offered for public subscription.
(4) [Notwithstanding anything contained in the Acts hereinafter mentioned in

this sub-clause, the shares of the Bank shall be deemed to be included among the
securities enumerated in section 20 of the Trusts Act, 1882, and to be approved
securities for the purposes of the Insurance Act, 1938, and the Banking Companies
(Control) Act, 1948.)5
(5) Separate registeres of shareholders shall be maintained at Karachi, Lahore
3· 4 Inserted.
Substituted for the word "No person, either singly or jointly with other persons shall, whether by
allotment or otherwise, hold more than five hundred shares.
Provided that any person holding at any time more than five hundred shares shall dispose of shares
in excess of the aforesaid limit of five hundred shares within a period of two months from the date of
his becoming owner thereof, failing which the excess shares, shall be forfeited to the Central
Government.
APPENDICES 403
and Dacca and a separate issue of shares assigned to each of the registers by the
Central Board shall be made in the respective areas served by those registers, as
defined in the First Schedule to this Order, and shares shall be transferable from one
register to another.
(6) A shareholder shall be qualified to be registered as such in any area in

which he is ordinarily resident or has his principal place of business in Pakistan, but
no person shall be registered as a shareholder in more than one register; and no
person who is not-
(a) domiciled in Pakistan and either a subject of Pakistan, or subject of a State

which has acceded or accedes to Pakistan; or
(b) a British subject ordinarily resident in Pakistan and domiciled in the United
Kingdom or in any part of his Majesty's Dominions, the Government of which does
not discriminate in any way against the subjects of Pakistan; or
(c) a company registered under the Indian Companies Act, 1913, as adapted
by the Pakistan (Adaptation of Existing Pakistan Laws) Order, 1947, or a society
registered under the Co-operative Societies Act, 1912, or any other law for the time
being in force in Pakistan relating to co-operative societies or a scheduled bank; or
a bank, company or co-operative society duly registered in a State which has acceded
or accedes to Pakistan; or a corporation or Company incorporated by or under an
Act of parliament or any law for the time being in force in any part of His Majesty's
Dominions, the Government of which does not discriminate in any way against the
subjects of Pakistan and having a branch in Pakistan;
shall be registered as a shareholder or be entitled to payment of any dividend on any

share and no person, who, having been duly registered as a shareholder, ceases to be
qualified to be so registered, shall be able to exercise any of the right of a shareholder
otherwise than for the purpose of the sale of his shares.
[(6A) The shares of the Bank may be held under his official designation by the
holder of any public office which may be notified in the Gazette by the Local Board,
and in regard to transfers the following provisions shall apply, namely-
(a) when a share is so held, it shall be deemed to be transferred without any

or further endorsement or transfer deed from each holder of the office
to the succeeding holder of the office on and from the date on which the
latter takes charge of the office;
(b) when the holder of the office transfers the share to a party not being his
successor in office, the transfer shall be made in the prescribed manner;
(c) the provisions of parts (a) and (b) of this sub-clause apply in the case of
an office of which there are two or more joint holders as they apply to
any office of which there is a single holder. ]6
(7) The Central Government shall, by notification in the Official Gazette,

specify the parts if any of his Majesty's Dominions which shall be deemed for the
purposes of paras (b) and (c) of sub-clause (6) to be the parts of His Majesty's
Dominions in which discrimination exists against the subjects of Pakistan.
Notice of any trust
[5-A. No notice of any trust, express, implied or constructive shall be acted

upon or receivable by the BankF
Central Board of Directors
6. (1) The general superintendence and direction of the affairs and business of
the Bank shall be entrusted to a Central Board of Directors which may exercise all
powers and do all acts and things which may be exercised or done by the Bank and
are not by this Order expressly directed or required to be done by the Bank in
General meeting.
(2) The Central Board shall consist of the Governor, one or more Deputy
Governors, if appointed, and [nine] 8 directors nominated or elected in accordance
with the provisions of clause 9 of this Order:
Provided that a Deputy Governor shall not be entitled to vote, except when he
is acting as Chairman at a meeting of the Central Board under the next succeeding
clause.
(3) No act or proceeding of the Central Board shall be questioned on the

ground merely of the existence of any vacancy in or any defect in the constitution of
the Central Board.
Meetings of the Central Board
7. (1) Meetings of the Central Board shall be convened by the Governor at least
six times in each calendar year and at least once in each quarter:
Provided that the Central Board shall meet at least once, and if possible twice,
in Dacca, and at least once in Lahore, in each calendar year.
6· 7 Inserted.
Substituted for the word "Eight".
APPENDICES 405
(2) Any three Directors may require the Governor to convene a meeting of the
Central Board at any time and the Governor shall forthwith take steps to convene
meeting accordingly.
(3) The Governor, or in his absence a Deputy Governor, shall preside at

meetings of the Central Board, and, in the event of an equality of votes, shall have
second or casting vote.
(4) If neither the Governor nor a Deputy Governor is available to preside at a

meeting of the Central Board, the members of the Central Board present shall elect
one of their members to act as Chairman of that meeting. The Chairman so elected
shall, in the event of an equality of votes, have a second or casting vote.
(5) At meetings of the Central Board, five members present shall form a
quorum:
Provided that pending the election of three Directors from amongst the
shareholders under sub-clause (1) of clause 9, of this Order, three members of the
Central Board present at a meeting shall form a quorum.
Governor and Deputy Governors
8. (1) The Governor of the Bank shall be the chief executive officer and shall, on
behalf of the Central Board, have the direction and control of the whole affairs of the
Bank:
Provided that in matters not specifically required to be done by the Central

Board or by the Bank in general meeting by this Order or regulations made
thereunder, the Governor shall have authority to conduct the business, control the
functions, and manage the affairs of the Bank.
(2) A Deputy Governor shall perform such duties as may be assigned to him
by the Central Board.
(3) In the event of absence or incapacity ofthe Governor from what-ever cause
arising, and in the event of there being no Deputy Governor to whom the duties of
the Governor may be assigned by the Central Board under sub-clause (2), the
Central Board shall authorise one of their members to act as Governor for the time
being, but no such person shall act as Governor for a period exceeding one month
without the approval of the Central Government.
(4) Subject to the provisions of sub-clause (9) of this clause, the Governor shall
be appointed by the Central Government for such term not exceeding five years and
on such salary as may be fixed by the Central Government at the time of
appointment, but no remuneration shall be in the form of a commission or be

computed with reference to the income or profits of the Bank:
Provided that the Central Government may require the Governor to hold an
office other than in the Bank, in which event, the Governor shall vacate his office,
and the period during which he holds the other office shall not count towards his
tenure of office as Governor:
Provided further that in the event of a vacancy occurring under the preceding
proviso, the Central Government shall make a temporary appointment of Governor
for such time as the Governor does not resume his office in the Bank.
(5) The Central Government may appoint one or more Deputy Governors,
and the provisions of the next preceding sub-clause shall apply to the Deputy
Governors so appointed.
(6) The Governor and Deputy Governor shall devote their whole time to the
affairs of the Bank:
[Provided that the Governor, or the Deputy Governor as the case may be, may
in addition to his duties as Governor or Deputy Governor, be entrusted by an Order
of the Central Government with such duties in relation to the National Bank of
Pakistan for such period as may be specified in the Order; and] 9
(7) The Governor and Deputy Governor shall on the expiry of their terms of
office be eligible for re-appointment.
(8) No person shall hold office as Governor or Deputy Governor who-
(a) is a member of the Central or a Provincial Legislature; or
(b) is employed in any capacity in the public service of Pakistan or of any

Province of Pakistan or of any State which has acceded or acceds to Pakistan or holds
any office or position for which any salary or other remuneration is payable out of
public funds; or
(c) is a director, officer or employee of any other bank or financial concern or

has an interest as a shareholder in any other bank or financial concern; or
(d) has reached the age of sixty five years.
[Provided that nothing in paragraph (c) of this clause shall apply where the
Inserted.
APPENDICES 407
Governor or Deputy Governor is entrusted with duties in relation to the National

Bank of Pakistan by an order of Central Government. ]1°
(9) The Central Government may remove from office the Governor, a Deputy
Governor or any nominated or elected Director:
Provided that in the case of a nominated or elected Director this power shall
be exercised only on a resolution passed by the Central Board in that behalf by a
majority or not less than six Directors.
[(10) The Central Government may grant leave to the Governor and Deputy
Governor for such period and on such terms and conditions as may be specified by
the Central Government.
(11) Notwithstanding anything in this Order, where the Governor or a Deputy

Governor during his term of office is absent, on leave or otherwise the Central
Government may appoint any person employed or holding any office or position as
provided in paragraph (b) of sub-clause (8) of this clause to act as Governor, or as
Deputy Governor as the case may be, in his place. ]11
Nomination and election of Directors
9. (1) [Six Directors, one of whom shall be a Government official holding office
at the pleasure of the Central Government, shall be nominated by the Central
Government for a period of three years and one Director to hold office for three
years shall be elected from amongst themselves by each group of the shareholders
registered in each of the three share registers provided for in clause 5 of the Order. ]1 2
Provided that, pending the election of the three Directors from amongst the
shareholders as aforesaid, the [six] 13 Directors nominated by the Central
Government and the Governor and Deputy Governor, if appointed, shall constitute
the Central Board for the purposes of this Order.
(2) (a) In the event of a vacancy occurring amongst the Directors appointed by
the Central Government before the expiry of the term of office, the Central
Government shall appoint another Director to hold office for the remainder of the
term.
10· 11 Inserted.
12 Substituted for the words "The Central Government shall nominate five Directors each for a term of
three years, and one Director to hold office for three years shall be elected from amongst themselves
by each group of the shareholders registered in each of the three share registers provided for in clause
5 of this Order".
13 Substituted for the word "five".
(b) In the event of a vacancy occurring amongst the Directors elected by the
shareholders before the expiry of the term of office, a new Director shall be elected
for the remainder of the term by and from amongst the shareholders registered on
the same share register as that from which the vacating Director was elected.
(3) The Directors shall, on the expiry of their term, be eligible for re-
nomination or re-election.
(4) In any election under sub-clause (1) and sub-clause (2) of this clause,no
shareholder shall have more than ten votes as provided for in sub-clause (3) of clause
II of this Order.
(5) No person shall be or shall continue to be, a Director of the Bank who-
(a) is a member of the Central or Provincial Legislature, or
(b) is a salaried Government official or a salaried official of a State, which has

acceded or acceds to Pakistan, or
(c) is,or at any time has been, adjudicated an insolvent or has suspended
payment or has compounded with his creditors, or
(d) is found lunatic or becomes of unsound mind, or
(e) is an officer or employee of any bank, or
(f) is a director of any bank, other than a bank which is a society registered
under the Co-operative Societies Act, 1912, or any other law for the time being in
force in Pakistan.
[Provided that nothing in paragraph (b) shall apply to the Government Official
nominated as a Director by the Central Government.]! 4
(6) If in the opinion of the Central Board, any Director becomes permanently
incapacitated, he may, subject to the approval of the Central Government, be
removed from office by a resolution of the Central Board.
(7) In the transaction of the business of the Central Board each Director shall
have one vote.
(8) The Directors shall be entitled to receive such remuneration for attendance
at meetings of the Central Board, or of the Executive Committee constituted under
14 Inserted.
APPENDICES 409
the next succeeding clause, as may be prescribed by regulations made under this
Order.
Removal from and vacation of office of Directors
[9-A. (1) Notwithstanding anything contained in sub-clause (9) of Clause 8 the

Central Government shall remove from office any director who becomes subject to
any of the disqualifications specified in sub-clause (5) of clause 9 or ceases to be a
qualified voter under sub-clause 3 of clause 11.
(2) A Director removed under sub-clause (1) shall not be eligible to become a
. Director again until the expiry of the term for which he would have held office had
he not been removed.
(3) A Director may resign his office by a statement to that effect in writing
signed by him and addressed to the Central Government, and on the acceptance of
his resignation his office shall be vacant. ) 15
Executive Committee
10. (1) There shall be an Executive Committee consisting of the Governor,

Deputy Governor, if any, (three) 16 Directors elected by the Central Board (to
represent respectively the areas mentioned in sub-clause (5) of clause 5)17 and an
officer appointed by the Central Government to act, as member of the Executive
Committee.
(2) Except when the Central Board is in session, the Executive Committee
shall:-
(a) deal with and decide any matter within the competence of the Central
Board; and
(b) determine the minimum rates at which the Bank is prepared to discount
or re-discount bills or to make advances.
(3) the Executive Committee shall keep full minutes of its proceedings which
shall be submitted to the Central Board at its next meeting for ratification.
General Meetings
11. (1) A general meeting (hereinafter referred to as the annual general meeting)
15 Inserted.
16 Substituted for the word "two".
17 Inserted.
shall be held annually at Karachi, or a place in Pakistan where there is an office or a

branch of the Bank, within three months from the date on which the annual accounts
of the Bank are closed, and general meeting may be convened by the Central Board
at any other time.
(2) The shareholders present at a general meeting shall be entitled to discuss

the annual accounts, the report of the Central Board on the working of the Bank
throughout the year, and the auditors' report on the annual balance sheet and
accounts.
(3) Every shareholder shall be entitled to attend at any general meeting, and
each shareholder who has been registered on a register maintained under clause 5 of
this Order for a period of not less than six months ending with the date of the
meeting, as holding five or more shares, shall have one vote, and on appeal being
demanded, each share holder so registered shall subject to a maximum of ten votes,
have one vote for each five shares, and such votes may be exercised by proxy
appointed on each occasion for that purpose, such proxy being himself a shareholder
entitled to vote at the election and not being an officer or employee of the bank;
Provided that a general meeting be held within six months after the
commencement of this Order, a shareholder shaH be entitled to vote as provided in
sub-clause (3) of this clause, notwithstanding that he has been registered as a
shareholder for a period less than six months.
Provided further that the Central Government as shareholder under sub-·

clause (2) of clause 5, may appoint any authority or person to be present at a general
meeting under this clause, in which event the restriction of the maximum of ten votes
shall not apply to the authority or person so appointed.
Local Boards, constitution and their functions
12. (1) A Local Board shall be constituted for each of the three areas specified in
the First Schedule, and shall consist of-
(a) four members elected from amongst themselves by the shareholders who
are registered on the register for that area and are qualified to vote, and
(b) not more than five members nominated by the Central Government. 18
Provided that the Central Government shall in exercising this power of

nomination aim at securing the representation of territorial or economic interest not
already represented, and in particular the representation of agricultural interests and
interests of co-operative banks.
18 Deleted the words "from amongst the shareholders registered on the register for that area".
----·-----·
APPENDICES 411
[Provided further that a member of a Local Board nominated under this

paragraph shall cease to hold office if, at any time after six months from the date of
his nomination he is not registered as a holder of un-encumbered shares of the Bank
of the nominal value of five hundred rupees;
Provided further that any shares sold at par by the Central Government to a
member seeking to obtain the minimum share qualification required under this
paragraph shall not be disposed of by such member otherwise than by resale to
Government at par, and Government shall be entitled to repurchase at par all such
shares held by any member on his ceasing from any cause to hold office as a member
of a Local Board. ) 19
(2) At an election of members of a Local Board for any area, any shareholder
who has been registered on the register for that area for a period of not less than six
months ending with the date of the election, as holding five shares, shall have one
vote, and each shareholder so registered as having more than five shares shall,
subject to a maximum of ten votes, have one vote for each five shares, and such votes
may be exercised by proxy appointed on each occasion for that purpose, such proxy
being himself a shareholder entitled to vote at the election and not being an
employee of the Bank.
Provided that at the first election held under this Order, a shareholder shall be
entitled to vote as provided for in sub-clause (2) of this clause, notwithstanding that
he has been registered as a shareholder for a period less than six months.
(3) The members of a Local Board shall hold office until they vacate it under
sub-clause (6) and shall be eligible for re-election or re-nomination, as the case may
be:
Provided that the election, nomination, re-election or re-nomination shall be

subject to the provisions of sub-clause (5) of clause 9.
[(3-a) In the event of a vacany occurring amongst the nominated members of

a Local Board before the expiry of the term of office, the Central Government shall
fill the vacancy by nominating another person from amongst the shareholders
registered on the register for the appropriate area as a member and he shall hold
office for the remainder of the term;
(3-b) In the event of a vacancy occurring amongst the elected members of a

Local Board before the expiry of the term of office, a new member shall be elected
for the remainder of the term by and from amongst the shareholders registered on
the share register for the appropriate area.]2°
19-20 Inserted.
(4) At any time within three months of the day on which the Director
representing the shareholders on any register are due to retire under the provisions
of this Order, the Central Board shall direct an election to be held of members of the
Local Board concerned, and shall specify a date from which the registration of
transfers from and to the register shall be suspended until the election has taken
place.
[Provided that nothing in this sub-clause shall be deemed to prevent the

Central Board from issuing a direction to a Local Board to suspend the registration
of transfers from and to the share register of any area for such period as the Central
Board may specify immediately before the election of a Director or a member of
Local Board to fill a vacancy arising before the expiry of the term of office. ]2 1
(5) On the issue of such direction the Local Board shall give notice of the date
of the election and shall publish a list of shareholders holding five or more shares with
the dates on which their shares were registered, and with their registered addresses,
and such list shall be available for purchase not less than three weeks before the date
fixed for the election.
(6) The names of the persons elected shall be notified by the Central Board to
the Central Government which shall thereupon proceed to make any nominations
permitted by para (b) of sub-clause (1); it shall then fix the date on which the
outgoing members of the Local Board shall vacate office, and the incoming members
shall be deemed to have assumed office on that date.
(7) A Local Board shall advise the Central Board on such matters as may be
generally or specifically referred to it and shall perform such duties as the Central
Board may, by regulations delegate to it.
Removal from and vacation of office of

members of Local Boards
[12A. (1) The Central Board shall remove from office any member of a Local
Board becoming subject to any disqualification referred to in the proviso to sub-
clause (3) of clause 12 or ceasing to be a qualified voter under sub-clause (2) of clause
12.
(2) A member of a Local Board removed under sub-clause (2) shall not be
eligible to become a member of a Local Board until the expiry of the term of office
during which he was removed.
(3) A member of a Local Board may resign his office by a statement in writing
21 Inserted.
APPENDICES 413
signed by him and addressed to the Central Board and on the acceptance of his
resignation his office shall become vacant. ]22
(a) stocks, funds and securities other than immovable property, in which a
trustee is authorised to invest trust money by any law for the time being in force in
Pakistan;
(b) gold or silver or documents of title to the same;
(c) such bills of exchange and promissory notes as are eligible for purchase or
rediscount by the Bank;
(d) promissory notes of any scheduled bank or Provincial co-operative bank,

supported by documents of title to goods which have been transferred, assigned or
pledged to any such bank as security for a cash credit or overdraft granted for bona
fide commercial or trade transactioans or for the purpose of financing seasonal
agricultural operations or the marketing of crops.
(5) The making to the Central Government, Provincial Governments or

Governments of States of advances repayable in each case not later than three
months from the date of the making of the advance.
(6) The issue of demand drafts made payable at its own offices or agencies and
making, issue and circulation of bank post bills.
[(6a) The drawing, accepting, making and issue, on its own account or on
account of the Central Government as the case may be, of any bill of exchange,
hundi, promissory note or engagement for the payment within or without Pakistan
of Pakistan or foreign currency payable to bearer or to a banker on demand.
Provided that the business mentioned in this sub-clause shall not be carried on
or transacted without the previous approval of the Central Government in each
case.J23
(7) The purchase and sale of Government securities of countries whose

currency has been declared as approved foreign exchange maturing within ten years
from the date of such purchase.
(8) The purchase and sale of securities of the Central Government, a

Provincial Government or the Government of a State, of any maturity or of such
securities of a Local Authority as may be specified in this behalf by the Central
Government on the recommendation of the Central Board;
zz.zJ In~erted.
Provided that securities fully guaranteed as to principal and interest by the

Central Government shall be deemed for the purposes of this clause to be securities
of that Government:
Provided further that the amount of such securities held at any time in the
Banking Department shall be so regulated that-
(a) the total value of such securities shall not exceed the aggregate amount of
the share capital of the Bank, the Reserve Fund and three-fifths of the liabilities of
the Banking Department in respect of deposits;
(b) the value of such securities maturing after one year shall not exceed the
aggregate amount of the share capital of the Bank, the Reserve Fund and two-fifths
of the liabilities of the Banking Department in respect of deposits;
(c) the value of such securities maturing after ten years shall not exceed the
aggregate amount of the share capital of the Bank and the Reserve Fund and one-
fifth of the liabilities of the Banking Department in respect of deposits.
(9) The custody of monies, securities and other articles of value, and the
collection of the proceeds, whether principal, interest or dividends, of any such
securities.
(10) The sale and realisation of all property, whether movable or immovable
which may in any way come into the possession of the Bank in satisfaction, or part
satisfaction of any of its claims.
(11) The acting as agent for the Central Government, any Provincial
Government, the Government of a State, or any Local Authority in the transaction
of any of the following kinds of business, namely:-
(a) the purchase and sale of gold or silver, or approved foreign exchange;
(b) the purchase, sale, transfer and custody of bills of exchange, securities or
shares in any company;
(c) the collection of the proceeds, whether principal, interest or dividends, of

any securities or shares;
(d) the remittance of such proceeds at the risk of the principal, by bills of
exchange payable either in Pakistan or elsewhere;
(e) the management of public debt.

APPENDICES 415
(12) The purchase and sale of gold coin and gold or silver bullion. 24
[(13) The opening of an account with or the making of an agency arrangement

with, and the acting as agent or correspondent of a bank incorporated in any country
outside Pakistan or the principal currency authority of any country under the laws for
the time being in force in that country or any international bank formed by such
principal currency authorities, and the investing of the funds of the Bank in the
shares of any such international bank.J25
(14) The borrowing of money for a period not exceeding three months for the
purposes of the business of the Bank, and the giving of security for money so
borrowed:
Provided that no money shall be borrowed under this sub-clause from any
person in Pakistan other than a scheduled bank or from any person outside Pakistan
other than bank which is the principal currency authority of any country under the
law for the time being in force in that country;
Provided further that the total amount of such borrowings from persons in
Pakistan shall not at any time exceed the amount of the share capital of the Bank.
(15) The making and issue of bank notes subject to the provisions of this
Order.
[Explanation.- The expression 'bank notes' in this sub-clause in its reference

to the issue of the bank notes, and hereinafter wherever the expression 'bank notes'
or 'notes of the Bank' occurs in this Order, excepting in clause 20 shall include bank
notes of the Reserve Bank of India inscribed with the words "Government of
Pakistan "]26
[(15A) the performance of the functions of the Bank under the International
Monetary Fund and Bank Act, 1950]27
(16) Generally, the doing of all such matters and things as may be incidental to
or consequential upon the exercise of its powers or the discharge of its duties under
this Order.
24
Deleted the words "and approved foreign exchange".
25 Substituted the words "the opening of an account or the making of an agency agreement with, and the
acting as agent or correspondent of, a bank which is the principal currency authority of any country
under the law for the time being in force in that country or any international bank formed by such banks
and the investing of the funds of the banks in the shares of any such international banks".
26-27
Inserted.
Power of direct discount
[13-A(1) Notwithstanding any limitation contained in paragraphs (a) and (b)

of sub-clause (2) or paragraphs (a) and (b) of sub-clause (3) or sub clause (4) of clause
13, the Bank may by a General order of the Central Board or a special order of the
Governor.
(a) purchase, sell or discount any of the bills of exchange or promissory notes
specified in paragraph (a) or (b) of sub-clause (2) or paragraph (b) of sub-clause (3)
of the clause, though such bill or promissory note does not bear the signature of a
scheduled bank or a provincial co-operative bank; or
(b) make loans or advances repayable on demand or on the expiry of fixed

periods not exceeding ninety days against the various forms of security specified in
sub-clause (4) of the clause or when the loan or advance is made to a banking
company as defined in the Banking Companies (Control) Act 1948, against such
other form of security as the Bank may consider sufficient.
(2) Where a banking company, to which a loan or advance has been made
under the provisions of paragraph (b) of sub-clause (1) of this clause, is wound up,
any sums due to the Bank in respect of such loan or advance shall subject only to the
claims, if any, of any other banking company in respect of any prior loan or advance
made by such banking company against any security, be a first charge on the assets
of the banking company. ]28
Declaration of Approved Foreign Exchange and

specification of securities
14. (1) The Central Government may, on the recommendation of the Central
Board, by notification in the Official Gazette, declare the currency of any country to
be approved foreign exchange for all or any of the purposes of this Order.
(2) The Central Government may, on the recommendation of the Central

Board, by notification in Official Gazette, specify securities of any Local Authority
which the Bank may purchase or sell under this Order.
Business which the Bank may not transact
15. The Bank shall not, except as authorised by this Order.-

(1) engage in trade or otherwise have a direct interest in any commercial,
industrial or other undertaking except such interest as it may in any way acquire in
the course of the satisfaction of any of its claims:
28 Inserted.
APPENDICES 417
Provided that all such interest shall be disposed of at the earliest possible
moment;
(2) purchase its own shares or the shares of any other bank or of any company,
or grant loans upon the security of any such shares;
(3) advance money on mortgage of or otherwise on security of, immovable

property or documents of title relating thereto, or become the owner of immovable
property, except so far as is necessary for its own business premises and residences
for its officers and servants.
(4) make loans or advances;

(5) draw or accept bills payable otherwise than on demand;
(6) allow interest on deposits on current account.
Government business
16. [(1))29 The Bank shall undertake to accept monies for account of the Central
Government, Provincial Governments and Governments of States, and to make
payments up to the amount standing to the credit of their account respectively, and
to carry out their exchange, remittance and other banking operations, including the
management of public debt.
[(2) (a) The Central Government and Provincial Governments shall entrust
the Bank, on such conditions as may be agreed upon between the Government
concerned and the Bank, with all their money, remittance, exchange and banking
transactions in Pakistan, and, in particular, shall deposit free of interest all their cash
balances with the Bank:
Provided that nothing in this sub-clause shall be deemed to prevent the Central
Government and any Provincial Governments from carrying on money transactions,
at places where the Bank has no branch or agency or from holding at such places such
balances as they may require.
(b) The Central Government and each Provincial Government shall entrust
concerned and the Bank, with the management of the public debt and with the issue
of any new loans.
(c) In the event of any failure to reach agreement on the conditions referred to
in this clause the Central Government shall decide the conditions and its decisions
shall be final. po
z,_,o Inserted.
Bank Rate
17. [The Bank shall make public from time to time the standard rate at which it is
prepared to buy or rediscount bills of exchange or other commercial paper eligible
for purchase under this Order. ]3 1
Sole right to issue bank notes
18. On and after the first day of July 1948, the Bank shall have the sole right to
issue bank notes in Pakistan and may, for a period which shall be fixed by the Central
Government on the recommendation of the Central Board, issue currency notes of
the Government of Pakistan supplied to it by the Central Government and the
provisions of this Order applicable to bank notes shall, unless a contrary intention
appears, apply to all currency notes of the Government of Pakistan in like manner as
if such currency notes were bank notes and references in this Order to bank notes
shall be construed accordingly.
Issue Department
19. (1) The issue of bank notes shall be conducted by the Bank in an Issue
Department which shall be separated and kept wholly distinct from the Banking
Department and the assets of the Issue Department shall not be subject to any
liability other than the liabilities of the Issue Department as hereinafter defined in
clause 25.
(2) The Issue Department shall not issue bank notes to the Banking
Department or to any person except in exchange for other bank notes or for such
coin, bullion, approved foreign exchange, or securities as are permitted by this Order
to form part of the assets of the Issue Department.
Denominations and form of notes
20. (1) Notes of the Bank shall be in such denominations and shall be printed and
signed or otherwise executed in such manner as may be determined by the Central
Government on the recommendations of the Central Board.
(2) The design, form and material of bank notes shall be such as may be
approved by the Central Government after consideration of the recommendations
made by the Central Board.
31 Substituted for the words "The Bank shall make public the rates at which it is prepared to discount or
rediscount bills or to make advances".
APPENDICES 419
Re-issue of notes
21. (1) The Bank shall not re-issue bank notes which are tom, defaced or
excessively soiled.
[(2) Notwithstanding anything contained in any enactment or rule oflaw to the

contrary no person shall as of right be entitled to recover from the Central
Government or the Bank the value of any lost, stolen, mutilated or imperfect
currency note of the Government of Pakistan or of any bank note:
Provided that the Bank may, with the previous approval of the Central
Government, prescribe the circumstances and the conditions and limitations subject
to which the value of such currency note or bank note may be refunded as of grace. ]32
Legal tender
22. (1) Subject to the provisions of sub-clause(2) every bank note shall be legal
tender at any place in Pakistan in paymet or on account for the amount expressed
therein and shall be guaranteed by the Central Government.
(2) On recommendation of the Central Board the Central Government may,

by- notification in the official Gazette, declare that with effect from such date as may
be specified in the notification, any series of bank notes of any denomination shall
cease to be legal tender save at a branch, office, or agency of the Bank.
Assets of the Issue Department
23. (1) The assets of the Issue Department shall consist of gold coin, gold bullion,
silver bullion, sterling securities, approved foreign exchange, rupee coin and rupee
securities to such aggregate amount as is not less than the total of the liabilities of the
Issue Department as hereinafter defined:
Provided that the assets falling to the [share of the Government of Pakistan ]33
under the provisions of the Pakistan (Monetary System and Reserve Bank) Order
1947, as modified by the Pakistan Monetary System and Reserve Bank
(Amendment) Order, 1948, which are held by the Reserve Bank of India pending
their physical transfer to the Bank, shall form part of the assets under this clause.
(2) Of the total amount of the assets not less than thirty per cent shall consist
of gold coin, gold bullion, silver bullion, sterling securities or approved foreign
exchange.
32 Substituted for the words "The Central Board may, from time to time, make regulations in respect of
the refund of the value of notes lost, stolen, mutilated or imperfect".
33
Substituted for the words "Share of the Bank".
(3) The remainder of the assets shall be held in rupee coin, rupee securities of
any maturity and such bills of exchange and promissory notes payable in Pakistan as
are eligible for purchase by the Bank, under para (a) or para (b) of sub-clause (2) of
clause 13.
(4) For the purposes of this clause, gold coin and gold bullion shall be valued
at 0.268601 grams of fine gold per rupee, silver bullion shall be valued at the market
value of the fine silver content thereof, rupee coin shall be valued at its face value,
and securities shall be valued at the market rate for the time being obtaining.
(5) Of the gold coin and gold or silver bullion held as assets not less than
seventeen-twentieths shall be held in Pakistan and all gold coin and gold and silver
bullion held as assets shall be held in the custody of the Bank including its branches,
offices or agencies:
Provided that gold or silver belonging to the Bank which is in any other bank
or in any mint or treasury or in transit may be reckoned as part of the assets.
(6) For the purposes of this clause the approved foreign exchange which may
be held as part of the assets shall be in any of the following forms, namely:-
(a) balances at the credit of the Issue Department with the bank of the country
of issue;
(b) bills of exchange bearing two or more good signatures and drawn on and
payable at any place in the country of issue and having a maturity not exceeding
ninety days;
(c) Government securitie~ of the country of issue maturing within five years.
Suspension of assets requirements
24. Notwithstanding any thing contained in the foregoing provisions, the Bank
may, with the previous sanction of the Central Government, for periods not
exceeding thirty days in the first instance, which may, with the like sanction, be
extended from time to time by periods not exceeding fifteen days, hold as assets gold
coin, gold or silver bullion, sterling securities or approved foreign exchange of less
aggregate amount than that required by sub-clause (2) of clause 23.
Initial assets and liabilities
[24A. On and after the 1st day of July 1948 the Issue Department shall take
over from the Reserve Bank of India the liability for all the bank notes of the Reserve
Bank of India inscribed with the words "Government of Pakistan" and issue before
APPENDICES 421
the first day of July 1948 and for the time being in circulation and the Central
Government shall transfer to the Issue Department assets falling to the share of the
Government of Pakistan under the provisions of Pakistan (Monetary System and
Reserve Bank) Order, 1947 equal to the amount of the liability taken over by that
Department from the Reserve Bank of India.
Obligation of the Government in respect of rupee coin
24B. (1) The Bank shall issue rupee coin on demand in exchange for bank
notes and currency notes of the Government of Pakistan and shall issue currency
notes or bank notes on demand in exchange for coin which is legal tender under the
Pakistan Coinage Act.
(2) The Bank shall in exchange for currency notes or bank notes of five rupees
or upwards supply currency notes or bank notes of lower value or coins which are
legal tender under the Pakistan Coinage Act, in such quantities as may in the opinion
of the Bank be required for circulation; and the Central Government shall supply
such coins to the Bank on demand and for so long as the Central Government fails
at any time to supply such coins to the Bank the Bank shall be released from its
obligation to supply them to the public. p4
Liabilities of the Issue Department
25. (1) The liabilities of the Issue Department shall be an amount equal to the total
of the amount of the currency notes of the Government of Pakistan and notes of the
Bank for the time being in circulation.
(2) For the purposes of this clause, any currency note of the Government of
Pakistan or Bank note which has not been presented for payment within forty years
from the first day of April following the date of its issue shall be deemed not to be in
circulation and the value thereof shall notwithstanding anything contained in sub-
clause (2) of clause 19 be paid by the Issue Department to the Central Government
or the Banking Department, as the case may be; but any such note, if subsequently
presented for payment, shall be paid by the Banking Department, and any such
payment in the case of a currency note of the Government of Pakistan shall be
debited to the Central Government.
Cash reserves of scheduled banks to be kept with the Bank
26. (1) Every bank included in the Second Schedule shall maintain with the Bank
a balance the amount of which shall not at the close of business on any day be less
than five per cent of the demand liabilities and two per cent of the time liabilities of
such bank in Pakistan as shown in the return referred to in sub-clause (2).
J4
Inserted.
[Provided that the requirements of this sub-clause as to the maintenance of

balance in the Bank may from time to time by notice published in the official Gazette
be varied by the Central Government but so that the balance required to be
maintained by any bank shall not at any time be less than the balance required by this
sub-clause to be maintained]35 .
Explanation. -For the purposes of this clause liabilities shall not include the
paid up capital or the reserves, or any credit balance in the profit and loss account of
such bank or the amount of any loan taken from the Bank.
Every scheduled bank shall send to the Central Government and to the Bank
a return signed by two responsible officers of such bank showing-
(a) the amounts ofits demand and time liabilities, respectively, in Pakistan,
[(b) the amount of money borrowed by it from the Bank;
(c) the total amount of money held by it in Pakistan, in the form of notes and
coins;
(d) the balance held by it at the Bank;
(e) the balances held by it at other banks in current account and the money
at call and short notice in Pakistan;
(f) the investments (at book value) separately, in Central Government

