Document of The World Bankdocuments.worldbank.org/curated/en/749111468146048… · · 2016-07-10Finance and Private Sector Development Unit Pakistan ... FMR Financial Monitoring

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Document of The World Bank

Report No: ICR00001254

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-36880)

ON A

CREDIT

IN THE AMOUNT OF SDR 21.30 MILLION (US$ 26.5 MILLION EQUIVALENT)

TO THE

ISLAMIC REPUBLIC OF PAKISTAN

FOR A

BANKING SECTOR TECHNICAL ASSISTANCE

June 7, 2010

Finance and Private Sector Development Unit Pakistan South Asia Regional Office

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CURRENCY EQUIVALENTS

(Exchange Rate Effective March 2, 2010)

Currency Unit = Pak Rupee (Rs) PKR 1.00 = US$ 0.0117 US$ 1.00 = PKR 84.90

FISCAL YEAR July 1 – June 30

ABBREVIATIONS AND ACRONYMS

AML Anti Money Laundering ATM Automated Teller Machine BSC Banking Services Corporation BSRPP Banking Sector Restructuring and Privatization Project CAL Consultancy Associates Ltd. CAS Country Assistance Strategy CFT Combating the Financing of Terrorism CIB Credit Information Bureau CNS Control of Narcotic Substance DFI Development Finance Institution DvP Delivery versus Payment ECW Economic Crimes Wing ERP Enterprise Resource Package FATF Financial Action Task Force FIA Federal Investigation Authority FM Financial Management FMR Financial Monitoring Report FSAP Financial Sector Assessment Program FSDIP Financial Sector Deepening and Intermediation Project GOP Government of Pakistan HR Human Resource HRMS Human Resource Management System ICB International Competitive Bidding ICR Implementation Completion and Results Report IDA International Development Association ISR Implementation Status and Results Report ISSP Information System Strategy Plan IT Information Technology KYC Know Your Customer LAN Local Area Network M&E Monitoring and Evaluation MIS Management Information System

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MoFA Ministry of Foreign Affairs NAB National Accountability Bureau NBFI Non-Bank Financial Institution NCB National Competitive Bidding NIBAF National Institute for Banking and Finance NIFT National Institute of Financial Transactions NPL Non-Performing Loan PAD Project Appraisal Document PDO Project Development Objective PRI Pakistan Remittance Initiative RTGS Real-Time Gross Settlement RVP Regional Vice President SBP State Bank of Pakistan SECP Securities & Exchange Commission of Pakistan SME Small and Medium Enterprises SMS Secure Messaging System TABS Banking Sector Technical Assistance Project TF Terrorist Financing TOR Terms of Reference TT Telegraphic Transfer WAN Wide Area Network WB The World Bank

Vice President: Isabel Guerrero

Acting Country Director: John W Wall

Sector Manager: Ivan Rossignol

Project Team Leader: Shamsuddin Ahmad

ICR Team Leader: Shabana Khawar

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COUNTRY PAKISTAN

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

1. Project Context, Development Objectives and Design ............................................... 62. Key Factors Affecting Implementation and Outcomes ............................................ 113. Assessment of Outcomes .......................................................................................... 204. Assessment of Risk to Development Outcome ......................................................... 205. Assessment of Bank and Borrower Performance ..................................................... 226. Lessons Learned ....................................................................................................... 247. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......... 25Annex 1. Project Costs and Financing .......................................................................... 26Annex 2. Outputs by Component ................................................................................. 34Annex 3. Economic and Financial Analysis ................................................................. 30Annex 4. Bank Lending and Implementation Support/Supervision Processes ............ 31Annex 5. Beneficiary Survey Results ........................................................................... 33Annex 6. Stakeholder Workshop Report and Results ................................................... 34Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 35Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 37Annex 9. List of supporting documents ........................................................................ 45

MAP

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A. Basic Information

Country: Pakistan Project Name: PK Banking Sector Technical Assistance

Project ID: P074797 L/C/TF Number(s): IDA-36880

ICR Date: 06/11/2010 ICR Type: Core ICR

Lending Instrument: TAL Borrower: ISLAMIC REPUBLIC OF PAKISTAN

Original Total Commitment:

XDR 21.3M Disbursed Amount: XDR 19.8M

Revised Amount: XDR 19.8M

Environmental Category: C

Implementing Agencies: State Bank of Pakistan

Cofinanciers and Other External Partners: B. Key Dates

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review: 10/03/2001 Effectiveness: 08/12/2002 08/12/2002

Appraisal: 01/10/2002 Restructuring(s): 06/26/2009

Approval: 07/09/2002 Mid-term Review: 02/10/2005 04/04/2005

Closing: 12/31/2007 06/30/2009 C. Ratings Summary C.1 Performance Rating by ICR

Outcomes: Satisfactory

Risk to Development Outcome: Moderate

Bank Performance: Satisfactory

Borrower Performance: Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies:

Satisfactory

Overall Bank Performance:

Satisfactory Overall Borrower Performance:

Satisfactory

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C.3 Quality at Entry and Implementation Performance IndicatorsImplementation

Performance Indicators

QAG Assessments (if any)

Rating

Potential Problem Project at any time (Yes/No):

No Quality at Entry (QEA):

None

Problem Project at any time (Yes/No):

No Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Satisfactory

D. Sector and Theme Codes

Original Actual

Sector Code (as % of total Bank financing)

Banking 80 80

General finance sector 2 2

Payment systems, securities clearance and settlement 18 18

Theme Code (as % of total Bank financing)

Other financial and private sector development 67 67

Standards and financial reporting 33 33 E. Bank Staff

Positions At ICR At Approval

Vice President: Isabel M. Guerrero Mieko Nishimizu

Country Director: Yusupha B. Crookes John W. Wall

Sector Manager: Ivan Rossignol Marilou Jane D. Uy

Project Team Leader: Shamsuddin Ahmad Mudassir H. Khan

ICR Team Leader: Shabana Khawar

ICR Primary Author: Kiran Afzal F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) The Banking Sector Technical Assistance Project (TABS) was a follow-on of the Financial Sector Deepening and Intermediation Project (FSDIP). The Project supported completion of the restructuring measures initiated under FSDIP and complemented broader reforms in the financial sector supported by the Bank and other development partners. The Project aimed to strengthen the regulator of the banking system - the State Bank of Pakistan (both in terms of its human resource skills and technological base), enhance the role of the credit information, strengthen the national payments system and

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establish deterrents to financial fraud and money laundering. Broadly, project objectives included: - Improving the standards and quality of human resource; - Modernizing and automating processes through use of technology and networking; - Streamlining and strengthening the national payments system for improved, safe, efficient and affordable delivery of financial services; - Strengthening and extending the scope of credit information services through enhanced quality and wider access; - Creating awareness and strengthening regulators and enforcers for prevention of money laundering and financial fraud; - Strengthening and building capacity for banking sector regulation and policy making; and - Supporting privatization of nationalized commercial banks. Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Better qualified and trained staff on-board, and hiring done through a competitive process on merit. Implementation of market based compensation and rewards system. Performance evaluation linked to market standards.

Value quantitative or Qualitative)

Staff recruited at entry level and few recruitments at middle management or senior levels. Promotion is based mainly on seniority.

SBP's pay structure, promotion, and performance evaluation linked to the market

Revised compensation and HR policy introduced: - Pay structure linked to market's 50th percentile. - Lateral hiring from market introduced at mid-managerial levels. - Staff turnover reduced to 2.5% in 2009 from 7.31% in 2006

Date achieved 05/14/2002 06/30/2009 06/30/2009 Comments (incl. % achievement)

Fully Achieved. Under the HR reforms introduced through TABS, the SBP policies have been revised to ensure that all promotions are merit and performance based at SBP.

Indicator 2 : Improved accessibility and information flow along with an efficient internal

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functioning of SBP.


Given SBP's weak technological base, flow of information within and outside the organization is far from smooth

Modern and state-of-the-art information technology successfully implemented.

IT infrastructure implemented in field offices and features: - Latest MIS involving banking solution; - ERP for accounting, HR and payroll; - Data warehouse, networking of offices and banking system implemented -Disaster Recovery System implemented


Fully Achieved

Indicator 3 : Extension of electronic clearing services in all major cities and for special purpose large value transactions.


- Weaknesses in the national payment system source of substantial systemic risk and lack of confidence in the banking system - Processing of payments done by manually-operated systems, which is unable to deliver enhanced financial services

- Introduction of Real Time Gross Settlement System (RTGS) to support large value transactions settlement of payments in real time. - Expansion of electronic cheque clearing services throughout the country and implementation of Globus interface.

RTGS functional and allows: - Settlement of deals, and updating of balances in real time, - Viewing of bank's current account positions on intraday basis to better manage liquidity. - Globus Interface implemented


Fully Achieved

Indicator 4 : Completion of a comprehensive assessment of existing credit information systems and expansion of services in line with international best practice.

Value quantitative or

Lack of credit information on both

The existing system of CIB

- The Electronic CIB (e-CIB) fully

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Qualitative) corporate and consumer clients. The existing system of data collection and retrieval suffers from narrow scope and limited accessibility of credit information

strengthened and its scope extended to ensure timely availability of both positive and negative credit information based on international best practices

operational and providing timely reports to the banking sector. - A comprehensive study on credit info systems completed and a draft Credit Bureau Act prepared.


Fully Achieved. Additionally, the Credit Bureau Act for the private sector credit bureaus has been approved by the Cabinet and is pending with the Law Division

Indicator 5 : Improved legal and regulatory framework to prevent money laundering and financial fraud.


AML unit of Economic Crimes Wing of the FIA has been set up. But staff in concerned units still lacks training and AML law has not been passed.

The AML law enacted, the FMU established within the SBP, and capacity building of staff in SBP, SECP and AML unit of ECW of FIA enhanced through rigorous training on AML

The new Anti-Money Laundering Law (AML) incorporating FATF 40+9 recommendations approved by the parliament.


Largely Achieved. AML law approved, FMU established and training imparted.

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Revised HR policies, procedures along with performance management and Human Resource Management System (HRMS) implemented. All categories of staff trained in management and technical skills.

Value (quantitative or Qualitative)

HR policies and procedures, along with performance and HRMS need to be strengthened further and implemented. Training needs to be enhanced to increase the capacity of SBP in key

All HRMS modules have been tested and successfully implemented. Staff's capability has been enhanced through intensive

- HRMS fully implemented - HR policies revised - Structured training program

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areas and structured training programs.

implemented for all staff. - 4 staff surveys undertaken (since 2005) to gauge staff satisfaction and to further improve HR policies within SBP.


Fully Achieved. This is a continuous process and efforts to further improve HR policies have continued at SBP even after project completion.

Indicator 2 : Fully operational MIS with Globus, Oracle ERP, and Data Ware-house with Local Area Network (LAN) and WAN in place with connectivity between SBP, banking sector and Ministry of Finance.


SBP's refinance facilities were manually maintained, financial information not submitted timely, HR/ payroll not computerized, and no data warehouse providing information of high integrity

Oracle ERP, HRMS, payroll, data warehouse and networking solutions successfully tested and gone livenot submitted timely, HR/ payroll non computerized, and there is no data warehouse providing information of high integrity

- Data Warehouse functional, EXIM data being processed for calculation of country's Balance of Payments and Current Account Status. EXIM data compilation time reduced from 2 weeks to 5 days - Oracle ERP for accounting, HRMS and payroll implemented


Substantially Achieved. Electronic connectivity between SBP and MoF is yet to be achieved.

