SBOTS Banking & Financial Awareness Syllabus

What is the SBP Policy Rate, and what is the policy rate corridor?

The policy (target) rate is the benchmark interest rate set by the MPC to signal the monetary stance. The corridor is bounded by the SBP Reverse Repo (ceiling) rate at the top and the SBP Repo (floor) rate at the bottom, with the target rate near the middle.

List the main instruments of monetary policy used by SBP.

Open Market Operations (OMOs), the policy/discount rate, the Cash Reserve Requirement (CRR), the Statutory Liquidity Requirement (SLR), and standing facilities/credit ceilings.

What are Open Market Operations (OMOs)?

The buying (injection of liquidity) or selling (absorption of liquidity) of government securities by SBP in the money market to adjust banks' reserves and steer the overnight rate toward the policy rate.

Distinguish the Cash Reserve Requirement (CRR) from the Statutory Liquidity Requirement (SLR).

CRR is the minimum percentage of deposits banks must hold as cash reserves with SBP. SLR is the minimum percentage of demand and time liabilities banks must hold in liquid assets (cash, gold, approved government securities), held in addition to the CRR.

How does raising the CRR affect bank lending and money supply?

Raising the CRR forces banks to hold more reserves, reducing loanable funds, contracting credit creation, and lowering the money supply (and vice versa when lowered).

What is inflation targeting as a monetary policy framework?

A framework in which the central bank publicly commits to achieving a specified inflation rate (target) over a horizon and uses its instruments primarily to keep actual inflation close to that target, anchoring inflation expectations.

Which price index is most commonly used to measure consumer inflation in Pakistan?

The Consumer Price Index (CPI), compiled by the Pakistan Bureau of Statistics. (Other measures include WPI/SPI and core inflation, which excludes food and energy.)

What is 'core inflation' and why is it watched by the central bank?

Core inflation is inflation excluding volatile items (food and energy). It is watched because it reflects underlying/persistent inflationary pressure and is more relevant for monetary policy decisions.

Define the monetary base / reserve money (M0).

M0 is currency in circulation plus banks' deposits/reserves held with the central bank. It is the most liquid base over which the central bank has direct control.

What does the money supply aggregate M1 include?

M1 = currency in circulation (held by the public) + demand deposits (current accounts) + other checkable deposits. It captures money available for immediate transactions.

What does M2 include, and how does it differ from M1?

M2 = M1 + time/term deposits + savings deposits (less liquid 'near money'). M2 is broader than M1, adding interest-bearing deposits not immediately usable for transactions.

Define the money multiplier and give its basic formula.

The money multiplier measures how much the money supply expands per unit of monetary base. Simple formula: m = 1 / reserve ratio (r). Broad form: m = (1+c) / (c+r), where c = currency-to-deposit ratio and r = reserve-to-deposit ratio.

Differentiate commercial banks, investment banks, and microfinance banks.

Commercial banks accept deposits and provide loans/general banking to the public. Investment banks deal in capital markets, underwriting, securities, and corporate advisory. Microfinance banks provide small loans/savings to low-income individuals and the unbanked.

What is the difference between a scheduled bank and a non-scheduled bank?

A scheduled bank is one listed in the schedule maintained by SBP (meets capital/reserve requirements and is entitled to SBP facilities). A non-scheduled bank does not meet these criteria and is not on that list.

Differentiate a current (demand) deposit account from a savings (time) deposit account.

A current account allows unlimited withdrawals on demand, typically pays no/low interest, and suits businesses. A savings account pays profit/interest, may have withdrawal limits, and is meant for accumulating funds.

What is the difference between a secured loan and an unsecured loan?

A secured loan is backed by collateral (e.g., property, assets) that the bank can seize on default. An unsecured loan has no collateral and relies on the borrower's creditworthiness, so it usually carries a higher interest rate.

Define a negotiable instrument and name its key types.

A negotiable instrument is a written, signed document promising or ordering payment of a certain sum of money, transferable by delivery or endorsement. Key types: cheque, bill of exchange (including bank draft), and promissory note (per the Negotiable Instruments Act, 1881).

What is a cheque, and who are its three parties?

A cheque is a bill of exchange drawn on a bank, payable on demand. Its three parties are the drawer (account holder issuing it), the drawee (the bank), and the payee (the person to be paid).

What is the difference between a bearer cheque and an order cheque?

A bearer cheque is payable to whoever presents/holds it (transferable by mere delivery). An order cheque is payable to a specified person or their order and is transferred by endorsement plus delivery.

What does 'crossing' a cheque mean, and what is the effect of a general crossing?

Crossing is drawing two parallel lines across the face of a cheque. A general crossing means the cheque cannot be cashed over the counter and must be paid into a bank account, improving security.

What is a bank draft (demand draft) and how does it differ from a cheque?

A bank draft is an order to pay drawn by a bank on itself or another bank, prepaid by the purchaser. Unlike a personal cheque, it cannot bounce for insufficient funds because the bank guarantees payment.

Define a promissory note and state its parties.

A promissory note is an unconditional written promise by one party to pay a definite sum to another, on demand or at a fixed future date. Parties: the maker (who promises to pay) and the payee (who is to receive payment).

What is the key legal difference between a promissory note and a bill of exchange?

A promissory note is a promise to pay made by the debtor (maker) with two parties. A bill of exchange is an order to pay made by the creditor (drawer) directing the drawee to pay, involving three parties and usually requiring acceptance.

What is the fundamental principle distinguishing Islamic banking from conventional banking?

Islamic banking prohibits Riba (interest), Gharar (excessive uncertainty), and Maysir (gambling), and requires asset-backed, risk-sharing, Shariah-compliant transactions; profit is earned through trade and partnership rather than interest.

Define Murabaha as an Islamic banking mode.

Murabaha is a cost-plus sale: the bank purchases an asset and sells it to the customer at cost plus a disclosed profit margin, with payment usually deferred in instalments. It is a sale-based (not loan) financing.

Differentiate Mudarabah from Musharakah.

Mudarabah is a partnership where one party provides capital (Rabb-ul-Maal) and the other provides expertise/management (Mudarib); profit is shared by agreement, loss is borne by the capital provider. Musharakah is a joint partnership where all partners contribute capital and share profit/loss in proportion to investment.

Explain Ijarah and Diminishing Musharakah in Islamic banking.

Ijarah is an Islamic leasing contract where the bank leases an asset to the customer for rent while retaining ownership. Diminishing Musharakah is a co-ownership where the customer gradually buys the bank's share over time (commonly used for home financing).

What are Salam and Istisna contracts used for in Islamic finance?

Salam is a forward sale where the price is paid in advance for goods (often agricultural) delivered later. Istisna is a contract to manufacture/construct goods (e.g., buildings, machinery) with payment flexible and delivery in the future.

What is the purpose of banking supervision and inspection by SBP?

To ensure the safety, soundness, and stability of banks by monitoring their financial health, compliance with laws/Prudential Regulations, risk management, and depositor protection, through off-site surveillance and on-site inspection.

What are Prudential Regulations issued by SBP, and what areas do they cover?

Prudential Regulations are SBP-issued mandatory rules governing banks' conduct to limit risk. They cover risk management, corporate governance, anti-money-laundering/KYC, capital adequacy, exposure/lending limits, and classification/provisioning of non-performing loans.

What is the Capital Adequacy Ratio (CAR), and what international standard sets its framework?

CAR = (Tier 1 + Tier 2 capital) / Risk-Weighted Assets, expressed as a percentage; it measures a bank's capital buffer against risk. The framework is set by the Basel Accords (Basel III), implemented in Pakistan through SBP.