Securities including Treasury Bills, in Provincial Government Securities
including Treasury Bills, and in Other;
(g) the amount of advances made and of the bills discounted in Pakistan,
separately. ]36
at the close of the business on each Friday; or if Friday is a public holiday under the
day and such return shall be sent not later than two working days after the date to
which it relates:
Provided that where the Bank is satisfied that the furnishing of a weekly return
under this sub-clause is impracticable in the case of any scheduled bank by reason of
35 Inserted.
36 Substituted for "(b) the total amount held in Pakistan in currency notes of the Government of Pakistan
and Bank notes, (c) the amounts held in Pakistan in rupee, coin and subsidiary coin, respectively (d)
the amount of advances made and of the bills discounted in Pakistan respectively, (e) the balance held
at the Bank..
APPENDICES 423
the geographical position of such bank and its branches, the Bank may require such
bank to furnish in lieu of a weekly return a monthly return to be despatched not later
than fourteen days after the end of the month to which it relates giving the details
specified in this sub-clause in respect of such bank at the close of business for the
month.
(3) If at the close of business on any day before the day fixed for the next
return, the balance held at the Bank by any scheduled bank is below the minimum
prescribed in sub-clause (1), such scheduled bank shall be liable to pay to the Bank
in respect of such day penal interest at a rate of three per cent above the bank rate
on the amount by which the balance with the Bank falls short of the prescribed
minimum, and if on the day fixed for the next return, such balance is still below the
prescribed minimum as disclosed by this return, the rates of penal interest shall be
increased to a rate five per cent above the bank rate in respect of that day and each
subsequent day on which the balance held at the Bank at the close of business on that
day is below the prescribed minimum.
(4) When under the provisions of sub-clause (3) penal interest at the increased
rate of five per cent above the bank rate has become payable by a scheduled bank,
if thereafter on the day fixed for the next return the balance held at the Bank is still
below the prescribed minimum as disclosed by this return-
(a) every director and officer of the scheduled bank, who is knowingly and
wilfully a party to the default, shall be punishable with fine which may extend to five
hundred rupees and with a further fine which may extend to five hundred rupees for
each subsequent day on which the default continues, and
(b) the Bank may prohibit the scheduled bank from receiving after the said day
any fresh deposit and if default is made by the scheduled bank in complying with such
prohibition, every director and officer of the scheduled bank who is knowingly and
wilfully a party to such default or who through negligence or otherwise contributes
to such default shall in respect of each default be punishable with fine which may
extend to five hundred rupees and with a further fine which may extend to five
hundred rupees for each day after the first on which a deposit received in
contravention of such prohibition is retained by the scheduled bank.
Explanation.- In this sub-clause "officer" includes manager, secretary,

branch manager, and branch secretary.
(5) Any scheduled bank failing to comply with the provisions of sub-clause (2)
shall be liable to pay to the Central Government or the Bank, as the case may be, or
to each, a penalty of one hundred rupees for each day during which the failure
continues.
(6) The penalties imposed by sub-clause (3), (4) and (5) shall be payable on
demand made by the Bank and in the event of a refusal by the defaulting bank to pay
on such demand, may be levied by a direction of the principal Civil Court having
jurisdiction in the area where an office of the defaulting bank is situated, such
direction to be made only upon application made in this behalf to the Court by the
Central Government in the case of a failure to make a return under sub-clause (2) to
the Central Government, or by the Bank, with the previous sanction of the Central
Government, in other cases.
(7) The Central Government may by notification in the Official Gazette, direct
the inclusion in the Second Schedule of any bank not already so included which
carries on the business of banking in Pakistan and which:
(a) has a paid up capital and reserves of an aggregate value of not less than
five lakhs of rupees, and
VII of1913
[(b) is a banking company as defined in section 277-F of the Companies Act,

1913 or a corporation or a company incorporated by or under any law in
force in any place in or outside Pakistanp 7
and shall, by a like notification, direct the exclusion from that Schedule of any
scheduled bank the aggregate value of whose paid up capital and reserves become at
any time less than five lakhs of rupees, or which goes into liquidation or otherwise
ceases to carry on banking business.
[(8) Whoever in any return under this clause wilfully or recklessly makes a
statement false in any material particular or wilfully or recklessly omits to state a
material particular shall be punishable with fine which may extend to one thousand
rupees in respect of each such return.p 8
Prohibition of and penalties for unauthorised

issue of demand bills and notes
27. (1) No person in Pakistan other than the Bank or, as expressly authorised by
this Order, the Central Government shall draw, accept, make or issue any bill of
exchange, hundi, promissory note or engagement for the payment of money payable
to bearer on demand, or borrow, owe or take up any sum or sums of money on the
bills, hundis or notes payable to bearer on demand of any such person:
37 Substituted for the words "is a company as defined in clause (2) of the Section 2 of the Indian
Companies Act, 1913, or a corporation or a company incorporated by or under any law in force in any
place outside Pakistan.
Inserted.
APPENDICES 425
Provided that cheques or drafts, including hundis, payable to bearer on

demand or otherwise may be drawn on a person's account with a banker, shroff or
agent.

1881, no person in Pakistan other than the Bank or, as expressly authorised by this
Order, the Central Government shall make or issue any promissory note expressed
to be payable to the bearer of the instrument.
(3) Any person contravening the provisions of this clause shall be punishable
with fine which may extend to double the amount of the bill, hundi, note or
engagement in respect whereof the offence is committed.
(4) No prosecution under this clause shall be instituted except on complaint

made on behalf of the Bank.
Power to require returns from co-operative banks
28. The Bank may require any Provinial co-operative bank with which it has any
transactions under clause 13 to furnish the return referred to in sub-clause (2) of
clause 26, and if the Bank does so require the provisions of sub-clauses (4), (5) and
(6) of clause 26 shall apply, so far as may be, to such co-operative bank as if it were
a scheduled bank.
Publication of consolidated statements by the Bank
29. The Bank shall compile and shall cause to be published each week a
consolidated statement showing the aggregate of the amounts under each para of
sub-clause (2) of clause 26 exhibited in the returns received from scheduled banks
under that clause.
Obligation to buy or sell foreign exchange
[30. The Bank shall sell to or buy from any authorised person who makes a demand
in that behalf at its office in Karachi, Lahore, Dacca or Chittagong foreign exchange
in such amounts, at such rates of exchange and on such conditions as the Central
Government may from time to time by general or special order determine.
Explanation.- In this clause "authorised person" means a person who is

entitled by or under Foreign Exchange Regulations Act, 1947, to buy, or as the case
may be, sell the foreign exchange to which his demand relates. )39
Allocation of surplus
31. After making provision for bad and doubtful debts, depreciation in assets,
contributions to staff and superannuation funds, and such other contingencies as are
usually provided for by bankers, there shall be paid to the shareholders out of the net
annual profits a cumulative dividend at the rate of four per cent per annum on the
share capital and any surplus remaining thereafter shall be [paid to the Central
Government ]40
Contribution by the Central Government to

the Reserve Fund
[31-A. The Central Government shall transfer to the Bank rupee securities of
the value of three crores of rupees to be allocated by the Bank to the Reserve
Funds] 41
Auditors
32. (1) Not less than two auditors shall be elected and their remuneration fixed at
the annual general meeting. The auditors may be shareholders, but no Director or
other officer of the Bank shall be eligible during his continuance in office to be so
elected. Any auditor so elected shall be eligible for re-election on vacating office.
(2) The first auditors of the Bank may be appointed by the Central Board
before the first annual general meeting, and, if so appointed, shall hold office only
until that meeting. All auditors elected under this clause shall severally be, and
continue to act as, auditors until the first annual general meeting after their
respective elections:
39 Substituted for the words "The Bank shall sell to or buy from any authorised person who makes a
demand in that behalf at its office in Karachi, Lahore or Dacca, foreign exchange at such rates of
exchange and on such conditions as the Central Government may from time to time by general or
special order determine, having regard, so far as rates of exchange are concerned, to its obligation to
the International Monetary Fund:
Provided that no person shall be entitled to demand to buy or sell foreign exchange of a value less
than two lakhs of rupees.
Explanation. -In this clause "authorised person" means a person who is entitled "by or under the
Foreign Exchange Regulation Act, 1947, as adapted to buy or as the case may be, sell the foreign
exchange to which his demand relates."
40 Substituted for the words "Allocated to the Reserve Fund so long as the latter is less than the share
capital:" and the following words were omitted:·
"Provided that whenever Reserve Fund is not less than the share capital the whole of any surplus
remaining after payment of the cumulative dividend as aforesaid shall be paid to the Central
Government."
41 Inserted.
APPENDICES 427
Provided that any casual vacancy in the office of any auditor elected under this
clause may be filled by the Central Board.
Appointment of auditors by Government
33. Without prejudice to anything contained in clause 32, the Central Government
may at any time appoint the Auditor General or such auditors as it thinks fit to
examine and report upon the accounts of the Bank.
Powers and duties of auditors
34. (1) Every auditor shall be supplied with a copy of the annual balance-sheet,
and it shall be his duty to examine the same, together with the accounts and vouchers
relating thereto; and every auditor shall have a list delivered to him of all books kept
by the Bank, and shall at all reasonable times have access to the books, accounts and
other documents of the Bank, and may, at the expense of the Bank, if appointed by
it, or at the expense of the Central Government, if appointed by that Government,
employ accountants or other persons to assist him in investigating such accounts and
may, in relation to such accounts, examine any director or officer of the Bank.
(2) The auditors shall make a report to the shareholders or to the Central
Government as the case may be, upon the annual balance sheet and accounts, and in
any such report they shall state whether in their opinion, the balance sheet is a full
and fair balance sheet containing all necessary particulars and properly drawn up so
as to exhibit a true and correct view of the state of the Bank's affairs, and in case they
have called for any explanation, or information from the Central Board, whether it
has been given and whether it is satisfactory. Any such report made to the
shareholders shall be read, together with the report of the Central Board, at the
annual general meeting.
Returns
35. (1) The Bank shall prepare and transmit to the Central Government a weekly
account of the Issue Department and of the Banking Department in such form as the
Central Government may, by notification in the Official Gazette, prescribe. The
Central Government shall cause these accounts to be published weekly in the Official
Gazette:
Provided that the first weekly account under this sub-clause shall fall due in the
second week after the commencement of business by the Bank.
(2) The Bank shall also within two months from the date on which the annual
accounts of the Bank are closed, transmit to the Central Government a copy of the
annual accounts signed by the Governor, the Deputy Governor if any, and the chief
accounting officer of the Bank, and certified by the auditors, together with a report
by the Central Board on the working of the Bank throughout the year, and the
Central Government shall cause such accounts and report to be published in the
Official Gazette.
(3) The Bank shall also, within two months from the date on which the annual
accounts of the Bank are closed, transmit to the Central Government a statement
showing the name, address and occupation of, and the number of shares held by each
shareholder of the Bank.
Power of the Central Board to make regulations
36. (1) The Cer.tral Board may, with the previous approval of the Central
Government, make regulations consistent with this Order to provide for all matters
for which provision is necessary or convenient for the purpose of giving effect to the
provisions of this Order.
(2) In particular and without prejudice to the generality of the foregoing

provision, such regulations may provide for all or any of the following matters,
namely:-
(a) the holding and conduct of election under this Order;
(b) the final decision of doubts or disputes regarding the qualifications of

candidates for election or regarding the validity of elections;
(c) the maintenance of the share registers, the manner in which and the
conditions subject to which shares may be held and transferred, and, generally, all
matters relating to the rights and duties of shareholders;
(d) the manner in which general meetings shall be convened, the procedure to
be followed thereat and the manner in which votes may be exercised;
(e) the manner in which notices may be served on behalf of the Bank upon
shareholders or other persons;
(f) the manner in which the business of the Central Board shall be transacted,
and the procedure to be followed at meetings thereof;
(g) the conduct of business of Local Boards and the delegation to such Boards
of powers and functions;
(h) the delegation of powers and functions of the Central Board to the
Governor or to Deputy Governor, Directors or Officers of the Bank;
(i) the formation of committees ofthe Central Board, the delegation of powers
APPENDICES 429
and functions of the Central Board, to such committees, and the conduct of business
in such committees;
(j) the recruitment of officers and staff of the Bank including the terms and
conditions of their service, and the constitution and management of staff and
superannuation funds for the officers and servants of the Bank;
(k) the manner and form in which contracts binding on the Bank may be
executed;
(1) the provision of an official seal of the Bank and the manner and effect of its
use;
(m) the manner and form in which the balance-sheet of the Bank shall be
drawn up and in which the accounts shall be maintained;
(n) the remuneration of Directors of the Bank;
(o) the relations of the scheduled banks with the Bank and the returns to be
submitted by the scheduled banks to the Bank;
(p) the regulation of clearing houses for the scheduled banks;
(q) the circumstances in which, and the conditions and limitations subject to
which, the value of any lost, stolen, mutilated or imperfect currency note may be
refunded;
["(qq) the denomination, form, issue, negotiability, encashment and

repatriation ofthe instruments mentioned in sub-clause (6a) of clause 13;] and42
(r) generally for the efficient conduct of business, discharge of functions and
management of the Bank.
(3) Copies of all regulations made under this clause shall be available to the
public on payment.
Powers of Government to supersede the Central Board
37. (1) If in the opinion of the Central Government the Bank fails to carry out any
of the obligations imposed on it by or under this Order, the Central Government
may, by notification in the Official Gazette declare the Central Board to be
superseded, and thereafter the general superintendence and direction of the affairs
42 Inserted.
of the Bank shall be entrusted to such agency as the Central Government may
determine and such agency may exercise the powers and do all acts and things which
may be exercised or done by the Central Board under this Order.
(2) When action is taken under sub-clause (i) the Central Government shall
cause a full report of the circumstances leading to such action and of the action taken,
to be laid before the Central Legislature at the earliest possible opportunity, and in
any case within three weeks of the reassembly thereof after the issue of the
Notification superseding the Central Board.
Exemption from stamp duty
[38. The Bank shall not be liable to the payment of any stamp duty under the
Indian Stamp Act, 1899, as adapted by the Pakistan (Adaptation of Existing Pakistan
Laws) Order, 1947.
Exemption of Bank from income-tax, super-tax and business

profits tax and provision for deduction at
source of income-tax on dividends
39. (1) Notwithstanding anything contained in the Indian Income Tax Act, 1922,
or the Business Profits Tax Act, 1947, or any other enactment for the time being in
force relating to income-tax, super tax or business profits tax, the Bank shall not be
liable to pay income-tax, super-tax or business profits tax on any of its income, profits
or gains;
Provided that nothing in this clause shall affect the liability of any shareholder,
other than the Central Government, in respect of income tax, super-tax or business
profits tax.
(2) For the purposes of section 18 of the Indian Income Tax Act, 1922 or of any
other relevant provisions of that Act relating to the levy and refund ofthe income-tax
any dividend paid under clause 31 shall be deemed to be interest on securities.]
THE FIRST SCHEDULE
(See clause 5)
Areas served by the various Share Registers
1. The Dacca area, served by the Dacca Register shall consist of the Province of
East Bengal.
2. The Karachi area, served by the Karachi Register shall consist of the Province
of Sind and the Province of Baluchistan, Kalat State, Las Bela State, Kharan State,
Mekran State and Khairpur State.
------------
APPENDICES 431
3. The Lahore area, served by the Lahore Register shall consist of the North
West Frontier Province, the Province of the West Punjab, Bahawalpur State, Chitral
State, Dir State, Swat State and Amb State.
THE SECOND SCHEDULE 43
(See Clause 26)
1. Allahabad Bank Ltd.

2. Australasia Bank Ltd.
~
3. Amencan Express Co. Inc.
4. Bank of Bahawalpur Ltd.
5. Bank of China.
6. Bank of India Ltd.
7. Bank of Tokyo Ltd.
8. Bharat Bank Ltd.
9. Canara Bank Ltd.
10. Central Bank of India Ltd.
11. Chartered Bank of India, Australia & China.
12. Eastern Bank Ltd.
13. Grindlays Bank Ltd.
14. Habib Bank Ltd.
15. Hind Bank Ltd.
16. Hindustan Commercial Bank Ltd.
17. Imperial Bank of India.
18. Lloyds Bank Ltd.
19. Mercantile Bank of India Ltd.
20. Muslim Commercial Bank Ltd.
21. Metropolitan Bank Ltd.
22. National Bank of India Ltd.
23. National Bank of Pakistan.
24. Netherlands Trading Society.
25. Oriental Bank of Commerce Ltd.
26. Prabhat Bank Ltd.
27. Punjab & Sind Bank Ltd.
28. Punjab National Bank Ltd.
29. Southern Bank Ltd.
30. United Commercial Bank Ltd.
31. United Industrial Bank Ltd.
32. United Bank of India Ltd.
43
Corrc~tcd upto lJtll July, 1953.
APPENDIX-V
THE BANKING COMPANIES (PAKISTAN)

ORDINANCE, 1947
[1947: Ord. 1]
Ordinance No. I of 1947
[22nd October, 1947]
An Ordinance to enable temporary relief to be afforded to certain banking

companies in the territories of Pakistan.
Whereas an emergency has arisen which makes it necessary to make provision

for affording temporary relief to certian banking companies in the territories of
Pakistan;
26 Geo, S,c. 2.
Now, Therefore, in exercise of the powers conferred by section 42 of the

Government of India Act, 1935, as adapted by the Pakistan (Provisional
Constitution) Order, 1947, the Governor-General is pleased to make and
promulgate the following Ordinance:-
Short title, extent, application and commencement
1. (1) This Ordinance may be called the Banking Companies (Pakistan)

Ordinance, 1947.
432
APPENDICES 433
(2) It extends to all the territories of Pakistan.
Interpretation
2. In this Ordinance-
VII of 1913
(a) "banking company" has the meaning assigned to it in section 277F of the
Companies Act, 1913; and shall include any branch operating in
Pakistan of a banking company incorporated in or outside Pakistan;
(b) "initial order" means an order first made under section 3 of this
Ordinance in respect of a banking company;
(c) "Prescribed" means prescribed by rules made under section 8.
Power to order moratorium in certain cases
3. On application in writing made to it in this behalf by a banking company to

which this Ordinance applies, the Government of Pakistan, if it considers it to be in
the public interest so to do, may, by notification in the official Gazette, make an
order, which shall be binding on all Courts, staying the commencement or
continuance of all actions and proceedings against the banking company1 for a period
of three months, and may, by a like order which shall be similarly binding, extend the
aforesaid period, for further periods not exceeding three months at a time.
Obligation of banking companies during moratorium
4. While an initial order is in force, the banking company to which it relates-
(a) shall, on demand duly made, pay to any depositor at each branch in
which the depositor has a current or deposit account or both, such
amounts not exceeding in any month ten per centum of the total
unencumbered amount in the depositor's current or deposit account or
both with the branch on the date of the notification of the order, or two
hundred and fifty rupees, whichever is less, and may make at a branch
situated within the territories of Pakistan, payments similarly limited in
amount to any person making a demand therefor at the branch, if he
satisfies the banking company both that he has a current or deposit
All actions and proceedings against the New Bank of India, Ltd., New Delhi shall be stayed upto the
25th day of January, 1948, s~:~: Gazette of Pakistan, 1948, Pt.l, p.l.
account with a branch of the banking company situated outside the

territories of Pakistan and as to the amount thereof;
2 [(aa) shall, on presentation for payment of a draft, pay to the payee or the
person entitled to receive payment of the amount thereof at the branch
on which the draft is drawn, such amount not exceeding 30 per cent of
the amount of the draft or seven hundred and fifty rupees, whichever is
less, and may make, at a branch situated within the territories of
Pakistan, payment similarly limited in amount to any person presenting
a draft at the branch who satisfies the banking company that he is the
payee or the person entitled to receive payment of the amount of the
draft drawn on a branch of the banking company situated outside the
territories of Pakistan.]
(b) shall not accept any deposits, whether in current or deposit account;
(c) shall not, save as provided in clause (a) 3[or clause (aa)] and save for the
purpose of meeting its normal running expenses, dispose of any of its
assets situated in Pakistan on the date of this Ordinance.
Explanation.- For the purposes of this section "month" means a period of

thirty days, the first such period commencing on the date of the notification of the
order under section 3 of this Ordinance.
Accounts and returns
5. Every banking company in respect of which an order has been made under
section 3 shall, while the order remains in force, maintain such accounts, and submit
to 4[the State Bank of Pakistan] and the Government of Pakistan such true returns
at such intervals as may be prescribed.
Penalties
6. If any provision of this Ordinance is contravened or if any default is made in

complying with any requirement thereof, every director and other officer of the
banking company who is knowingly a party to the contravention or default shall-
(a) Where the contravention is a contravention of the provisions of clause

(c) of section 4, or is in respect of the submission of a return which is
incorrect in any material particular, be punishable with imprisonment
Clause (aa) ins. by the Banking Companies (Pakistan) Amendment Ordinance, 1948 (7 of 1918), s.2.
Ins. ibid.
Subs. by G.G.O.l8 ofl948 for "the Reserve Bank ofindia".
APPENDICES 435
for a term which may extend to three years and shall also be liable to
fine;
(b) In any other case, be punishable with fine not exceeding five hundred
rupees, or where the contravention or default is a continuing one, with
a further fine not exceeding fifty rupees for every day during which it
continues.
Cognizance of offence
7. No court shall take cognizance of an offence punishable under section 6 herein

except upon complaint in writing made by a person authorised in this behalf by the
Government of Pakistan or [the State Bank of Pakistan] and no court inferior to that
of a Magistrate of the first class shall try any such offence.
Power to make rules
8. The Government of Pakistan may, by notification in the official Gazette, make

rules for carrying out the purposes of this Ordinance.
Effect of expiry of Ordinance
Xof1897
9. On the expiry of this Ordinance, section 6 of the General Clauses Act, 1897,
shall apply as if this Ordinance were an enactment then repealed by a Central Act.
APPENDIX-VI
THE BANKING COMPANIES (INSPECTION)

ORDINANCE, 1946
[1946: Ord.IV]
10RDINANCE NO. IV OF 1946
[15th January, 1946]
An Ordinance to enable inspection of the affairs of banking companies to be

made in certain circumstances.
Whereas an emergency has arisen which renders it necessary to make

provision to enable inspection of the affairs of banking companies to be made in
certain circumstances;
26 Geo. 5.c.2

Government of India Act, as set out in the Ninth Schedule to the Government of
India Act, 1935, the Governor-General is pleased to make and promulgate the
following Ordinance:-
The Ordinance has been applied to Baluchistan, see Notification No.7-W., dated the 30th January,
1946, Gazette of India, 1946, Pt. I, p.173.
The Ordinance has been extended to and brought into force in the State of Bahawalpur, see the
Bahawalpur (Extension of Laws) (Second) Order, 1952 (G.G.O. 5 o£1952).
436
APPENDICES 437
Short title, extent and commencement
1. (1) This Ordinance may be called the Banking Companies (Inspection)

Ordinance, 1946.
(2) It extends to 2 [ all the Provinces and the Capital of the Federation].
Definitions
2. In this Ordinance,-
XXIIof1948
3 [ (a) "banking company" means a banking company as defined in section 5 of

the Banking Companies (Control) Act, 1948;]
(b) 4 ["State Bank"] means 5[the State Bank of Pakistan].
Power to order inspection
VII of1913
6[3. (1) Notwithstanding anything to the contrary contained in section 138 of the
Companies Act, 1913, the State Bank at any time may, and on being directed so to
do by the Central Government shall, inspect any banking company, its books and
accounts.
(2) The State Bank shall, if it has been directed by the Central Government to
make an inspection, and in any other case may, submit a report to the Central
Government on any inspection made under this section.
(3) The inspection shall be carried out by such class I officer or officers of the
State Bank as the State Bank may direct.]
Subs. by the A.O., 1949, for "the whole of British India".

Subs. by the Banking Companies (Control) Act, 1948 (22 of 1948), s. 18, for the original clause (a).
Subs. by the Pakistan (Adaptation of Existing Pakistan Laws) (State Bank of Pakistan) Order, 1948
(G.G.O. 18 of 1948), for "Reserve Bank".
Subs. ibid., for "The Reserve Bank of India".
Subs. by the Pakistan Banking Companies (Inspection) (Amendment) Act, 1952 (60 of 1952), s.2, for
the original section 3.
Inspection of books and examination of officers
7 [4. (1) It shall be the duty of every director or other officer of the banking
company to produce to any officer, hereinafter in this section called the inspecting
officer, making an inspection under section 3, all such books, accounts and other
documents in his custody or power and to furnish him with such statements and
information relating to the affairs of the banking company and within such time as
the inspecting officer may require.
(2) The inspecting officer may examine on oath any director or other officer of
the banking company in relation to its business and may administer an oath
accordingly.
(3) If any director or other officer of a banking company refuses or fails to

produce any book, account or other document or to furnish any statement or
information which he is required under this section to produce or furnish, or refuses
or fails to answer any question relating to the business of the banking company which
he is asked by the inspecting officer, he shall be punishable with a fine which may
extend to five hundred rupees in respect of each offence, and if he persists in such
refusal or failure, with a further fine which may extend to fifty rupees for every day
during which the offence continues.]
Powers of Central Government on receipt of report
5. (1) If after consideration ofthe report of 8[the State Bank] under section 3, the
Central Government is of opinion that the affairs of a banking company are being
conducted to the detriment of the interest of its depositors, the Central Government
may-
(a) by order in writing prohibit the banking company from receiving fresh
deposits, or
9 [ (b) notwithstanding anything contained in 10 [ sub-clause (7) of clause 26 of

the State Bank of Pakistan Order, 1948] refuse to direct the inclusion of
the banking company in the Second Schedule to that Act, or if the
Subs. by the Pakistan Banking Companies (Inspection) (Amendment) Act, 1952 (60 of 1952), s.2, for
the original section 4.
Subs. by the Pakistan (Adaptation of Existing Pakistan Laws) (State Bank of Pakistan) Order, 1948
(G.G.O. 18 of 1948), for "the Reserve Bank".
This clause was substituted temporarily (for the period from 14th August, 1947 to 30th June, 1948) by
the Pakistan (Monetary System and Reserve Bank) Order, 1947 (G.G.0.21 of 1947), Art.17.
10
Subs. by the Federal Laws (Revision and Declaration) Act, 1951 (26 of 1951), s. 4 and Third Sch., for
"sub-section (6) of section 42 of the Reserve Bank of India Act, 1934".
APPENDICES 439
banking company is included therein, by notification in the official

Gazette direct its exclusion from that Schedule:
11 [Provided that the Central Government may defer for such period as it thinks
fit the passing of an order under this sub-section or cancel or suspend or modify any
such order upon such terms and conditions as it thinks fit to impose.]
(2) If any deposits are received by a banking company in contravention of an

order under clause (a) of sub-section (1), every director or other officer of the
banking company, unless he proves that the contravention took place without his
knowledge or that he exercised all due diligence to prevent it, shall be deemed to be
guilty of such contravention and shall be punishable with a fine which may extend to
twice the amount of the deposits so received.
Publication of reports
26. The Central Government may, after giving reasonable notice to the banking
company concerned, publish any report of [the State Bank] under section 3 or such
portion thereof as may appear necessary to the Central Government.
11 Subs. by the Banking Companies (Control) Act, 1948 (22 of 1948), s.18, for the original proviso.
APPENDIX-VII
THE BANKING COMPANIES (RESTRICTION OF

BRANCHES) ACT, 1946
ACT NO. XXVII OF 19461
(22nd November, 1946)

An Act to restrict the opening and removal of branches by banking companies.
Whereas it is expedient to restrict the indiscriminate opening and removal of

branches by banking companies;
It is hereby enacted as follows:-
Short title and extent

1. (1) This Act may be called the Banking Companies (Restriction of Branches)
Act, 1946.
(2) It extends to 2(all the Provinces and the Capital of the Federation).
Interpretations
2. In this Act,-
(a) "banking company" means a banking company as defined in section
For statement of Objects and Reasons, see Gazette oflndia, 1946, Pt.V, p.246.
The Act has been applied to British Baluchistan, see Notfn. No.374/B.P.G., dated 22-12-46,
Gazette oflndia, 1946, Pt.1, p.1913.
2 Subs. by G.G.O. 4 of1949, Arts.3(2) and4, for "the whole of British India".
440
APPENDICES 441
277F of the Companies Act, 1913 3 ( and includes every banking company
incorporated in any place outside Pakistan and carrying on or intending
to carry on business as a banking company in any province of Pakistan);
(b) "branch" includes any sub-office, pay-office, sub-pay-office and any

place of business of a banking company at which deposits are received,
cheques cashed or moneys lent;
4 (c) "new branch" includes a branch which is re-opened after being

temporarily closed;)
5( d) the expression "officer" has the meaning assigned to it in the Indian

Companies Act, 1913;
S(e) "6(State Bank)" means 7(the State Bank of Pakistan).
Restriction on opening and removal of branches
3. (1) No banking company shall open a new branch or change the location of an
existing branch without obtaining prior permission in writing from (State Bank).
(2) (The State Bank) may, before giving the permission referred to in sub-
section (1) to any banking company, take into consideration its financial condition
and history, the general character of its management, the adequacy of its capital
structure and earning prospects and the public interest to be served by the branch.
(3) For all or any of the purposes referred to in sub-section (2), (the State
Bank) may, with the previous approval of the Central Government, cause an
inspection to be made of the books, accounts and other documents of the banking
company by any competent person authorised by (the State Bank), and it shall be the
duty of every director or other officer of the banking company to produce to any
person so authorised all such books, accounts and other documents in his custody or
power relating to the affairs of the banking company as the person so authorised may
require of him.
(4) Any person making an inspection under sub-section (3) may examine on
oath any director or other officer of the banking company in relation to its business,
and may administer an oath accordingly.
Added by Ord. XX of 1948, s.2.