Indicator 3 : Consultants engaged to implement RTGS systems, and new procedures and rules devised.


- The existing national payment and clearing system is limited in scope, time consuming, and is only partially computerized. - Integration of RTGS with government securities systems to provide model 1 Delivery

The new system to process 5% of the National Institute of Financial Transactions (NIFT) transactions.

- RTGS is clearing up to 1,200 transactions worth Rs 200/250 billion daily, (90% of the entire banking sector large value transactions) - DvP capability established for

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versus Payment (DvP) capability

secondary market trading in securities, and provides repo based intraday liquidity


Fully Achieved. Payment Systems and Electronic Fund Transfers Act 2007, has been enacted and operational.

Indicator 4 : Report on the study for strengthening of credit information services submitted and discussed.


Consultants have been hired and report prepared

The recommendations of the consultant reports implemented successfully to achieve the intended project outcomes

CIB Report prepared. The inputs & recommendations from the study report were used in drafting of the Credit Bureau Act, which was approved 'in principle' by the Cabinet and now pending with the Law Division


Fully Achieved

Indicator 5 : ECW, SBP and SECP staff trained on detection techniques as well as to investigate financial fraud. Regulation to prevent money laundering and banking courts in place.


Staff receives rudimentary training in AML

Improved regulations to control and prevent financial fraud and money laundering. Seminars and workshops organized on money laundering

AML Law approved by the parliament. Training imparted to SECP/SBP staff on Anti Money Laundering /Combating the Financing of Terrorism (AML/CFT) issues


Largely Achieved

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G. Ratings of Project Performance in ISRs

No. Date ISR Archived

DO IP Actual

Disbursements (USD millions)

1 01/17/2003 Satisfactory Satisfactory 0.87 2 08/01/2003 Satisfactory Satisfactory 3.92 3 01/22/2004 Satisfactory Satisfactory 4.12 4 09/30/2004 Satisfactory Satisfactory 6.60 5 05/17/2005 Satisfactory Satisfactory 12.51 6 11/17/2005 Satisfactory Satisfactory 16.12 7 05/12/2006 Satisfactory Satisfactory 18.01 8 11/27/2006 Satisfactory Satisfactory 19.57 9 06/13/2007 Satisfactory Satisfactory 21.24

10 12/14/2007 Satisfactory Satisfactory 24.44 11 06/25/2008 Satisfactory Satisfactory 25.68 12 12/24/2008 Satisfactory Satisfactory 25.94 13 06/29/2009 Satisfactory Satisfactory 26.38

H. Restructuring (if any)

Restructuring Date(s)

Board Approved

PDO Change

ISR Ratings at Restructuring

Amount Disbursed at

Restructuring in USD millions

Reason for Restructuring & Key Changes Made

DO IP

06/26/2009 N S S 26.38

This was primarily a reallocation of credit proceeds within the existing categories and from project savings on account of exchange rate gain. The reallocation allowed for the implementation of the Disaster Recovery System, and AML/CFT systems. As the reallocation from savings was more than 5% of credit amount, it was done through a 2nd order restructuring.

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I. Disbursement Profile

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1. Project Context, Development Objectives and Design (this section is descriptive, taken from other documents, e.g., PAD/ISR, not evaluative)

1.1 Context at Appraisal 1.1.1 The Government of Pakistan (GoP) initiated the first wave of reforms in the

financial sector during the mid 1990s to address the wide spread governance problems of the financial sector, particularly in the state owned banking and development finance institutions (DFIs). This was done to replace the prevailing public sector system with one that is largely in private hands and which operates in a strong regulatory environment. The GoP pursued these reforms with the support of the Bank and other development partners. As part of these reforms, parallel initiatives were taken to make SBP more independent and strengthen its regulatory and supervisory capacity.

1.1.2 The first such technical assistance was provided to the SBP under the Bank

supported Financial Sector Deepening and Intermediation Project (FSDIP) from 1995 – 2002. FSDIP helped in bringing about a considerable change at SBP. It initiated a process of institution building that hitherto had been ignored. The project assisted SBP in improving its management structure; strengthening banking supervision through development and adoption of latest bank examination techniques and training; introducing technology and preparing an Information System Strategy for SBP’s automation and establishing its linkages with the banking sector; and building general staff capacity through training. The support brought about significant changes in the methodology and quality of supervision. These improvements were reported in the Bank's financial sector update of May 2000 as well as the IMF report of Monetary and Exchange Affairs Department, April 2001.

1.1.3 With a change of management in January 2000, SBP initiated the second wave of

reforms where it was split into two broad areas, (i) a core central bank to focus on monetary policy, supervision and regulation of the financial sector, foreign exchange management and payments system, and (ii) an independent subsidiary, the Banking Services Corporation (BSC) responsible for retail and treasury functions. Initiatives to improve the skill base through rightsizing, reorganization and further training were planned for the second phase. SBP's technological base was weak, impeding the information flow within and outside the organization. While electronic clearing services were introduced, substantial weaknesses existed in the system concerning both the design and availability of services and their geographic coverage. Weaknesses in the national payment system were a source of substantial systemic risk and lack of confidence in the banking system. In addition, regulatory weaknesses persisted, and the sector remained fragmented with a multitude of small and weak institutions.

1.1.4 The Country Assistance Strategy (CAS) for year 2004 – 2006 also recognized the

importance of a strong financial sector to support private sector development and

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economic growth, and indicated the need for further improving the health of the country’s financial system. The critical need to strengthen the institutional infrastructure of the central bank and the broader financial sector was foreseen as a key aspect of the deepening of the financial system, as new and more complex products and processes developed due to the advances in technology, service and intermediation capacity.

1.1.5 The Bank then prepared the Banking Sector Technical Assistance (TABS) Project to further assist the SBP in its second phase of institutional reform. TABS was undertaken in accordance with the CAS objectives for support of a safer and sounder financial sector, its rehabilitation and privatization, as well as continued assistance for strengthening the central bank.

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved)

1.2.1 TABS, a follow on to the Bank supported FSDIP, complemented broader reforms

in the financial sector. The key project objective was to transform the SBP into a professional, efficient and modern institution while focusing on further strengthening and improving functioning of SBP as a regulator and guardian of the banking system; and improving and modernizing financial infrastructure including the payments system, credit information, and monitoring and prevention of financial fraud.

1.2.2 The key performance indicators of the project included: (i) more qualified,

competent and skilled staff at the SBP; (ii) market and performance based compensation, rewards and promotion of the staff; (iii) implementation of a Real Time Gross Settlement (RTGS) system; (iv) improved systems, accessibility and flow of information; (iv) comprehensive assessment and strengthening of the existing credit information system; (v) enhanced capacity for supervision and enforcement of money laundering regulations; and (vi) due diligence for Habib Bank privatization.

1.2.3 While some of the indicators were measured quantitatively (RTGS, human

resource management system, information systems and Habib Bank due diligence), others used qualitative assessments to gauge the level of achievement.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification

Neither the PDO nor the key indicators were revised

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1.4 Main Beneficiaries 1.4.1 The Project’s main beneficiary was the SBP. 1.4.2 The Project also supported the due diligence for the privatization of Habib Bank

Limited, which was privatized in 2004. 1.4.3 The project in addition, aimed to benefit financial institutions, consumers,

corporate entities, and the general public by improving the regulation of financial markets, improving payment systems, improving the credit information systems, strengthening the capacities of the regulators (Securities and Exchange Commission of Pakistan) and enforcers (Ministry of Foreign Affairs) to prevent financial fraud and money laundering, and through better management of monetary policy.

1.5 Original Components 1.5.1 Human Resource Development (USD 1.12 million): The component supported

initiatives in the following areas: (i) People Management; (ii) Performance Management; (iii) Team work & Leadership programs; (iv) Change Management; and (v) Acquisition of HR tools. TABS covered revision in HR policies and development of an HR management system (HRMIS) with the objectives of: (a) reviewing/re-aligning policies of recruitment, training, compensation, performance evaluation, promotion and separation; (b) strengthening the human resource base of SBP by attracting, retaining and motivating professional staff; and (c) carrying out a comprehensive HR audit to identify and fill the skill gaps in relation to the existing and emerging functional needs of SBP. Training and capacity building were key elements of the project.

1.5.2 Technology Up-gradation (USD 16.63 million): The component provided

support for the following IT interventions: (i) Introduction of GLOBUS Banking Solution to help SBP achieve compliance with international banking standards, availability of reliable information, ease of introducing new products into the market, as well as efficiency and controls of banking operations, currency management, government securities, prize bonds management, National Savings Schemes, foreign exchange, debt management and treasury operations. TABS aimed to support the implementation and branch roll out of Globus.

(ii) Introduction of ERP Oracle to facilitate the introduction of international accounting standards and a consolidated chart of accounts, integration of departmental functions such as financial accounting, human resources, budgeting, payroll, procurement, inventory and asset management.

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(iii) Establishment of a Data Warehouse which would be the central repository of information that provides comprehensive and high integrity data in a form suitable for decision support to end-users and to the decision-makers. In technologically advanced environment, it has become essential that systems and data structures be redesigned for sustainability and scalability. (iv) Strengthening of Hardware and Networking: including expansion of the systems to 15 SBP branch offices beyond the Central Directorate and Karachi Office, including entire roll out of Globus, ERP/Oracle financials and networking of the branch offices.

(v) Training and Change Management: This included training programs in networking as well as conducting similar programs during transition and before switch over. Business change management initiatives were also supported, so that SBP was fully prepared to accept the new systems and processes.

1.5.3 Strengthening and Streamlining the National Payments System (USD 5.0

million): Prior to TABS, the financial system lacked the capacity to efficiently and securely process large value and other time critical funds transfers. The strengthening and streamlining of the national payments system infrastructure was also pending. TABS supported the implementation of a Real Time Gross Settlement (RTGS) system and its integration with Globus enabling SBP to provide a model 1 Delivery versus Payment (DvP) system.

1.5.4 Strengthening and Extending the Scope of Credit Information Bureau (CIB)

(USD 0.60 million): The State Bank's CIB was established in December 1992. The system prior to TABS was semi automated and relied on paper based input-output processes. TABS supported the following:

(i) Strengthening the existing system and extending its scope to ensure that

optimum benefits are provided to participants, consistent with best international practice;

(ii) Improving the knowledge and skills of a small group of SBP specialists; and (iii)Enhancing the technical platform to provide a basis for an on-line secure

connectivity with the system users. A review of the international best practices for private credit bureaus and their functioning was also envisaged under the project.

1.5.5 Anti Money Laundering (AML) and Financial Fraud (USD 0.80 million): (i) The Securities and Exchange Commission of Pakistan (SECP) is the regulatory and supervisory authority for non-bank financial markets including stock market, Non bank financial institutions (NBFIs) and insurance. Both SBP and SECP initiated measures to strengthen their in-house capacity/ competencies to control and prevent money laundering activities. TABS provided support for the training

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of the essential staff of SBP, SECP, Anti Money Laundering (AML) unit of Economic Crimes Wing (ECW) of the Federal Investigation Authority, and the judiciary. Enhancements in the existing computer systems for monitoring and record keeping were also to be supported to improve the capability of enforcing these new policies. (ii) TABS also supported the Secure Messaging System (SMS) for the Foreign Affairs Ministry (MoFA) for AML/Counter Terrorism. In addition to strengthening the AML/CFT capability of MoFA and its Strategic Exports Controls Division, financing was also provided through reallocation of TABS funds, primarily for foreign source networking and related equipment for the MoFA.

1.5.6 Banking Sector Capacity Building (USD 4.65 million): TABS included support

for further work in the development of financial markets. The project assisted the SBP and policy makers in keeping pace with developments in global financial markets through participation in seminars and specialized training programs. The privatization of the nationalized commercial banks was supported under this. Additionally, TABS assisted in developing research capabilities within the SBP.

1.6 Revised Components. Other than extension of Closing Date and some reallocations, there were no significant changes to the Project’s Original Components.

1.6.1 Extensions in Project Closing Date: Upon the request of SBP, the Project’s

Closing Date (PCD) of December 31, 2007, was extended twice. The first extension was requested by the SBP for 12 months (up to December 31, 2008) mainly to complete the implementation of the RTGS System. Subsequently, the PCD was again extended selectively, from December 31, 2008 until June 30, 2009, due to delays in the shipment of the Disaster Recovery System. As a result of this extension, SBP was able to procure the Disaster Recovery System, the Hot Back-up for RTGS and the SMS for the MoFA for AML/Counter Terrorism. The Disaster Recovery System and the RTGS Hot-Back-up was completed by June 2009. Most of the hardware and software procurement for the Secure Messaging System (SMS) was completed by June 30 2009; however, the new timeline for permanent connectivity’s completion is end of year 2010. SBP has conveyed to the Bank team that the activities to put the system in place will continue after project’s closing.

1.6.2 Reallocation of Credit Funds: At the SBP’s request, Credit funds were

reallocated from Category 4 (Unallocated) and Category 2 (Consultants' service) to Category 1 (Goods) and Category 3 (Training, workshops and study tours). This reallocation was largely made for the Disaster Recovery System, the Hot Back-up for RTGS and for the Secure Messaging Service (SMS). Since reallocation of savings under Category 2 was greater than 5 percent, this was done through a second order restructuring which was approved by the Regional Vice

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President (RVP) on June 26, 2009. This allowed SBP to cover all costs incurred prior to June 30, 2009.

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry: The Bank had been supporting banking sector reforms in Pakistan for over a decade, prior to TABS, through project (FSDIP) and policy lending (Banking Sector DPL, Banking Sector Restructuring and Privatization – BSRP). The lessons of these earlier operations were taken into account in the design of TABS. In addition, all stakeholders including the SBP, MoF, commercial banks, actively participated in project design. Although there were delays in completion of the RTGS, the successful completion of the Project and a very positive impact and achievement of the development outcomes is a clear indication of its satisfactory “Quality at Entry”.

2.1.1 Project preparation clearly identified risks as well as appropriate risk mitigation measures. The latter were generally accurately identified except for the security risks and the time required for installation of a complex IT architecture—both of which were not envisaged during preparation.

2.2 Implementation: The project implementation was affected by several external factors related to foreign vendors working in Karachi and significant events such as the terrorist incidents, which led to security situation in the country and caused vendors to invoke ‘force majeure’ and leave Pakistan. SBP and the Bank project team had to deal with at least three such incidents during the implementation period resulting in significant loss in momentum and project implementation delays. Many innovative ideas were deployed to maintain momentum including project funding to relocate several SBP staff from Karachi to Johannesburg (South Africa), during a critical period for the project team. These extra-ordinary measures were responsible for ensuring that ERP, Banking and Data Warehouse components were largely completed within project timeline.

2.2.1 Implementation was also affected by SBP’s internal processes. At project

appraisal, it was envisaged that the RTGS system would be contracted out by the end of 2003. The original bid validity of 21st April, 2003 was extended till January 15, 2004 due to delays in bid evaluation. Eventually, the contract with the firm ‘CMA Small System A Sweden’, was signed in November 2004 with the effective date of February 2005. The time delay between the RTGS project initiation and implementation was largely due to complex business and pre-requisite infrastructure requirements for the Globus and RTGS interface. Another reason for delay was the unfamiliarity of the SBP management with the new systems. Despite the visits of SBP’s senior managers to a number of other countries for studying their RTGS systems, the process took longer than anticipated.

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2.2.2 The overall RTGS implementation had several aspects of legislative framework, integration with other systems, setups of telecommunication networks, and overall reengineering in the funds and securities settlements. It also required maintaining a robust support system for about 40 financial institutions. Managing multiple local and international vendors to achieve overall project integration was a huge challenge as well. Timely availability of experienced resources required for the execution of the project, both in the SBP and with vendors, proved to be a big impediment.

2.2.3 Negotiations for signing the contract with M/S Temenos also took long and the contract was signed in May 2007 as against the initially envisaged date of end 2003. The delay was primarily caused due to contractor’s disagreement with certain contractual terms. Tax matters were yet another aspect that required lengthy dialogue until resolution.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization

The Project’s M&E systems were well designed and implemented, and the SBP and the Bank were effectively able to track project implementation and results. The Bank team conducted Implementation Support missions periodically during the life of project and key implementation issues and progress were recorded in the Implementation Status Reports.

2.4 Safeguard and Fiduciary Compliance.

2.4.1 There was full compliance with applicable Safeguard and Fiduciary Policies. Only the Safeguard Policy; ‘Environmental Assessment’ (OP 4.01, BP 4.01, GP 4.01) was applicable, and it was determined that the Project did not have any direct adverse environmental impact.

2.4.2 Procurement and Financial Management: As of June 29, 2009, all procurements had been completed and there were no major issues pending. A review of the financial management arrangements during the Implementation Support missions provided reasonable assurance that the Credit proceeds were being used for the intended purposes. The quarterly financial monitoring reports were received on time and found to be in order. Audited financial statements of the project and entity were received and accepted by the Bank.

2.5 Post-completion Operation/Next Phase 2.5.1 The project was completed on June 30, 2009. In spite of delays in project

implementation, almost all the project components have been successfully implemented. Full completion of only one activity will take place beyond the Project Closing Date, which is the full installation and integration of SMS software and hardware for AML. This should be done latest by December 2010 with support from the SBP.

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2.5.2 Meanwhile, SBP is keenly interested to leverage the existing IT platform by going for a second wave of IT business applications that will realize and capture additional business benefits. Almost 93 new requests received from SBP business departments and external financial institutions, are being considered internally by SBP for financing.

2.5.3 The SBP management has also recently expressed its desire to seek further assistance from the Bank to initiate a follow-on TABS – 2 Project, to further enhance the payments system, IT platform and capacity building of SBP officials in key areas.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation

The Project’s Original Objectives remained relevant throughout the course of the project, and remain relevant today. Considering the rapidly changing technological architecture of the banking system, globally and domestically, the Project’s interventions were very timely and appropriate. In addition, given the critical importance of a sound, stable and competitive banking system to supporting economic growth—which was one of the fundamental pillars of Bank’s 2004 – 2009 CAS for Pakistan—the Project has played an important role in this regard.

3.2 Achievement of Project Development Objectives 3.2.1 All the PDOs have either been fully or largely achieved. The independent

feedback of various stakeholders including the financial sector (commercial banks) about project achievements and progress on PDOs demonstrate the positive impact of the project on SBP and the overall financial sector. While SBP and banking sector institutional reforms have been underway, since the initiation of the FSDIP project, there has been a marked improvement in the functioning of the SBP and the banking system as a result of the TABS Project. Specifically:

SBP's HR Policies have been transformed from the old governmental HR system, where salaries were linked to government pay scales; recruitment was only at entry grade; and promotions were seniority based, to a more flexible, professional and dynamic HR system wherein salaries are now linked to market salaries, promotions are performance driven and mid-level managers are recruited from the market. SBP now functions as an autonomous and best practice central bank, compared to working like a bureaucratic government department a decade back.

SBP is now a fully IT based organization, compared to being a mostly manual based institution prior to the project. As a result, information for monetary, fiscal and exchange rate management is now available in real time; weekly and quarterly reports are prepared with a lag of a few days; and communication both

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internal and with the banking system is now mostly electronic rather than paper- based as in the past.

Key stakeholders, banks and MoF, are unanimous in their views that the quality of SBP's banking supervision has undergone a sea change, in terms of focus, coverage, quality of analysis, and timeliness. Supervisory reports are now considered best practice. As a result of improvements in the banking supervision and prudential regulations, the banking system is more diligent, as clearly highlighted in the 2010 Financial Sector Assessment (FSA) conducted by the Bank. The SBP, due to its strengthened capacity, was able to successfully manage the liquidity crises that hit the banking sector in the last quarter of 2008.

The banks and MoF are unanimous in their views that SBP has undergone a transformation in its conduct of monetary policy.

Credit information sharing among the banks has also been significantly upgraded, as a result of TABS support for e-CIB initiatives and strengthening of the existing CIB.

AML laws, policies and institutional capacities have been significantly strengthened through the establishment of SMS, a Financial Monitoring Unit, enactment of the AML Law, and training of staff from the MoFA. These capabilities were non-existent prior to TABS. The procurement of hardware and software has been completed by the MoFA, however, its integration and implementation will happen at the end of year 2010 with assistance of the SBP.

Central banks of other countries in the South Asia Region have already received technical assistance from the SBP during the year 2009. SBP officials visited Nepal to train the Nepal Rastra Bank officials in Stress Testing methodologies, and Bangladesh Central Bank officials visited the SBP in Karachi to study its systems for banking surveillance and supervision.

Technology Up-gradation and Development of Payments System (Substantially Achieved)

3.2.2 Computerization and automation of the entire business of SBP and its field offices

is a major step towards modernization. SBP is now adding newer applications and functionalities that leverage the existing IT platform. A Disaster Recovery System (DRR) has also been installed to protect against loss of data and to ensure business continuity. SBP will be taking over the full cost of maintenance and upgrading of the entire IT platform after project closing.

3.2.3 The infrastructure development on modern lines such as the Globus, RTGS, e-CIB, and communication system have contributed significantly towards institutional modernization of SBP. With the establishment of the RTGS, inter-bank gross settlements are now automated and taking place in real time, compared to manual systems that existed prior to TABS. This has greatly reduced the systemic risks. The System is clearing up to 1,200 transactions daily, for a maximum value of Rs. 800 billion and a daily average of Rs 200 – 250 billion,

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covering almost the entire banking system. Tameer Bank, a leading microfinance bank, is now also a member of the RTGS and is availing the online facility. The integration of RTGS and Globus has enabled SBP to provide a model 1 DvP capability for secondary market trading in government securities, and centralized settlement of retail clearing. By virtue of this integration, the SBP can provide a repo based intra-day liquidity to RTGS participants. Consequently, TABS has developed a robust and secure inter-bank money market, while enabling banks to better manage their liquidity position, and settlement of payments in real time.

Human Resource Development (Satisfactorily Achieved)

3.2.4 Under the TABS, SBP has improved its recruitment, compensation rewards policy and systems, by bringing them in line with the market standards. In addition, training has been introduced as a key pillar for professional development and growth. As a result, SBP is now a more professional institution compared to what it was before the beginning of the Project. The HR policies include: market based compensation; merit based promotions; lateral induction at middle and senior levels (Deputy Governor and Executive Directors being hired from market) and in specialized departments (Housing, etc.); and a structured training program for all level of officers.

3.2.5 Fifty seven percent of the officers working in SBP fall in the age bracket of 40

and below, as compared to thirty percent in 2004. The induction and training of new, younger staff has created performance based culture in all the important areas of the organization. About ten percent of the officers in monetary and research cluster are PhDs, as compared to only three percent PhDs in 2004. Similarly, During the last 5 years, SBP professionals with relevant qualifications and skills have been inducted in different specialized areas like Housing Finance, IT, HR, Research, Treasury, Economics, Banking etc.