Clause (c) inserted, ibid.
Clauses (c) and (d) were re-lettered as clauses (d) and (e), ibid.
Subs. by G.G.O. 18 of 1948, for "Reserve Bank".
Subs. ibid, for "the Reserve Bank of India".
Penalty
4. (1) If any banking company opens a branch or changes the location of an

existing branch in contravention of section 3, every director or other officer of the
banking company who is knowingly and wilfully a party to the contravention shall be
liable to a fine which may extend to one hundred rupees for every day during which
that branch remains open for business or as the case may be, the change in its location
continues.
(2) If any person refuses to produce any book, account or other document
which under section 3 it is his duty to produce, or to answer any question relating to
the business of the banking company, he shall be liable to a fine which may extend
to five hundred rupees in respect of each offence, and if he persists in such refusal,
to a further fine which may extend to fifty rupees for every day during which the
offence continues.
APPENDIX-VIII
THE PAKISTAN BANKING (PREVENTION OF DEFAULT

AND EVASION OF LIABILITIES) ORDINANCE, 1947
Ordinance No. V of 1947
[15th December, 1947]
An Ordinance to provide for prevention of loss to people in Pakistan from the

withholding of payments of cheques and delivery of things held in safe custody by
banks acting under directions issued by a government or authority outside Pakistan.
Whereas an emergency has arisen which requires measures to be taken to

prevent banking concerns in Pakistan from making default in meeting their
commitments and liabilities under external pressure;
26 Geo 5.c.2.

Government of India Act, 1935, as adapted by the Pakistan (Provisional
Constitution) Order, 1947, the Governor-General of Pakistan is pleased to make and
promulgate the following Ordinance:-
1. (1) This Ordinance may be called the Pakistan Banking (Prevention of Default
and Evasion of Liabilities) Ordinance, 1947.
(2) It extends to the whole of Pakistan and its Provinces, including

Baluchistan.
443
Definitions
2. In this Ordinance-
(a) "Bank" means [the Imperial Bank of India and] any banking company
as defined in section 277F of the Companies Act, 1913 and includes any
branch of a bank.
VII of1913
(b) "Manager" includes the term Agent or Sub-Agent and any other officer
having charge of any branch or agency of any bank in Pakistan.
(c) "Central Government" means the Government of Pakistan.
No Bank to stop payment of cheques or delivery of

deposits under instructions from any Government
authority outside Pakistan
3. No Bank operating in Pakistan shall act on the instructions of a Government

or authority other than the Government of Pakistan issued to it direct or through its
Head Office outside Pakistan, in regard to stopping of payment of cheques, delivery
of securities or things held in safe custody ,or in regard to any other banking business
in Pakistan, without obtaining the prior approval in writing of an officer appointed
by the Central Government in this behalf.
Procedure for demanding explanation and search
4. (1) On receiving a complaint that a Bank is wrongfully withholding the

payment of a cheque or the delivery of any thing held in deposit or safe custody, the
Central Government may by order require the Bank to explain the grounds on which
it has withheld or delayed payment of the cheque or delivery of the thing held in
deposit or safe custody and to furnish by a date to be specified a true statement of all
the assets at the credit of or held in safe custody on behalf of the person concerned.
(2) If the Bank refuses or fails to comply with an order made under sub-section
(1) of this section by the date specified or if the Central Government is not satisfied
with the correctness or completeness of the statement submitted thereunder, the
Central Government may authorise any officer of the Central Government or of a
Provincial Government to inspect the books, accounts and other documents of the
Bank and to conduct a search of its vaults, coffers and premises which the officer may
consider necessary to inspect or search in order to obtain the information required or
to verify the statement furnished.
APPENDICES 445
(3) An officer authorised in this behalf may enter any premises at any time and
if necessary break open any door or lock for the purpose of carrying out the order
made under this section.
Order to prohibit removal of assets outside Pakistan
5. While ordering a Bank to furnish a statement under section 4, the Central

Government may order the Bank not to remove out of the Dominion of Pakistan any
thing held in safe custody on behalf of the person referred to in sub-section (1) of
section 4 or any documents related thereto.
Seizure of assets
6. (1) If the Central Government after considering such explanation as the Bank
concerned may have given, the information secured by any action taken under sub-
sections (2) and (3) of section 4 and such further enquiry as it may deem necessary,
is satisfied that the Bank has wrongfully withheld payment of a cheque wholly or
partially or the delivery of any thing held in deposit or safe custody, the Central
Government may order the Bank to make payment of the cheque to such extent as
in the opinion of the Central Government payment has been wrongfully withheld, or
make delivery of the thing held in deposit or safe custody as the case may be, by a
specified date to the person named in the order.
(2) If the Bank fails to comply with the order made under sub-section (1) the
Central Government may as the case may be order-
(a) the seizing of the thing held in safe custody and its transfer to the person
named in the order,
(b) the seizing of assets of the Bank sufficient to cover the amount of the
Bank's liability as determined under sub-section (1) and the transfer to
the person named in the order under sub-section (1) of such part of these
assets or so much of their value on realization as will discharge the
Bank's liability to him.
(3) If after discharging the liability of the Bank referred to in sub-section (2)
above there is a surplus it shall be returned to the Bank after deducting such
incidental expenses as may have been incurred by the Central Government.
Service of Orders under sections 4, 5 or 6
7. An order under sections 4,5 or 6 may be served on the Manager by delivery at

the office of the Bank. If service of the order is refused or any attempt is made to
avoid it, the order may be affixed on the premises of the Bank in the presence of two
witnesses and the order shall then be deemed to have been duly served.
Penalties
8. If the Manager of a Bank:
(a) fails to comply with an order to furnish a statement under section 4 or if

he furnishes a statement which he knows to be false in any material
particular; or
(b) refuses to allow, or fails to afford, reasonable facilities to an officer

authorised under section 4; or
(c) having been served with or having knowledge or information of an order

under section 5 conceals, removes or allows to be removed out of the
Dominion of Pakistan in contravention of that order any thing held in
deposit or safe custody; or
(d) fails to make payment or effect delivery by the specified date in

compliance with an order issued under section 6,
he shall be punishable with imprisonment which may extend to three years or with
fine or with both.
Withdrawal or amendment of orders under sections 5 and 6
9. On sufficient cause being shown the Central Government may withdraw or

amend all or any of the orders made under sections 5 and 6 of this Ordinance.
Bar of legal proceedings
10. No suit, prosecution or other legal proceedings shall lie against any person or
against the Central Government for anything done or in good faith intended to be
done under this Ordinance.
Powers to make rules
11. The Central Government may make rules for the purpose of giving effect to
this Ordinance.
APPENDIX-IX
THE BANKING COMPANIES (CONTROL) ACT, 1948
ACT NO. XXII OF 1948
[8th January, 1949]
1Act to provide for the control of banking companies by the State Bank of
Pakistan.
Whereas it is expedient to provide for the control of banking companies by the
State Bank of Pakistan;
Short title extent and commencement
1. (1) This Act may be called the Banking Companies (Control) Act, 1948.
(2) It extends to all the Provinces and to the Capital of the Federation and to
every Acceding State to the extent to which the Central Legislature has power to
make laws for that State as regards Banking.
Act not to apply to co-operative banks
2. Nothing in this Act shall apply to a co-operative bank registered under the Co-
For Statement of Objects and Reasons see Gazette of Pakistan, 1948. Pt. V, p.157.
447
operative Societies Act, 1912 or any other law for the time being in force in any
Province relating to co-operative societies.
Power to exempt Banks
3. The State Bank may with the previous approval of Central Government
exempt any banking company from all or any of the provisions of this Act or any rule
made thereunder subject to such terms and conditions as it may consider proper.
Application of other laws not barred
Vllof1913
4. The provisions of this Act shall be in addition to, and not, save as otherwise
expressly provided herein, in derogation of the Companies Act, 1913, and any other
law for the time being in force applicable to banking companies.
Definitions
5. In this Act,-
VII of1913
(a) "banking company" means a banking company as defined in section

277F of the Companies Act, 1913 and includes the Imperial Bank of
India and any body of persons incorporated by or under any law in force
in any place outside the Provinces and carrying on the business of a
banking company in any Province or any Acceding State;
VII of1913
(b) "Court" means the Court having jurisdiction under the Companies Act,
1913;
(c) "prescribed" means prescribed by rules made under this Act;
(d) "the Provinces" means the Provinces of Pakistan, and except in sub-
section (2) of section 1 includes the Capital of the Federation;
(e) "State Bank" means the State Bank of Pakistan;
(f) "secured loan or advance" means a loan or advance made on the security
of assets the market value of which is not at any time less than the
amount of such loan or advance;
APPENDICES 449
(g) "unsecred loan or advance" means a loan or advance not so secured;
II of1882
(h) "approved securities" means securities in which a trustee may invest

money under clauses (a), (b), (bb), (c) or (d) of section 20 of the Trusts
Act, 1882;
0.11 of 1948
(i) "scheduled bank" means a bank included in the Second Schedule to the
State Bank of Pakistan Order, 1948;
(j) "demand liabilities" means liabilities which a bank is required to meet

on demand; and "time liabilities" means liabilities which are not
demand liabilities;
(k) "gold" includes gold in the form of coin, whether legal tender or not, in
the form of bullion or in ingot whether refined or not.
Power of State Bank to control advances by

banking companies
6. (1) Whenever the State Bank is satisfied that it is necessary or expedient in the
public interest so to do, it may determine the policy in relation to advances to be
followed by banking companies generally or by any banking company in particular,
and when the policy has been so determined all banking companies or the banking
company concerned, as the case may be, shall be bound to follow the policy as so
determined.
(2) Without prejudice to the generality of the power vested in the State Bank
under sub-section (1), the State Bank may give directions to banking companies
either generally or to any banking company or any group of banking companies in
particular as to tlhe purposes for which advances may or may not be made, the
margins to be maintained in respect of secured advances and the rates of interest to
be charged on advances, and each banking company shall be bound to comply with
any directions as so given.
Restrictions on loans and advances
7. (1) Notwithstanding anything to the contrary contained in section 54A of the

Companies Act, 1,913, no banking company shall make any loam; or advances on the
security of its own shares or grant unsecured loans or advances to any of its directors
or to firms or private companies in which it or any of its directors is interested as

partner, director or managing agent, or to any individuals, firms or private
companies in cases where any of the directors is a guarantor.
(2) Every banking company shall, before the close of the month succeeding
that to which the return relates, submit to the State Bank a return in the prescribed
form and manner, showing particulars of all unsecured loans and advances granted
by it to companies, other than private companies, in which it or any of its directors
is interested as director or managing agent or guarantor.
(3) If on examination of any return submitted under sub-section (2) it appears

to the State Bank that any loans or advances referred to in that sub-section have been
granted to the detriment of the interests of the depositors of the banking company,
the State Bank may, by order in writing, prohibit the banking company from granting
any further such loans or advances or impose such restrictions on the grant thereof
as it thinks fit, and may, by like order, direct the banking company to secure the
repayment of any such loans or advances within such time as may be specified in the
order.
Maintenance of Liquid Assets
8. (1) After the expiry of three months from the commencement of this Act,
every banking company shall maintain within the Provinces in cash, gold, or
unencumbered approved securities valued at a price not exceeding the current
market price, an amount which shall not at the close of business on any day be less
than twenty per cent of the total of its time and demand liabilities within the
Provinces.
Explanation.- For the purposes of this section liabilities shall be deemed not
to include the paid-up capital or the reserve or any credit balance in the profit and
loss account of the company or the amount of any loan taken from the State Bank.
0.11 of 1948
(2) In computing the amount provided for in sub-section (1) any balance
maintained by a banking company with the State Bank, including, in the case of a
scheduled bank, the balance required to be so maintained under sub-clause (1) of
clause 26 of the State Bank of Pakistan Order, 1948, shall be deemed to be cash
maintained.
XXVof1881
(3) Every banking company shall, 2[before the close of the month succeeding
Subs. by the Banking Companies (Control) (Arndt.) Act, 1950 (28 of 1950), s. 2, for the original words
"not later than fifteen days after the end of the month".
APPENDICES 451
the month] to which the return relates, furnish to the State Bank a monthly return in
the prescribed form and manner showing particulars of the company's assets
maintained in accordance with this section and its time and demand liabilities in the
Provinces at the close of business on every Friday, or if any Friday is a public holiday
under the Negotiable Instruments Act, 1881, at the close of business on the
preceding working day.
Assets in the Provinces
9. (1) At the close of 3[business on any day] the assets in the Provinces of every
banking company shall not be less in value than an amount representing such
percentage of its time and demand liabilities within the Provinces as may be
prescribed by the State Bank from time to time provided that the percentage so
prescribed shall not exceed 4[eighty-five] per cent.
XXVof1881
5[(2) Every banking company shall, before the close ofthe month succeeding
that to which the return relates, furnish to the State Bank, in the prescribed form and
manner, a monthly return showing particulars of the company's assets maintained in
accordance with this section and its time and demand liabilities in the Provinces at the
close of business on every Friday or if any Friday is a public holiday under the
day.]
Ord. of19
(3) For the purposes of this section, the expression "assets" shall be deemed to
include such promissory notes, bills of exchange and securities as the State Bank is
under the State Bank of Pskistan Order, 1948, empowered to purchase, discount or
make advances against, and export bills drawn in Pakistan and expressed in such
currencies as the State Bank may from time to time approve in this behalf, but shall
not include such loans and advances as in the opinion of the State Bank cannot
properly be regarded as assets.
6* * * * * * * * *
Submission of returns and information
7[10. (1) Every banking company shall, before the close of the month
Subs. by the Banking Companies (Control) (Arndt.) Act, 1950 (28 of 1950) s.3, for the original words
"the last working day of every quarter".
Subs. ibid., for "seventy-five".
Subs. ibid., for the original sub-section (2)
Sub-section (4) omitted ibid.
Subs. lbld., s.4, for original section 10.
succeeding the half year to which the return relates, submit to the State Bank a half-
yearly return in the prescribed form and manner showing particulars of its assets and
liabilities in the Provinces as they stood at the close of business on the thirtieth day
of June in the first half and on the thiry-first day of December in the second half of
the year.
(2) Every banking company shall also submit to the State Bank information
every half year regarding the classification of the advances and investments of such
banking company in respect of industry, commerce and agriculture, ifthe State Bank
so desires.]
General powers and functions of the State Bank
11. (1) The State Bank may,-
(a) caution or prohibit banking companies generally or any banking

company in particular against entering into any transaction or class of
transactions;
(b) require banking companies generally, or any banking company in

particular, to refrain from taking such action as it may specify in relation
to any matter relating to the business of such banking company or
companies, or to take such action in relation thereto as the State Bank
thinks fit;
(c) on a request from the banking companies concerned and subject to the
provisions of section 14, assist, as intermediary or otherwise, in
proposals for the amalgamation of banking companies;
Ord. IV of 1946
(d) after a banking company has been inspected under section 3 of the
Banking Companies (Inspection) Ordinance, 1946, by order in writing
require the company-
(i) to call a meeting of its directors to consider matters arising out of

such inspection or to meet an officer of the State Bank to discuss
such matters, and
(ii) to make, within such time as may be specified in the order, such
changes in its management as the State Bank may consider
necessary in consequence of the inspection; and
(e) by notice in writing require any banking company at any time to furnish
it, within such time and in such manner as may be specified in the notice,
APPENDICES 453
with any statement or information relating to the business of such

banking company.
(2) No right to compensation, in contract or otherwise, shall arise in respect of

any loss incurred by reason only of the compliance by a banking company with any
order given to it under sub-clause (ii) of clause (d) of sub-section (1).
Power to publish information
12. The State Bank, if it considers it in the public interest so to do, may publish any
information obtained by it under section 8[10] or section 11 in such form as it thinks
fit.
State Bank to be official liquidator
VII of1913
13. Notwithstanding anything contained in section 175 of the Companies Act,

1913, wherein any proceeding for the winding up of a banking company by the court
an application is made by the State Bank in this behalf, the State Bank shall be
appointed official liquidator of the banking company in that proceeding.
Restriction on amalgamation
14. Notwithstanding anything contained in any law for the time being in force,-
(a) no court shall entertain an application for sanctioning a compromise or

arrangement between a banking company and its creditors or any class
of them, or between such company and its members or any class of them,
unless the application made in respect thereof is accompanied by a
report of the State Bank certifying that the compromise or arrangement
is not detrimental to the interests of the depositors of the company, and
(b) no banking company shall enter into any agreement or arrangement for,
or be a party to, any scheme for the amalgamation of such company with
any other banking company without the previous sanction in writing of
the State Bank.
Penalties
15. (1) Whoever in any return, statement or other information required by or

under this Act, wilfully makes a statement which is false in any material particular
Subs. by the Banking Companies (Control) (Arndt.) Act. 1950 (28 of 1950) s.5 for the figure "9".
knowing it to be false, or wilfully omits to make a material statement, shall be

punishable with imprisonment for a term which may extend to three years and shall
also be liable to fine.
(2) If any other provision of this Act is contravened, or if any default is made
in complying with any requirement of this Act or any rules made under this Act or
any order made thereunder, every director and other officer of the banking company
who is knowingly a party to the contravention or default shall be punishable with fine
which may extend to five hundred rupees, and where the contravention or default is
a continuing one, with a further fine which may extend to fifty rupees for every day
during which it continues.
(3) Without prejudice to the provisions contained in sub-section (2), where a

banking company has made default in complying with any requirement of this Act or
any rule made under this Act or any order made thereunder, the State Bank shall, by
notice in writing, make a demand on the banking company to comply with the said
requirement within thirty days from the receipt of the notice, and, if the banking
company fails to do so, the State Bank may apply to the Court for an order directing
the winding up of such banking company; and where such application is made, the
Court shall make an order accordingly.
Cognizance of offences
16. No Court shall take cognizance of any offence punishable under section 15
except upon a complaint in writing made by an officer of the State Bank generally or
specially authorised in writing in this behalf by the State Bank, and no court inferior
to that of a Magistrate of the first class shall try any such offence.
Powers to make rules
17. (1) The Central Government may, by notification in the official Gazette, make
rules for carrying into effect the purposes of this Act.
9[(2) In particular, and without prejudice to the generality of the foregoing

power, such rules may provide for the particulars to be included in the returns
required by this Act and the manner in which such returns shall be submitted.]
Protection of action taken in good faith
10[17A. No suit or other legal proceeding shall lie against the Central
Government, the State Bank or any officer of the said Government or Bank for
Subs. by the Banking Companies (Control) {Amendment) Act, 1950 (28th of 1950) s.6, for the original
sub-section {2).
10 S, 17A ins., ibid., s.7.
APPENDICES 455
anything which is in good faith done or intended to be done in pursuance of this Act
or of any rules or orders made thereunder, or for any damage caused or likely to be
caused by any such thing as aforesaid.]
Amendment of the Banking Companies (Inspection)

Ordinance, 1946
8. In the Banking Companies (Inspection) Ordinance, 1946,-
(1) in section 2, for clause (a), the following clause shall be substituted,
namely:-
"(a) 'banking company' means a banking company as defined in section 5 of

the Banking Companies (Control) Act, 1948;"; and
(2) in section 5 for the proviso to sub-section (1), the following proviso shall be
substituted, namely:-
"Provided that the Central Government may defer for such period as it thinks
fit the passing of an order under this sub-section or cancel or suspend or modify
any such order upon such terms and conditions as it thinks fit to impose."
APPENDIX-X
FOREIGN EXCHANGE REGULATION ACT, 1947
Act No. VII of 1947
11th March, 1947

An Act to regulate certain payments, dealings in foreign exchange and
securities and the import and export of currency and bullion.
Whereas it is expedient in the economic and financial interests of Pakistan to

provide for the regulation of certain payments, dealings in foreign exchange and
securities and the import and export of currency and bullion;
It is hereby enacted as follow:-

1. (1) This Act may be called the Foreign Exchange Regulation Act, 1947.
(2) It extends to all the Provinces and the Capital of the Federation and applies
also to British subjects and servants of the Crown in any part of Pakistan and to
British subjects who are domiciled in any part of Pakistan wherever they may be.
(3) It shall come into force on such date as the Central Government may, by
notification in the official Gazette, appoint in this behalf.
Interpretation
2. In this Act, unless there is anything repugnant in the subject or context,-
456
APPENDICES 457
(a) "Authorised Dealer" means a person for the time being authorised
under section 3 to deal in foreign exchange;
(b) "currency" includes all coin, currency notes, bank notes, postal notes,
money orders, cheques, drafts, traveller's cheques, letters of credit, bills
of exchange and promissory notes;
(c) "foreign currency" means any currency other than Pakistan currency;
(d) "foreign exchange" means foreign currency and includes (any

instrument drawn, accepted, made or issued under clause (8) of Section
17 of the State Bank of Pakistan Act, 1956---XXXIII of 1956), all
deposits, credits and balances payable in any foreign currency and any
drafts, traveller's cheques, letters of credit and bills of exchange
expressed or drawn in Pakistan currency but payable in any foreign
currency;
(e) "foreign security" means any security issued elsewhere than in Pakistan
and any security the principal of or interest on which is payable in any
foreign currency or elsewhere than in Pakistan;
(f) "gold" includes gold in the form of coin, whether legal tender or not, or
in the form of bullion or ingot, whether refined or not;
(g) "Pakistan currency" means currency which is expressed or drawn in

Pakistan rupees;
(h) "owner", in relation to any security, includes any person who has power
to sell or transfer the security or who has the custody thereof or who
receives, whether on his own behalf or on behalf of any other person,
dividends or interest thereon and who has any interest therein and in a
case where any security is held on any trust or dividends or interest
thereon are paid into a trust fund, also includes any trustee or any person
entitled to enforce the performance of the trust or to revoke or vary,
with or without the consent of any other person, the trust or any terms
thereof, or to control the investment of the trust moneys;
(i) "prescribed" means prescribed by rules made under this Act;
U) "State Bank" means the State Bank of Pakistan;
(k) "Security" means shares, stocks, bonds, debentures, debenture stock

and Government securities, as defined in the Securities Act, 1920,
deposit receipts in respect of deposits of securities, and units or sub-units
of unit trusts, but does not include bills of exchange or promissory notes
other than Government promissory notes;
(I) "silver" means silver bullion or ingot, silver sheets and plates which have
undergone no process of manufacture subsequent to rolling and
uncurrent silver coin which is not legal tender in Pakistan or elsewhere;
(m) "transfer" includes, in relation to any security, transfer by way of loan or

security.
Authorised Dealers in Foreign Exchange
3. (1) The State Bank may, on application made to it in this behalf, authorise any
person to deal in foreign exchange.
(2) An authorisation under this section-
(i) may authorise dealings in all foreign currencies or may be restricted to

authorising dealings in specified foreign currencies only;
(ii) may authorise transactions of all descriptions in foreign currencies or

may be restricted to authorising specified transactions only;
(iii) may be granted to be effective for a specified period, or within specified

amounts, and may in all cases be revoked for reasons appearing to it
sufficient by the State Bank.
(3) An authorised dealer shall in all his dealings, in foreign exchange comply
with such general or special directions or instructions as the State Bank may from
time to time think fit to give, and, except with the previous permission of the State
Bank, an authorised dealer shall not engage in any transaction involving any foreign
exchange which is not in conformity with the terms of his authorisation under this
section.
(4) An authorised dealer shall, before undertaking any transaction in foreign

exchange on behalf of any person, require that person to make such declarations and
to give such information as will reasonably satisfy him that the transaction will not
involve, and is not designed for the purpose of, any contravention or evasion of the
provisions of this Act or of any rules, directions or orders made thereunder, and
where the said person refuses to comply with any such requirement or makes only
unsatisfactory compliance therewith, the authorised dealer shall refuse to undertake
the transaction and shall, if he has reason to believe that any such contravention or
evasion as aforesaid is contemplated by the person, report the matter to the State
Bank.
APPENDICES 459
Restrictions on dealing in Foreign Exchange
4. (1) Except with the previous general or special permission of the State Bank,
no person other than an authorised dealer shall in the Provinces and the Capital of
the Federation, and no person resident in the Provinces and the Capital of the
Federation other than an authorised dealer shall outside the Provinces and the
Capital of the Federation, buy or borrow from, or sell or lend to, or exchange with,
any person not being an authorised dealer, any foreign exchange.
(2) Except with the previous general or special permission of the State Bank,
no person whether an authorised dealer or otherwise, shall enter into any transaction
which provides for the conversion of Pakistan currency into foreign currency or
foreign currency into Pakistan currency at rates of exchange other than the rates for
the time being authorised by the State Bank.
(3) Where any foreign exchange is acquired by any person other than an
authorised dealer for any particular purpose, or where any person has been
permitted conditionally to acquire foreign exchange, the said person shall not use the
foreign exchange so acquired otherwise than for that purpose or, as the case may be,
fail to comply with any condition to which the permission granted to him is subject,
and where any foreign exchange so acquired cannot be so used or, as the case may
be, the conditions cannot be complied with, the said person shall without delay sell
the foreign exchange to an authorised dealer.
(4) Nothing in this section shall be deemed to prevent a person from buying
from any post office, in accordance with any law or rules made thereunder for the
time being in force, any foreign exchange in the form of postal orders or money
orders.
Restrictions on payments
5. (1) Save as may be provided in and in accordance with any general or special
exemption from the provisions of this sub-section which may be granted
conditionally or unconditionally by the State Bank, no person in or resident in the
Provinces and the Capital of the Federation shall-
(a) make any payment to or for the credit of any person resident outside
Pakistan;
(b) draw, issue or negotiate any bill of exchange or promissory note or

acknowledge any debt, so that a right (whether actual or contingent) to
receive a payment is created or transferred in favour of any person
resident outside Pakistan;
(c) make any payment to or for the credit of any person by order or on
behalf of any person resident outside Pakistan;
(d) place any sum to the credit of any person resident outside Pakistan;
(e) make any payment to or for the credit of any person as consideration for
or in association with-
(i) the receipt by any person of a payment or the acquisition by any

person of property outside Pakistan;
(ii) the creation or transfer in favour of any person of a right whether
actual or contingent to receive a payment or acquire property
outside Pakistan;
(f) draw, issue or negotiate any bill of exchange or promissory note,

transfer any security or acknowledge any debt, so that a right (whether
actual or contingent) to receive a payment is created or transferred in
favour of any person as consideration for or in association with any
matter referred to in clause (e).
(2) Nothing in sub-section (1) shall render unlawful-
(a) the making of any payment already authorised, either with foreign
exchange obtained from an authorised dealer under section 4 or with
foreign exchange retained by a person in pursuance of an authorisation
granted by the State Bank;
(b) the making of any payment with foreign exchange received by way of
salary or payment for services not arising from business in, or anything
done while in Pakistan.
(3) Nothing in this section shall restrict the doing by any person of anything
within the scope of any authorisation or exemption granted under this Act.
(4) For the purposes of this section "security" also includes coupons or
warrants representing dividends or interest and life or endowment insurance
policies.
Blocked Accounts
6. (1) Where an exemption from the provisions of section 5 is granted by the State
Bank in respect of payment of any sum to any person resident outside Pakistan and
the exemption is made subject to the condition that the payment is made to a blocked
account,
APPENDICES 461
(a) the payment shall be made to a blocked account in the name of that
person in such manner as the State Bank may by general or special order
direct, and
(b) the crediting to that sum to that account shall, to the extent of the sum
credited, be a good discharge to the person making the payment.
(2) No sum standing at the credit of a blocked account shall be drawn on except
in accordance with any general or special permission which may be granted
conditionally or otherwise by the State Bank.
(3) In this section "blocked account" means an account opened as a blocked

account at any office or branch in the Provinces and the Capital of the Federation of
a bank authorised in this behalf by the State Bank, or an account blocked, whether
before or after the commencement of this Act, by order of the State Bank.
Special Accounts
7. (1) Where in the opinion of the Central Government it is necessary or

expedient to regulate payments due to persons resident in any territory, the Central
Government may, by notification in the official Gazette, direct that such payments
or any class of such payments shall be made only into an account (hereinafter
referred to as a special account) to be maintained for the purpose by the State Bank
or an authorised dealer specially authorised by the State Bank in this behalf.
(2) The credit of a sum to a special account shall, to the extent of the sum
credited, be a good discharge to the person making the payment:
Provided that where the liability of the person making the payment is to make
the payment in foreign currency, the extent of the discharge shall be ascertained by
converting the amount paid into that currency at such rate of exchange as is for the
time being fixed or authorised by the State Bank.
(3) The sum standing to the credit of any special account shall from time to
time be applied-
(a) where any agreement is entered into between the Central Government
and the Government of the territory to which the aforesaid notification
relates for the regulation of payments between persons resident in the
Provinces and the Capital of the Federation and in that territory, in such
manner as the State Bank having regard to the provisions of such
agreement, may direct, or
(b) where no such agreement is entered into, for the purpose of paying
wholly or partly, and in such order of preference and at such times as the
Central Government may direct; debts due from the persons resident in
the said territory to persons resident in the Provinces and the Capital of
the Federation or in such other territories as the Central Government
may, by order, specify in this behalf.
Restrictions on import and export of certain

currency and bullion
8. (1) The Central Government may, by notification in the official Gazette, order
that, subject to such exemptions if any, as may be contained in the notification, no
person shall, except with the general or special permission of the State Bank and on
payment of the fee, if any, prescribed bring or send into the Provinces and the Capital
of the Federation any gold or silver or any currency notes or bank notes or coin
whether Pakistan or foreign.
Explanation.- The bringing or sending into any part or place in the territories
of Pakistan of any such article as aforesaid, intended to be taken out of the territories
of Pakistan without being removed from the ship or conveyance in which it is being
carried, shall nonetheless be deemed to be bringing or as the case may be sending,
into the territories of Pakistan of that article for the purposes of this section.
(2) No person shall, except with the general or special permission of the State
Bank or the written permission of a person authorised in this behalf by the State
Bank, take or send out of the Provinces and the Capital of the Federation any gold,
jewellery or precious stones, or Pakistan currency notes, bank notes or coin or
foreign exchange.
VIII of1878
(3) The restrictions imposed by sub-section (1 and 2) shall be deemed to have

been imposed under Section 19 of the Sea Customs Act, 1878, without prejudice to
the provisions of Section 23 of this Act, and all the provisions of that Act shall have
effect accordingly.
Acquisition by Central Government of Foreign Exchange
9. The Central Government may, by notification in the official Gazette, order

every person in, or resident in the Provinces and the Capital of the Federation-
(a) who owns such foreign exchange as may be specified in the notification,
to offer it, or cause it to be offered for sale to the State Bank on behalf
of the Central Government or to such person, as the State Bank may
authorise for the purpose, at such price as the Central Government may
fix, being a price which is in the opinion of the Central Government not
APPENDICES 463
less than the market rate of the foreign exchange when it is offered for
sale;
(b) who is entitled to assign any right to receive such foreign exchange as
may be specified in the notification, to transfer that right to the State
Bank on behalf of the Central Government on payment of such
consideration therefor as the Central Government may fix:
Provided that the Central Government may by the said notification or another
order exempt any person or class of persons from the operation of such order:
Provided further that nothing in this Section shall apply to any foreign
exchange acquired by a person from an authorised dealer and retained by him with
the permission of the State Bank for any purpose.
Duty of persons entitled to receive foreign exchange etc.
10. (1) No person who has a right to receive any foreign exchange or to receive
from a person resident outside Pakistan a payment in rupees shall, except with the
general or special permission of the State Bank, do or refrain from doing any act with
intent to secure-
(a) That the receipt by him of the whole or part of that foreign exchange or
payment is delayed, or
(b) that the foreign exchange or payment ceases in whole or in part to be

receivable by him.
(2) Where a person has failed to comply with the requirements of sub-section
(1) in relation to any foreign exchange or payment in rupees, the State Bank may give
to him such directions as appear to be expedient for the purpose of securing the
receipt of the foreign exchange or payment as the case may be.
Power to regulate the uses, etc., of imported