3.2.6 Under HR development, TABS supported the following two types of training for

SBP staff: (i) short term management development program under which over 1,280 staff were trained; and (ii) specialized foreign training, under which 384 staff were trained in all the core areas of responsibilities of SBP. The National Institute of Banking and Finance (NIBAF) is also strengthened to provide training to domestic and foreign central banking professionals.

3.2.7 There has been a strong positive impact of new HR policy on staff performance,

efficiency and turnover, as a result of the following:

For salary survey purposes, a list of benchmark institutions has been indentified for SBP. The first salary survey was conducted in year 2007. Based on the findings of the survey, new Compensation and Benefits Structure was introduced under which the progressive retirement benefits in the shape of defined contributions were launched.

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Through the second Compensation and Benefits survey conducted in year 2009, the Total Remuneration approach has been adopted, as the basis for benchmarking with comparator institutions.

The results of the surveys have been used to introduce market aligned benefits for SBP employees.

Retention has improved as a consequence of improved HR polices, with turnover showing a declining trend.

2006 2007 2008 2009 7.31% 8.36% 5.37% 2.5%

SBP has also been conducting employee motivation/engagement surveys through

an external consultant to obtain feedback on the HR policies. The first survey was done in 2003, with subsequent surveys in 2004, 2005 and in 2009. The results of the surveys provided an input in formulating the HR strategy of various departments.

Capacity Building and Institutional Strengthening (Fully Achieved)

3.2.8 Under TABS, SBP has strengthened its managerial and professional capacity.

SBP also significantly delegated decision making powers to avoid delayed process of approvals and paper based activities. With the view to create efficiency, and strengthen SBP’s co-ordination with government departments and ministries, restructuring of SBP was carried out in September 2006, and the following new departments have been created.

Exchange & Debt Management Department Payment Systems Department Consumer Protection Department Risk Management and Compliance Department

3.2.9 Additionally, the following four thematic clusters were formed within SBP to

improve reporting lines: Banking Cluster Monetary Policy and Research Cluster Financial Markets and Reserve Management Cluster Corporate Cluster

Drafting and Enactment of New Laws (Fully Achieved)

3.2.10 As part of TABS, several laws were drafted, and their status is as follows:

The Payment Systems and Electronic Fund Transfers Act 2007, has been enacted and is in operation.

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The Anti-Money Laundering and Combating Terrorism Financing Bill 2009 has been approved by the parliament (National Assembly and the Senate). The new law with amendments incorporates FATF 40+9 recommendations.

Deposit Protection law has been drafted, finalized and sent to Ministry of Finance for submission to the parliament.

Amendments in Banking Companies Ordinance (BCO) have been passed by the National Assembly and are now with the Senate.

The amendments to the SBP Act have been presented to the National Assembly.

Consumer Protection law has been prepared and is being reviewed by the Law Division.

Draft Credit Bureau Act has been approved ‘in principle’ by the Cabinet and expected to be presented to the parliament once it has been reviewed by the Law Division.

3.2.11 Other Impacts of the TABS: The Automation of the Central bank has had a

ripple effect on the financial sector with major banks and financial companies embarking on their own automation projects, partly to integrate and interface better with SBP systems. This has spurred productivity and improved business agility, controls and information availability in the banking sector at large.

3.2.12 Another spin-off effect has been the growth of local IT industry and the presence of global IT vendors in Pakistan. SBP automation project was considered to be the largest IT investment in the financial sector and has spurred growth of related IT vendors and IT skills. Automated systems like accounting entries, data consolidation, standardized automated reporting are some of the visible benefits of the Project. The SBP management believes that there has been a very positive impact on staff productivity and efficiency, and that automation of data collection, reporting and analysis functions has enabled staff to focus more on core functional areas

3.3 Efficiency 3.3.1 The Economic Rate of Return (ERR) or Internal Rate of Return (IRR) is not

calculated as this is a technical assistance project. Nevertheless, strengthening of the SBP and enhancing the national payments system and credit information services in the country, have had a significant positive impact on financial sector stability and general business environment. The independent feedback received from the financial sector institutions has confirmed these developments and their positive impact on the industry.

3.3.2 Some notable improvements in SBP’s performance over these years are also reflected in the series of the Financial Sector Assessments Program (FSAP) and FSA conducted by the Bank and IMF in 2004, 2008 and 2010. For instance, the 2004 FSAP noted that revising key financial sector legislation including the SBP

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Act and Banking Companies Act (BCO) in accordance with sound international standards were needed to avoid the SBP relapsing into past practices and unwarranted government interference. Under the TABS, the SBP reviewed these laws, and the amendments to BCO and SBP Act are now in the Parliament for approval. It is expected that these revisions will make the existing laws more conducive to the changing global economic and regulatory environment, and will further strengthen SBP’s authority in managing and preventing a crisis.

3.3.3 The FSAP 2004 and 2008 also emphasized the need to introduce RTGS to increase efficiency and counter systemic risks. The recent FSA 2010 notes that SBP has made considerable progress to increase the safety and efficiency of the payments by successfully deploying the RTGS. The deployment of RTGS has not only reduced the transaction costs, but more importantly it has allowed the banks to manage their intra-day liquidity in a much more efficient manner, thereby improving deployment and returns, both for the industry and the banking sector. During the last quarter of 2008 when there was a tight liquidity situation, the SBP team used the RTGS system very effectively by closely monitoring the daily liquidity positions of the banks and taking prompt actions.

3.3.4 Investments in technology and human resource through TABS has resulted in

much improved functioning of the Central Bank that has had its impact on performance of the financial sector despite the global financial crises and tough economic conditions in the country. Although these gains are hard to quantify but the results of the financial industry indicate that the country weathered these crises well and none of the institutions failed although the sector did witness a liquidity crunch towards late 2008. Through the support provided by TABS, the national payments system has been strengthened and streamlined, thereby reducing systemic risks, enabling efficient use of the available money stock, improved confidence in the banking system, and development of new financial services. SBP has also put in place a liquidity facility which is available to small banks without the usual collateral. This has been done to prevent a liquidity crunch similar to the one that took place in year 2008. The off-site Supervision and Enforcement department monitors system liquidity on a regular basis through weekly reporting from the banks. This has been made possible by the extensive investments in IT under the TABS.

3.3.5 Similarly, e-CIB services have considerably increased the efficiency and

soundness of credit decisions which were expanded to cover all consumers in addition to the corporate sector. Expansion of these services has also curtailed frauds as well as defaults in the market.

3.3.6 The SBP has also reduced the group credit exposure limit in a phased manner and

by the end of year 2013, this will be brought down to 25% from 45% in year 2009. The changes have already been reflected in the Prudential Regulations for the commercial banks

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3.3.7 SBP has also since 2008, started to announce and implement the monetary policy, consistent with its objectives of macroeconomic stability and low inflation.

3.4 Justification of Overall Outcome Rating 3.4.1 Rating: Satisfactory. These ratings are fully justified in light of the satisfactory

completion of all key project components, beneficial impact on SBP, the positive assessment by the commercial banks of Project’s results on the banking system, and validation of these by the ICR mission conducted in May 2010.

3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 3.5.1 An indirect impact on poverty is envisaged through improved capacity of the SBP

for consumer protection and the establishment of consumer protection department. 3.5.2 An expected positive impact on expansion of financial services and an indirect

impact on poverty reduction through financial inclusion by way of introduction of new regulations/ guidelines for Microfinance Banks and Branchless Banking. The enhanced capacity of SBP’s officials due to TABS has enabled the institution to draft and introduce Mobile Banking Regulations, that have already enabled the telecom services provider, Telenor, and Tameer Bank to launch ‘Easy Paisa’ that facilitates domestic remittances even in remote areas of the country.

(b) Institutional Change/Strengthening 3.5.3 TABS provided significant support to SBP for modernizing its IT systems and

imparting the desired training to the staff. The project has managed to bring about a change in the institution’s procedures around credit information, clearance of cheques, and provision of up-to-date monetary data and information. There has been noteworthy change in the HR policies as SBP has managed to attract experienced professionals from the market and the turnover has also reduced significantly. The quality of SBP publications (quarterly reviews, annual reviews, etc) have also improved significantly.

(c) Other Unintended Outcomes and Impacts (positive or negative) None

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3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops 3.6.1 The Bank provided SBP with a detailed questionnaire for assessment, by SBP

senior management, of the Project’s impact on SBP. According to SBP’s own assessment:

The project has had a positive impact on SBP’s professional capacity to supervise

banks and undertake monetary policy. SBP believes that due to institution’s autonomous status, all internal policies, procedures and operations of SBP are now more independent of outside interference. The general superintendence and direction of the affairs and business of SBP now fully vests in the SBP’s Board. With financial and operational independence, internal management of SBP is based on the principle of autonomy and accountability.

The SBP now formulates its monetary policy more independently taking into

account its own analysis and professional judgment. The Project helped SBP enhance its skills levels through qualitative and quantitative up-gradation of its staff’s capabilities.

In respect of banking supervision, banking policies, operations and development of new products, SBP has gone through a major transformation. One specific problem area, i.e. quality of lending by the banks, was previously more vulnerable to outside interference, as a result of which banks had accumulated massive non-performing loans (NPLs). This area is now under close oversight and scrutiny by the SBP, due to improved quality of supervisory staff. Consequently, ratio of NPLs had come down over the last few years; however owing to the recent global financial crisis and domestic economic slowdown, some banks have witnessed an increase in the NPLs in the last one year.

3.6.2 Feedback of the Banking Sector The Bank team also provided a questionnaire to

a large number of local and foreign banks operating within the country to obtain their feedback on the outcomes of the TABS project, especially with regards to SBP’s role as a regulator, and in conducting monetary policy. An interesting mix of responses was received from 10 banks, accounting for 25% of the banking system:

Almost all banks unanimously responded very positively in respect of SBP’s

performance in regards to conducting the monetary policy. All banks indicated that there is: (i) A qualitative positive change in monetary policy management by SBP. In

addition to regular periodic revision of the monetary policy, SBP now

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actively resorts to monetary policy revisions to address macroeconomic indicators requiring immediate attention;

(ii) SBP has taken swift action, during the recent past, against the increasing inflationary pressures through monetary tightening; and

(iii) The prudent monetary control by SBP has been evident from a gradual stability in inflation, economic growth and liquidity management.

The banks also noted considerable improvements in SBP's banking regulatory

and supervisory capacity. The depth of the annual review conducted by the SBP team each year has increased, as the coverage of the review now encompasses:

(i) The compliance with the SBP regulations by the banks in their regular

credit and investment operations; and (ii) Key aspects such as governance of the institutions, business plan/strategy,

human resource management, customer service quality, etc.

Similarly, most of the respondents were appreciative of automation efforts such as

RTGS, Globus, NIFT and e-CIB. While all banks have noted the very positive impact of the RTGS, some banks have expressed concern that the turnaround time for clearing cheques is still three days.

Various banks have recommended the incorporation of ‘group based reporting’ in e-CIB reports so that banks receive information on entire group in one e-CIB report. There are still demands on the CIB to provide information on corporate loans overdue under 90 days, which is not available in the current e-CIB system.

The banks also recommended reforms in the regulations (such as SME Prudential

Regulations), to ensure better penetration of financial services through technology driven innovation. Similarly some small banks have suggested expansion of SBP’s regulations, so that ‘muqaddams’ and service providers of security, custody, credit reports/industry checks can also be included in the framework. Suggestions have come in for tailored supervision in the areas of mobile and paperless banking.

There is a widely held view that integration of the entire banking system is vital for supporting a strong anti money laundering regime in the sector. A matrix of comments received from the banking sector is enclosed at the end of the ICR.

4. Assessment of Risk to Development Outcome

Rating: This has been rated as Moderate, taking into account the impact to-date on the ground, the strengthening of SBP’s professional capacity and the very encouraging autonomy and independence it is exhibiting in banking supervision and conduct of monetary policy and. The team believes that there is only a

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moderate risk that the positive impact on Development Outcomes could be undermined in future.

5. Assessment of Bank and Borrower Performance (Relating to design, implementation and outcome issues)

5.1 Bank Performance

The Bank overall performance rests on the performance achieved in ensuring quality at entry and quality of supervision

(a)Bank Performance in Ensuring Quality at Entry

Rating: Satisfactory.

5.1.1 The Bank provided the TA to SBP as a continuation of its support to financial sector reforms. The MoF and SBP were fully committed to these reforms and requested Bank support in this regard. The Bank’s CAS put a special emphasis on strengthening and deepening the financial sector in Pakistan. The Bank team remained fully engaged with the Government through policy dialogue and technical assistance.

5.1.2 The above notwithstanding, one area that could have been improved during preparation is the realism of the complex IT processes, architecture and capacity that was required to implement the RTGS system. This may have reduced the delays that were encountered subsequently during the implementation.

(b) Quality of Supervision


5.1.3 This rating is fully justified taking into account the generally satisfactory implementation of the Project, and the Bank’s pro-active support to SBP in overcoming challenges faced during implementation—especially dealing with timely extension of project closing dates to address the delays caused by external factors.

5.1.4 The Bank’s task team comprised lead technical specialists, both national and international, who contributed significantly through country and sector specific knowledge. The international expertise on IT was much needed and was made available to the SBP as and when needed. Similarly, technical assistance was provided by legal experts on the draft laws, such as the BCO amendments, SBP Act, Credit Bureau Act, Payments System Act and the Banking Act.

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(c) Justification of Rating for Overall Bank Performance Rating: Satisfactory.

5.1.5 Overall, the Bank performance has been satisfactory. Throughout the preparation and implementation of the project, the Bank team remained fully engaged with the SBP and responded effectively to emerging issues. Continuity of key IT and HR experts throughout project implementation contributed to providing timely advice on policy and implementation issues. The Bank team proactively followed through outstanding issues and actions and regularly documented the same in the supervision mission aide-memoires.

5.2 Borrower Performance (a) Government Performance


This rating reflects MoF’s strong support for the Project objectives, as well as full support to SBP in implementing the TABS.

(b) Implementing Agency or Agencies Performance

Rating: Satisfactory

5.2.1 Although the Project implementation was delayed by 2 years, SBP’s performance is being rated as Satisfactory in the light of results on the ground and the very positive assessment of the financial sector on the impact of TABS on SBP and the banking system. For the most part, the delay in implementation was due to (i) the complexity of IT procurement which stretched SBP’s IT procurement capacity and (ii) unforeseen contractual issues due to the deteriorating security situation. Both these situations were not envisaged, either by the Bank team or the SBP’s team.

5.2.2 The SBP top management showed high level of commitment to project objectives

and activities. A strong project management team was put in place throughout the implementation to oversee the critical IT investments. Senior SBP management including the Deputy Governor and the Executive Directors for HR, Banking Policy and Supervision Department regularly reviewed the progress on ground.

(c) Justification of Rating for Overall Borrower Performance

Rating: Satisfactory

5.2.3 Overall, the Borrower’s performance is rated Satisfactory. It is evaluated in terms of the high level of commitment of the both the MoF and SBP during project

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preparation and implementation; strong and regular oversight by SBP management; and presence of strong project management team.

6. Lessons Learned 6.1 Overall, the Project can be classified as a ‘success story’, in bringing about

technological transformation of the central bank and strengthening its professional capacity. The following are the key lessons that emerge from the implementation experience of the Project:

6.2 The first, and perhaps the most important, lesson is the critical importance of

committed and reform minded senior management team, and capable project team, for implementing and sustaining deep institutional reforms, especially technologically and institutionally complex reforms in an institution, which historically worked like a rigid and bureaucratic government department. Prior to TABS, promotions were seniority based and all mid and senior level appointments were from within SBP. Bringing about a paradigm shift in the culture of a public sector organization, especially in the socio-political setting where politicization is deep and incremental changes are the norm, could not have happened without the commitment of senior management. Hence, for the Bank, it is essential that before it approves an institutional reform project, it should ensure that the organization's management is fully committed to reform, has support of senior policy makers, and there is enough assurance that the management team will be in place for the full duration of the project. Without this 'success ingredient', institutional reform initiatives are unlikely to succeed.

6.3 A second important lesson relates to implementation of large scale 'state of the art'

IT programs in a public sector setting, with limited initial in-house IT knowledge or capacity. Globally, there are more cases of failure than successes. The experience under the TABS was very challenging for both the Bank and the SBP teams. Some of the critical success factors include: (i) senior management commitment to the program, and to supporting change management and perception management, given the cultural change that takes place when moving from a manual based institution to an IT based institution (ii) sound project planning, with clearly defined realistic timelines , taking into account SBP’s available capacity and past experience, (iii) up-front training of SBP staff (v) strengthening of SBP's procurement policies and capacity, to enable it to handle complex IT procurement (vi) re-engineering of the business process that were part and parcel of the automation initiative.

6.4 The Bank team believes that delays in completion of project activities could have

been avoided if there was greater realism built into assessing the implementing agency (IA) capacity for handling complex transactions especially those involving IT and automation. In the case of TABS, perhaps there could have been greater capacity building efforts for the SBP’s IT team, particularly for the component on

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RTGS and Globus interface. Ideally, the training should have been imparted prior to the procurement of IT systems and equipment

6.5 The final lesson relates to ex-ante assessment of the likelihood of

reforms bringing about the expected level of improvement in the institution’s performance. The critical issue is to rigorously examine whether the IA has the necessary legal and administrative autonomy and 'space', so that the reformed IA and its better trained staff fully deliver on the institution's key mandates. While better qualified staff, market linked salaries and merit based promotions are necessary, they are not sufficient in themselves to ensure institutional performance.

6.6 Clearly SBP’s performance in conduct of monetary policy has been very good in

the last 24 months. The broader banking sector reforms, which were implemented during 1997 – 2006 (and to some extent TABS), could have focused more on additional measures to strengthen SBP’s autonomy enabling SBP to take bolder steps, such as on interest rate, exchange rate, SBP’s financing of deficits, and on managing external imbalances resulting from loose fiscal policy.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies

7.1 The Borrower, SBP, has prepared its own completion report which is attached in the last section of the ICR. In addition, various departments of the SBP provided comments on the draft ICR, most of which have been incorporated in the report. The SBP’s own evaluation confirms the ICR assessments and rates the project as a successful intervention.

7.2 The draft report was also shared with the MoFA and SECP. Their comments are summarized in Annex 8. Both the MoFA and SECP have raised their concerns over delays encountered in the implementation of their activities under TABS (related to AML training and procurements), as well as reallocation of funds by the SBP without prior consultations. Both entities have suggested that in the future, funding should be provided directly to the respective agencies rather than through a centralized special account maintained by the primary borrower.

(b) Cofinanciers

None (c) Other partners and stakeholders

7.3 The Bank team conducted an independent survey of the banking sector to capture their feedback on the impacts of TABS on the banking sector. The feedback from various banks is summarized in a matrix attached at the end of the ICR.

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Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent)

Components Appraisal Estimate

(USD millions)

Actual/Latest Estimate (USD

millions)

Percentage of Appraisal

HUMAN RESOURCE DEVELOPMENT

1.12 0.537 47.95

TECHNOLOGY UP-GRADATION

16.63 22.812 137.17

STRENGTHENING PAYMENTS SYSTEM

5.00 3.411 68.22

STRENGTHENING CREDIT INFORMATION SERVICES

0.60 0.205 34.16

ANTI MONEY LAUNDERING AND FINANCIAL FRAUD

0.80 1.294 161.75

STRENGTHENING BANKING SECTOR CAPACITY

4.65 2.240 48.17

FINANCIAL SECTOR RESTRUCTURING/PRIVATIZATION

0.075 -

CONTINGENCY

Total Baseline Cost 28.80

Physical Contingencies 1.50 Price Contingencies 0.00

Total Project Costs 30.30 30.574 100.9 Total Financing Required 30.30

(b) Financing

Source of Funds Type of Co-

financing

Appraisal Estimate

(USD millions)

Actual/Latest Estimate

(USD millions)

Percentage of Appraisal

Borrower 3.80 1.172 30.84 International Development Association (IDA)

26.50 29.402 110.95

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Annex 2. Outputs by Component

Components and Output Targets Number or text

1. Human Resource Development Output Targets: (i) Reviewing and re-aligning policies of recruitment,

training, compensation, performance evaluation, promotion and separation;

(ii) Strengthening the human resource base of SBP by attracting, retaining and motivating professional staff; and

(iii) Carrying out a comprehensive HR audit to identify and fill the skill gaps in relation to the existing and emerging functional needs of SBP

- SBP's pay structure linked to 50th percentile of market. - SBP successfully attracted 5 expat Pakistanis to its team,

and has plans to add around 60 fresh graduates to the HR strength every year.

- Automated Performance Management System successfully implemented.

- All HRMS modules successfully tested and implemented. - Staff's capability has been enhanced through intensive and

structured program of training and more than 400 officers were trained abroad.

- Staff turnover reduced to 2.5% in 2009 from 7.31% in 2006.

2. Technology Up-gradation Output Targets: (i) Globus: Implementation and branch roll out of

Globus, and assessment of Globus functionality to identify new processes and practices

(ii) ERP Oracle: Supporting ERP changes needed to cater for the SBP and subsidiary split, implementation of a self-service HR kiosk and OLAP financial analyzer for end user reporting, and Oracle workflow implementation.

(iii) Data Warehouse: Initiating Business Process Reengineering of routine processes along with additional subject areas, conversion and flow of data from different applications into the data warehouse, and introducing custom-built packages.

(iv) Hardware and Networking: The procurement of 925 desktop and 120 laptop computers, 200 Network, 25 Personal and 10 High End Printers, Completion of LAN setup including cabling at Karachi Office, Connecting regional offices through VSAT, digital cross connect and dial up link – Wide Area Network (WAN), and to ensure quality power supply power generators, voltage stabilizers, UPS and related infrastructure.

(v) Training and Change Management: Completion of the training programs in networking and O/A, conducting similar programs during transition and

- Modern MIS involving banking solution; ERP for accounting, HR and payroll; a new data warehouse; and networking of offices and banking system successfully implemented.

- Disaster Recovery system piloted

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before switch over, and change management initiatives.

3. Strengthening and Streamlining the National Payments System

Output Targets: (i) RTGS systems implemented by consultants with

new procedures and rules. (ii) Automation of check processing through

introduction of RTGS to support the private sector in extending low value electronic services outside the main population centers.

(iii) All necessary training of SBP and commercial banks' operations, IT and treasury personnel

- Automation of cheque processing through introduction of RTGS to support the private sector in extending low value electronic services outside the main population centers.