gold and silver
11. The Central Government may, by notification in the official Gazette, impose
such conditions as it thinks necessary or expedient on the use of disposal of or
dealings in gold and silver prior to, or at the time of, import into the Provinces and
the Capital of the Federation.
Payment for exported goods
12. (1) The Central Government may, by notification in the official Gazette,
prohibit the export of any goods or class of goods specified in the notification from
the Provinces and the Capital of the Federation directly or indirectly to any place so
specified unless a declaration supported by such evidence as may be prescribed or so
specified, is furnished by the exporter to the prescribed authority that the amount
representing the full export value of the goods has been or will within the prescribed
period be, paid in the prescribed manner.
(2) Where any export of goods has been made to which a notification under
sub-section (1) applies, no person entitled to sell, or procure the sale of, the said
goods shall, except with the permission of the State Bank, do or refrain from doing
any act with intent to secure that-
(a) the sale of the goods is delayed to an extent which is unreasonable

having regard to the ordinary course of trade, or
(b) payment for the goods is made otherwise than in the prescribed manner
or does not represent the full amount payable by the foreign buyer in
respect of the goods, subject to such deductions, if any, as may be
allowed by the State Bank, or is delayed to such extent as aforesaid:
Provided that no proceedings in respect of any contravention of this sub-

section shall be instituted unless the prescribed period has expired and payment for
the goods representing the full amount as aforesaid has not been made in the
prescribed manner.
(3) Where in relation to any such goods the said period has expired and the
goods have not been sold and payment therefor has not been made as aforesaid, the
State Bank may give to any person entitled to sell the goods or to procure the sale
thereof, such directions as appear to it to be expedient for the purpose of securing the
sale of the goods and payment therefor as aforesaid, and without prejudice to the
generality of the foregoing provision, may direct that the goods shall be assigned to
the Central Government or to a person specified in the directions.
(4) Where any goods are assigned in accordance with sub-section (3), the
Central Government shall pay to the person assigning them such sum in
consideration of the net sum recovered by or on behalf of the Central Government
in respect of the goods as may be determined by the Central Government.
(5) Where in relation to any such goods the value as stated in the invoice is less
than the amount which in the opinion of the State Bank represents the full export
value of those goods, the State Bank may issue an order requiring the person holding
the shipping documents to retain possession thereof until such time as the exporter
of the goods has made arrangements for the State Bank or a person authorised by the
State Bank to receive on behalf of the exporter payment in the prescribed manner of
an amount which represents in the opinion of the State Bank the full export value of
the goods.
APPENDICES 465
(6) For the purpose of ensuring compliance with the provisions of this section
and any orders or directions made thereunder, the State Bank may require any
person making any export of goods to which a notification under sub-section (1)
applies to exhibit contracts with his foreign buyer or other evidence to show that the
full amount payable by the said buyer in respect of the goods has been, or will within
the prescribed period be, paid in the prescribed manner.
Regulation of export and transfer of securities
13. (1) No person shall, except with the general or special permission of the State
Bank:-
(a) take or send any security to any place outside Pakistan;
(b) transfer any security or create or transfer any interest in a security to or

in favour of a person resident outside Pakistan;
(c) transfer any security from a register in the Provinces and the Capital of
the Federation to a register outside Pakistan or do any act which is
calculated to secure, or forms part of a series of acts which together are
calculated to secure, the substitution for any security which is either in,
or registered in, the Provinces and the Capital of the Federation, of any
security which is either outside or registered outside Pakistan;
(d) issue, whether in the Provinces and the Capital of the Federation or
elsewhere, any security which is registered or to be registered in the
Provinces and the Capital of the Federation, to a person resident outside
Pakistan.
(2) Where the holder of a security is a nominee, neither he nor any person
through whose agency the exercise of all or any of the holder's rights in respect of the
security is controlled shall, except with the general or speical permission of the State
Bank, do any act whereby he recognises or gives effect to the substitution of another
person as the person from whom he directly recieves instructions, unless both the
persons previously instructing him and the person substituted for that person were,
immediately before the substitution, resident in Pakistan.
(3) The State Bank may, for the purpose of securing that the provisions of this
section are not evaded, require that the person transferring any security and the
person to whom such security is transferred shall subscribe to a declaration that the
transferee is not resident outside Pakistan.
(4) Notwithstanding anything contained in any other law, no person shall,

except with the permission of the State Bank,-
(a) enter any transfer of securities in any register or book in which securities
are registered or inscribed if he has any ground for suspecting that the
transfer involves any contravention of the provisions of this section, or
(b) enter in any such register or book, in respect of any security, whether in
connection with the issue or transfer of the security or otherwise, an
address outside Pakistan except by way of substitution for any such
address in the same country or for the purpose of any transaction for
which permission has been granted under this section with knowledge
that it involves entry of the said address.
(5) For the purposes of this section,-
(a) "holder" in relation to a bearer security means the person having

physical custody of the security; provided that, where a bearer security
is deposited with any person in a locked or sealed receptacle from which
the person with whom it is deposited is not entitled to remove it without
the authority of some other person, that other person shall be deemed
to be the holder of the security;
(b) "nominee" means a holder of any security (including bearer security) or

any coupon representing dividends or interest who, as respects the
exercise of any rights in respect of the security or coupon, is not entitled
to exercise those rights except in accordance with instructions given by
some other person, and a person holding a security or coupon as a
nominee shall be deemed to act as nominee for the person who is
entitled to give instructions either directly or through the agency of one
or more persons, as to the exercise by the holder of the security or
coupon of any rights in respect thereof and is not, in so doing, himself
under a duty to comply with instructions given by some other person;
(c) "security" also includes coupons or warrants representing dividends or

interest, and life or endowment insurance policies;
(d) "A person resident outside Pakistan" includes a foreign national for the
time being resident in Pakistan.
Custody of securities
14. (1) The Central Government may, by notification in the official Gazette, order
every person by whom or on whose behalf a security or document of title to security
specified in the order is held in the Provinces and the Capital of the Federation to
cause the said security or document of title to be kept in the custody of an authorised
depository named in the order:-
APPENDICES 467
Provided that the State Bank may by order in writing permit any such security
to be withdrawn from the custody of the authorised depository subject to such
conditions as may be specified in the order.
No authorised depository may part with any security covered by an order

under sub-section (1) without the general or special permission of the State Bank
except to, or to the order of, another authorised depository.
(3) Except with the general or special permission of the State Bank, no
authorised depository shall;
(a) accept or part with any security covered by an order under sub-section
(1) whereby the security is transferred into the name of a person resident
outside Pakistan, or
(b) do any act whereby he recognises or gives effect to the substitution of

another person as the person from whom he directly receives
instructions relating to such security unless the person previously so
instructing him and the person substituted for that person were
immediately before the substitution resident in Pakistan.
(4) Except with the general or special permission of the State Bank, no person
shall buy, sell or transfer any security, or document of title to a security, covered by
an order under sub-section (1) unless such security or document of title has been
deposited in accordance with the order.
(5) Except with the general or special permission of the State Bank, no capital
moneys, interest or dividends in respect of any security covered by an order under
sub-section (1) shall be paid in the Provinces and the Capital of the Federation except
to or to the order of the authorised depository having the custody of the security.
(6) For the purposes of this section:-
(a) "authorised depository" means a person notified by the Central

Government to be entitled to accept the custody of securities and
documents of title to securities, and
(b) "security" shall include coupons.
Restrictions on issue of bearer securities
15. The Central Government may, by notification in the official Gazette, order
that except with the general or special permission of the State Bank no person shall
in the Provinces and the Capital of the Federation issue any bearer security or
coupon or so alter any document that it becomes a bearer security or coupon.
Acquisition by Central Government of foreign securities
16. (1) Subject to any exemptions that may be contained in the notification, the
Central Government may if it is of opinion that it is expedient so to do for the purpose
of strengthening its foreign exchange position by notification in the official Gazette:-
(a) order the transfer to itself of any foreign securities specified in the
notification at a price so specified, being a price which is, in the opinion
of the Central Government not less than the market value of the
securities on the date of the notification, or
(b) direct the owner of any foreign securities specified, in the notifiction to
sell or procure the sale of the securities and thereafter to offer or cause
to be offered the net foreign exchange proceeds of the sale to the State
Bank on behalf of the Central Government or to such person as the State
Bank may authorise for the purpose, at such price as the Central
Government may fix, being a price which is in the opinion of the Central
Government not less than the market rate of the foreign exchange when
it is offered for sale.
(2) On the issue of a notification under clause (a) of sub-section (1),-
(a) the securities to which the notification relates shall forthwith vest in the
Central Government free from any mortgage, pledge or charge, and the
Central Government may deal with them in such manner as it thinks fit;
(b) the owner of any of the securities to which the notification relates and
any person who is responsible for keeping any registers or books in
which any of these securities are registered or inscribed, or who is
otherwise concerned with the registration or inscription of any of those
securities, shall do all such things as are necessary or as the Central
Government or the State Bank may order to be done, for the purpose of
securing that-
(i) the securities and any documents of title relating thereto are
delivered to the Central Government and, in the case of
registered or inscribed securities, that the securities are registered
or inscribed in the name of the Central Government or of such
nominee of the Central Government as it may specify, and
(ii) any dividends or interest on those securities becoming payable on

or after the date of the issue of the notification are paid to the
APPENDICES 469
Central Government or its nominee as aforesaid and where in the

case of any security payable to bearer which is delivered in
pursuance of the said notification, any coupons representing any
such dividends or interest are not delivered with the security, such
reduction in the price payable therefor shall be made as the
Central Government thinks fit:
Provided that where the price specified in the notification in relation to any
security is ex-dividend or ex-interest, this sub-clause shall not apply to the dividend
or interest or to any coupon representing it.
(3) A certificate signed by any person authorised in this behalf by the Central
Government that any specified securities are securities transferred to the Central
Government under this section shall be treated by all persons concerned as
conclusive evidence that the securities have been so transferred.
Restriction on settlement
17. (1) No person resident in the Provinces and the Capital of the Federation shall,
except with the general or special permission of the State Bank, settle any property,
otherwise than by will upon any trust under which a person who at the time of the
settlement is resident outside Pakistan elsewhere than in territories notified in this
behalf by the State Bank, will have an interest in the property or exercise, other than
by will any power for payment in favour of a person who at the time of the exercise
of the power is resident outside Pakistan elsewhere than in such notified territories.
(2) A settlement or power as aforesaid shall not be invalid except in so far as

it confers any right or benefit on any person who at the time of the settlement or the
exercise of the power is resident outside Pakistan, elsewhere than in territories
notified by the State Bank.
Certain Provisions as to companies
18. (1) Except with the general or special permission of the State Bank, no person
resident in the Provinces and the Capital of the Federation shall do any act whereby
a company, which is controlled by persons resident in Pakistan ceases to be so
controlled.
(2) Except with the general or special permission of the State Bank, no person
resident in the Provinces or the Capital of the Federation shall lend any money or
security to any company, not being a banking company, which is by any means
controlled, whether directly or indirectly, by persons resident outside Pakistan
elsewhere than in the territories notified in this behalf by the State Bank.
HISTORY OF THE STATE BANK OF PAKISTAN
470
In this sub-section, "company" includes a firm, branch or office of a company

or firm.
Power to call for information
19. (1) The Central Government or the State Bank may, at any time by
notification in the official Gazette direct owners subject to such exceptions, if any, as
may be specified in the notification, of such foreign exchange or foreign securities as
may be so specified, to make a return thereof to the State Bank within such period,
and giving such particulars, as may be so specified.
(2) The Central Government may by order in writing require any person to
furnish it or any person specified in the order with any information, book or other
document in his possession, being information, book or document which the Central
Government considers it necessary or expedient to obtain and examine for the
purposes of this Act and may, at any time, by notification in the official Gazette,
direct that the power to make such order shall for such period as may be specified in
the direction, be exercised by the State Bank.
(3) On a representation in writing made by a person authorised in this behalf

by the Central Government or the State Bank and supported by a statement on oath
of such person that he has reason to believe that a contravention of any of the
provisions of this Act has been or is being or is about to be committed in any place
or that evidence of the contravention is to be found in such place, a district
magistrate, a sub-divisional magistrate or a magistrate of the first class, may be
warrant, authorise any police officer not below the rank of sub-inspector-
(a) to enter and search anyplace in the manner specified in the warrant, and
(b) seize any books or other documents found in or on such place.
Explanation.- In this sub-section, "place" includes a house, building; tent,

vehicle, vessel or aircraft.
(3A) A police officer authorised under sub-section (3) may search any person
who is found in or whom he has reasonable ground to believe to have recently left or
to be about to enter such place and to seize any article found in the possession of or
upon such person and believed by the police officer so authorised to be evidence of
the commission of any offence under this Act.
Vof1898
(3B) A police officer authorised under sub-section (3) shall conduct any search
under that sub-section or under sub-section (3A) in accordance with the provisions
APPENDICES 471
relating to search in the Code of Criminal Procedure 1898.
XI of1922
(4) The provisions of sub-sections (1), (2) and (3) of section 54 of the Income-
tax Act, 1922, shall apply in relation to information obtained under sub-section (2)
of this section as they apply to the particulars referred to in that section, and for the
purposes of such application-
(a) the said sub-section (3) shall be construed as if in clause (a) thereof there
was included reference to a prosecution for an offence under section 23
ofthis Act, and
(b) persons to whom any information is required to be furnished under an

order made under sub-section (2) of this Section shall deemed to be
public servants within the meaning of that Section.
Supplementary Provisions
20. (1) For the purposes of this Act and of any rules, directions or orders made
thereunder:-
(a) until the State Bank by general or special order otherwise directs, any
person who has at any time after the commencement of this Act been
resident in Pakistan shall be treated as still being resident in Pakistan
and if such direction is given in relation to any such person the State
Bank may be the same or a subsequent direction, declare the territory in
which he shall be treated as being resident;
(b) in the case of any person to whom clause (a) does not apply the State
Bank may by general or special order declare the territory in which he
shall be treated as being resident;
(c) in the case of any person resident in the Provinces and the Capital of the
Federation who leaves Pakistan, the State Bank may give a direction to
any bank that until the direction is revoked, any sum from time to time
standing to the credit of that person and any security held on his behalf
at any office or branch of that bank in the Provinces and the Capital of
the Federation specified in the direction shall, not be dealt with except
with the permission of the State Bank-
(d) any transactions with a branch of any business whether carried on by a

body corporate or otherwise, shall be treated in all respects as if the
branch were a body corporate resident where the branch is situated;
(e) the making of any book entry or other statement recording a debt
against a branch of any business in favour of the head office or any other
branch of that business shall be treated as the acknowledgement of a
debt whereby a right is created in favour of a person resident where the
head office or other branch is situated.
(2) Nothing in this Act relating to the payment of any price or sum by the
Central Government shall be construed as requiring the Central Government to pay
that price or sum otherwise than in Pakistan currency or otherwise than in Pakistan.
(3) The State Bank may give directions in regard to the making of payments
and the doing of other acts by bankers, authorised dealers, travel agents, carriers,
whether common or private stock brokers and other persons who are authorised by
the State Bank to do anything in pursuance of this Act in the course of their business,
as appear to it to be necessary or expedient for the purpose of securing compliance
with the provisions of this Act and any rules, orders or directions made thereunder.
Contracts in evasion of this Act
21. (1) No person shall enter into any contract or agreement which would directly
or indirectly evade or avoid in any way the operation of any provision of this Act or
of any rule, direction or order made thereunder.
(2) Any provision of, or having effect under this Act, that a thing shall not be
done without the permission of the Central Government or the State Bank, shall not
render invalid any agreement by any person to do that thing, if it is a term of the
agreement that thing shall not be done unless permission is granted by the Central
Government or the State Bank as the case may be; and it shall be an implied term of
every contract governed by the law of any part of the Provinces and the Capital of the
Federation that anything agreed to be done by any term of that contract which is
prohibited to be done by or under any of the provisions of this Act except with the
permission of the Central Government or the State Bank, shall not be done unless
such permission is granted.
(3) Neither the provisions of this Act nor any term (whether expressed or
implied) contained in any contract that anything for which the permission of the
Central Government or the State Bank is required by the said provisions shall not be
done without that permission, shall prevent legal proceedings being brought in the
Provinces and the Capital of the Federation to recover any sum which, apart from the
said provisions and any such term, would be due, whether as a debt, damages or
otherwise, but-
(a) the said provisions shall apply to sums required to be paid by any
judgement or order of any Court as they apply in relation to other sums;
and
APPENDICES 473
(b) no steps shall be taken for the purpose of enforcing any judgement or
order for the payment of any sum to which the said provisions apply
except as respects so much thereof as the Central Government or the
State Bank, as the case may be, may permit to be paid; and
(c) for the purpose of considering whether or not to grant such permission,
the Central Government or the State Bank,as the case may be, may
require the person entitled to the benefit of the judgement or order and
the debtor under the judgement or order to produce such documents
and to give such information as may be specified in the requirement.
XXVI of1881
(4) Notwithstanding anything in the Negotiable Instruments Act, 1881,

neither the provisions of this Act or of any rule, direction or order made thereunder,
nor any condition, whether express or to be implied having regard to those
provisions, that any payment shall not be made without permission under this Act,
shall be deemed to prevent any instrument being a bill of exchange or promissory
note.
False statements
22. No person shall, when complying with any order or direction, under Section
19, or when making any application or declaration to any authority or person for any
purpose under this Act, give any information or make any statement which he knows
or has reasonable cause to believe to be false, or nottrue, in any material particular.
23. Penalty and procedure. -(1) Whoever contravenes, attempts to contravene or

abets the contravention of any of the provisions of this Act or of any rules, direction
or order made thereunder shall notwithstanding anything contained in the Code of
Criminal Procedure, 1898 (Act V of 1898) be tried by a Tribunal constituted by
Section 23A and shall be punishable with imprisonment for a term which may extend
to two years or with fine or with both and any such Tribunal trying any such
contravention may, if it thinks fit and in addition to any sentence which it may impose
for such contravention, direct that any currency, security, gold or silver or goods or
other property in respect of which the contravention has taken place shall be
confiscated.
(2) Notwithstanding anything contained in the Code of Criminal Procedure,

1898 (Act V of 1898) any offence punishable under this Section shall be cognizable
for such period as the Central Government may from time to time, by notification in
the official Gazette, declare.
(3) A tribunal shall not take cognizance of any offence punishable under this
Section and not declared by the Central Government under the preceding sub-
sectiion to be cognizable for the time being or of an offence punishable under Section
54 of the Income-tax Act, 1922 (XI of 1922), as applied by Section 19, except upon
complaint in writing made by a person authorised by the Central Government or the
State Bank in this behalf.
Provided that where any such offence is the contravention of any of the
provisions of this Act or of any rule, direction or order made thereunder which
prohibits the doing of an act without permission and is not declared by the Central
Government under the preceding sub-section to be cognizable for the time being, no
such complaint shall be made unless the person accused of the offence has been given
an opportunity of showing that he had such permission.
(4) Where the person guilty of an offence under this Act is a company or other
body corporate, every Director, Manager, Secretary and other officer thereof who
is knowingly a party to the offence shall also be guilty of the same offence and liable
to the same punishment.
23A. Tribunal, its powers, etc. -(1) Every Sessions Judge shall, for the areas within
the territorial limits of his jurisdiction be a Tribunal for trial of an offence punishable
under Section 23.
(2) A Tribunal may transfer any case for trial to an Additional Sessions Judge
within its jurisdiction who shall, for trying a case so transferred be deemed to be a
Tribunal constituted for the purpose.
(3) A Tribunal shall have all powers of a Magistrate of the First Class in
relation to criminal trials, and shall follow as nearly as may be the procedure
provided in the Code of Criminal Procedure, 1898 (Act V of 1898), for trials before
such Magistrate, and shall also have powers as provided in the said Code in respect
of the following matters, namely:-
(a) directing the arrest of the accused;
(b) issuing search warrants;
(c) ordering the police to investigate any offence and report;
(d) authorizing detention of a person during police investigation;
(e) ordering the release of the accused on bail.
(4) All proceedings before a Tribunal shall be deemed to be judicial

proceedings within the meaning of Sections 193 and 228 of the Pakistan Penal Code
(Act XLV of 1860), and for the purposes of Section 196 thereof and the provisions
relating to the execution of orders and sentences in the Code of Criminal Procedure,
APPENDICES 475
1898 (Act V of 1898) shall, so far as may be, apply to orders and sentences passed by
a Tribunal.
(5) As regards sentences of fine, the powers of a Tribunal shall be as extensive

as those of a Court of Session.
(6) The State Bank of Pakistan or any other person aggrieved by a judgement
of a Tribunal may, within three months from the date of the judgement, appeal to the
High Court.
(7) Save as provided in the preceding sub-section, all judgements and orders
passed by a Tribunal shall be final.
Burden of proof in certain cases
24. (1) Where any person is tried for contravening any provision of this Act or of
any rule, direction or order made thereunder which prohibits him from doing any act
without permission, the burden of proving that he had the requisite permission shall
be on him.
(2) If in a case in which the proof of complicity of a person resident in Pakistan

with a person outside Pakistan is essential to prove an offence under this Act, then
after proof of the circumstances otherwise sufficient to establish the commission of
the offence, it shall be presumed that there was such complicity, and the burden of
proving that there was no such complicity shall be on the person accused of the
offence.
Power to Central Government to give direction
25. For the purposes of this Act the Central Government may from time to time
give to the State Bank such general or special directions as it thinks fit, and the State
Bank shall, in the exercise of its functions under this Act, comply with any such
directions.
Bar of legal proceedings
26. No suit, prosecution or other legal proceedings shall lie against any person for
anything in good faith done or intended to be done under this Act or any rule,
direction or order made thereunder.
Power to make rules
27. The Central Government may, by notification in the official Gazette, make
rules for carrying into effect the provisions of this Act.
APPENDIX-XI
STATE BANK OF PAKISTAN (AMENDMENT)

ORDER, 1949
G.G.O. No.2, 25th March, 1949.- Whereas in exercise of the powers

conferred by section 9 of the Indian Independence Act, 1947, the Governor-General
was pleased to make the State Bank of Pakistan Order, 1948 (hereinafter referred to
as 'the Principal Order');
And whereas subsection (5) of section 19 of the said Act provides that any
power conferred by that Act to make any Order includes power to revoke or vary any
Order previously made in exercise of that power;
And whereas it is expedient to vary the provisions of the Principal Order in the
manner hereinafter appearing;
Now, therefore, in exercise of the powers conferred on him as aforesaid and of

all other powers enabling him in that behalf, the Governor-General is pleased to
make the following Order:-
1. Short title and commencement.-(!) This Order may be cited as the State
Bank of Pakistan (Amendment) Order, 1949.
2. The amendments shown in the Schedule annexed hereto shall be made in the
Principal Order.
476
APPENDICES 477
THE SCHEDULE
(Amendments)
1. After paragraph (f) of sub-clause (1) of clause 2 add the following paragraphs:-
"(g) 'Provincial Co-operative Bank' means the principal society in a province

which is registered or deemed to be registered under the Co-operative Societies Act,
1912, or any other law for the time being in force in Pakistan relating to co-operative
societies and the primary object of which is the financing of other societies in the
province which are or are deemed to be so registered;
Provided that in addition to such principal society in a province, or where there

is no such principal society in a province, the Provincial Government may declare
any central co-operative society in that province to be a provincial co-operative bank
within the meaning of this definition."
II. In clause 3, after the words "State Bank of Pakistan" wherever they occur,
insert the words "or Bank-e-Daulat-e-Pakistan."
III. In sub-clause (2) of clause 6, for the word "eight" substitute the word
"nine".
IV. In clause 8, after sub-clause (9), the following sub-clauses shall be added,
namely:-
"(10) The Central Government may grant leave to the Governor and Deputy
(11) Notwithstanding anything in this Order, where the Governor or a Deputy

Governor during his term of office is absent on leave or otherwise the Central
Government may appoint any person employed or holding any office or position as
provided in paragraph (b) of sub-clause (8) of this clause to act as Governor, or as
Deputy Governor as the case may be, in his place."
V. For sub-clause (1) of clause 9, substitute the following sub-clause:-
"Six Directors, one of whom shall be a Government official holding office at

the pleasure of the Central Government, shall be nominated by the Central
Government for a period of three years and one Director to hold office for three
years shall be elected from amongst themselves by each group of the shareholders
registered in each of the three share registers provided for in clause 5 of the Order:"
In the proviso to sub clause (1) of clause 9 for the word "five" substitute the
word "six" and at the end of sub-clause (5) of clause 9, add the following proviso:-
"Provided that nothing in paragraph (b) shall apply to the Government official
nominated as a Director by the Central Government."
VI. After clause 9, add the following clause:-
"9A. Removal from and vacation of office of Directors.- (1) Notwithstanding

anything contained in sub-clause (9) of clause 8 the Central Government shall
remove from office any Director who becomes subject to any of the disqualifications
specified in sub-clause (5) of clause (9) or ceases to be a qualified voter under sub-
clause 3 of clause 11.
(2) A Director removed under sub-clause (1) shall not be eligible to become a
Director again until the expiry of the term for which he would have held office had
he not been removed.
(3) A Director may resign his office by a statement to that effect in writing
signed by him and addressed to the Central Government, and on the acceptance of
his resignation his office shall be vacant."
VII. In sub-clause (1) of clause 10 for the word "two" substitute the word
"three" and after the words "the Central Board" insert the words "to represent
respectively the areas mentioned in sub-clause (5) of clause 5."
VIII. Clause 12: In clause 12-
(1) In paragraph (b) of sub-clause (1) omit the words "from amongst the
shareholders registered on the register for that area" and add the following after the
proviso to this paragraph:-
"Provided further that a member of a Local Board nominated under this

paragraph shall cease to hold office if, at any time after six months from the date of
his nomination he is not registered as a holder of unencumbered shares of the Bank
of the nominal value of five hundred rupees:
Provided further that any shares sold at par by the Central Government to a
member seeking to obtain the minimum share qualification required under this
paragraph shall not be disposed of by such member otherwise than by resale to
Government at par, and Government shall be entitled to repurchase at par all such
shares held by any member on his ceasing from any cause to hold office as a member
of a Local Board."
APPENDICES 479
(2) After sub-clause (3) add the following sub-clauses:-
"(3a) In the event of a vacancy occurring amongst the nominated members of

a Local Board before the expiry of the term of office, the Central Government shall
fill the vacancy by nominating another person from amongst the shareholders
registered on the register for the appropriate area as a member and he shall hold
office for the remainder of the term;
(3b) In the event of vacancy occurring amongst the elected members of a Local
Board before the expiry of the term of office, a new member shall be elected for the
remainder of the term by and from amongst the shareholders registered on the share
register for the appropriate area and":
at the end of sub-clause (4) add the following proviso:-

"Provided that nothing in this sub-clause shall be deemed to prevent the
Central Board from issuing a direction to a Local Board to suspend the registration
of transfers from and to the share register of any area for such period as the Central
Board may specify immediately before the election of a Director or a member of
Local Board to fill a vacancy arising before the expiry of the term of office."
IX. After clause 12, add the following clause:-
"12A.-Removal from and vacation of office of members of Local

Boards.-(1) The Central Board shall remove from office any member of a Local
Board becoming subject to any disqualification referred to in the proviso to sub-
clause (3) of clause 12 or ceasing to be qualified voter under sub-clause (2) of clause
12.
(2) A member of a Local Board removed under sub-clause (1) shall not be
eligible to become a member of a Local Board until the expiry of the term of office
during which he was removed.
(3) A member of Local Board may resign his office by a statement in writing
signed by him and addressed to the Central Board and on the acceptance of his
resignation his office shall become vacant."
X. In clause 13-
(1) for sub-clause (3) (a) substitute the following:-
"(3) (a) The purchase and sale of approved foreign exchange."
"(2) in sub-clause (12) omit the words "and approved foreign exchange"
occurring after the words "gold coin and gold or silver bullion."
(3) for sub-clause (13) substitute the following:-
(13) The opening of an account with or the making of an agency arrangement

with, and the acting as agent or correspondent of, a bank incorporated in any country
outside Pakistan or the principal currency authority of any country under the laws for
principal currency authorities, and the investing of the funds of the bank in the shares
of any such international bank."
(4) After sub-clause (15) add the following explanation:-
"Explanation.- The expression 'bank notes' in this sub-clause in its reference

to the issue of bank notes, and hereinafter wherever the expression 'bank notes' or
'notes of the Bank' occurs in this Order, excepting in clause 20 shall include bank
notes of the Reserve Bank of India inscribed with the words 'Government of
Pakistan"'.
XI. After clause 13 add the following:-
"13A. Power of Direct Discount.-(1) notwithstanding any limitation

contained in paragraphs (a) and (b) of sub-clause (2) or paragraphs (a) and (b) of
sub-clause (3) or sub-clause (4) of clause 13, the Bank may, by a general order of the
Central Board or a special order of the Governor.
specified in paragraph (a) or (b) of sub-clause (2) or paragraph (b) of sub-clause (3)
of the clause, though such bill or promissory note does not bear the signature of a
scheduled bank or a provincial co-operative bank; or
(b) make loans or advances repayable on demand or on the expiry of fixed

sub-clause (4) of the clause, or, when the loan or advance is made to a banking
company as defined in the Banking Companies (Control) Act, 1948, against such
other form of security as the Bank may consider sufficient.
(2) Where a banking company, to which a loan or advance has been made
under the provisions of paragraph (b) of sub-clause (1) of this clause, is wound-up,
any sums due to the Bank in respect of such loan or advance shall, subject only to the
claims, if any, of any other banking company in respect of any prior loan or advance
of the banking company."
APPENDICES 481
XII. Renumber the existing clause 16 as sub-clause (1) of clause 16 and add the
following sub-clause:-
"(2) (a) The Central Government and Provincial Governments shall entrust
concerned and the Bank, with all their money, remittance, exchange and banking
transactions in Pakistan, and, in particular, shall deposit free of interest all their cash
balances with the Bank:
Provided that nothing in this sub-clause shall be deemed to prevent the Central
Government and any Provincial Government from carrying on money transactions
at places where the Bank has no branch or agency or from holding at such places such
balances as they may require.
(b) The Central Government and each Provincial Government shall entrust
of any new loans.
(c) In the event of any failure to reach agreement on the conditions referred to
in this clause the Central Government shall decide the conditions and its decision
shall be final."
XIII.- For clause 17 substitute the following clause:-
"17. Bank rates.- The Bank shall make public from time to time the standard
rate at which it is prepared to buy or rediscount bills of exchange or other commercial
paper eligible for purchase under this Order."
XIV. For sub-clause (2) of clause 21 substitute the following sub-clause:-
"(2) Notwithstanding anything contained in any enactment or rule oflaw to the

contrary no person shall as of right be entitled to recover from the Central
Government or the Bank the value of any lost, stolen, mutilated or imperfect
currency note of the Government of Pakistan or of any bank note:
Provided that the Bank may, with the previous approval of the Central
Government, prescribe the circumstances and the conditions and limitations subject
to which the value of such currency note or bank note may be refunded as of grace."
XV. In the proviso to sub-clause (1) of clause 23, for "share of the Bank"
substitute "share of the Government of Pakistan".
XVI. After clause 24, add the following clauses:-
"24A. Initial assets and liabilities. -On and after the first day of July 1948, the
Issue Department shall take over from the Reserve Bank of India the liability for all
the bank notes of the Reserve Bank of India inscribed with the words "Government
of Pakistan" and issued before the first day of July, 1948, and for the time being in
circulation and the Central Government shall transfer to the Issue Department assets
falling to the share of the Government of Pakistan under the provisions of the
Pakistan (Monetary System and Reserve Bank) Order, 1947, equal to the amount of
the liability taken over by that Department from the Reserve Bank of India.
24B. Obligations of the Government and the Bank in respect of rupee

coin.- (1) The Bank shall issue rupee coin on demand in exchange for bank notes and
currency notes of the Government of Pakistan and shall issue currency notes or bank
notes on demand in exchange for coin which is legal tender under the Pakistan
Coinage Act.
(2) The Bank shall in exchange for currency notes or bank notes of five rupees
or upwards supply currency notes or bank notes of lower value or coins which are
legal tender under the Pakistan Coinage Act, in such quantities as may in the opinion
of the Bank be required for circulation; and the Central Government shall supply
such coins to the Bank on demand and for so long as the Central Government fails
at any time to supply such coins to the Bank, the Bank shall be released from its
obligation to supply them to the public."
XVII. In clause 26-