- Globus and RTGS interface implemented. - NIFT settlement and trading of govt. securities added to

RTGS. - Hot Back-up in place. - Retail payments centralized & settled through RTGS,

processing approx 1,200 transactions daily averaging between Rs 200 – 250 billion . RTGS has enabled better liquidity management by banks. Intraday liquidity facility has been introduced and consequently, payments are settled in real time

- SBP launched a model 1 Delivery versus Payment (DvP) capability on August 9, 2008 for secondary market trading in government securities and to provide a repo based intra-day liquidity to RTGS participants.

4. Strengthening and Extending the Scope of Credit Information Bureau (CIB) to ensure timely availability of both positive and negative credit information

Output Targets: (i) CIB benefits to be provided to participants consistent

with best international practice; (ii) Improving the knowledge and skills of a small group of

SBP specialists; and (iii) Enhancing the technical platform to provide a basis for

an on-line secure connectivity with the system users.

- A comprehensive study to assess the old credit information systems was supported by TABS. The study was completed in year 2008 and subsequently a draft "Credit Bureau Act" was put together. This Act allows private credit bureaus to operate under regulatory supervision. The Act was approved ‘in principle’ by the Cabinet, and is now pending with the Law Division.

- Web based credit checking has been introduced by CIB. - The existing system of CIB was strengthened and its scope

extended to ensure timely availability of both positive and negative credit information based on international best practices

- e-CIB offering web-based credit reporting to 100 FIs across the country

5. Improved legal and regulatory framework to prevent money laundering and financial fraud.

Output Targets: (i) Seminars and workshops organized on money

laundering

- Training of SBP and SECP was conducted under TABS in the area of AML.

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(ii) The AML law enacted, the Financial Management Unit established within the SBP, and capacity building of staff in SBP, SECP and AML unit of ECW of FIA enhanced through rigorous training on AML

- Financial Management Unit established for improved control & prevention of fraud and ML.

- The Government of Pakistan has re-enacted AML Ordinance 2009, after incorporating the amendments proposed by the Financial Action Task Force (FATF). The Senate Committee on Finance approved the AML and Combating Terrorism Financing Bill 2009 to facilitate government, linking it with the approval of Ministry of Finance.

6. Strengthening and Building Capacity for Banking Sector Regulation and Policy Making

Output Targets: (i) Provision of specialized training in "soft skills'

areas, particularly management of change and culture;

(ii) Appointment of well-regarded senior level trainers from abroad to bring in new ideas to supplement internal programs and courses offered within Pakistan; (iii) taking part in international seminars and conferences;

(iii) Hiring consultants/ advisers to support training needs, IT and HR functions;

(iv) Conducting studies for development of financial markets and services including a comprehensive diagnostic study on Habib Bank Limited; and

(v) Building capacity at the Ministry of Finance (banking wing) for strategy and policy making to keep abreast of developments in the sector.

- Bringing in trainers from abroad was problematic due to

security conditions being unfavorable. - Hiring of consultants for training and for providing support

to other components including RTGS and ‘Beneficiary Survey’ has been problematic owing to SBP’s internal procurement policies and procedural delays.

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Annex 3. Economic and Financial Analysis (Including assumptions in the analysis) A 3.1 As noted in the PAD, there is no economic evaluation methodology for the technical assistance projects. However, as envisaged during the project design, the strengthening of SBP, enhancing the national payment systems and credit information services in the country has had a positive impact on financial sector stability, general business environment and economic development. This is evident from the responses received by the Bank, from the financial institutions across the country. A matrix containing these responses is attached with the ICR. A 3.2 Investments in technology and human resource through TABS has resulted in much improved functioning of the Central Bank that has had its impact on performance of the financial sector despite the global financial crises and tough economic conditions in the country. Although these gains are hard to quantify, but the results of the financial industry indicate that the country weathered these crises well and none of the institutions failed, although the sector did witness a liquidity crunch towards late 2008. Through the support provided by TABS, the National Payments System has been strengthened and streamlined, thereby reducing risks, enabling efficient use of the available money stock, improved confidence in the banking system, and development of new financial services. Additionally, strengthening the quality and extending the coverage of CIB through the electronic platform has facilitated better allocation of credit in the economy, improved borrower discipline, and reduction in frauds and defaults. This is also captured in the attached matrix of comments received from the financial institutions. A.3.3 Regulatory improvements, encouragement of modern banking practices, and the use of technology opened doors for expansion of financial services. Although it is still early but the use of electronic modes of payments is on the rise and is helping outreach of financial services.

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Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Names Title Unit Responsibility/

Specialty Lending

Supervision/ICR Kiran Afzal Research Analyst SASFP Shabana Khawar Senior Financial Sector Specialist SASFP Shamsuddin Ahmad Senior Financial Sector Spec. SASFP Asif Ali Senior Procurement Specialist SARPS Rakesh Asthana Senior Manager ISGOS Anwar Ali Bhatti Financial Analyst SACPK Syed Abul Kamal Md Abdul Hye

Program Assistant SASFP

Robert Keppler Consultant CAIFI Isfandyar Zaman Khan Financial Sector Specialist ECSF1 Samuel Munzele Maimbo Senior Financial Sector Spec. AFTFE Mudassir Khan Senior Financial Sector Spec. SASFP Amir Munir Senior Business Partnership Officer ISGOS Rubina Geizla Quamber Program Assistant SASHD Ann Rennie Lead Financial Sector Specialist SASFP

Furqan Ahmad Saleem Senior Financial Management Specialist

SARFM

Hasan Saqib Senior Financial Management Specialist

SARFM

Imtiaz Ahmad Sheikh Team Assistant SASFP Kiatchai Sophastienphong Senior Financial Sector Specialist SASFP Namoos Zaheer Junior Professional Associate SASFP

(b) Staff Time and Cost

Stage of Project Cycle Staff Time and Cost (Bank Budget Only)

No. of staff weeks USD Thousands (including travel and consultant costs)

Lending FY02 18 72.47 FY03 5 9.19 FY04 0.00 FY05 0.17 FY06 0.00 FY07 0.00 FY08 0.00

Total: 23 81.83 Supervision/ICR

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FY02 0.00 FY03 15 39.85 FY04 19 74.91 FY05 34 139.51 FY06 31 135.00 FY07 25 129.65 FY08 26 113.31 FY09 28 0.00

Total: 178 632.23

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Annex 5. Beneficiary Survey Results Not Applicable.

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Annex 6. Stakeholder Workshop Report and Results Not Applicable.

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Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR A 7.1 Summary of SBP Comments on Draft ICR/ SBP’s Evaluation Report SBP’s own Evaluation Report is attached with this ICR at the end. In addition, the draft ICR prepared by the Bank team was shared with SBP, and comments of SBP were conveyed to the Bank via email. The comments and feedback mostly pertain to the IT component of TABS project. SBP’s Evaluation Report provides a detailed assessment of the milestones achieved under TABS and how these have transformed the SBP into a modern and efficient regulator of the banking sector. The evaluation report notes the considerable improvement in technical expertise of the SBP staff since 2002. SBP now has a much deeper understanding of the financial markets, and is significantly better equipped to deal with the issues of banking sector. SBP’s operational staff appreciates the importance of effective maintenance, support and service level agreements as these were given high priority during the project. The project suffered substantial delays due to security situation, as foreign consultants could not travel in time to deliver their services. Accordingly, new methods of project execution like formation of virtual teams, use of internet connectivity etc. were explored and adopted where required.

Above all, SBP is now being witnessed by all stakeholders as more efficient, modern, professional and equipped with latest technology. A 7.2 Summary of Comments Received from MoFA and SECP The Ministry of Foreign Affairs (MoFA) and Securities & Exchange Commission of Pakistan (SECP) shared their comments with the Bank which are summarized below: MoFA: The AML/Counter Terrorism project for the MoFA, based on the concept of a wider range of secure communications capability was a new initiative. The MoFA had previously not participated in any such Bank funded project. The contribution of the project has been strengthening of the AML/CT capability of both the MoFA and its Strategic Export Controls Division (SECDIV) in terms of secure communications, data storage and retrieval. The reallocated amount under TABS, intended for consultancy services and training purposes could not be utilized fully as the reallocation was done at the end of year 2008, leaving little time for the planning and commencement of these activities. While all the permitted hardware and software procurement for the MoFA part of the project was completed, its integration and implementation is expected to take place at the end of 2010 when the New High Security Block of the MoFA, adjacent to the existing block is completed.

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The SBP has assured to assist the MoFA in system integration and in any further assistance required for the MoFA through a TABS – 2 project. SECP: SECP’s share under the project component ‘Anti Money Laundering (AML) and Financial Fraud’ was USD 0.35 million. SECP could only utilize USD 0.2 million and the remaining unutilized amount of USD 0.15 million was reallocated by SBP without prior consultations with the SECP. SECP feels that future allocations to the entity should be direct as the involvement of a third party causes procedural delays. On its role in preventing Money Laundering (ML) and Terrorist Financing (TF) activities, SECP informed the ICR mission that in year 2009, it issued circulars for conduct of business by NBFCs and Modarabas thereby safeguarding them against AML/TF and other illegal trades. The circulars provide for a comprehensive KYC policy to be in place, specify the minimum requirement for account opening, and identification and verification of documents.

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Annex 8. Comments of Co-financiers and Other Partners/Stakeholders There were no co-financiers. The Bank, however, sought feedback on TABS from the banking sector through a questionnaire to various financial institutions. The responses received from the financial institutions have been summarized in the matrix attached with the ICR.

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Annex 9 List of Supporting Documents

1. SBP’s Own Evaluation Report 2. Matrix of Comments received from the banks

Project Documents

1. Project Appraisal Document – The World Bank, May 14, 2002 2. Implementation Status and Results Reports, The World Bank, 2003 – 2009

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IMPLEMENTATION COMPLETION RESULTS REPORT SBP’S OWN ASSESSMENT

----- Forwarded by Kiran Afzal/Person/World Bank on 06/01/2010 04:17 PM ----- From: Amanullah Ogahi - BPRD <[email protected]> To: "[email protected]" <[email protected]> Cc: "Syed Irfan Ali - Director BPRD" <[email protected]>,

Muhammad Tahir - BPRD <[email protected]>, "Akbar Abdul Ali - BPRD" <[email protected]>, "[email protected]" <[email protected]>

Date: 05/27/2010 01:17 PM Subject: IMPLEMENTATION COMPLETION RESULTS REPORT - SBP'S OWN ASSESSMENT

Madam, Please find attached Implementation Completion Results Report for necessary action at your end. Best Regards AMANULLAH Joint Director Banking Policy & Regulations Department State Bank of Pakistan I.I. Chundrigar Road Karachi, Pakistan. Ph: +92‐21‐2453580 Cell: +92‐333‐3965688 Fax: +92‐21‐9212506 e‐mail: [email protected]

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IMPLEMENTATION COMPLETION RESULTS REPORT SBP’S OWN ASSESSMENT

Q1: Assessment of the operation’s objective design, implementation and operational experience, as well as an assessment of the outcome of the operation against the agreed objectives; Assessment of the operation’s objective design, implementation and operational experience including outcome of the operation has been divided largely in the following areas with details in the ensuing paragraphs.

RTGS-Development of payment system. Technology Up-gradation. Credit information Bureau. Anti Money Laundering Human Resource Development

RTGS-Development of Payment System The acquisition and implementation of the Real Time Gross Settlement (RTGS) system at SBP covered the following:

Acquisition and installation of a comprehensive and robust RTGS system Necessary trainings of concerned SBP and commercial banks personnel Initial visits by senior and mid level officers to other central banks and institutions

for knowledge transfer Establishment of appropriate legal infrastructure (including the enactment of

Payment Systems and EFT Act 2007) for the new system ensuring provisioning of final and irrevocable immediate settlement of payment instructions

The implementation of the RTGS system has achieved major policy objectives in the area of Payment Systems as described below:-

1. RTGS System implementations has significantly reduced the settlement risk by enabling SBP to migrate from deferred gross settlement system (previously used for interbank funds and government securities settlement) to Real Time Gross Settlement System. This in turn has also helped in minimizing systemic risk in interbank funds and securities settlement.