(1) After sub-clause (1) add the following proviso:-
"Provided that the requirements of this sub-clause as to the maintenance of

balances in the Bank may from time to time, by notice published in the Official
Gazette be varied by the Central Government but so that the balance required to be
maintained by any bank shall not at any time be less than the balance required by this
sub-clause to be maintained."
(2) After sub-clause (7) add the following sub-clause:-
"(8) Whoever in any return under this clause wilfully or recklessly makes a
material particular shall be punishable with fine which may extend to one thousand
rupees in respect of each such return."
XVIII. For clause 30 substitute the following clause:-
"The Bank shall sell to or buy from any authorised person who makes a
APPENDICES 483
demand in that behalf at its office in Karachi, Lahore, Dacca or Chittagong, foreign
exchange in such amounts, at such rates of exchange and on such conditions as the
Central Government may from time to time by general or special order determine.
Explanation.-In this clause 'authorised person' means a person who is

entitled by or under Foreign Exchange Regulation Act, 1947, buy or, as the case may
be, sell the foreign exchange to which his demand relates."
XIX. In clause 31-
(1) for the words and colon "allocated to the Reserve Fund so long as the latter
is less than the share capital:" occurring after the words "and any surplus remaining
thereafter shall be" substitute the following:-
"paid to the Central Government"; and
(2) Omit the proviso to this clause.
XX. After Clause 31 insert the following clause:-
"31A. -Contribution by the Central Government to the Reserve Fund.- The

Central Government shall transfer to the Bank rupee securities of the value of three
crores of rupees to be allocated by the Bank to the Reserve Fund."
XXI. After Clause 38, insert the following clause:-
"39. Exemption of Bank from Income-Tax, Super Tax, and Business Profits
Tax and provision for deduction at source of income-tax on dividends.-(1)
Notwithstanding anything contained in the Indian Income-tax Act, 1922 or the
Business Profits Tax Act, 1947, or any other enactment for the time being in force
relating to income-tax, super-tax, enactment for the time being in force relating to
income-tax, super-tax, or business profits tax, the Bank shall not be liable to pay
income-tax, super-tax or business profits tax on any of it~ income, profits or gains:-
Provided that nothing in this clause shall affect the liability of any shareholder,
other than the Central Government, in respect of income-tax, super-tax or business
profits tax.
(2) For the purposes of section 18 of the Indian Income-tax Act, 1922, and of
any other relevant provisions of that Act relating to the levy and refund of the
income-tax any dividend paid under clause 31 shall be deemed to be interest on
securities."
APPENDIX-XII
AGREEMENT BETWEEN THE STATE BANK OF

PAKISTAN AND THE GOVERNMENT OF PAKISTAN
An AGREEMENT made this 23rd day of June, 1949 BETWEEN THE

GOVERNOR-GENERAL on the one part, and THE STATE BANK OF
PAKISTAN (thereinafter called "the Bank") on the other part. WHEREAS the
Bank was constituted and incorporated and is regulated by the State Bank of
Pakistan Order, 1948 (hereinafter called "the Order") with and subject to the various
powers, provisions and restrictions in and by the Order set forth and an agreement
is necessary between the Central Government and the Bank-
(1) generally to operate the currency and credit system of the country to the
country's advantage and
(2) for the Bank to accept monies for account of the Central Government and
to make payments up to the amount standing to the credit of its account and to carry
out its exchange remittance and other banking operations, including the
management of the public debt and
(3) so that the Central Government should entrust the Bank with all its money,
remittance, exchange and banking transactions in Pakistan and in particular should
deposit free of interest all its cash balances with the Bank excepting that the Central
Government should be at liberty to carry on money transactions at places where the
Bank has no branches or agencies and the Central Government might hold at such
places such balances as it may require and
(4) so that the Central Government may entrust the Bank with the
management of the public debt and with the issue of new loans.
484
APPENDICES 485
NOW IT IS HEREBY MUTULALL Y AGREED AND DECLARED by

and between the said parties hereto as follows, that is to say:-
Commencement
1. This agreement shall come into force on the first day of July, one thousand
nine hundred and forty eight.
General Banking Business
2. The general banking business of the Central Government (in which business is
included the payment, receipt, collection and remittance of money on behalf of the
Central Government and of such Local Governments as may not have the custody
and management of their own provincial revenues) shall be carried on and transacted
by the Bank in accordance with and subject to the provisions of this agreement and
of the Order and with and to such orders and directions as may from time to time be
given to the Bank by the Central Government through and Government Officer or
Officers authorised by him in that behalf and at any of the offices, branches or
agencies of the Bank for the time being in existence as may from time to time be so
directed and for this purpose such accounts shall be kept in the books of the Bank and
at such offices, branches or agencies of the Bank as shall be necessary or convenient
or as the Central Government from time to time direct in the manner aforesaid.
Deposits
3. Government of Pakistan shall employ the Bank as the sole Banker in Pakistan
of the Central Government who shall deposit or cause to be deposited with the Bank
or allow the Bank to receive and hold as banker the whole of his cash balances at any
places at which for the time being the Bank shall have an office, branch or agency and
the Bank shall subject to such orders as may from time to time be given by the Central
Government in the manner aforesaid receive and hold for the Central Governments
all such monies as may be or become payable to him or on his account and the Bank
shall transact at its offices, branches and agencies for the time being existing
respectively all such business for the Central Government regarding the receipt,
collection, payment and remittance of money and other matters, as is usually
transacted by bankers for their customers. The Bank shall make the said monies at
the said offices, branches and agencies available for transfer to such places and at
such times as the Central Government may direct. No interest shall be payable to the
Central Government on any of the monies for the time being held by the Bank.
Public Debts
4. The management of the public debt and the issue of new loans by the Central
Government and the performance of all the duties relating thereto respectively
including the collection and payment of interest and principal and the consolidation,
division, conversion, cancellation and renewal of securities of the Central
Government and the keeping of all registers, books and accounts and the conduct of
all correspondence incidental thereto shall be transacted by the Bank at its office in
Karachi, and at any of its offices, branches or agencies at which respectively the
administration of any portions of the public debt is for the time being conducted or
interest thereon is for the time being payable and the Bank shall also keep and
maintain such registers, books and accounts in respect of the said public debt as the
Central Government may from time to time direct and shall audit all payments of
such interest and act generally as agents in Pakistan for the Central Government in
the management of the said public debt and shall conduct such agency subjected to
such orders and directions with regard to the general management thereof as may
from time to time be given to the Bank by the Governor-General.
Remuneration of Ordinary Banking Business
5. The Bank shall not be entitled to any remuneration for the conduct of the
ordinary banking business of the Central Government other than such advantage as
may accrue to it from the holding of his cash balances free of obligation to pay
interest thereon.
6. As remuneration to the Bank for the management of the public debt as

aforesaid the Bank shall be entitled to charge to the Central Government half-yearly
a commission at the rate of Rs.2,000 per crore per annum or the amount of the public
debt as aforesaid at the close of the half-year for which the charge is made. In
calculating this charge the following amounts shall be excluded from the amount of
public debt, viz:-
(a) The amounts of loan discharged outstanding after one year from the
date of a notice of discharge.
(b) The amount of stock certificates for Rs.SO,OOO and upwards held by the
Governor-General or by a Local Government or by any officer or
officers of the Goverment of Pakistan or of a Local Government
authorised in that behalf provided that such amount exceeds one crore.
(c) The amount of the Government of Pakistan rupee securities held in the
Issue Department of the Bank.
(d) The amount of stock and notes outstanding in the London register.
And in addition to the charge of Rs.2,000 per crore per annum the Bank shall
be entitled to charge to the Central Government a fixed sum of Rs.2,000 a year on
account of the stock certificates referred to in head.
APPENDICES 487
(b) of this clause and the Bank shall be also entitled to charge the public (but
not the Central Government or a Local Government) all such fees and charges as are
now or may hereafter from time to time be prescribed by the Central Government
under the powers conferred upon them by the Indian ~ecurities Act, 1920 (Act No.X
of 1920) as in force in Pakistan for duplicate securities and fm the ren<;wal,
consolidation division or otherwise of all Government Securities which the Bank
issues.
Currency Chests
7. The Bank shall maintain currency chests of its Issue Department at such places
as the Central Government may prescribe and the Central Government shall provide
sufficient accommodation for such chests as may be required for the deposit of notes
or coins and shall be responsible to the Bank for the safe custody of the said chests,
notes and coins. The Bank shall keep the said chests supplied with sufficient notes
and coins to provide currency for the transactions of the Central Government and
reasonable remittance facilities to the public at the said places. The Central
Government shall supply the Bank with such information and returns as the Bank
may from time to time require as to the composition of the balances in the said chests
and the amount and nature of the transfers to and from the said chests. The Bank
shall have access to the said chests at all reasonable times for the purpose of
inspecting and checking the contents. The Central Government shall be responsible
to the Bank for the examination and correctness of coins or notes at the time of
deposit in or withdrawal from the said chests.
Closing of Offices and Branches
8. The Bank shall not be at liberty to close any of its offices or branches except
on such days as are public holidays under Section 25 of the Negotiable Instruments
Act and on any other day declared to be a public holiday by any notification
published in pursuance of the said Act subject nevertheless and notwithstanding the
provisions of that Act to any special orders or directions which may be issued by the
Central Government and the Bank shall be responsible that no one of its agencies
doing Government business for the time being existing shall be closed except on
Sundays and on public holidays authorised by the Local Governments within whose
jurisdiction such agencies may be respectively situated.
Loss on Account of negligence and omission
9. The responsibility for all loss or damage to the Government of Pakistan and
the Central Government which may result from any act or negligence or omission of
the Bank in conducting the business of the public debt aforesaid or the payment of
interest or discharge value thereon or the renewal, conversion, consolidation,
subdivision or cancellation of any Government security shall rest with and be borne
by the Bank provided however that it shall not be incumbent on the Bank to verify
signature and endorsements on Government securities which prima facie appear to
be in order and in the acceptance of which the Bank shall not be guilty of any
negligence and in such cases no liability shall be incurred by the Bank in respect
thereto PROVIDED ALSO THAT in regard to the ordinary banking business at the
offices, branches and agencies of the Bank of receiving and realising money and
securities for money on account of the Central Government and paying cheques,
orders, draft, bills and other documents whether negotiable or not in the Bank's
capacity of bankers for the Central Government and whether such business be done
by the Bank or by agencies on its behalf the responsibility to the Government of
Pakistan and the Central Government shall be that of the Bank and such
responsibility shall be that of a banker to an ordinary customer.
Remittance of Account
10. The Bank shall remit on account of the Central Government between Pakistan
and London such amounts as may be required by him from time to time at the market
rate of the day for telegraphic transfers, subject to the proviso that if a large transfer
has to be effected in connection with the floatation or repayment of a sterling loan or
analogous operation, and if it is considered by either party to be inappropriate to
apply the rate of a single day, an average rate based on a longer period may be fixed
by agreement between the two parties.
Termination of Agreement
11. This agreement may be terminated by either party giving to the other party one
year's notice in writing expiring on the 31st day of March in any year, such notices if
given by or on behalf of the Government of Pakistan to be addressed to the Governor
of the Bank and to be served by being left at the Head Office of the Bank and if given
by the Bank to be served by leaving the same with or addressing the same by
registered post to the Secretary to the Government of Pakistan in the Finance
Ministry and immediately upon the expiration of such notice this agreement shall
absolutely cease and determine save as to rights or liabilities acquired or incurred
prior to such termination.
Obligation of the Order
12. Nothing in this agreement shall operate to affect in any way the obligations
imposed either on the Central Government or on the Bank by or under the Order or
any subsequent amendment or amendments of the Order.
13. The Bank shall be entitled to perform all or any or the matters contained in this
agreement through such agency or agencies as may be prescribed by the Order or any
amendment thereof or as may be approved by the Central Government.
APPENDICES 489
IN WITNESS WHEREOF SIR VICTOR ALFRED CHARLES TURNER,

Secretary to the Government of Pakistan in the Finance Ministry by the order and
direction of the Governor-General has hereunto set his hand and the common seal
of the State Bank of Pakistan pursuant to a resolution of the Central Board has been
hereunto affixed in the presence of its subscribing officials the day and year first
above written.
Signed by the said SIR VICTOR sd/V.A.C. Turner.

ALFRED CHARLES TURNER, Secretary to the
Secretary to the Government of Government of Pakistan,
Pakistan in the Finance Ministry for Finance Ministry
and on behalf of the Governor-General
of Pakistan in the presence of
Sd/- Under Secretary to the Government of Pakistan.
The Common seal of the State Bank Common Seal of the

of Pakistan was affixed hereto in the State Bank of Pakistan
presence of Mr. Kassim H .K. Dada sd/- Kassim H.K. Dada
and Mr. Hatim A. Alvi sd/- Hatim A. Alvi.
two of its Directors and Directors
Mr. Abdul Qadir sd/- Abdul Qadir*
its Governor. Governor
Abdul Qadir was temporarily appointed as Governor in the absence of Zahid Husain for about
two months.
APPENDIX-XIII
INTERNATIONAL MONETARY FUND-MEMBERSHIP

FOR PAKISTAN
WHEREAS, the Government of Pakistan has applied for admission to

membership in the International Monetary Fund in accordance with Section 2 of
Article II of the Articles of Agreement of the Fund; and
WHEREAS, pursuant to Section 21 of the By-Laws of the Fund, the

Executive Board after consultation with representatives of that Government has
made recommendations to the Hoard of Governors with regard to the quota to be
subscribed by the Government of Pakistan and other conditions·, which in the
opinion of the Executive Board, the Board of Governors might wish to prescribe;
NOW THEREFORE, the Board of Governors, having considered the

recommendations of the ~xecutive Board, hereby resolves that the Government of
Pakistan shall be admitted to membership in the International Monetary Fund under
Article II, Section 2, of the Articles of Agreement on the following terms and
conditions:
(1) That the quota of Pakistan shall be $100,000,000;
(2) That its subscription shall be equal to its quota and not less than 3lh per
cent of the subscription shall be paid in gold and the balance in the
currency of Pakistan;
(3) That the portion of the subscription to be paid in gold shall be paid not
later than the day the Article of Agreement are signed on behalf of
Pakistan;
490
-- --- --- --------------------- --- --- ---

APPENDICES 491
(4) That within thirty days after the Fund so requests, Pakistan shall
communicate to the Fund the par value of its currency based on the rates
of exchange prevailing on the date Pakistan becomes a member of the
Fund, and within sixty days following the Fund's receipt of the
communicated par value Pakistan and the Fund shall agree on an initial
par value for the currency; provided that the Fund may extend the
period of sixty days, and that Pakistan shall be deemed to have
withdrawn from the Fund if agreement on a par value has not been
reached when the extended period expires;
(5) That Pakistan may not engage in exchange transactions with the Fund
before the thirtieth day after the par value of its currency has been
agreed in accordance with (4) above and its subscription shall be paid in
full before such thirtieth day;
(6) That Pakistan shall become a member of the Fund subject to the terms
and conditions set forth in this resolution as from the date when Pakistan
has complied with both of the following requirements.
a. Pakistan shall deposit with the Government of the United States

of America an instrument stating that it has accepted in
accordance with its law the Articles of Agreement and all the
terms and conditions prescribed in this resolution, and that it has
taken all steps necessary to enable it to carry out all its obligations
under the Articles of Agreement and this resolution; and
b. Pakistan shall sign the original copy of the Articles of Agreement

held in the Archives of the Government of the United States of
America.
(7) That Pakistan may accept membership in the Fund pursuant to this
resolution until July 31, 1950; provided, however, that, if extraordinary
circumstances are deemed by the Executive Directors to warrant an
extension of the period during which Pakistan may accept membership
pursuant to this resolution, the Executive Directors may extend such
period until such later date as they may determine, but in no event
beyond January 31, 1951.
Approved by the Executive Board on December 9, 1949, for submission to the

Board of Governors.
APPENDIX -XIV
LIST OF SCHEDULED BANKS
(as on June 30, 1949)
1. Allahabad Bank Ltd.
*3 Bankers' Union Ltd.
5. Bank of Bhopal Ltd.
6. Bank of China
8. Bengal Central Bank Ltd.
9. Bharat Bank Ltd.
**10. Calcutta Commercial Bank Ltd.
11. Calcutta National Bank Ltd.
12. Canara Bank Ltd.
492
APPENDICES 493
14. Chartered Bank of India Australia & China
15. Comilla Banking Corporation Ltd.
16. Comilla Union Bank Ltd.
18. Exchange Bank of India & Africa Ltd.
19. Grindlays Bank Ltd.
20. Habib Bank Ltd.
21. Hind Bank Ltd.
22. Hindustan Commercial Bank Ltd.
23. Imperial Bank of India
**25. Mahaluxmi Bank Ltd.
26. Mercantile Bank of India Ltd.
*27. Muslim Commercial Bank Ltd.
28. Nath Bank Ltd.
29. National Bank of India Ltd.
*30. Netherlands Trading Society
**31. Noakhali Union Bank Ltd.
**33. Pioneer Bank Ltd.
34. Prabhat Bank Ltd.
35. Punjab and Sind Bank Ltd.

**37. Tripura Modern Bank Ltd.
39. United Industrial Bank Ltd.
Included in the Second Schedule during the year ended June 30, 1949. The Hyderabad State Bank
which was iincluded in the Second Schedule during the year was excluded from the Schedule in the same
year.
Have suspended payment.

APPENDIX-XV
STATE BANK OF PAKISTAN ACT, 1956
Act XXXIII of 1956
An Act to provide for the establishment of the

State Bank of Pakistan
[Received the assent of the President on 18th April1956]

Whereas it is necessary to provide for the constitution of a State Bank to
regulate the monetary and credit system of Pakistan and to foster its growth in the
best national interests with a view to securing monetary stability and fuller utilisation
of the country's productive resources;
CHAPTER I-PRELIMINARY
1. Short title, extent and commencement.- (1) This Act may be cited as the State
Bank of Pakistan Act, 1956.
(2) It extends to the whole of Pakistan.
(3) It shall come into force at once and except section 46, shall be deemed to
have taken effect on and from the twelfth day of May 1948.
2. Definitions.- In this Act, unless there is anything repugnant in the subject or

context,-
495
(a) "annual general meeting" means the annual meeting of the shareholders of
the Bank;
(b) "approved foreign exchange" means currencies declared as such by any
notification under section 19;
(c) "the Bank" means the State Bank of Pakistan;
(d) "bank notes" means notes made and issued by the Bank in accordance with
section 24 and include currency notes of the Government of Pakistan issued by the
Bank;
(e) "Central Board" means the Central Board of Directors of the Bank;
(f) "Co-operative Bank" means a society registered under the Co-operative

Societies Act, 1912, or any other law for the time being in force in Pakistan relating
to co-operative societies, the primary object of which is to provide financial
accommodation to its members;
(g) "Director" means a Director for the time being of the Central Board;
(h) "general meeting" means the meeting of the shareholders of the Bank
convened for transacting such business as may be specified in the notice convening
the meeting;
(i) "Governor" and "Deputy Governor" mean respectively the Governor and
Deputy Governor of the Bank;
U) "Local Board" means a Local Board of members;
(k) "member" means a member for the time being of a Local Board;
(!) "rupee coin" means one-rupee coin and one rupee notes which are legal
tender in Pakistan;
(m) "scheduled bank" means a bank for the time being included in the list of
banks maintained under subsection (1) of section 37.
CHAPTER II-ESTABLISHMENT, INCORPORATION AND

SHARE CAPITAL OF THE BANK
3. Establishment and incorporation of the Bank.-(1) As soon as may be after

the commencement of this Act, steps shall be taken to establish, in accordance with
the provisions of this Act, a bank to be called the State Bank of Pakistan or Bank-e-
Daulat-e-Pakistan, for the purposes of taking over, as from the first day of July, 1948,
APPENDICES 497
the management of the currency from the Reserve Bank of India, and carrying on the
business of Central Banking.
(2) The Bank shall be a body corporate by the name of the State Bank of
Pakistan or Bank-e-Daulat-e-Pakistan, having perpetual succession and a common
seal, and shall by the said name sue and be sued.
4. Share capital. -(1) The original share capital of the Bank shall be three crores
of rupees divided into three hundred thousand fully paid up shares of the nominal
value of one hundred rupees each, out of which not less than fifty-one per cent shall
be held by the Central Government and the balance by the public.
(2) The share capital may be increased by a resolution of the Central Board
subject to the approval of the Central Government, but not less than fifty-one per
cent of the additional share capital shall be issued to the Central Government.
(3) The nominal v.alue, issue price, the manner in which the new shares may be
issued and allotted and their assignment to the registers of shareholders maintained
under subsection (1) of section 7 shall, subject to the approval of the Central
Government, be determined by the Central Board.
5. Guarantee by Central Government.- Notwithstanding anything contained in

the Acts hereinafter mentioned in this section, the shares of the Bank shall be
deemed to be included among the securities enumerated in section 20 of the Trusts
Act, 1882 and to be approved securities for the purposes of the Insurance Act, 1938
and the Banking Companies (Control) Act, 1948.
6. Notice of trust. -(1) No notice of any trust in respect of any share ofthe Bank
shall be receivable by the Bank nor shall the Bank be bound by any such notice given,
expressly or otherwise, nor shall the Bank be regarded as a trustee in respect of any
such share.
(2) Without prejudice to the provisions of sub-section (1), the Bank may,
without any liability to the Bank, record in its books such directions given by the
holder of a share for the payment of dividend or transfer or any other matter relating
to such share as the Bank may think fit.
7. Register of shareholders.- (1) Separate registers of shareholders to serve the

areas specified in the Schedule shall be maintained at Karachi, Lahore and Dacca,
and the shares shall be transferable from one register to another.
(2) A shareholder is qualified to be registered as such in any area in which he

is ordin11rily resident or has his principal place of business in Pakistan but no person
shall be registered as a shareholder in more than one register and no person who is
not-
(a) a citizen of Pakistan;
(b) ordinarily resident in Pakistan for business or employment;
(c) a company registered under the Companies Act, 1913, or a society

registered under the Co-operative Societies Act, 1912 or any other law for the time
being in force in Pakistan relating to co-operative societies or a scheduled bank;
(d) a bank, company or co-operative society duly registered in an Acceding

State; and
(e) a corporation or company incorporated by or under any law for the time
being in force, any other country and having a branch in Pakistan;
shall be registered as a shareholder or be entitled to payment of any dividend on any

share, and no person who, having been duly registered as a shareholder ceases to be
qualified to be so registered, shall be able to exercise any of the rights of a
shareholder otherwise than for the purpose of the sale of his shares.
(3) Nothing in this Act prevents any Provincial Government, or the

Government of any Acceding State or any Corporation incorporated by or under an
Act of the Government of Pakistan or an Act of any Provincial Government or an
Acceding State from subscribing to the shares reserved for public subscription.
(4) The shares of the Bank may be held under his official designation by the
holder of any public office which may be notified in the Gazette by the Local Board
and in regard to transfers the following provisions shall apply, namely:-
(a) when a share is so held it shall be deemed to be transferred without any or

further endorsement or transfer deed from each holder of the office to the succeeding
holder of the office on and from the date on which the latter takes charge of the
office; and
(b) when the holder of the office transfers the shares to a party not being his
successor in office, the transfer shall be made in the prescribed manner.
Explanation. -The provisions of clauses (a) and (b) of this sub-section apply in
the case of an office of which there are two or more joint holders in the same manner
as they apply to an office of which there is a single holder.
APPENDICES 499
CHAPTER III-MANAGEMENT
8. Offices, branches and agencies.-(!) The head office of the Bank shall be
situated in Karachi.
(2) The Bank may establish branches, offices, and agencies in Pakistan, or,
with the prior approval of the Central Government anywhere outside Pakistan.
(3) The Bank shall create a special Agricultural Credit Department, the
functions of which shall be:-
(a) to maintain an expert staff to study all questions of agricultural credit and
be available for consultation by the Central Government, Provincial Governments,
Provincial Co-operative Banks and other banking organisations;
(b) to co-ordinate the operations of the Bank in connection with agricultural

credit and its relations with the Provincial Co-operative Banks and any other
organisations engaged in the business of agricultural credit.
9. Central Board of Directors.-(!) The general superintendence and direction

of the affairs and business of the Bank shall be entrusted to the Central Board of
Directors which may exercise all the powers and do all acts and things that may be
exercised or done by the Bank and are not by this Act expressly directed or required
to be done by the Bank in general meeting or in annual general meeting.
(2) The Central Board shall consist of-
(a) the Governor;
(b) one or more Deputy Governors, if appointed;
(c) six Directors nominated by the Central Government, one of whom shall be
a Government official; and
(d) one Director elected in the manner prescribed by regulations made under
this Act from amongst themselves by each group of the shareholders registered in
each of the three registers.
10. Governor and Deputy Governor.- (1) The Governor of the Bank shall be the
chief executive officer and shall, on behalf of the Central Board, direct and control
the whole affairs of the Bank.
(2) In the matters not specifically required by this Act or by regulations made
thereunder, to be done by the Central Board or by the Bank in general meeting, the
Governor shall have authority to conduct the business, control the functions and
manage the affairs of the Bank.
(3) Subject to the provisions of subsection (11) of this section the Governor
shall be appointed by the Central Government for such term (not exceeding five
years) and on such salary and terms and conditions of service as the Central
Government may determine, except that neither the salary of the Governor nor his
other terms and conditions of service shall be varied to his disadvantage after his
appointment.
(4) One or more Deputy Governors may be appointed by the Central

Government for such period (not exceeding five years) and on such salary and such
terms and conditions of service as the Central Government may determine, except
that neither the salary of a Deputy Governor nor his other terms and conditions of
service shall be varied to his disadvantage after his appointment.
(5) A Deputy Governor shall perform such duties as may be assigned to him
by the Central Board.
(6) The Central Government may require the Governor or a Deputy Governor
to hold an office other than in the Bank, in which event the Governor or the Deputy
Governor shall vacate his office, and the period during which he holds the other
office shall not count towards his tenure of office as Governor or Deputy Governor
as the case may be.
(7) The Governor and a Deputy Governor shall devote their whole time to the
affairs of the Bank.
(8) The Governor, or a Deputy Governor, as the case may be, may, in addition
to his duties of the Governor or a Deputy Governor, be entrusted by an order of the
Central Government with such duties for such period as may be specified in the
order.
(9) The Governor and a Deputy Governor shall on the expiry oftheir terms of
office be eligible for reappointment.
(10) No person shall hold office as Governor or a Deputy Governor:
(a) who is a member of the Central or a Provincial Legislature;
(b) who is employed in any capacity in the public service of Pakistan or of any
Province of Pakistan or holds any office or position for which any salary or other
remuneration is payable out of public funds;
APPENDICES 501
(c) who is a director, officer or employee of any other bank or of a financial

concern or has an interest as a shareholder in any other bank or financial concern;
provided that nothing in this clause shall apply where the Governor or Deputy
Governor is entrusted with additional duties under subsection (8) above:
(d) who has reached the age of sixty-five years.
(11) The Central Government may grant leave to the Governor and a Deputy
(12) Where the Governor or a Deputy Governor during his term of office is
incapacitated or is absent on deputation, leave or otherwise, the Central
Government may appoint any person qualified under sub-section (10) but who may
not be qualified under clause (b) of that subsection to act for the time being as the
Governor or a Deputy Governor, as the case may be, in his place.
(13) The Governor or in his absence a Deputy Governor shall preside at

meetings of the Central Board and Executive Committee and at general meetings
and annual general meetings and in the event of an equality of votes shall have a
second or casting vote.
11. Executive Committee. -(1) There shall be an Executive Committee consisting

of the Governor, Deputy Governor, if any, three Directors elected by the Central
Board to represent respectively the areas specified in the Schedule and an officer
appointed by the Central Government to act as member of the Executive
Committee.
(2) Except when the Central Board is in session, the Executive Committee
shall deal with and decide any matter within the competence of the Central Board.
12. Local Boards, their constitution and functions.-(!) A Local Board shall be
constituted for each of the three areas specified in the Schedule and shall consist of-
(a) two members elected in the manner prescribed by regulations made under
this Act from amongst themselves by the shareholders registered on the register for
that area; and
(b) not more than three members nominated by the Central Government.
(2) The Central Government shall in exercising this power of nomination

endeavour to secure representation of territorial or economic interests not already
represented and in particular the representation of agricultural interests and the
interests of Co-operative Banks.
(3) A Local Board shall advise the Central Board on such matters as may be
generally or specifically referred to it, and shall perform such duties as the Central
Board may, by regulations, delegate to it.
13. Qualifications and disqualifications of directors and members. -(1) No person

shall be or shall continue to be a director or member-
( a) who is a member of the Central or Provincial Legislature; or
(b) who is a salaried Government official;
(c) who is, or at any time has been, adjudicated an insolvent or has suspended
payment or has compounded with his creditors; or
(d) who is found lunatic or becomes of unsound mind; or
(e) who is an officer or employee of any bank; or
(f) who is a director of any bank other than the Bank, but he shall not be
disqualified or cease to be a director if he is a director of a bank which is a society
registered under the Co-operative Societies Act, 1912, or any other law for the time
being in force in Pakistan relating to co-operative societies; or
(g) who is not within six months from the date of his becoming a director or
member, as the case may be, registered as a holder of unencumbered shares of the
Bank of the nominal value of five hundred rupees; or
(h) who absents himself from three consecutive meetings of the Central Board
or Local Board without leave from the Central Board or Local Board, as the case
maybe.
(2) Nothing in clauses (b) and (g) of subsection (1) shall apply to the
Government official nominated as a director by the Central Government.
(3) The Central Government shall sell shares at par to a director or a member
nominated by it under sections 9 and 12, seeking to obtain the minimum share
qualification required under this section, but no such share shall be disposed of by
such director or member otherwise than by resale to the Central Government at par,
and the Central Government shall have the right to order the retransfer at par of all
or any of such shares to itself, whereupon all or any of such shares shall be deemed
to have been transferred to it.
14. Term of office of directors and members.-(1) The elected directors and
members shall hold office for three years and thereafter until their successors shall
have been duly elected.
APPENDICES 503
(2) The directors and members nominated by the Central Government shall
hold office at the pleasure of the Central Government.
(3) Directors and members shall on the expiry of their term of office be eligible
for re-election or re-nomination as the case may be.
15. Removal from and vacation of office of the Governor, Deputy Governor,
directors and members. -(1) Subject to subsection (2) the Central Government may
remove from office-
(a) the Governor or Deputy Governor if he becomes permanently incapable of

performing his duties or subject to any of the disqualification specified in subsection
(10) of section 10, or has done any act which is a breach of the trust reposed in him,
or if his continuance in office is regarded as manifestly opposed to the interests of the
Bank; and
(b) any director or member.
(2) An elected director or member shall not be removed from his office except
upon a resolution passed by the Central Board in that behalf by a majority of not less
than six directors.
(3) (a) The Governor, a Deputy Governor or a director may resign his office
by statement to that effect in writing signed by him and addressed to the Central
Government.
(b) A statement of resignation by a Deputy Governor or director shall be

addressed as above through the Governor.
(c) A member may resign his office by a statement to that effect in writing
signed by him and addressed to the Central Board.
(d) On the acceptance of such a resignation by the Central Government or the

Central Board, as the case may be, the office shall become vacant.
(4) Any director or member vacating office under this section shall not be
eligible to become a director or member, as the case may be, until the expiry of the
term of office for which he was nominated or elected.
(5) In the event of a vacancy occurring amongst the nominated directors or

members, the Central Government shall fill the vacancy by nominating another
director or member as the case may be.
(6) In the event of a vacancy occurring amongst the elected directors or

members before the expiry of their term of office, a new director or member, as the
case may be, shall be elected for the remainder of the term by and from amongst the
share-holders registered on the same register as that from which the vacating director
or member was elected.
16. General and annual general meetings.-(1) The annual general meeting shall
be held annually at Karachi, or a place in Pakistan where there is an office or branch
of the Bank, within three months from the date on which the annual accounts of the
Bank are closed.
(2) In the said meeting the share-holders present shall be entitled to discuss the
annual accounts, the report of the Central Board on the working of the Bank
throughout the year, and the auditors' report on the annual balance sheet and
accounts.
(3) A general meeting may be convened by the Central Board at any other
time.
(4) Every shareholder shall be entitled to attend at any general meeting; and
each share-holder who has been registered on a register maintained under section 7
for a period of not less than six months ending with the date of the meeting, as
holding five or more shares shall have one vote, and on a poll, each share-holder so
registered shall, subject to a maximum of ten votes, have one vote for each five
shares, and such votes may be exercised either personally or by proxy; but the
Central Government as a shareholder may appoint any authority or person to be
present at any general meeting or annual general meeting in which event the
restriction of the maximum of ten votes shall not apply to the authority or person so
appointed.
CHAPTER IV-BUSINESS AND

FUNCTIONS OF THE BANK
17. Business which the Bank may transact.-The Bank is authorised to carry on
and transact the several kinds of business hereinafter specified, namely:-
(1) The accepting of money on deposit without interest from, and the
collection of money for the Central Government, the Provincial Governments,
Local Authorities, banks and other persons;
(2) (a) The purchase, sale and rediscount of bills of exchange and promissory
notes drawn on and payable in Pakistan and arising out of bona fide commercial or
trade transactions bearing two or more good signatures one of which shall be that of
a scheduled bank, and maturing within ninety days from the date of such purchase or
rediscount, exclusive of days of grace;
APPENDICES 505
(b) The purchase, sale and rediscount of bills of exchange and promissory
notes, drawn on and payable in Pakistan and bearing two or more good signatures
one of which shall be that of a scheduled bank, and drawn or issued for the purpose
of financing seasonal agricultural operations or the marketing of crops, and maturing
within fifteen months from the date of such purchase or rediscount, exclusive of days
of grace;
Explanation.- For the purposes of this sub-clause-
(i) the expression "agricultural operations" includes animal husbandry and

allied activities jointly undertaken with agricultural operations;
(ii) "crops" include products of agricultural operations;
(iii) the expression "marketing of crops" includes the processing of crops prior
to marketing by agricultural producers or any organisation of such producers;
(c) The purchase, sale and rediscount of bills of exchange and promissory
notes drawn on and payable in Pakistan and bearing the signature of a scheduled
bank, and issued or drawn for the purpose of holding or trading in securities of the
Central Government, a Provincial Government or the Governments of such
Acceding States, as may be approved by the Central Government and maturing
within ninety days from the date of such purchase or rediscount, exclusive of days of
grace;
(d) The purchase, sale and rediscount of bills of exchange and promissory
notes drawn and payable in Pakistan and bearing two or more good signatures one
of which shall be that of a scheduled bank, or any corporation approved by the
Central Government and having as one of its objects the making of loans and
advances in cash or kind, drawn and issued for financing the development of
agriculture, or of agricultural or animal produce or the needs of industry, having
maturities not exceeding five years from the date of such purchase of rediscount:
Provided that the total amount of such bills of exchange and promissory notes
purchased, sold, and rediscounted shall not at any time exceed the limit fixed each
year by the Bank:
Provided further that the Bank may from time to time issue to a corporation
which may have dealings with the Bank under this sub-section any directions which
can be issued to a banking company under the Banking Companies (Control) Act,
1948 and in the event of anybody, while carrying out any direction hereunder, either
wilfully making a false statement or wilfully omitting to make a material statement
shall be punishable under subsection (1) of section 15 of the said Act and in the event
of any contravention or default in compliance with any direction, any director or
officer who is knowingly a party to the contravention or default shall be punishable

under subsection (2) of section 15 of the said Act, and the provisions of section 16 of
the said Act shall apply to such proceedings as if such corporation were a banking
company;
(3) (a) The purchase and sale of approved foreign exchange;
(b) The purchase, sale and rediscount of bills of exchange including treasury
bills, drawn in or on any place in countries whose currency has been declared as
approved foreign exchange and maturing within ninety days from the date of
purchase, provided that no such purchase, sale or rediscount shall be made in
Pakistan except with a scheduled bank;
(c) The keeping of balances with banks in countries whose currency has been
declared as approved foreign exchange;
(4) The making to Local Authorities or scheduled banks of advances and loans
repayable on demand or on the expiry of fixed periods not exceeding ninety days
against the security of-
(a) stocks, funds and securities, other than immovable property, in which a
trustee is authorised to invest trust money by any law for the time being in force in
Pakistan;
(b) gold or silver or documents of title to the same;
(c) such bills of exchange and promissory notes as are eligible for purchase or
rediscount by the Bank; and
(d) promissory notes of any scheduled bank supported by documents of title

relating to goods, such documents having been transferred, assigned or pledged to
any such bank as security for a cash credit or overdraft granted for bona fide
commercial or trade transactions or for the purpose for financing seasonal
agricultural operations or the marketing of crops;
(5) The making to the Central Government, Provincial Governments, or

Governments of such Acceding States as may be approved by the Central
Government of advances repayable in each case not later than three months from the
date of the making of the advance;
(6) The making to institutions or banks, specially established for the purpose
of promoting agricultural or industrial development in the country or co-operative
banks of advances and loans for such amounts and on such terms and conditions as
the Central Board may decide from time to time.
APPENDICES 507
(7) The issue and purchase of telegraphic transfers, demand drafts and other
kinds of remittances made payable at its own branches, offices or agencies;
(8) The drawing, accepting, making and issue on its own account or on account
of the Central Government, as the case may be, of any bill of exchange, hundi,
promissory note or engagement for the payment within or without Pakistan, of
Pakistan or foreign currency payable to bearer or to a banker on demand; but no such
business shall be carried on or transacted without the previous approval of the
Central Government;
(9) (a) Subject to clause (b) the purchase and sale of securities of countries
whose currency has been declared as approved foreign exchange with an unexpired
currency of not more than ten years;
(b) The restrictions relating to maturity shall not apply to securities held by the
Bank on the date on which this Act comes into force or any securities that may be
received as assets under the Pakistan (Monetary System and Reserve Bank) Order,
1947;
(10) (a) The purchase and sale of securities of the Central Government, a
Provincial Government or the Government of an Acceding State of any maturity or
of such securities of a Local Authority as may be specified in this behalf by the
Central Government by notification in the official Gazette on the recommendation
of the Central Board;
(b) Securities, debentures and shares fully guaranteed as to principal and

interest by the Central Government shall be deemed for the purpose of this section
to be securities of that Government;
(c) The amount of such securities held at any time in the Banking Department
shall be so regulated that-
(i) the total value of such securities shall not exceed the aggregate amount of
the share capital of the Bank, the Reserve Fund and three-fifths of the liabilities of
the Banking Department in respect of deposits;
(ii) the value of such securities maturing after one year shall not exceed the
aggregate amount of the share capital of the Bank, the Reserve Fund and two-fifths
of the liabilities of the Banking Department in respect of deposits;
(iii) the value of such securities maturing after ten years shall not exceed the
aggregate amount of the share capital of the Bank and the Reserve Fund and one-
fifth of the liabilities of the Banking Department in respect of deposits;
(11) The custody of monies, securities and other articles of value and the
collection of the proceeds, whether principal, interest or dividends of any such
securities;
(12) The sale and realisation of all property, whether movable or immovable
which may in any way come into the possession of the Bank in satisfaction, or part
satisfaction of any of its claims;
(13) The acting as agent to the Central Government, any Provincial

Government, the Government of any Acceding State, or any Local Authority in the
transaction of any of the following kinds of business, namely:-
(a) the purchase and sale of gold or silver or approved foreign exchange;
(b) the purchase, sale, transfer and custody of bills of exchange, securities or
shares in any company;
(c) the collection of the proceeds, whether principal, interest or dividends, of

any securities or shares;
(d) the remittance of such proceeds at the risk of the principal, by bills of
exchange payable either in Pakistan or elsewhere; and
(e) the management of public debt;
(14) The purchase and sale of gold coin and gold or silver bullion;
(15) The opening of an account with or the making of any agency arrangement
with, and the acting as agent or correspondent of bank incorporated in any country
outside Pakistan or the principal currency authority of any country under the law for
principal currency authorities, and the investing of the funds of the Bank in the
shares of any such international bank;
(16) (a) Subject to clauses (b) and (c) the borrowing of money for period not
exceeding three months for the purpose of the business of the Bank, and the giving
of security for money so borrowed;
(b) No money shall be borrowed under this subsection from any person in
Pakistan other than a scheduled bank or from any person outside Pakistan other than
a bank which is the principal currency authority of any country under the law for the
time being in force in that country;
(c) The total amount of borrowings from persons in Pakistan shall not at any
time exceed the amount of the share capital of the Bank;
APPENDICES 509
( 17) The making and issue of bank notes subject to the provisions of this Act;
(18) The performance of the functions of the Bank under the International
Monetary Fund and Bank Act, 1950;
(19) Establish credits and give guarantees; and
(20) Generally, the doing of all such matters and things as may be necessary,
incidental to or consequential upon the exercise of its powers or the discharge of its
duties or functions under this Act.
18. Power of direct discount. -(1) Where, in the opinion of the Central Board or
of the Governor, circumstances so warrant, the Bank may, notwithstanding any
limitation contained in paragraphs (a) and (b) of subsection (2) or paragraphs (a) and
(b) of subsection (3) or subsection (4) of section 17-
specified in paragraph (a) or paragraph (b) of subsection (2) or paragraph (b) of
subsection (3) of section 17, though such bill or promissory note does not bear the
signature of scheduled bank; or
(b) make advances or loans repayable on demand or on the expiry of fixed

subsection (4) of section 17 or against the security of goods or when the advance or
loan is made to a banking company against such other form of security as Bank may
consider sufficient.
(2) Where a banking company, to which an advance or loan has been made
under the provisions of paragraph (b) of subsection (1) of this section, is wound up,
any sums due to the Bank in respect of such advance or loan shall, subject only to the
claims, if any of any other banking company in respect of any prior claim or advance
of the banking company.
19. Declaration of approved foreign exchange.-On the recommendation of the

Central Board, the Central Government may, by notification in the official Gazette,
declare the currency of any country to be approved foreign exchange for all or any
of the purposes of this Act.
20. Business which the Bank may not transact.-The Bank shall not, except as
authorised under this Act-
(1) engage in trade or otherwise have a direct interest in any commercial,

industrial or other undertaking except such interest as it may in any way acquire in
the course of the satisfaction of any of its claims, but all such interest shall be disposed
of at the earliest possible moment;
(2) purchase its own shares or the shares of any other bank or of any company,
or grant advances or loans upon the security of any such shares;
(3) advance money on mortgage of, or otherwise on the security of, immovable
property or documents of title relating thereto, or become the owner of immovable
property, except so far as such advance or ownership is necessary for its own business
premises or residence for its officers and servants;
(4) make unsecured advances and loans;
(5) draw or accept bills payable otherwise than on demand; and
(6) allow interest on deposits on current account.
21. Government business.-(!) The Bank shall undertake to accept monies for
account of the Central Government, Provincial Governments and Governments of
such Acceding States as may be approved by the Central Government and to make
payments up to the amount standing to the credit of their accounts respectively and
to carry out their exchange, remittance and other banking operations, including the
management of public debt.
(2) (a) The Central Government and Provincial Governments shall entrust the
Bank, on such conditions as may be agreed upon between the Government
concerned and the Bank, with all their money, remittance, and banking transactions
in Pakistan, and, in particular, shall deposit free of interest all their cash balances
with the Bank.
(b) Nothing in this subsection shall be deemed to prevent the Central

Government and any Provincial Government from carrying on money transactions,
at places where the Bank has no office, branch or agency or from holding at such
places such balances as they may require.
(c) The Central Government and each Provincial Government shall entrust
of any new loans.
(d) In the event of any failure to reach agreement on the conditions referred
to in this section, the Central Government shall decide the conditions and its decision
shall be final.
22. Bank rate.- The Bank shall make public from time to time the standard rate
APPENDICES 511
at which it is prepared to buy or rediscount bills of exchange or other commercial

paper eligible for purchase under this Act.
23. Obligation to buy or sell foreign exchange.- The Bank shall sell to or buy from
any authorised dealer in Pakistan, approved foreign exchange at such rates of
exchange, at such place and on such conditions as the Central Government may from
time to time by general or special order determine.
Explanation.- In this section "authorised dealer" means a person for the time
being authorised under section 3 of the Foreign Exchange Regulation Act, 1947, to
deal in foreign exchange.
24. Sole right to issue bank notes.- (1) The Bank shall have the sole right to issue
bank notes made payable to bearer on demand in Pakistan in accordance with the
provisions hereinafter made, provided that the currency notes of the Government of
Pakistan supplied to the Bank by the Government may be issued by it for a period
which shall be fixed by the Central Government on the recommendations of the
Central Board.
(2) Any person contravening this authority or committing any other offence
specified in section 35, shall be liable to the penalties therein mentioned.
25. Legal tender. -(1) Subject to the provisions of subsection (2) every bank note
shall be legal tender at any place in Pakistan for the amount expressed therein and
shall be guaranteed by the Central Government.
(2) On the recommendation of the Central Board, the Central Government

may, by notification in the official Gazette,declare that with effect from such date as
may be specified in the notification, any series of bank notes of any denomination
shall cease to be legal tender save at such offices, branches and agencies, if any, of
the Bank as may be specified in the notification.
26. Issue Department.-(!) The issue of bank notes shall be conducted by the
Bank in an Issue Department which shall be separated and kept wholly distinct from
the Banking Department and the assets of the Issue Department shall not be subject
to any liability other than the liabilities of the Issue Department as hereinafter
defined in section 32.
(2) The Issue Department shall not issue bank notes to the Banking
Department or to any person except in exchange for other bank notes or for such
coin, bullion, approved foreign exchange or securities as are permitted under this
Act to form part of the assets of the Issue Department.
27. Denominations and form of bank notes.- Bank notes made and issued by the
B"nk sh"ll be in such denominations and of such design, form and material as may
be approved by the Central Government on the recommendations of the Central

Board.
28. Re-issue of notes.-The Bank shall not re-issue bank notes which are torn,
defaced or excessively soiled.
29. Lost, stolen, mutilated or imperfect notes.-Notwithstanding anything

contained in any enactment or rule of law to the contrary, no person shall as of right
be entitled to recover from the Central Government or the Bank the value of any
lost, stolen, mutilated or imperfect bank note.
30. Assets ofthe Issue Department.- (1) The assets of the Issue Department shall
not be less than the total of its liabilities and shall be maintained as follows:-
(a) of the total amount of the assets, not less than thirty per cent shall consist
of gold coin, gold bullion, silver bullion or approved foreign exchange;
(b) the remainder of the assets shall be held in rupee coins, rupee securities of
any maturity and such bills of exchange and promissory notes payable in Pakistan as
are eligible for purchase by the Bank under paragraphs (a), (b) and (d) of subsection
(2) of section 17:
Provided that the assets falling to the share of the Government of Pakistan
under the provision of Pakistan (Monetary System and Reserve Bank) Order, 1947,
which are held by the Reserve Bank of India pending their physical transfer to the
Bank shall form a part of the assets.
(2) For the purposes of this section, gold coin and gold bullion shall be valued
at 0,268601 grams of fine gold per rupee, silver bullion shall be valued at the market
value of the fine silver content thereof, rupee coin shall be valued at its face value and
rupee securities and securities specified in subsection (4) shall be valued at the
market rate for the time being obtaining.
(3) Of the gold coin and gold or silver bullion held as assets not less than
seventeen-twentieths shall be held in the custody of the Bank including its branches,
offices or agencies, and the gold or silver belonging to the Bank which is in any other
bank or in any mint or treasury or in transit may be reckoned as part of the assets.
(4) For the purposes of this section the approved foreign exchange which may
be held as part of the assets shall be in any of the following forms, namely:-
(a) balances standing to the credit of the Bank at the Central Bank of the
country of origin of the currency in question;
APPENDICES 513
(b) bills of exchange bearing two or more good signatures and drawn on and
payable at any place in the country of origin having a maturity not exceeding ninety
days; and
(c) securities of a Government with an unexpired currency of not more than

five years.
(5) Restrictions relating to maturity shall not apply to securities mentioned in

subsection (4) held by the Bank on the date on which this Act comes into force or any
securities that may be received as assets under the Pakistan (Monetary System and
Reserve Bank), Order, 1947.
31. Suspension of assets requirements.-Notwithstanding anything contained in

the foregoing provisions, the Bank may, with the previous sanction of the Central
Government, for periods not exceeding thirty days in the first instance, which may
with the like sanction be extended from time to time by periods not exceeding fifteen
days, hold as assets gold coin, gold or silver bullion, or approved foreign exchange
of less aggregate amount than that required by paragraph (a) of subsection (1) of
section 30.
32. Liabilities of the Issue Department. -(1) The liabilities of the Issue
Department shall be an amount equal to the total of the amount of the bank notes for
the time being in circulation.
(2) For the purposes of this section any bank note which has not been
presented for payment within forty years from the first day of July following the date
of its issue shall be deemed not to be in circulation and the value thereof shall
notwithstanding anything contained in subsection (2) of section 26 be paid by the
Issue Department to the Banking Department; but any such bank note, if
subsequently presented for payment, shall be paid by the Banking Department.
33. Obligation to supply different forms of currency.-(1) The Bank shall issue
rupee coin on demand in exchange for bank notes and bank notes on demand in
exchange for coin which is legal tender under the Pakistan Coinage Act.
(2) The Bank shall in exchange for bank notes of five rupees or upwards supply
bank notes of lower value or coins which are legal tender under the said Pakistan
Coinage Act, in such quantities as may in the opinion of the Bank be required for
circulation. The Central Government shall supply such coins to the Bank on demand
and if it fails to do so at any time the Bank shall be released during the period of such
failure from its obligation to supply them to the public.
(3) The Central Government shall take over from the Bank at such times and
in such quantities as the Bank may, with the previous approval of the Central
Government, determine rupee coins which are not required for purposes of
circulation against payment.
34. Obligation of the Central Government in respect of rupee coin.- The Central
Government shall not re-issue any rupee coins taken over under subsection (3) of
section 33 nor put into circulation any rupee coin except through the Bank and the
Bank shall not dispose of rupee coin otherwise than for purposes of circulation or by
delivery to the Central Government under the preceding section.
35. Offences and penalties relating to unauthorized issue of bills and Bank
notes. -(1) No person in Pakistan other than the Bank or as expressly authorised by
this Act, the Central Government shall draw, accept, make or issue any bill of
exchange, hundi, promissory note or engagement for the payment of money payable
to bearer on demand, or borrow, owe or take up any sum or sums of money on the
bill,hundis or notes payable to bearer on demand of any such person, but such
cheques, or drafts, including hundi, payable to bearer on demand or otherwise may
be drawn on a person's account with a banker, shroff or agent.

1881, no person in Pakistan other than the Bank, or as expressly authorised by this
Act, the Central Government shall make or issue any promissory note expressed to
be payable to the bearer of the instrument.
(3) Any person contravening the provision of this section shall be punishable
upon conviction with fine which may extend to double the amount of the bill, hundi,
promissory note or engagement in respect whereof the offence is committed.
(4) No prosecution under this section shall be instituted except on complaint

made on behalf of the Bank.
36. Cash reserve of scheduled banks to be kept with the Bank. -(1) Subject to
subsection (2) every scheduled bank shall maintain with the Bank a balance the
amount of which shall not at the close of business on any day be less than five per cent
of the demand liabilities and two per cent of the time liabilities of such bank in
Pakistan.
(2) The requirements of this section as to the maintenance of balances in the

Bank may from time to time, by notification in the official Gazette, be varied or, for
such period and subject to such condition as may be specified in the notification, be
dispensed with by the Central Government.
Explanation. -For the purposes of this section liabilities shall not include the
paid-up capital or the reserves, or any credit balance in the profit and loss account of
such bank or the amount of any loan taken from the Bank.
APPENDICES 515
(3) Every scheduled bank shall send to the Bank returns signed by two
responsible officers of such bank containing such information as may be deemed
necessary for carrying out the purposes and objects of this Act at such periods of time
as the Bank may from time to time direct.
(4) If at the close of business on any day before the day fixed for the next return
under the proceeding subsection, the balance held at the Bank by any scheduled
bank is below the minimum fixed by subsection (1) or varied under subsection (2),
such scheduled bank may be ordered by the Bank to pay to the Bank in respect of
such day penal interest at a rate three per cent above the bank rate on the amount by
which the balance with the Bank falls short of the fixed minimum, and if on the day
on which the next return is due such balance is still below the fixed minimum as
disclosed by this return, the rate of penal interest rna y be increased to a rate five per
cent above the Bank rate in respect of that day and each subsequent day on which the
balance held at the Bank at the close of business on that day is below the fixed
minimum.
(5) When under the provisions of subsection (4) penal interest at the increased
rate of five per cent above the Bank rate has become payable by a scheduled bank,
if thereafter on the day fixed for the next return under subsection (3) the balance held
at the Bank is still below the fixed minimum as disclosed by this return-
(a) every director and officer of the scheduled bank, who is knowingly and
wilfully a party to the default, shall by order of the Bank be punishable with fine
which may extend to five hundred rupees for each subsequent day on which the
default continues; and
(b) the Bank may prohibit the scheduled bank from receiving after the said day
any fresh deposit, and if default is made by the scheduled bank in complying with
such prohibition, every director and officer of the scheduled bank who is knowingly
and wilfully a party to such default or who through negligence or otherwise
contributes to such default shall by order of the Bank be punishable in respect of each
default with fine which may extend to five hundred rupees for each day after the first
on which a deposit received in contravention of such prohibition is retained by the
scheduled bank.
Explanation.- In this subsection "officer" includes Manager, Secretary,

Branch Manager and Branch Secretary.
(6) Any scheduled bank failing to comply with the provisions of subsection (3)
shall by order of the Bank be liable to pay to the Bank a penalty of one hundred
rupees for each day during which the failure continues.
(7) Whoever in any return under this section wilfully or recklessly makes a
material particular shall by order of the Bank be punishable with fine which may
extend to one thousand rupees in respect of each such return.
(8) The penalties imposed by subsections (4), (5), (6) and (7) shall be payable
on demand made by the Bank and in the event of refusal by the defaulting bank,
director or officer to pay on such demand, may be levied by a direction of the
principal Civil Court having jurisdiction in the area where an office of the defaulting
bank is situated, such direction being made only upon application made in this behalf
to the Court by the Bank, with the previous sanction of the Central Government.
37. Scheduled banks.-(1) The Bank shall maintain at all its offices and
branches an up-to-date list of banks declared byitto be scheduled banks under clause
(a) of subsection (2).
(2) The Bank shall by notification, in the official Gazette-
(a) declare any bank to be scheduled bank which is carrying on the business of
banking in Pakistan and which-
(i) is a banking company as defined in section 277F of the Companies Act,

1913, or a co-operative bank, or a corporation or a company incorporated by or
established under any law in force in any place in or outside Pakistan;
(ii) has a paid-up capital and reserves of an aggregate value of not less than five
lakhs of rupees:
Provided that in the case of a co-operative bank, an exception may be made by

the Bank;
(iii) satisfies the Bank that its affairs are not being conducted in a manner
detrimental to the interests of its depositors;
(b) direct the descheduling of any scheduled bank which ceases to fulfil the
requirements mentioned in clause (a) or goes into liquidation or otherwise wholly or
partly ceases to carry on banking business:
Provided that the Bank may, on application of the scheduled bank concerned
and subject to such conditions, if any, as it may impose, defer the making of a
direction under clause (b) for such period as the Bank considers reasonable to give
the scheduled bank an opportunity of fulfilling the requirements mentioned in sub-
clauses (ii) and (iii) of clause (a);
(c) alter the description in the list of scheduled banks whenever any scheduled
bank changes its name.
APPENDICES 517
Explanation.- In subsection (2) the expression "value" means the real or

exchangeable and not the nominal value of the capital and reserves and the valuation
made by the Bank shall be final.
38. Power to require returns from Corporations.- The Bank may require any
Corporation with which it has any transactions under section 17 to furnish returns
prescribed under subsection (3) of section 36, and if it does so require, the provisions
of subsections (6), (7) and (8) of section 36 shall apply, so far as may be, to such
Corporation as if it were a scheduled bank.
39. Publication of consolidated statements by the Bank.- The Bank shall compile
and publish in such manner and at such times as the Central Government may direct,
a consolidated statement from such information as may be received under this Act.
40. Returns.-(!) The Bank shall prepare and transmit to the Central
Government a weekly account of the Issue Department and of the Banking
Department in such form as the Central Government may, by notification in the
official Gazette, direct. The Central Government shall cause these accounts to be
published weekly in the official Gazette.
(3) The Bank shall also, within two months from the date on which the annual
accounts of the Bank are closed, transmit to the Central Government a statement
showing the name, address and occupation of, and the number of shares held by each
share-holder of the Bank.
CHAPTERV
General
41. Securities of the value of three crores of rupees allocated for the purpose by the
Central Government shall be held by the Bank as the Reserve Fund.
42. After making provision for bad and doubtful debts, depreciation in assets,
contributions to staff and super annuation funds, and such other contingencies as are
usually provided for by bankers, there shall be paid to the share-holders out of the
net annual profits a dividend on the shares at a rate to be fixed by the Central
Government from time to time, which shall not be less than 4 per cent per annum.
Any surplus remaining thereafter shall be paid to the Central Government.
43. (1) Not less than two auditors shall be elected and their remuneration fixed at
the annual general meeting. The auditors may be shareholders, but no director,
member or other officer of the Bank shall be eligible during his continuance in office
to be so elected. Any auditor so elected shall be eligible for re-election on vacating
office.
(2) All auditors elected under this section shall be and continue to act as
auditors until the first annual general meeting after their respective elections.
(3) Any casual vacancy in the office of any auditor elected under this section
may be filled by the Central Board.
44. Without rejudice to anything contained in section 43 the Central Government

may at any time appoint the Auditor-General or such auditors as it thinks fit to
examine and report upon the accounts of the Bank.
45. (1) Every auditor shall be supplied with copy of the annual balance sheet, and
it shall be his duty to examine the same together with the accounts and vouchers
relating thereto; and every auditor shall have a list delivered to him of all books kept
by the Bank, and shall at all reasonable time have access to books, accounts and
other documents of the Bank, and may, at the expense of the Bank, if appointed by
it, or at the expense of the Central Government if appointed by that Government
employ accountants or other persons to assist him in investigating such accounts and
may, in relation to such accounts, examine any director or officer of the Bank.
(2) The auditors shall make a report to the shareholders or to the Central
Government, as the case may be, upon the annual balance sheet and accounts, and
in any such report they shall state whether in their opinion the balance sheet is a full
and fair balance sheet containing all necessary particulars and properly drawn up so
as to exhibit a true and correct view of the state of affairs of the Bank, and, in case
they have called for any explanation or information from the Central Board, whether
it has been given and whether it is satisfactory. Any such report made to the
shareholders shall be read, together with the report of the Central Board, at the
annual general meeting.
46. (1) For the purposes of section 124 of the Evidence Act, 1872 the provisions of
Part IV of the Code of Civil Procedure, 1908, and the provisions of rule 27 of Order
V, and rule 52 of Order XXI of the said Code, the Bank and any officer of the Bank
acting in his capacity as such shall be deemed to be a public officer.
(2) The provisions of section 123 of the Evidence Act shall apply to the
unpublished records relaing to the affairs of the Bank and the Governor shall be
deemed to be the officer or head of the department concerned.
47. Notwithstanding anything contained in any law for the time being in force
pension granted by the Bank to its officers and servants shall not be liable to seizure,
attachment or sequestration by process of any court in Pakistan at the instance of a
creditor, for any demand against the pensioner or in satisfaction of a decree of order
of any such court.
APPENDICES 519
48. The bank shall not be liable to the payment of any stamp duty under the Stamp
Act, 1899.
49. (1) Notwithstanding anything contained in the Income-tax Act, 1922, or the
Business Profits Tax Act, 1947, or any other law for the time being in force in
Pakistan relating to income tax, super-tax or business profits tax, the Bank shall not
be liable to pay any income-tax, super-tax, or business profits tax on any of its
income, profits or gains.
(2) For the purposes of section 18 of the Income-tax Act, 1922, or of any other
relevant provision of that Act relating to the levy and refund of income-tax any
dividend paid under section 42 shall be deemed to be interest on securities;
Provided that nothing in this section shall affect the liability of any
shareholder, other than the Central Government, in respect of income-tax super-tax
or business profits tax.
50. The Bank shall not be placed in liquidation save by order of the Central
Government and in such manner and on such terms and conditions as it may direct.
51. No act or proceeding of the Central Board or a Local Board shall be

questioned on the ground merely of the existence of any vacancy in or any defect in
the constitution of such Board.
52. (1) If in the opinion of the Central Government, the Bank fails to carry out any
of the obligations imposed on it by or under this Act the Central Government may
by notification in the official Gazette declare the Central Board to be superseded,
and thereafter the general superintendence and direction of the affairs of the Bank
shall be entrusted to such agency as the Central Government may determine and
such agency may exercise the power and do all acts and things which may be
exercised or done by the Central Board under this Act.
(2) When action is taken under sub-section (1) the Central Government shall
cause a full report of the circumstances leading to such action and of the action taken
to be laid before the Central Legislature at the earliest possible opportunity and in
any case within three weeks of the re-assembly thereof after the issue of the
notification superseding the Central Board.
53. (1) Except in the performance of his duties under this Act every officer or
servant of the Bank shall preserve and aid in preserving secrecy with regard to all
matters relating to the affairs of the Bank not published by it, and with regard to all
matters relating to the financial or monetary affairs of any institution, person, body
of persons, any Government or authority whether in Pakistan or outside that may
come to his knowledge in the performance of his duties.
(2) Every such officer or servant who communicates any such matter, except
when required by law to do so or in the discharge of his duty as such, shall be guilty
of an offence and shall on conviction by a court of competent jurisdiction be punished
with imprisonment to either description for a term which may extend to six months
or with fine which may extend to Rs.500 or with both.
(3) No court shall take cognizance of any offence punishable under this section
except upon complaint in writing by a person authorised in this behalf by the
Governor.
54. (1) Subject to the approval ofthe Central Government, the Central Board may
made regulations consistent with this Act to provide for all matters for which
provision is necessary or convenient for the purposes of giving effect to the provisions
ofthis Act.
(2) In particular and without prejudice to the generality of the foregoing

provision, such regulations may provide for all or any of the following matters,
namely:-
(a) the manner of holding and conducting of elections under this Act, the
votes of shareholders and the manner in which they may be exercised by
shareholders at such elections;
(b) the final decision of doubts or disputes regarding the qualifications of

candidates for election or regarding the validity of elections;
(c) the maintenance of the share registers, the manner in which and the
conditions subject to which shares may be held and transferred,
suspension and the manner of suspension of transfer of shares from one
register to another and generally, all matters relating to the rights and
duties of shareholders;
(d) the manner in which general meetings and annual general meetings shall
be convened and held, their quorum, the procedure to be followed
thereat, votes of the shareholders and the manner in which they may be
exercised;
(e) the manner in which notices may be served on behalf of the bank upon
shareholders or other persons;
(f) the manner in which meetings of the Central Board, Executive

Committee and Local Boards and committees of the Central and Local
Board shall be convened and held, their quorum, the procedure to be
followed at such meetings, votes of Deputy Governor, directors and
APPENDICES 521
members and the manner in which they may be exercised and the
appointment and election of Chairman of such meetings except as
otherwise provided by this Act;
(g) the conduct of business of the Executive Committee and Local Boards
and the delegation of powers and functions to Local Boards;
(h) the delegation of powers and functions of the Central Board, the
Governor, Deputy Governor, directors or officers of the Bank;
(i) the formation of committees of the Central Board, their supervision by

the Central Board, and the conduct of business in such committees;
(j) recruitment of officers and servants of the Bank including the terms and
conditions of their service, constitution of superannuation, beneficial
and other funds, with or without bank's contribution, for the officers
and servants of the Bank; their welfare; providing amenities, medical
facilities, grant of loans and advances; their betterment and uplift;
(k) the manner and form in which contracts binding on the Bank may be
executed;
(1) the provision of an official seal of the Bank and the manner and effects
of its use;
(m) the manner and form in which the balance sheet of the Bank shall be
drawn up, and in which the accounts shall be maintained;
(n) the remuneration of directors and members;
( o) the relations of the scheduled banks with the Bank and the returns to be
submitted by the scheduled banks to the Bank;
(p) the regulations of clearing houses for the scheduled banks;
( q) the circumstances in which, and the conditions and limitations subject to

which, the value of any lost, stolen, limitations subject to which, the
value of any lost, stolen mutilated or imperfect bank note may be
refunded as of grace;
(r) the denomination, form issue, negotiability, encashment and

repatriation of the instruments mentioned in sub-section (8) of section
17;
(s) notice of trust; and
(t) generally for making any provision necessary or convenient for the
conduct of the business, discharge of functions and for purposes of
management of the Bank.
(3) Copies of all regulations made under this section shall be available to the
public on payment.
55. (1) The State Bank of Pakistan Ordinance, 1955 is hereby repealed.
(2) Any rules or regulations made, order passed, notification issued, thing
done, action taken or proceedings commenced under any of the provisions of the
State Bank of Pakistan Ordinance, 1955 or deemed to have been so made, passed,
issued, done, taken or commenced, shall continue in force and be deemed to have
been made, or as the case may be, passed, issued, done, taken or commenced under
the corresponding provision of this Act.
THE SCHEDULE
(See Section 7)
Areas served by the various share registers
1. The Karachi area, served by the Karachi Register, shall consist of-
Karachi Division, Khairpur Division, Hyderabad Division, Quetta and Kalat
Division.
2. The Lahore area, served by the Lahore Register, shall consist of-
Peshawar Division, Dera Ismail Khan Division, Rawalpindi Division, Lahore

Division, Multan Division and Bahawalpur Division of the Province of West
Pakistan.
3. The Dacca area, served by the Dacca Register, shall consist of-
The Province of East Pakistan.