2. RTGS Implementation has also resulted in centralization of NIFT’s all three clearing cycles resulting in a single country wide clearing nets settled electronically in RTGS System instead of settling numerous individual net settlement batches (for each clearing cycles) previously used to settle retail clearing at SBP BSC’s sixteen (16) field offices. This has resulted in significant time reduction in retail clearing settlement.

3. RTGS System Implementation has also helped to increase the settlement timings i.e. from 1:30 PM previously to 5 PM now therefore increasing efficiency of the large value payment systems by providing enhanced timing for money market operations.

4. Government Securities are now settled on real time DvP (delivery vs payment) basis instead of deferred gross settlement previously used to settle government securities.

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Further, transactional activities of PRISM indicate that the system was used to settle 236,412 transactions during FY09. The value of these transactions was Rs 62.2 trillion, which is 4.8 times the GDP for the year. Trends in the number of transactions and their corresponding value indicate that in FY09, PRISM was (on average) used to settle 750 transactions on a daily basis, worth Rs 200.0 billion, which implies that the average value of each transaction is slightly higher than Rs 250 million. During the first eight (8) months of FY10 (July – Feb), the system was used to settle Rs. 46.5 trillion worth of 189,353 transactions. Accordingly, the average value of each transaction also slightly increased to Rs. 253 million. The real time settlement mechanism of such large value transactions is a welcome development for the payment system infrastructure of the country, as it contributes to effective risk management by reducing systemic and credit risks. It also allows banks in managing their liquidity more prudently. System tools like, ILF and queuing allows banks to manage their payments as well as position most efficiently. Settlement of multilateral NIFT clearing batches in RTGS on country wide basis has significantly reduced the need for banks to manage dispersed liquidity and maintain it on a more centralized basis in one location. Further, the settlement time has also been reduced significantly and banks are now able to see their clearing position in real time via the online web-portal developed by NIFT. PRISM is also likely to strengthen the transmission mechanism of monetary policy, in Pakistan as it is operated on a market-based mechanism and given the two-way causal relationship between monetary policy and the payment system. At one end, a well designed and efficient payment system influences the demand for money and the efficiency of some monetary policy instruments by affecting the speed of execution of financial transactions. On the other hand, monetary policy influences the available liquidity in the payment system and the opportunity cost of settling transactions. Technology Up-gradation Technology up-gradation was essential to meet the rising demands of bringing efficiency and quality in business operations, economic & banking sector data analysis and to transform the work culture of SBP and SBP (BSC) with an automated IT environment. The key purpose was to replace the outdated and legacy information systems with new and modern IT infrastructure having automated IT systems and support infrastructure to enable SBP conduct its banking operations and other key functions efficiently and smoothly. It was also required to strengthen regulatory framework for FIs through improve procedures, monitoring and enforcement and establish good corporate governance practices within the organization. An efficient data processing, financial and non- financial reporting, data analysis and communication system to addresses the automation needs of SBP and its subsidiaries specifically and also to facilitate reporting and data acquisition from key stakeholders i.e. scheduled and non- scheduled banking sector companies, IMF (International Monetary Fund), MoF (Ministry of Finance), FBR (Federal Board of Revenue) etc. In order to meet the above stated broad objective following specific steps were planned and implemented.

Automate and integrate the core banking, currency issue & management business functions. Important business functions as a part of automation includes government securities, deposit banking, foreign exchange management, investment accounting, government banking, currency issuance, prize bonds etc. Automation and reengineering the core business processes were suppose to bring the following efficiencies in system

Reduced transaction time.

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Standardized business processes across the system. Open technology platform. Compliances to industry standards and best business practices. Convenient, faster, reliable and integrated information. IT infrastructure with most recent technology. Low cost for steady operation. Future oriented stability and flexibility. Easy access to the integrated information. Higher efficiency in surveillance of SBP and whole financial sector. Thorough control of foreign exchange.

Automate and integrate the non-banking business functions i.e. assets & inventory management, cash management, payroll function ( Salary, advances, funds, pension), medical services, performance management system, general ledger, accounts payable and procurement. The key benefits were:

Create value through integrating activities across organization. Implementation of best practices. Standardization of processes. Single source of data for reporting. Complete automation of all the Financial, administrative and HR Functions. Online/Real time maintenance of all financial data. Online/Real time maintenance of employee's data. Improved budgetary controls. Online approvals of financial instruments. Centralized payments. Efficient processing and improved controls through isolation of purchasing, invoicing

and payment areas (with only on payment desk for all kinds of non-banking payments).

Online availability of all financial reports. Seamless Integration among different departments and applications. Automatic reconciliation of Intercompany Transactions.

Designing and building up a centralized on-line gateway for financial data acquisition

from a number of organizations across the country that includes local and foreign Banks operating within the country, Development Financial Institutions (DFIs), Exchange Companies, Government Agencies (e.g. Central Board Revenue, Federal Bureau of Statistics, Economic Affairs Division - Ministry of Finance, etc.) and other organizations such as airlines, freight forwarders, etc.

Designing and building up a data ware house to transform, aggregate and process the data captured from different internal and external sources. The purpose is to provide the end-user with comprehensive analytical capabilities on different subject areas i.e. Banking and Money, Balance of Payments & Exchange Rates, Agricultural Credit that enables our stakeholders to make better data based decisions in assessing the financial trends, supervising the banking companies, assessing the economic indicators (inflation, growth, etc.) and their movement.

Design and implementation of network connectivity based on different feasible and economical media options to ensure smooth and reliable communication among all SBP and SBP (BSC) offices and also providing the comprehensive hardware infrastructure for

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business applications that includes medium rang servers, enterprise class storage systems. Country wide implementation of technology infrastructure includes servers, data storage, networks i.e. Local Area Network LAN & Wide Area Network (WAN), Uninterruptable Power Supply UPS) , Security devices, housing facilities, services, other required components and manpower to run the operations.

Establishing a disaster recovery hosting facility and building up necessary technology infrastructure for timely shift over in case of catastrophic event as per the required business objectives against the different applications.

Globus Core Banking System: System automatically processes all accounting entries and other calculations thus

eliminating the paper work and manual calculations. System provides real time positions of securities and accounts to users and management. More reliable and timely information is available for Management Information System

(MIS) purposes. System has real time interface with RTGS system and transactions processed on bank’s

accounts are updated in RTGS system in real time. One of the envisaged benefits of system implementation was elimination of Inter branch

accounts reconciliation. It was achieved through Auto Inter Company Transactions refer to as online Funds Transfer facility where offices transfer funds to other offices on line in Globus.

Inter systems reconciliation was achieved through implementation of cash management module of Enterprise Resource Planning (ERP). This includes the payments made to various contractors where cheque is issued to contractors from ERP and payment is made to them from Globus. An interface has been developed from where transactions pertaining to various ERP modules responded in Globus are reported to Cash Management module on daily basis.

Compliance to reporting to IMF is achieved through Monetary and Financial Statistics Manual (MSFM) project. SBP had to revise its data collection process according to the standards defined by IMF in shape of MFSM. Globus team in consultation with Data Ware House (DWH) team designed and implemented the solution and MSFM reporting is now through DWH.

System has enabled SBP to introduce new products into the market like recently done in shape of launching of Sukkuk, Pakistan Investment Bonds (PIBs) and 30 years bonds.

SBP has gained more efficiency and control along with less risk through implementation of system. Example includes Foreign Currency Deposits where system checks limit of counterparties online and also provides MIS reports to Risk Management & Compliance Department to monitor limits in real time.

System has enhanced skill level of the staff resulting in improved productivity evident from the fact that business is now daily closed at 5.00 to 6.00 pm.

Last but not the least Globus has introduced modern banking practices in bank.

Oracle ERP System: Integrated Oracle ERP system enhances the management decision making process Bring about improvement in the quality & timeliness of required information. Delegation of Powers & Restructuring. Seamless Integration among different offices/departments and applications. Cultural changes observed after Automation.

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Complete automation of all the Financial, Administrative and HR Functions Online availability of all financial reports. Efficient processing and improved controls. Consolidation of the functions. Technology enabled business processes. Manual registers have been discontinued and replaced by different reports of Oracle ERP. The General Ledger (GL) entries generated within Fixed Assets, Purchasing, Inventory,

Accounts Payable, Payroll and Globus will be directly entered into the system by the concerned departments, eradicating the need for creating any GL entries for these functions within the GL module. The role of Accounts/Finance Department of SBP and BSC has been changed towards monitoring, controlling and reporting.

Limited or no flow of manual vouchers required from any of the offices for verification and processing.

Automated consolidation of accounting information at SBP, SBP BSC Karachi Office and offices after implementation of systems at all offices. This ability to consolidate information is a crucial benefit of having data available electronically across the various offices on the ERP systems.

Accuracy and validity of information of the transaction file transferred from Globus to Oracle GL.

Data Ware House System:

Banking and Money Subject Area:- Development and testing of Reporting Chart of Accounts (RCOA) weekly completed and

rolled out to production. This application is now live and the banks are successfully submitting weekly statements electronically. The SBP users are generating output reports from this data and manual returns have been discontinued from the banks.

Development of RCOA Annex A-07 (Classification of Credit by Borrowers) completed and rolled out to production. This system is currently in parallel run and banks are successfully submitting their monthly returns electronically. Manual returns from banks will be soon discontinued

Development and testing of RCOA Quarterly completed and rolled out to production. This system is currently in parallel run and banks are successfully submitting their quarterly reports electronically. Output reporting requirements of all the departments are being catered as Quarterly Reporting Chart (QRC) data is used by almost all departments for reporting. Once the reporting is finalized, manual reporting of QRC will be discontinued which will be a major milestone for the Data Warehouse Division. Data Validation reports for RCOA quarterly data, requested by Off-Site Enforcement Department (OSED), are also under development.

Balance of Payments Subject Area:- Development on the new application for Balance of Payments whereby the Statistics

Department users will be able to load data in an Excel file and perform validation checking on it, before it is bulk loaded into the Data Warehouse. Previously, data was entered one transaction at a time using a data entry application which was very time consuming.

International Transaction Reporting System (ITRS) application released to all 2000+ branches of all the Commercial Banks of Pakistan. This application is being used to enter Foreign Exchange Returns transactions. Once the data is entered, this application

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generates the Comma Separated Values (CSV) file according to the requirements of State Bank of Pakistan.

Development of Exchange Rates Application whereby all the head offices of the commercial banks report the daily exchange rates of the currencies on a monthly frequency. Using this on-line application, banks prepare the excel sheet and load it from their premises.

Capital Market Subject Area:- Fully automated the generation of Balance Sheet Analysis (BSA) Book. Previously,

developers prepared this report manually for the users. SBP in-house team has developed new reports for the purpose and also trained the users regarding using Adobe Acrobat and a PDF page numbering software. All this made it possible for the users to successfully publish the BSA Books for year 2005 and 2006 themselves without the involvement of developers.

Many new reports demanded by the users were developed, tested and attached in the production system and are working successfully. One of these reports was especially required by the Economic Advisor which was completed exactly according to the requirements and attached in the production system.