APPENDIX-XVI
SUMMARY OF THE REPORT OF THE

CREDIT ENQUIRY COMMISSION
The Credit Enquiry Commission was appointed in February, 1959 with the
following terms of reference:-
(1) To examine the scope and working of the agencies which provide credit
facilities to agriculture, business and industry.
(2) To suggest measures to meet the agricultural and urban credit

requirements of the country by improving the existing facilities and by
creating new facilities, where necessary, with special emphasis on
agriculture, small business and industry.
(3) To examine what special measures are necessary in the credit field to
ensure proper implementation of the land reforms recently approved by
the Government.
(4) To examine the training facilities for banking within the country and to
consider the feasibility of setting up an institution for such training.
2. The personnel of the Commission was as follows:-
1. Mr. Abdul Qadir, Governor, State Bank of Pakistan Chairman

2. Mr. Mumtaz Mirza, Managing Director, Agricultural
Development Finance Corporation Member
3. Mr. G .S. Kehar, Member, National Planning
Commission Member
4. Mr. A. Muhajir, Managing Director, National Bank
of Pakistan Member
523
5. Dr. S.A. Hussain, Cooperative & Marketing Advisor

to the Government of Pakistan Member
6. Mr.S.A.A. Sobhan, Development Commissioner,
Government of East Pakistan Member
7. Malik Khuda Bakhsh Bucha, Secretary, Revenue &
Rehabilitation Deptt., Govt. of West Pakistan Member
8. Mulla Abdul Majid, C.S.P. (Retired) East Pakistan,
Dacca. Member
9. Dr. M.N.Huda, Head ofthe Department of
Economics, University of Dacca. Member
3. The Commission submitted an interim Report on item 3 of its terms of

reference in March, 1959. The final Report was submitted in the month of
September, 1959.
4. The Report of the Commission consists of twenty-five chapters. While the first
chapter is introductory, the second outlines the major problems in the perspective of
developments in the credit field since Independence. Chapters 3-10 are concerned
with rural credit, Chapters 11-12 with commercial credit, Chapters 13-16 with
industrial credit and Chapters 17-24 with various miscellaneous problems, such as
housing and construction finance, mining industry finance, financing of inland
transport, the role of the State Bank in the provision of credit facilities, certain
general problems of the statutory credit agencies, remittance facilities, mobilisation
of savings and banking and co-operative training. The last chapter (i.e. Chapter 25)
summarises the conclusions and recommendations of the Report.
5. According to the Commission the main problems in the credit field are as
follows:-
(a) Firstly, an effective institutional credit system designed for the direct
benefit of the primary producer is yet to be developed in the country. In
the absence of organised facilities to provide him credit when needed
and at reasonable rates, the cultivator is often forced to take loans from
the middlemen and sell his crop to them in advance of the harvest at low
prices. If he manages to avoid advance sale, he is in any case forced to
sell immediately at the harvest because the non-availability of marketing
credit weakens his holding power. Similarly, cottage industry workers
eke out a miserable existence not only because of their output with the
middleman who supplies the raw material on credit at high prices and
compels them to sell their finished goods to him at low prices.
(b) Secondly, within the groups who are in a position to obtain credit from
organised institutional sources, there is a tendency for credit to gravitate
towards the more substantial elements in the community because they
APPENDICES 525
can offer adequate security. Striking evidence of concentration was

found in the case of the commercial banking system. In a special survey
made available to the Commission by the State Bank, it was found that
on 31st March, 1959, 63% of total bank credit was locked up in only 222
loan accounts ranging between Rs.lO and 50 lakhs and above. This
concentration virtually meant a denial of credit to borrowers of small
means. This was evident from the fact that advances under Rs.25,000
accounted for hardly 6% of total bank credit.
(c) Thirdly, the cooperative credit movement has not so far achieved any
measurable success in its mission. To large extent, the resources of the
cooperative banks have been exploited by men of influence for personal
and commercial purposes in complete disregard of cooperative ideals
and objectives. This has resulted not only in undermining the movement
by the denial of credit to the primary producer but also in jeopardising
the interests of the general public who have deposited their savings with
cooperative institutions.
(d) Fourthly, there is a lack of uniform control over the credit structure in
the country. While some credit institutions are subject to the control of
the State Bank of Pakistan, others are controlled by separate agencies.
This is an anomalous position which needs rectification.
6. In the context of the above problems, the Commission was guided in its
deliberations by the following main considerations:(a) credit must percolate to the
primary productive sectors of the economy so as to increase production; (b) credit
policy must work in the direction of promotion of small and medium-scale
enterprises in every sector of the economy;(c) extension of credit facilities to
neglected sectors should take place both through the redistribution of the existing
pool of liquid resources and through the establishment of additional institutional
agencies; and (d) savings are essential for credit expansion, if inflation is to be
avoided.
7. Dealing with the rural sector, the Commission has observed that with the
large-scale migration of money-lenders from Pakistan at the time of partition, there
has occurred a vacuum in the credit field in this sector. The institutional credit
agencies have not been able to fill this vacuum. The total outstanding advances of
institutional credit agencies do not exceed about Rs. 7 crores which is a meagre
contribution in relation to the potential requirements for productive credit. Among
the institutional credit agencies, the cooperative credit societies at the primary level
have been characterised by stagnation in the post-partition period due to several
factors including the diversion of cooperative funds to non-cooperative uses,
political intervention, lack of trained staff; while the higher agencies, namely, the
central and provincial banks have switched the main focus of their activities to
commercial lending rather than agricultural lending. Recognising the shortcomings

of the cooperative movement, the Government set up two specialised agricultural
credit agencies; namely, the Agricultural Development Finance Corporation and the
Agricultural Bank of Pakistan. Although they have made some valuable
contribution to the development of agricultural credit facilities, they are still
handicapped in their activities by a number of legal and administrative restrictions,
as also paucity of trained staff. As this situation calls for extensive reforms in the rural
credit structure, the Commission has made a number of recommendations in this
regard, which can be summarised under the following heads:-
(a) Primary Cooperative Credit Societies: To correct the structural

weakness of the primary cooperative credit societies, the Commission
has recommended gradual establishment of larger-sized and single-
purpose primary credit societies covering areas not exceeding in any
case the geographical coverage of the "union". They should be operated
on limited liability basis and run by paid staff whose salary would be met,
in part at least, by the provincial cooperative banks. They should
undertake financing of seasonal needs and medium-term needs of the
cultivators not exceeding a period of three years on the basis of
individual credit limits based primaryily on repaying capacity and
recovery experience. They should be linked up with marketing societies
situated at a higher level. The Commission has also made suggestions for
improving the supervision and audit of these societies.
(b) Central & Provinclal Cooperative Banks: The Commission has

recommended the reorganisation of apex cooperative banks into
autonomous institutions subject to inspection and control by the State
Bank of Pakistan. The central cooperative banks, which are considered
a weak link in the cooperative credit structure, should be merged into
apex banks. Since commercial lending is not the proper function of the
cooperative banks, there should be a phased withdrawal of cooperative
banks from this field. The rate of interest to the ultimate borrowers at
the union or village level should not exceed 7 per cent on the basis of the
current level of the Bank Rate. The State Bank of Pakistan should lend
to the apex banks for short-term and medium-term needs at a
concessional rate of 1 per cent below the Bank Rate.
(c) Statutory Agricultural Credit Agencies: With a view to facilitating the

working of the statutory agricultural credit agencies; namely; the
Agricultural Development Finance Corporation and the Agricultural
Bank of Pakistan, the Commission has made a number of
recommendations designed to remove the existing impediments to the
prompt recovery of their loans, and has also suggested certain
simplifications in their mortgage procedures. It has further been
APPENDICES 527
recommended that these institutions should accept deposits in order to

increase their resources. The Commission maintains that in order to
reduce the overhead expenses of these two organisations, it would be
ideal to amalgamate them into one institution. It may not, however, be
feasible to effect a merger immediately, as this will create some sort of
disturbance in their working with adverse repercussions on the
implementation of the land reforms and reorganisation of the
cooperative credit structure. It has, therefore, been recommended that
an Expert Committee should be appointed to work out details for an
ultimate amalgamation of the two institutions.
(d) Agricultural marketing and warehousing: The Commission is strongly

of the view that mere extension of credit facilities to the agricultural
sector would be of no value, unless it is accompanied by improvements
in the marketing, storage and processing facilities. It has, therefore,
recommended the setting up of cooperative marketing and processing
centres throughout the country. There is also need for the establishment
of licensed warehouses. As private initiative is lacking in this field, the
Commission has recommended that warehousing corporations should
be established as statutory bodies under central legislation.
(e) Rural Credit Fund: As it would not be possible to meet the full
requirements of medium-term and long-term credit in the agricultural
sector without substantial assistance from the State Bank of Pakistan,
the Commission has recommended the creation of a Rural Credit Fund
for the purpose. The Fund should be initially built up with an amount of
Rs.50 million by the Central Government and the State Bank of
Pakistan and then progressively augmented by recurring annual
appropriations of Rs.one crores from the surplus profits of the State
Bank of Pakistan. The Commission has also suggested the establishment
of a Rural and Cooperative Advisory Committee under the auspices of
the State Bank of Pakistan to provide a machinery of consultation and
to co-ordinate the credit policies of all agricultural credit agencies.
Peoples Finance Corporation
8. In the field of commercial credit, two of the main problems stressed by the
Commission are:(l) the inadequate expansion of commercial banking in the
relatively undeveloped areas of the country; and (2) the acute concentration of bank
credit in a few hands. To solve the first problem, the Commission has recommended
that 250 bank offices be opened by the end of the Second Five-Year Plan period. To
encourage the banks to open branches in the mofussil areas where branches may not
be remunerative initially, it has been recommended that the subsidy arrangements in
the agency agreement between the State Bank of Pakistan and the National Bank of
Pakistan may be extended to other Pakistani banks with suitable modifications. To

tackle the second problem, the Commission has suggested that the State Bank of
Pakistan should examine the possibillity of restraining the banks from providing
credit for purposes of equity, thereby preventing industrial promotors from
obtaining loans for establishing fresh undertakings against their personal holdings
and shares in existing undertakings and thus avoiding resort to the capital market.
With a view to providing increased credit facilities to the small businessmen and
traders, the Commission has recommended the establishment of a Peoples Finance
Corporation on the lines of the Small Busines~ Administration in the U.S.A. It has
also suggested that the commercial banks should explore the possibility of appointing
"Guarantee Brokers" who would guarantee the loans extended to the small
borrowers. The State Bank of Pakistan should also consider the establishment oftwo
Discount Houses, one in each wing of the country, with the main object of
discounting 'Hundis' from the small traders and businessmen. To induce the
commercial banks to lend directly to the small concerns, it has been recommended
that the State Bank of Pakistan may prescribe a uniform percentage of deposits
which must be earmerked for small loans upto Rs.25,000 and that the proposed
Peoples Finance Corporation may administer a guarantee fund for covering a
portion of losses incurred by the commercial banks on small loans.
Industrial Development Bank
9. As for the industrial credit, the Commission has come to the conclusion that
there is no dearth of credit facilities for the large-sized industries. They are in a
position to obtain their full requirements of finance, both short-term and long-term,
from the specialised industrial finance corporations, the commercial banks and the
market sources. The real difficulty in obtaining credit facilities is faced by the
medium, small-scale and cottage industries. To meet the difficulty experienced by
the medium-scale industries, the Commision has suggested that the Pakistan
Industrial Finance Corporation should be reorganised into an Industrial
Development Bank catering mainly to the needs of such industries. Its lending limit
should not exceed Rs.l million except in certain special circumstances. To augment
its resources, it should be encouraged to accept deposits from the general public. In
regard to the small-scale industries, the Commission has pointed out that although
two specialized corporations have been set up at Karachi and in East Pakistan to
cater to the requirements of such industries, the assistance provided by them so far
has been more in the field of supply of raw material and marketing of finished
products than in the provision of credit facilities. The Commission holds that these
specialized corporations should not, in_fact, be burdened with credit function as it is
a highly specialized business. Since the need of the small industries in most cases will
be for short and medium-term credit, the commercial banks would be able to
undertake this business provided the specialized corporations can undertake to give
them a technical appraisal of the scheme to be financed and negotiate guarantee
arrangements to cover 50 per cent of the losses arising out of loans made on
APPENDICES 529
liberalized terms. Regarding cottage industries, the Commission has recommended

that the best way to solve their problem is to set up industrial cooperative societies.
Mortgage Bank
10. Apart from discussing the credit problems in the rural, commercial and
industrial sectors, the Commission has also dealt with a number of other problems in
the credit field. One of the problems considered by it is the question of provision of
credit facilities for housing and construction. In order to expand credit facilities in
this field, it has suggested the establishment of a mortgage bank with an initial capital
of Rs.20 million to be provided by the Central Government out of counterpart funds
if possible. The proposed mortgage bank would provide loans against the security of
land, buildings and other real estate for puposes not already covered by existing
specialized institutions.
Mining
11. Another problem discussed by the Commission relates to the extension of

credit facilities to the mining industries. As the mining sector is of great potential
importance for the economy, the Commission has urged the necessity of providing
adequate credit to this sector. It has suggested that the Pakistan Industrial Finance
Corporation should be invested with primary responsibility for meeting the medium
and long-term needs of the mining industries and also the short-term needs to the
extent that these are not satisfied by the commercial banks.
Inland Water Transport
12. The Commission has also examined the question of financing of inland
transport and has recommended that the reorganised PIFCO may be entrusted with
special responsibility for this sector and foreign exchange credits presently under
negotiation may be channelled through it.
13. The Commission has also considered the question of the State Bank's control
over the various statutory credit agencies set up by the Government; namely the
Agricultural Development Finance Corporation, Agricultural Bank of Pakistan,
National Bank of Pakistan, Pakistan Industrial Finance Corporation, Hous Building
Finance Corporation. Out of these institutions, the National Bank of Pakistan and
the Agricultural Bank of Pakistan, by virtue of their being treated as banking
companies, are subject to the control of the State Bank of Pakistan. There is,
however, no control of the State Bank of Pakistan on the remaining institutions. The
Commission recommends that while in the matter of administrative and non-crdit
activities, the statutory credit agencies can remain subject to Government directions,
they must come under the control of the State Bank in respect of credit policies.
Suitable provisions should, therefore, be made in the statutes of these agencies for
declaring them banking companies for purposes of State Bank control.
Remittance Facilities
14. As extensive remittance facilities at a cheap rate are conducive to the rapid
expansion of banking facilities in the country, the Commission has suggested several
measures to liberalise the existing "Remittance Facilities Scheme" of the State Bank
of Pakistan.
Training Facilities
15. Two Banker's Training Institutes have been set up by the State Bank of
Pakistan at Karachi and Chittagong to give training to the new recruits in commercial
banking. With a view to enlarging the training facilities in these Institutes, the
Commission has suggested the introduction of a Refresher Course for advanced
training to a selected number of bank officers with at least five years service. As
regards training in co-operative credit, the Commission maintains that the training
and education given to co-operative personnel should impart a more practical kind
of knowledge than is taught at present and should also attempt to instil an enthusiasm
for the co-operative movement. To this end, it has recommended that the State Bank
of Pakistan should take the initiative in arranging for training of the staff of co-
operative banks according to a fixed programme whereby the entire existing
supervisory staff is trained properly in the next few years. The Commission has
furhter recommended that in addition to the Co-operative Colleges for training
senior personnel which are now being established, regional training institutes should
be organised for intermediate and subordinate staff and specialised institutions set
up for training the staff in co-operative marketing, farming and cottage industries.
As facilities for co-operative education are required at various levels and in various
spheres of co-operative activity, the Commission suggests that the proposed Rural
and Co-operative Credit Advisory Committee may give special attention to this
problem.
16. Lastly, the commission has emphasised that expansion of credit facilities must
be accompanied by the mobilisation of savings if inflation is to be avoided, and has,
in this regard, made a number of recommendations such as the setting up of
Investment Trusts and expansion of Postal Life Insurance.
APPENDIX-XVII
LIST OF GOVERNORS AND DEPUTY GOVERNORS OF

THE STATE BANK OF PAKISTAN
Governors
Zahid Husain: June, 1948 to July, 1953
Mumtaz Hasan J\pril,1952toJuly,1952
J\bdul Qadir July, 1953toJuly, 1960
Shujaat J\li Hasnie July, 1960 todate
Deputy Governors
Sher Jang Khan December, 1951 to March, 1959
AM. Jalaluddin Mmad January, 1959todate
Muhammad Ghouse Mohiuddin March, 1955 todate
531
APPENDIX-XVIII
CENTRAL BOARD OF DIRECTORS
1. Zahid Husain (Chairman) July, 1948toJuly, 1953
2. Hatim A. Alvi July, 1948 to date
3. KasimDada July, 1948 to date
4. Syed Maratib Ali Shah July, 1948todate
5. Wahiduzzaman July, 1948toMay, 1951

June, 1952 to November, 1952
March, 1956 to date
6. P.C.Gosh October, 1948 to May, 1951
7. Victor A. Turner May,1949toAugust,1949

November,1949to
January, 1950
8. J.B. Shearer August, 1949 to

November, 1949
9. Malik Noor Mohammad Khan November, 1949todate
10. Sultanuddin Ahmed November, 1949to

February 1952
11. Abdul Hamid December, 1949toJune, 1954
532
APPENDICES 533
12. Muhammad Ismail June, 1951 to date
13. J.N. Dutta June, 1951 to date
14. Sher J ang Khan December,1951to

March, 1959
15. Mumtaz Hasan (Chairman) April, 1952 to July, 1952

(Member) July, 1952 to July, 1953
16. Bahauddin Ahmed November,1952to

February,1956
17. Anwar Ali July, 1953toAugust, 1954
18. Abdul Qadir (Chairman) July, 1953toJuly, 1960
19. Muhammad Ali Khan June, 1954 to date
20. M.A. Mozaffar August, 1954 to October, 1956
21. VaqarAhmed October, 1956 to

October, 1957
October, 1957to
December, 1960
22. Nasim Ahmed Khan 5th October, 1957 to

22nd October, 1957
23. A.M. J alaluddin Ahmad January, 1959todate
24. Muhammad Ghouse Mohiuddin March, 1959 to date
25. S.A. Hasnie (Chairman) July, 1960todate
26. M.Ayub December, 1960 to date

APPENDIX-XIX
LOCAL BOARDS: KARACHI, LAHORE AND

DACCA AREAS (1948-60)
Members of the Local Board-Karachi Area
1. Akbar Ali M. Essaji Sept., 1950 to March 1956
2. Fidahussain A. Lotia Sept., 1950toMarch, 1956
3. Shaikh Mohammad Yaqub Sept., 1950toMarch, 1952
4. Mohammad Siddique Dawood Sept., 1950toNov., 1952
5. Abdul J a bar Fazal Ellahie Sept., 1950toMarch, 1952
6. K.A.Marker Sept., 1950toMarch, 1953
7. Choudhari Ghulam Husain Sept., 1950toMarch, 1953
8. Mohammad Ally Rangoonwala Sept., 1950to March, 1953
9. T.Motandas October, 1950toMarch, 1956
10. Mrs. Ashraf Burney July, 1952 to date
11. Haji Wajihuddin March, 1953 todate
12. Ahmed Dawood March, 1953 to date
13. Mohammad Yaqub March, 1953 to Oct., 1953
534
APPENDICES 535
14. Sardar Mohammad Akbar

KhanBugti March, 1953 to Sept., 1953
15. KasimDada March, 1953 to Sept., 1956
16. Akbar Ali Shaikh Essaji

Ferozporwala March, 1956 todate
17. Pir Mohammad Mahfooz Sept., 1956 to date
Members of the Local Board-Lahore Area
1. Mohammad Sharif Muttaqi Sept., 1950toMarch, 1956

Sept., 1956 to date
2. Khawaja Khurshed Ali Sept., 1950 to March, 1956
3. Sheikh ljaz Ahmad Sept., 1950 to Nov., 1952
4. Malik Khuda Buksh Khan Sept., 1950to Nov., 1950
5. Sheikh Zahur Ahmed Sept., 1950 to date
6. Sardar Mohammad
Ghazanfarullah Sept., 1950 to April, 1951
7. D.M.Malik Sept., 1950toMarch, 1953
8. Nawabzada Khurshid Ali Khan Dec., 1950toMarch 1953
9. Mohd. Qamar-uz-Zaman Khan Feb., 1951 to date
10. Fida Mohammad Khan Feb., 1951 to March, 1953
11. Malik Khalilur Rehman August, 1952 to March, 1953
12. Ghulam Hasan Khan

Major(Retd.) Nov., 1952 to March, 1959
13. Khan Sher Afzal Khan March, 1953 to Sept., 1956
14. Qureshi Ahmed Ali Sadiq March, 1953 to Sept., 1956
15. Chaudhry Abdul Karim March, 1953 to Sept., 1956

16. Syed Maratib Ali Shah March, 1953 to Sept., 1956
17. KuliKhan Sept., 1956toDec., 1956
18. Mian Abidul Haque April, 1957 to date
19. Muhammad Bashir Khan July, 1959 to date
Members of the Local Board-Dacca Area
1. Lt. Col. Dr. Muhammad

NurulAmin Nov., 9, 1949to date
2. Mr. BahauddinAhmed Nov. 9, 1949todate
3. Mr. MohiuddinAhmedKhan Feb. 5, 1951 to date
4. Mr. Abu Sadat Muhammad Sayem Feb. 5, 1951 to date
5. Mr. KhanBahadurBazlulKarim Sept.15, 1950todate
6. Mr. QuaziAshraffHosain Sept.15, 1950todate
7. Mr. M. AbdulJalil Sept.15, 1950to date
8. Mr. Abdul Latif Chaudhry April13, 1951 to date
9. Mr. UpendraNathMalik Sept. 29, 1951 to date
10. Mr. Abdur Rahim Jan. 9, 1954todate
11. SyedEhsanKabir Sept. 15, 1956 to date
12. SyedMurtazaAli July 11, 1959 to date
13. Mr. Mizanur Rehman July 30, 1960 to date

APPENDIX-XX
STATE BANK OFFICES/BRANCHES
Opening Dates
1. Karachi. July, 1948
2. Lahore July, 1948
3. Dacca July, 1948
4. Chittagong July, 1948
5. Peshawar April, 1949
6. Quetta September, 1952
7. Khulna March, 1954
8. Bogra March, 1954
9. Lyallpur (Faisalabad) December, 1956
10. Rawalpindi November, 1959
537
APPENDIX-XXI
LIST OF SCHEDULED BANKS IN PAKISTAN
(as on June 30, 1960)
1. Agricultural Bank of Pakistan
2. American Express Co. Inc.
4. Bank of China
6. Bank of Baroda Ltd.
8. Bank of Tokyo Ltd.
10. Chartered Bank.
12. Eastern Mercantile Bank Ltd.
13. Habib Bank Ltd.
538
APPENDICES 539
15. Mercantile Bank Ltd.
16. Muslim Commercial Bank Ltd.
17. National Bank of Pakistan
18. National Commercial Bank Ltd.
19. Netherlands Trading Society
20. National And Grindlays Bank Ltd.
23. Punjab Provincial Co-operative Bank Ltd.
24. State Bank of India
25. Southern Bank Ltd.
27. United Bank Ltd.
28. United Bank of India Ltd.

---------
541
Select Bibliography
Material for the compilation of the History of the State Bank of Pakistan has been
gathered from variety of primary and secondary sources. It had to be sorted out and sifted from
legislative enactments, official notifications, a mass of departmental correspondence, notings
scattered in the files of the Bank and the proceedings of the meetings of the Central Board of
Directors. Speeches, statements and articles written by the Governors formed an additional
source material. Letters addressed to the Minister of Finance were a valuable asset in addition
to the documents like the annual budgets, reports of the Planning Commission and the Bank's
own publications. Through his intimate contacts with the Governors, the Deputy Governors
and a number of eminent personalities in the field of banking, the author had access to vital
information which have not been recorded or published.
I. Books
Ahmad Iqbal (Colonel): Strategic Importance of Baluchistan, Royal Book Company,
1992.
Andrus J.R. and Mohammad Aziz Ali F: Trade, Finance and Development in Pakistan,
London Oxford University Press, 1966.
Michel Alloys Arthur: The Indus Rivers; A Study of the Effects on Pakistan, Yale
University New Haven, 1967.
Memon, V.P: Transfer of Power in India, Calcutta, Orient Longmans, 1959.
Mohamad Ali Chaudhri: The Emergence of Pakistan, Columbia University Press, 1967.
Parakash Tandon: Banking Century, Penguin Book (India) Ltd., New Delhi, 1989.
Sayers, R.S: Banking in the British Commonwealth, Exford Claredon Press, 1952.
Sayers, R.S: Modern Banking, Oxford Claredon Press, 7th Ed., 1967.
Simha, S.L: History of the Reserve Bank of India 1935-1951, Reserve Bank of India
Publication, 1970.
Vakil, C.N: Economic Consequences of Divided India, Vora & Co., Bombay, 1950.
II. Other Publications

Agricultural Credit in Pakistan, State Bank of Pakistan, 1964.
SELECT BIBLIOGRAPHY
542
Annual Reports of the State Bank of Pakistan, 1949-60.
Annual Speeches of the Governors, State Bank of Pakistan, 1949-60.
Balance of Payments 1948-1959, State Bank of Pakistan.
Banking Control Department- Functions and Operations, State Bank of Pakistan, 1964.
Banking Statistics of Pakistan 1948-57, State Bank of Pakistan.
Budgets of the Central Government of Pakistan 1947-48 (August 15 to March 31) and
1948-49, Ministry of Finance, Government of Pakistan.
Central Banking Corporations, Ministry of Finance, Government of Pakistan, 1966.
Central Banking in Pakistan, Zahid Husain, The Federal Economic Review, 1954.
Chief Accountants Department - An Appraisal, State Bank of Pakistan, 1964.
Credit Enquiry Commission Report, Government of Pakistan, 1959.
Economic Appraisal Committee, Ministry of Economic Affairs, Government of Pakistan,

1952.
Exchange Control in Pakistan (1948-1962), Said Ahmad, State Bank of Pakistan, 1964.
Marketing and Financing of Cotton in Pakistan: State Bank of Pakistan, 1954.
Report of the Royal Commission on Banking and Finance, 1964.
Report on Agricultural Credit in Pakistan, Mohammad Chafie-El Labban, State Bank of

Pakistan, 1954.
Report on Currency and Finance 1954-55, State Bank of Pakistan.
Report on Currency and Finance 1960-61, State Bank of Pakistan.
State Bank Bulletins, 1951-60.
Ten Years of Banking in Pakistan, State Bank of Pakistan, 1959.
The Co-operative Inquiry Committee Report, The Government of West Pakistan, 1955.
The First Five Year Plan, Government of Pakistan, 1957.
Twelve Years of Banking in Pakistan, State Bank of Pakistan, 1960.
Twenty Five Years of the State Bank of Pakistan, State Bank of Pakistan, 1973.
543
Index
Abdul Hamid, (Sir), 66, 67 Ali Kasuri, (Moulvi) Mohammad, 70

Abdul Jalil, 72 Allah Bux, Sheikh, 36
Abdul Majid, Mulla, 186 Altaf Gauhar, 36
Abdul Qadir, 185, 222, 340 Alvi, Hatim A., 43, 64, 66, 67, 340, 353,
Ad hoc Treasury Bills, 315, 318, 319 355
Advances, Distribution of - Regional, by Ambegaokar, K.G., 12, 109
purpose, 174-176 Amery Tribunal, 22
Advances, Distribution of - Province Aminuddin, Mohammad, 73
wise, 177 Anglo-Afghan Trade Convention of 1923,
Agricultural Bank Act, 1957, 223 249, 250
Agricultural Bank of Pakistan, 190, 223- Anglo-Afghan Treaty of 1929, 249, 250
224, 227 Anglo-Pakistan Financial Agreement, 240-
Agricultural Banks and A.D.F.C., 242, 284
Relation between, 213-214 Anti-Inflationary Measures Committee,
Agricultural Banks for Punjab, 209 321
Agricultural Banks in Sind, Organising, Anwar Ali, 64
208 Arbitral Tribunal, 12, 22, 23
Agricultural Cooperative Bank of Egypt, Ashraf Hossain, 72
217, 222 Asiatic Commercial Bank, 142
Agricultural Credit, 193-232 Aslam, K.M., 69
Agricultural Credit Agencies, Deputation Assets of Non-Residents in Pakistan,
of Officers, 227 Liquid, 272
Agricultural Credit, Interest Rate - Attlee, Clement, 1
Concessional, 231 Australasia Bank, 116, 122, 127
Agricultural Credit, Interest Rate Policy, Balance of Payments of Pakistan, 321
227 Bank Deposits, 168-171
Agricultural Credit - Objectives, 215 Bank Deposits and Advances,
Agricultural Credit, Simplicity in Development of, 168-178
Operations, 214 Bank-i-Millat-e-Pakistan, 40
Agricultural Credit State Bank Bank Milli Iran-Governor, 51
Legislation, 220-222 Bank Misr-Governor, 50
Agricultural Development Bank of Bank Notes, Designing of, 81
Pakistan, 220, 227 Bank of Canada, 303
Agricultural Development Finance Bank of Canada Act, 303
Corporation, 186, 190, 203-204, 213, Bank of Canada - Governor, 49
216, 222, 227 Bank of England, 26, 33, 35, 52, 53, 84,
Agricultural Mortgage Banks, 212 102, 106, 241, 301
Ahmad, (Justice) Qadeeruddin, 45 Bank of England Act of 1946, 301
Ahmad, Sultanuddin, 66 Bank of England-Governor, 48
Ahmed, Bahauddin, 66, 67 Bank of France, 302
Ahmed, Mohiuddin, 67 Bank of Pakistan, (proposed name of the
Ahmed, Shaikh, 81 State Bank of Pakistan), 40
Aid Imports, 259-260 Bank of Siam-Governor, 50
Aijaz Ahmad, Sheikh, 65, 66, 67 Bank Rate, 171, 325-329, 358
544 INDEX
Bankers' Training Institutes, 190 Central Bank of India, 10, 46, 73, 137
Bankers-Trained, vacuum of, 72-76 Central Bank of Pakistan, 39
Banking Agreement, 1949, 123 Central Bank of Turkish Republic -
Banking Agreement, Agreed Decisions, Governor, 50
124-125 Central Banking Enquiry Committee, 139
Banking Agreement, Implementation of, Central Banking Enquiry Committee
123 Report, 1930, 193
Banking Companies (Control) Act, 1948, .Central Banking Law for Pakistan, 42
110, 126, 141, 144, 146, 152, 201, 308, Central Board, State Bank of Pakistan see
309 State Bank of Pakistan - Central
Banking Companies Inspection Board of Directors
Ordinance, 1946, 19 Central Claims Organisation of Pakistan
Banking Companies Ordinance, 1947, 125 and India, 101
Banking Companies Ordinance, 1962, 147 Central Cooperative Bank, 198
Banking Companies (Restriction of Ceylon-Board of Commissioners of
Branches) Act, 1946, 19, 127, 308 Currency Board, 49
Banking Control Commission (of France), Chafai-el-Labban, Muhammad, 217, 222
302 Chaudhry, Abdul Matin, 36
Banking Diploma Examination, 74 Chetty, Shanmukhan, 24
Banking Legislation, 125-128 Chief Controller of Imports and Exports,
Banks Liquidation Work, 146-147 257, 263, 295
Barter Trade, 252-253 Coins - Rupee, 80
Bashir, Khan Sahib Mohammad, 36 Coins of Small Denominations, 80-81
Batheya, H.R., 36 Comilla Banking Corporation, 137
Bazlul Karim (Fazlul Karim), 72 Comilla Union Bank, 137
Bearer Bonds 1958 - 1lh per cent income Commercial Banking, Rehabilitation of,
tax free, 31 115-147
Bengal Act of 1940, 196 Commercial Relations with Afghanistan,
Bhalwal Central Cooperative Bank, 219 249-251
Bihar Relief Fund, 128 Commonwealth Bank of Australia, 302
Black Market, Emergence of, 238-240 Commonwealth Bank of Australia -
Board of Economic Enquiry Punjab, 208 Treasurer, 49
Bombay Act of 1925, 196 Commonwealth Finance Ministers,
Bradbury Wilkinson & Co. United Conference of the, 242
Kingdom, 84, 103 Companies Act, 1913, 144, 147, 220
British Government Plan of Congress of the United States, 300
Independence, 1 Controller of Capital Issues, 288
Bruce, (Sir) Arthur, 26 Cooperative and Marketing Advisor, 186,
Brussels Conference, 300 231
Cooperative Banks - Expert Committee,
Bucha, Malik Khuda Baksh, 186 217-220
Burma-Board of Commissioners of Cooperative Banks, Inspection of, 216-217
Currency Board, 50 Cooperative Banks Remittance
Cash Balances (of Pakistan with Reserve Facilities, 232
Bank of India), 24 Cooperative Credit, 197
Cash Balances (of Pakistan with Reserve Cooperative Land Mortgage Banks, 209
Bank of India), Transfer of, 27 Cooperative Movement, 195-203
Central Bank and the Government, 299- Cooperative Movement Before Partition
335 195-199 •
INDEX 545
Cooperative Movement in East Pakistan, (Memorandum), 330

Revitalisation of, 224-226 Development Planning, 329-333
Cooperative Movement Post Dinshaw, Hoshang, 36
Independence Development, 199-203
Cooperative Personnel, Training of, 219 East Pakistan Provincial Cooperative
Cooperative Planning Committee, Report Bank Ltd., 198, 230
of 1946, 193 Eastern Mercantile Bank, Creation of, 177
Cooperative Societies Act, 1904, 196 Economic Appraisal Committee, 204-205
Cooperative Societies Act of 1912, 196, Egypt-Finance Minister, 50
202 Emergency Provisions (Continuance)
Cooperatives and Specialised Credit Ordinance, 1946, 234
Institutions, Loans of, 226-227 Empire Currencies, 234
Cotton Association, 155 Enquiry Committee, 308
Cotton Ordinance, 155 Essaji, Akbarali M., 65, 67
Cotton Trade, 153-158 Exchange Banks, 139, 174
Credit Agencies, Control over, 190 Exchange Control and Management, 233-
Credit Enquiry Commission, 176, 185-189, 297
228-231
Credit Inadequacies, Problem of, 158-160 Exchange Control Committee, 278
Credit Institutions - Specialised, Need Exchange Control Regulations, 273
for, 222-223 Expert Committee, 1959, 194, 341
Credit (Rural and Cooperative a Expert Committee of the Partition
quarterly periodical), 226 Council, 3, 12, 17, 21, 25, 26, 42
Credit System, Evolution of, 149-167 Export Bonus Scheme, 245, 265-269, 270,
Currency against Ad hoes - Expansion 275, 277
of, 26 Export Earnings, 269-270
Currency and Coinage, 18 Export Incentive Scheme, 263-264, 266
Custodian of Evacuee Property, 120 Export Price Check, 263
Export Promotion, 263-269
Dada, Kasim Hussain Kassam, 43, 64, 66, Export Promotion Schemes, 266
340, 344, 356 Exports, 262-270
Das, Jogesh, 43 External Balance, 333-335
Dawood, Mohammad Siddique, 65, 67
Dawood, (Sir) Adamjee Haji, 36 Fatima Jinnah, Miss, 51
Fazul Ellahi, Abdul Jabbar, 71
Defence of India Act, 1939, 234 Federal Deposit Insurance Corporation of
Defence of India Act, Financial Provisions U.S.A., 146
of, 234 Federal Reserve Bank for the United
Defence of India Ruies, 233 States, 52
Deferred Payments Scheme, 170 Federal Reserve Bank of Dallas, 157
Devaluation, 107-112 Finance in N.W.F.P., Sources of, 209-210
Devaluation of India Rupee, 107, 112, 238 Financial Agreement, 105
Devaluation of Pakistan Rupee, 269 Financing Jute and Cotton Trade, 150-158
Devaluation of Pound Sterling, 107, 109, Five Year Plan, First, 162, 323, 325, 330
112, 132, 238, 246, 247, 289 Five Year Plan, First - Evaluation
Development Loan Fund of U.S.A., 165 Report, 330
Development of Industries (Federal Food and Agricultural Commission, 1960,
Control) Act, 1949, 283 194
Development Performance for 1957-58, Foreign Advisors, Appointment of, 217
546 INDEX
Foreign Exchange Accounts, 274 Habib Bank, 44, 45, 77, 118, 127, 136,
Foreign Exchange-Allowance for 155, 178
Medical Treatment Abroad, 246 Habib, (Seth) Mohammad Ali, 36, 131
Foreign Exchange Banks, 156 Habib-ur-Rehman, 70
Foreign Exchange Control Act, 236 Haroon, Yusuf Abdullah, 70
Foreign Exchange, Declaration and Hasan, Mohammad (Prof.), 36
Surrender of Illegal Holdings House Building Finance Corporation
Martial Law Regulation No.45, 270- (HBFC), 166-167, 358
271, 272 House Building Finance Corporation Act,
Foreign Exchange Education 1952, 166
Allowance, 245-246
Huda, M.N., 186
Foreign Exchange Expenditure,
Husain, S.A., 186
Regulation and Control of, 274-281
Hussain, Abdul Qadir Mohammad, 70
Foreign Exchange Facilities for Business
Hussain, Moazzamuddin, 206
Travel, 244-245
Hyderabad State Bank see State Bank of
Foreign Exchange for Pilgrimage to Saudi
Arabia, 246-248 Hyderabad
Foreign Exchange Grant of
Allowances, 242-246 Ideal Bank Ltd., 142
Foreign Exchange, Holdings of, 270-274 IMP - Procedure, 255-256
Foreign Exchange Illegal Holdings - Imperial Bank of India, 21, 30, 34, 46, 47,
Examination of Declaration, 272-273 60, 73, 75, 89, 99, 104, 117, 119, 122,
Foreign Exchange, Management of, 20 127, 129, 137, 140, 151, 159
Foreign Exchange Regulation Act, 1947, Imperial Bank of India, Special Position
234, 238, 249, 270, 287, 290, 292, 293, of, 129-130
294, 295, 296, 297, 307, 309 Import of Capital Goods and Machinery
Foreign Exchange Regulation Bill, 236 under Deferred Payments
Foreign Exchange Regulations, 249 Arrangements, 260
Foreign Exchange (Surrender and Import Policy, Streamlining of, 257-259
Declaration) Martial Law- Importers and Exporters Order, 1952, 264
Regulation, 1958, 270 Importers, Registration of, 256-257
Foreign Exchange - Travel Allowance, Imports, 254-262
242-244 Imports Against Foreign Assets, 273-274
Foreign Exchange Tribunal, 293, 296 Imports - Arrangements with India, 260
Foreign Investment, 281-289 Imports - Conditions Prevailing After
Frontier Cooperative Bank Ltd., 198, 210- Partition, 254-255
211, 227, 230 Imports from India - Limited Payment
Agreement, 261-262
Income Tax Act, 1922, 272
Gandhi, Mahatama Mohandas India - Custodian of Evacuee Property,
Karamchand, 30 101
Ghosh, P.C., 66 India Coins, 81
Ghulam Husain, Choudhari, 71 India Notes & Coins, Retirement of, 88-92
Ghulam Mohammad, 12, 24, 34, 48, 130, India Rupees/Notes, 106, 110, 112
305 India Securities, 91, 107, 112
Giigit Cooperative Bank, 227 India - Security Printing Press, Nasik,
Gilt-edged Securities, 23 102
Gold, Shipment of, 92-93 Indian Congress, 8, 11,
Guizar Ali, Sheikh, 341 Indian Independence Act, 1
INDEX 547
Indian Rupee Account, 262 Kania, (Sir) Harilal J., 12

Indian Scheduled Banks, 138, 143 Karachi Improvement Trust, 345
Indo-Pakistan Agreement on Movable Karachi Improvement Trust, Drigh Town
Property of Evacuees, 123-125 Expansion Scheme, 345
Indo-Pakistan Agreements on Banking, Karachi Municipal Corporation, 46, 55,
119-123 337
Indo-Pakistan Payments Agreement, 238 Kazmi, Abbas, 73
Indo-Pakistan - Points of Agreement, 12- Kazmi, S.M.O., 45
16 Kehar, G.S., 186
Indo-Pakistan Relations, 9-14 Kenan, J.I., 45
Indo-Pakistan Trade Agreement, 111 Kershaw, Raymond, 33
Indo-Pakistan Trade and Payments Khaikhalashi Banks, 206
Agreement, 262 Khaliquzzaman, Chowdhary, 343
Industrial Credit Bank, Genesis of, 162- Khan, Agha Mohammad, 65
164 Khan, Fida Mohammad, 69
Industrial Credit Institutions, Khan, Khan Mohammad Yusuf, 69
Establishment of, 161-166 Khan, Liaquat Ali, 27, 235, 305
Industrial Development Bank, 189 Khan, Malik Khuda Bakhsh, 71
Inspection (of Ba;;ks) Enlarged, Scope of, Khan, Naimuddin, 65
143 Khan, Nazir Ahmed, 26
Inspection (of Banks), Law Relating to, Khan, Sardar Mohammad Gazanfarullah,
144-145 72
Inspection (of Banks), Standardisation of, Khan, Sher Jang, 42, 218, 340
146 Khursheed Ali, Khawaja, 65, 66, 67
Institute of Bankers in Pakistan, 76 Korean War/Boom, 155, 169, 179, 263,
Institute of Bankers in Pakistan, Council 289, 293, 321, 333
of, 76
Inter-Dominion Banking Agreement, 142 Lahore Mint, 78
Interest Rate on Government Borrowings, Land Mortgage Banks, 198, 206-208, 211-
318-320 213
International Bank for Reconstruction and League of Nations, 300
Development (World Bank), 12, 15, Lloyds Bank, 44, 45, 73, 76
25, 76, 165, 316 Loans, Floatation of, 30-31
International Monetary Fund (IMF), 12, Lotia, Fidahussain A., 65, 67
15, 25, 38, 87, 105, 109, 111, 235, 236,
244 Maclagan Committee Report on
International Monetary Fund Quota, 21, Cooperation, 1914, 193
25 MacMillan Commission, 300
Iranian Coin, 79 Mahatama Gandhi see Ghandhi,
Iraq - Finance Minister, 50 Mahatama
Iskandar Mirza, (Major General), 343 Mahbub Alam, 65, 66
Ismail, 12, 355 Mahmood, M., 45
Ismail, Khan Bahadur Mohammad, 69 Mahmood, Mohammad, 73
Ispahani, Mirza Ahmed, 36, 131 Mahmood, Naziruddin, 73
Mahmoud, Riad, 338
Malik, A.M., 36
Jinnah, Muhammad Ali see Quaid-i-Azam Malik, D.M., 72
Jute Board, 153 Malik, Noor Mohammad Khan, 65, 66
Jute Trade, 150-153 Malik, O.M., 45
548 INDEX
Marker, K.A., 71 National Bank of Pakistan (proposed

Marketing and Financing of Cotton, 157 name of the State Bank of Pakistan),
Martial Law Regime, 171, 270, 365 39
Martial Law Regulation No.45 see National Credit Council of France, 302
Foreign Exchange, Declaration and National Economic Council, 317, 325
Surrender of Illegal Holdings of National Planning Commission, 186
Martial Law Regulation No.58 see
Nawab Ali, 36
(Foreign Exchange Surrender and Nicholson's Report, 1895, 193
Declaration) Regulation, 1958- Nishtar, Abdur Rub, 11
Martial Law North Nazimabad Development Scheme,
Masiuddin, S.M., 73
345
Maula Bux, (Haji), 70 Nural Ameen, (Major) Mohammad, 66,
Mayo School of Ans and Crafts, Lahore,
67
81
Nurul Huda, 70
Messrs M.R.V. (Pakistan), 338
Midland Bank, 76 Overseas Chamber of Commerce,
Mining and Inland Water Transport, 189-
Karachi, 138
190
Mitra, Khagendra Narayan, 70
Mohammad, Ali Chaudhri, 3, 11, 23, 24 Pak-India Relations, 9-32
Mohammad, Azizali F., 157, 186 Pakistan Agricultural Committee, 1950,
Mohajir, A., 73 194
Monetary Management, 178-185 Pakistan-Accounts of Government
Money Changers, Authorised, 248 Wrong debits by Reserve Bank of
Montague-Chelmsford Reforms in 1919, India, 99
196 Pakistan Assets, Disputes over release of,
Moore, Neal T., 146 93-97
Mortgage Bank, 189 Pakistan Banking Companies (Inspection)
Mountbatten, Lord, 11, 117 (Amendment Act, 1952), 145
Moveable Evacuee Property Agreement, Pakistan Banking System, 139
98 Pakistan Central Claims Organisation, 101
Muhajir, M.A., 132, 186 Pakistan Coins, 78-81
Mumtaz Hasan, 35, 36, 39, 41, 109 Pakistan Currency and Coinage, 18
Mumtaz Mirza, 186 Pakistan's Financial Predicament, 27-30
Munir, (Justice) Mohammad, 45 Pakistan Fund, 128
Muslim Bank of Delhi, 142 Pakistan Government Labour Policy of
Muslim Commercial Bank, 75, 77, 128, 1959, 360
136, 155 Pakistan Government Pay and Service
Muslim League, 11, 128 Commission Report, 356
Muttaqi, Mohammad Sharif, 65, 66, 67, 69 Pakistan Government Pay Enquiry
Commission Report, 356
National Bank of Egypt - Governor, 50 Pakistan Governemnt Securities, 362
National Bank of Pakistan, 68, 75, 77, Pakistan - Historical Background, 1-32
120, 130-137, 140, 151, 152, 154, 155, Pakistan Industrial Credit and Investment
156, 178, 186, 188, 190, 210, 224, 261 Corporation (PICIC), 164-166
National Bank of Pakistan, Central Board Pakistan Industrial Development
of Directors, 133 Corporation (PIDC), 162
National Bank of Pakistan Ordinance, Pakistan Industrial Finance Corporation
1949, 132, 135 (PIFC), 161, 189, 190
INDEX 549
Pakistan Inscribed Notes, 88 Management of, 237

Pakistan Inscribed Notes, Arrangement Punjab National Bank, 10
for Printing of, 102 Punjab Provincial Cooperative Bank, 198,
Pakistan Mint, 78 210, 219
Pakistan (Monetary System and Reserve
Bank) Order, 1947, 17, 18, 24, 25, 26, Qamar-uz-Zaman, 68
42, 45, 56, 88, 97, 237 Qazilbash, Mumtaz Hasan, 70
Pakistan Monetary System and Reserve Quaid-i-Azam (Mohammad Ali Jinnah),
Bank (Amendment) Order, 1948, 31 4,5, 11,23,47,48,51,55,58, 79,128
Pakistan Notes, 18 Quota in I.M.F. and Membership of
Pakistan (Prevention & Default & I.B.R.D., 25
Evasion of Liabilities) Ordinance, Qureshi, Anwar Iqbal, 35
1947, 125 Qureshi, Ishtiaq Husain, 12
Pakistan Provincial Securities, 107
Pakistan Rupee, 79, 106, 111 Raisman, (Sir) Jeremy, 45
Pakistan Rupee Coins, 80, 91 Rajgopalcharia, 11
Pakistan Rupee, non-devaluation of, 113 Rangacharia, M.V., 12
Pakistan Security Printing Corporation, Rangoonwala, Mohammad Ally, 71
89, 103 Raziuddin, Syed, 73
Pakistani Scheduled Banks, 138 Regional Cooperative Bank Ltd., 198
Partition - Administrative Consequences Registrar Cooperative Societies, Punjab,
of, 11 219
Partition Agreement, 98 Registrar of Cooperative Societies, 217,
Partition Arrangements, 11-12, 97 231
Partition Committee, 117 Registration of (Importers and Exporters)
Partition Council, 11, 13, 21, 22-24, 25, Order, 1952, 264
26, 28, 29 Regulations concerning foreign
Partition Plan, 2, 7, 10, 118 companies, 288-289
Patel, H.M., 11, 24 Remittance Facilities Scheme, 19, 232
Patel, Sardar Vallabhai, 11, 23, 24, 27 Remittances between India and Pakistan,
Payments Agreement, 105-107, 108, 113 19
People's Finance Corporation, 188 Repatriation of India Capital,
Permanent Settlement of Lord Cornwalis, Arrangement for, 287-288
6 Repatriation of invested capital in
Planning Board, 322, 333 Pakistan, 281-284
Planning Commission, 330 Repatriation of remitted funds, 286-287
Postal Life Insurance Policies, 363, 364 Repatriation of U.K. Capital, Settlement
Prasad, Rajendra, 11 regarding, 284
Premier Sugar Mill, 210 Reserve Bank of India, 1, 3, 12, 13, 14,
Price Support Scheme, 157, 334 ~,n,~,~,w,n,~,~,~,~,
Promotors' Company, 131 33, 34, 35, 37, 38, 39 41, 42, 44, 45, 49,
Provincial Cooperative Bank in Bombay, ~'~'~'~,n,n,~,~,M,~,
198 92, 93, 94, 95, 96, 97, 98, 99, 100, 101,
Provincial Cooperative Bank Ltd., 197, 102, 104, 105, 112, 113, 116, 120, 123,
198, 225, 225 127, 129, 144, 146, 193, 234, 236, 237,
Provincial Cooperative Banks in Pakistan, 242, 262, 306, 320, 337, 338, 340, 341,
19 349, 350, 355, 356, 358
Provincial Partition Committees, 11 Reserve Bank of India Act, 1934, 14, 17,
Public Debt and Exchange Control, the 19, 21, 26, 28, 37, 39, 193, 194, 304
550 INDEX
Reserve Bank of India, Agricultural Rowland, (Sir) Archibald, 24

Credit Department, 218 Royal Commission on Agriculture, Report
-Agricultural Department, 193 of the 1929, 193
-As banker to Government of Pakistan, Rupee Coins and Notes, Payment by
18 Reserve Bank of India, 97
-As Controller of Foreign Exchange, 235 Rural and Cooperative Advisory
-Assets and Reserve Fund, Division of Committee, 231
Surplus, 99 Rural Credit Fund, 231-232
-Assets, Depreciation in, 112-114 Rural Credit, Need for Special
-Balances of Optees (to Pakistan), Legislation, 213
Transfer of, 100-102 Rural Finance in Punjab, 208
-Banking Department, 17, 21, 25, 59,
112, 114 Said Ahmed, 42, 92, 93
-Central Board of Directors, 26, 29, 304 Sanjiva Row, 12
- Central Board of Directors Saudi Arabia Monetary Agency, 247
Nomination of Pakistani Directors, 26 Sayem, Abu Sadat Mohammad, 67
-Disputes over release of, 93-97 Scheduled Bank Advances, Classification
-Division of Profits, 20-21, 97 of, 171-178
-Exchange Control Manual, 239 Scheme relating to Regulation and
-Governor, 49 Control of Foreign Exchange
-In Pakistan, Status of, 21-22 Expenditure on Imports and other
-Interest on Securities, Transfer of, 98 Payments, 276
-Issue Department, 15, 21, 25, 33, 59, Second World War, 22, 80, 114, 197, 233,
89, 112 240, 253
- Issue Department - Division of Assets Seraj-ul-Islam, Khan Bahadur, 70
of, 20 Shah, (Sir) Syed Maratab Ali, 26, 29, 43,
-Local Boards, 305 64, 66, 340
-Outstanding Issues with Pakistan, 87- Shah, Syed Mehar Ali, 70
114 Shah, Syed Mohammad, 70
- Relations with Scheduled Banks (of Shahudul Haq, 70
Pakistan), 19 Shearer, J.B., 66
-Reserve Fund, 15, 20 Siddiqi, N.D., 70
-Role in Pakistan - Termination of, 31- Siddiqi, Rafiuddin, 131
32 Sind Provincial Cooperative Banks, 198,
-Share (of Pakistan) in the profits of the, 230
97-98 Sind Zamindari Banks, 207-208
-Shares and Securities, Restriction on Singha Committee, 39, 41
transfer of, 98-99 Singha, Dewan Bahadur S.P., 36
Reserve Bank of New Zealand, 49 Sobhan, S.A., 186
Reserve Bank of New Zealand Sohail, Mohammad, 66
Governor, 49 Special Police Establishment, 256, 290,
Reserve Bank of Pakistan (proposed name 297
of the State Bank of Pakistan), 36, 39, Special Pilgrim Notes, 248
78 Spens, (Sir) Patrick, 12
Rice, Morgan H., 157 Standstill Agreement, 7
Ritchie, J.A., 340, 341 State Bank of Hyderabad, 46, 73, 352
Round Sum Remittances Facility Scheme, State Bank of India, 261
258 State Bank of Pakistan (proposed name),
Round Table Conference, 4 39
INDEX 551
State Bank of Pakistan Act, 1956, 220, - Exchange Control Department

232, 248, 315, 316 Central Exchange Accounts Unit, 178,
State Bank of Pakistan, Agricultural 281
Credit Department, 195, 220 - Exchange Control Department
-Agricultural Department, 216 Enforcement Section, 289-297
-Allowances and Welfare Benefits, 366- - Exchange Control Office, Chittagong,
367 60
-Annual General Meeting, 158, 320, 321, -Executive Committee, 317, 324, 339,
330 340, 362, 364
-Appointment of children of the sub- -Executive Committee, Constitution of,
ordinate staff, 354 64
-Appointment of Staff, 44-46 - Expatriation Allowance, 366
-As an Employer, 347-368 -Foreign Exchange Department, 165
-As Banker to Central and Provincial Formation of, 33-58
Governments, 306, 314-318 -General Service Conditions, 355-357
-Bank Employees Associations, 367-368 -Gratuity Fund, 365-366
-Bank House for the Governor, 344 - Guarantee Fund, 364-365
-Bank Officers Training Scheme, 72, 131 -Historical Background, 1-32
-Bank's correspondence to the -House Building Advance, 357-358
Government, Channelisation of, 312- -Inaugural Ceremony - Quaid-i-Azam's
314 speech, 56-58
-Banking Control Department, 126, 131, - Inaugural Ceremony - Zahid Husain's
134, 141, 195, 290, 306 speech, 51-56
-Bonus, 366 -Inauguration Ceremony, 47-58
-Branch Licensing Policy, 137, 140 -Involvement with the Apex Banks, 230-
-Branch Offices, 60-62 231 .
-Branches, opening of, 136-137 - Issue Department, 60
-Building Projects, 337-346 -Issue of Share Capital, 43-44
-Central Board- Constitution of, 43-44 -Karachi Office, 61
-Central Board of Directors, 37, 39, 40, -Lahore Office, 61-62
~,~,C,M,~,M,~,~'~'~' - Lahore Office - Local Board, 69
~,w,m,~6,m,~,~,~, -Leave Fare Concession, 366
343, 344, 350, 352, 353, 356, 358, 359, -Legislative Spadework, 34-42
365 -Local Boards, 37-38, 47, 67, 68
- Central Directorate, 62-63 - Local Boards, Constitution of, 65-72
-Chief Accountant's Department, 62 - Local Boards Nomination of
-Classification of Staff, 349-352 Members, 68-72
-Clerical Staff Associations, 355, 356 -Medical and other Facilities, 358-361
- Commences Business, 59-85
-Committee of Principal Officers, 357 State Bank of Pakistan Order, 1948, 43,
-Dacca Office, 342 52, M, 68, 69, 71, 125, 132, 152, 195,
- Department of Banking Operation, 62, 201, 221, 304, 306, 308, 309
126 State Bank of Pakistan, (Payment of
-Departmental Examination, 76 Gratuity to Employees) Regulations,
-Departmental Promotions, 77-78 365
-Employer-Employee Relations, 348 -Premises in East Pakistan, 342-344
-Exchange Control, 310 -Promotion Policy, 354
-Exchange Control Department, 62, 240, - Provident Fund, 362
244, 261, 264, 272, 291, 343 -Recruitment of Officers, 352-353
552 INDEX
-Recruitment Policy for Clerks, 354 United Bank Ltd., 136

-Research Department, 186, 195, 307 United Kingdom, Chancellor of the
Residential Accommodation for all Exchequer of, 48
cadres at Chittagong and Khulna, 346 United Nations, Technical Assistance
- Residential Accommodation for cadres Programme of, 146
at Dacca, 345-346 United States Mutual Security Pact of
- Residential Accommodation for all 1954, 259
cadres at Karachi, 345 Unsound Banks, Weeding out of, 141-143
- Residential Accommodation for cadres Uquaili, Nabi Bukhsh Mohammad, 45, 73,
at Lahore, 346 131, 165
- Residential Accommodation for all U.S. Federal Reserve Act, 300
cadres at Peshawar/N.W.F.P., 346 U.S. Federal Reserve System, 300, 301
- Rules and Regulations Framed and U.S. Surplus Agricultural Commodities
Agreements concluded, 47 (Public Law 480), 260
- Scheme of Exchange Accounts, 281 U.S. Technical Assistance Programme,
- Search for the premises, 46 157
- Secretary's Department, 62
-Special Division for formation, 42-43,
47 Valibhai, (Seth) Fakhruddin, 70
- Sub-ordinate Staff Associations, 368 Vaqar Ahmed, 324, 356
-Training for Supervisory Posts, 77 Victoria Museum Building, 46, 337
-Training Scheme, 353 Vocke, Wilhelm, 266, 275
-Welfare and Medical Section, 360-361 Vocke's Scheme see Export Bonus
Steering Committee, 11, 17, 26 Scheme
Sterling Area, 242
Sterling Balances, 21, 24, 114, 240
Sterling Balances Agreement, 114, 240 Wahdat Colony of the Lahore
Sterling Balances, Supplementary Report Improvement Trust, 346
on, 16-18 Wahid-uz-Zaman, 43, 64, 66
Sterling Securities, 38, 91 Wajid Ali, S., 131
Ways & Means Advances, 28, 29, 315, 319
Takt-Bai Sugar Mill, 210 West Pakistan Cooperative Inquiry
Technical Advisory Committees of Committee, 1950, 194
Cooperative Banks, Boards of, 227 Westminster Bank, 76
Thomas de La Rue Co. Ltd. London, 81, World Bank see International Bank for
82, 103 Reconstruction and Development
Trade Agreement with India, 261
Trade Agreement with Iran, Border, 292
Trade Agreements - specialised, 249-253 Yaqub, Sheikh Mohammad, 65, 67
Trade of Afghanistan, In-Transit, 249-251 Yusuf, Khawaja Mohammad, 65, 66, 67
Trade Unions Act, 1926, 368
Trade with Iran, 251-252 Zahid Husain, 12, 31, 42, 47, 51, 72, 117,
Trevon, (Sir) Ceicil, 93 133, 136, 158, 194, 204, 344, 348
Turner, St. John Victor, 26, 33, 35, 36, 38, Zahoor Ahmad, 70, 71
39, 45, 65 Zahur Ahmed, Sh. Mian, 131
---------~---------------~-----~

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HISTORY OF THE

STATE BANK OF PAKISTAN

FIRST PUBLISH ED AUGUST I992

Published by the State Bank of Pakistan

STATE BANK OF PAKISTA N

I would be failing in my duty if I do not pay tribute to Mr. S.

State Bank of Pakistan,

In the absence of the Editorial Committee I had to look to the

I am particularly grateful to Mr. Said Ahmad, who was

In the initial stages Mr. Riaz Iqbal assisted me in the collection

Islam Pirzadeh who was extremely helpful in the execution of the

State Bank of Pakistan, S. AijazHusain

Select Bibliography 541

The Independence Act which had embodied the terms of the

--- ----- ----------------------------------------- -------

the monetary and fiscal systems and, of course, defence to mention

The committees, the councils and the tribunals composed gf

On the eve of Partition the London Economist in its 'Foreign

Pakistan's political sovereignty, though universally recognised,

With the monetary resources and instruments of control still

most undescribable conditions of destitution and despair. Purely in

The colonial pattern of trade inherited from the British was

Karachi was no more than a fishermen's town. Like the interior

visible and the judiciary was completely bereft of their

Conditions in East Bengal, which was the most populous

Like West Pakistan, East Pakistan was an agricultural

The establishment of Pakistan was an eyesore to the Hindu

the British could now be their undisputed monopoly in the future.

Pakistan had no industrial base; its greatest single asset was

considered an industrial base or even the nucleus of such a base in the

Commerce based on its primary commodities was perhaps the

The Congress leadership in its own mind was convinced that

Whatever the hopes the Hindus had entertained on the basis of

India had to go through no such exercise. It had received a

With no impartial authority to adjudicate on the peaceful

The share of each Dominion in the assets and liabilities of the

military stores had to be shared on the basis of army units allocated

In case of Central Bank of India, out of 81 branches, only 3 kept

At that time, it was widely believed that Pakistan would be a

The Partition Council worked through a Steering Committee

liabilities; central revenue, currency and coinage; economic and

The Expert Committee, which was assigned the task of dealing

This Expert Committee submitted its main report on July 28,

acceptance in good faith and without reservations was in the larger

Even these so-called unanimous decisions were robbed of their

(1) It was agreed that in matters concerning Pakistan, the

(2) India was vehemently opposed to Pakistan's share of

(3) Pakistan's demand for the appointment of its nominee as the

(4) Pakistan's proposal for a provision in the Reserve Bank of

(5) Administration of Pakistan currency by Reserve Bank for a

(7) Pakistan's plea for a joint approach to the International

The supplementary report on the division of sterling balances,

India was disinclined to keep large sterling securities as assets

the Issue Department should be determined entirely on the basis of

The recommendations of the Expert Committee were examined

(ii) The appointment of a Deputy Governor of Reserve Bank by

(iii) It was not in the interest of both governments to encourage

Rs.400 million against India's ad hoc securities. Besides, in the

Currency and Coinage:

In order to perform its duties as the currency authority of

So far as India rupee coins and India subsidiary coins were

Management of the Public Debt and Exchange Control was to

Relations with Scheduled Banks