Changes in Data Entry screens were also catered as per users’ requirements e.g. the need for a separate window for data entry was also fulfilled.

Other minor bugs and issues reported in the system were rectified and resolved and the system finally got signed off by the business users, which was pending for a long period.

Price Trends Subject Area:-

Development of the new Price Trends application. This application is now in use by the Business users. It contains implementation of 5 new variations of price trend calculations; 3 Index-based and 2 Price-based. Previously, only one set of price-based calculations could be performed.

MFSM Subject Area:- Development of Phase 1 of MFSM; sectoral Balance Sheet Preparation.

Agricultural Credit Subject Area:- Successfully catered the loading and merging of 6 monthly data for the last one and a half

year. Removed minor bugs from the database procedures and reports.

Networks and Infrastructure:

SBP has deployed Fast Ethernet, structured network system in all SBP centers, in 15 different cities of Pakistan. The Main Data Center is situated at 6th Floor of the main building of State Bank of Pakistan in Karachi, which has State of the Art Campus Clustered setup for the core applications of Globus and Oracle ERP. Main building has a campus network of three building interconnected over Giga bit Fiber Optic backbone system consisting of more than 3500 nodes in overall. Primary server farm has both Reduced Instruction Set Computing (RISC) and Intel based servers and enterprise storage with multiplatform Operating Systems. A hot backup site has been established clustered with the primary site over Fiber Optic cabling system. The campus network has a large setup having more than 3000 desktops and workstations interconnected over 100Mbps LAN.

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In total across all SBP offices there are more than 4500 structured 10/100 Megabits per second LAN nodes so far installed under the scope of Automation Project.

All countrywide SBP (BSC) offices are interconnected using terrestrial based leased line digital cross connect links at primary data centers and satellite links at backup data centre of SBP beside that the disaster recovery centre is connected to Primary and backup data centre using terrestrial circuits. All network points are powered by conditioned electricity supplied by (UPS) of APC (American Power Company) that are supported by Automatic Voltage Regulators (AVR) –and backed up Generators dedicated for IT load at each office.

Automated accounting entries, data consolidation, standardized automated reporting.

System automatically processes all the accounting entries and other calculation through Globus core banking solution thus substantially reducing the quantum of work related to book keeping, reconciliation and settlements of accounts in the areas of government banking, deposit banking, securities and money market as well as the currency issuance and distribution system.

Systems provide real time position of securities and accounts thus provide an immediate platform for decision making and other detailed MIS reports to concerned departments for Forex and money market management.

Automated systems have facilitated the launching of new products especially securities such as Sukkuk and other bonds. Besides Globus provides the foundation for the RTGS operations through its interface where the current accounts of financial institutions are maintained in Globus and settlement takes place in RTGS.

Risk management and more internal controls have been achieved in the business processes with the automated system. An example is Foreign Currency Deposits where system checks limits of counterparties online and also provides MIS reports to Risk Management and Compliance Department in real time.

Data Acquisition Portal provides a greatly improved facility through online data collection from financial institutions.

The Data Warehouse provides requisite statistical information utilized for multidimensional trend analysis and projections in developing the Monetary, Agriculture Credit and Exchange policies of the Central Bank.

All export/import data from financial institutions is processed in Data Warehouse and effectively and efficiently utilized for calculation of Balance of Payments and Current Account status of Pakistan.

IMF reporting compliance (MFSM) has been achieved through Data Warehouse system. In the Organizational Financial System that includes General Ledger, Payables, Asset

management and procurements; Automation has substantially reduced the manual work of the resources.

In Human Resources Management Areas, the Recruitment, Internal Transfers and Posting, Compensation and Benefits Including Medical Services System, Training and Performance Management System are all integrated to each other thus increasing the overall efficiency and productivity of work force.

All GL entries generated within respective systems mentioned above are directly entered into the system by concerned departments. This has provided a great facility to Accounts/Finance department of SBP and SBP (BSC) by focusing them on monitoring,

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controlling and reporting functions. Consolidation of books in sixteen SBP BSC and SBP main office was a very resource

intensive task prior to automation which in now totally automated through Globus core banking solution and single consolidated GL report is available on daily basis from Oracle ERP GL module thus resulting in availability of consolidated information.

Integration and re-engineering of different HR, BSSD, Finance and SBP (BSC) functions through the automated systems i.e. Globus banking and Oracle ERP, like for example, payment transactions to various contractors is entered in Globus against the cheques issued through Oracle ERP system. An interface is operational between Globus and ERP to reflect the transactions on daily basis in Oracle Cash Management Module.

Countrywide infrastructure in SBP, BSC and field offices and NIBAF has facilitated the internal communication and exchange of information within the organization through instant access to email, Intranet Portal and SBP website as well as access to other IT resources has result in building up the capacity of SBP’s workforce for IT enabled banking and ERP operations.

Automated systems result in convenience and efficiency of internal working as is evident from the fact that after automation business in all offices daily closes timely by 6:00 PM as opposed to mid-night closing in the manual system.

The compilation of Weekly Statement of Affairs has been reduced from two weeks to two days through an online Data Acquisition Portal.

Export/import data compilation has been reduced from two weeks to five days. Distribution of salary and pension processing across seventeen offices has been

converged to single centralized processing with the attendant reduction of work and the processing time has reduced from fifteen days to five days and the processes are integrated with Human Resource Information System(HRIS) and Finance.

SBP's Internal and external websites provides instant and convenient access to publications, circulars & notifications, administrative orders, economic indicators and data including Karachi Inter Bank Operating Rates (KIBOR) rates to the employees within SBP and other stakeholders of SBP i.e. financial institutions. The provision of documentation availability through an online channel made not only a convenience in accessibility but also brings a huge efficiency in terms of timely communication within and outside SBP irrespective of geographical locations.

Staff productivity of key business areas pertaining to SBP Banking cluster and SBP

Economic cluster has increased with automated systems as the data collection; reporting and analysis function with automated systems has facilitated them on focusing their respective core functional areas.

Staff objective settings and performance assessment has been made transparent and provides convenience in setting staff goals against their respective business plan in the start of business year. Oracle Performance Management System (PMS) module facilitates the individual contributor, unit leads, team leads and departments heads in setting their respective goal and KPI's against the business objectives. This results in proper planning and assessment of work from the bottom level worker to high ups as per the set business objectives in business plan of that year.

SBP has passed through a major hiring process in 2007 recruiting the IT personnel in

different specialized areas of infrastructure and business applications. The hiring was aimed to bring functional specialization, standardization, capacity building and contingency planning of human resources. Currently Information System &Technology Department(IS&TD) of SBP has over 130+ employees in ten different domain of I.T

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infrastructure, I.T business applications, Administration, Planning & Coordination and I.T Security.

SBP keeping in view the mission critical importance of its infrastructure and services decided to plan and develop a Disaster Recovery site geographically separated from the primary site hosted at Karachi. In addition to Disaster Recovery site SBP has operational Clustered High Availability Backup Site.

The Information System & Technology Department is now headed by the Chief Information Officer(CIO) reporting to Deputy Governor, and is structured with two deputy CIO’s heading the two main work streams i.e. infrastructure and business systems.

Recruitment, retention and continuous training. – Key project resources have been retained by giving them permanent employment status.

Essential technical trainings are imparted to key technical staff working on the implementation of new systems.

Outstanding issues pertaining to residual work and settlement of payments of the automation project was completed satisfactorily within the TABS deadlines. This was effective in the smooth transition of the project into live operations.

In June 2009, SBP had its fourth consecutive financial closing on the implemented automated systems.

Products life cycle management- regular maintenance contracts and replacements of obsolete products is managed through organizational budgeting and procurement.

The project of NOC (Network Operations Centre) was initiated on the recommendations of the World Bank. This project is aimed to bring the proactive management of I.T resources which has enhance internal capabilities in customer support services, I.T assets management and I.T capacity planning.

A new I.T security team reporting to the CIO has been created. Presently all of the key implementation areas are being managed by the internal resources along with the vendors support through maintenance and support contracts. However, certain areas are being evaluated for possible outsourcing. Routine recruitment is being pursued to fill attrition gaps.

Credit Bureau Business

The World Bank funded project under Technical Assistance for Banking Sector (TABS) was aimed to transform State Bank into a highly professional, efficient and modern central bank, fully equipped to play a meaningful role in the economic and social development of Pakistan. In order to cater evolving needs for comprehensive credit information and associated credit scoring tools, strengthening of existing credit bureau services and providing an enabling environment for establishment of credit bureaus in the private sector was recommended. State Bank of Pakistan (SBP) hired services of M/s Sidat Hyder Morshed Associates (SHMA) as a consultant, to carry out a comprehensive assessment/study of the existing credit information systems in Pakistan. The job included specifying the parameters under which the private credit bureau would be established, collect and disseminate data, safeguarding the interest of stakeholders, laying down the enabling legal frameworks for the provision of optimum benefits to the participants consistent with best international practices. Training of CIB officials in the critical design and operational aspects of credit reporting systems and their role in a market economy was also part of consultant’s assignment. The consultant had prepared a comprehensive study report highlighting enabling environment for incorporation and functioning of private credit bureaus business in

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Pakistan. A draft law titled “Credit Bureau Act” was also proposed for effective regulation of credit bureau business in Pakistan. The SHMA report was approved by the State Bank. The proposed legislation was comprehensively reviewed by SBP legal advisor and deliberated upon in series of meetings of Banking Laws & Review Commission (BLRC). Presently, proposed law is with the Ministry of Finance which will be tabled in National Assembly and Senate for its enactment. The proposed legislation will provide an enabling environment for incorporation and functioning of credit bureau business in Pakistan. Besides, technology transfer, the credit bureau business will bring in expertise of international repute. The healthy growth of credit bureau business will result in increased access to credit, more equitable allocation of credit and greater private sector lending. Anti Money Laundering

The State Bank of Pakistan (SBP) is the primary regulator for Banks and DFIs in Pakistan while the Securities & Exchange Commission of Pakistan (SECP) is responsible for regulating the non-banking financial sector. The regulatory measures taken by SBP under the head of AML are as under:-

Being regulator of banks / DFIs, State Bank of Pakistan is fully cognizant of its role in ensuring clean and transparent banking system in the country. Toward this end, requirement of determining the true identity of prospective account holders was imposed by State Bank as far back as 1992. This was in addition to, prudential regulations on prevention of criminal use of banking channels for the purpose of money laundering and other unlawful trades. The regulatory regime continued to evolve and strengthened in the light of changes and developments in the financial market and international best practices. During the process, State Bank has taken following steps to curb and control money laundering:

Issuance of Prudential Regulations: The basic elements of anti-money laundering for financial institutions include risk based system of know your customer (KYC), account monitoring, record retention, due diligence in correspondent banking relationship and reporting of suspicious transactions. Though Banking Regulations were in vogue since long, a comprehensive set of Prudential Regulations was enforced in June, 2004 and updated from time to time. These Prudential Regulations contain Know Your Customer, Anti-Money Laundering Measures, Record keeping, Correspondent Banking Relationship, Reporting of Suspicious Transactions, appointment of Compliance Officer. Implementation of these regulations is ensured through on-site examination and off-site surveillance. Officers of Inspection Department specifically verify the adequacy of KYC policies and other Anti-money laundering safeguards during their on-site inspections. Inspection of banks/ DFIs is conducted on periodic as well as on need basis. The inspection report is shared with Banking Supervision Department for enforcement action. Banking Supervision Department takes action against banks/ DFIs who are found deficient in compliance of regulations and other remedial measures are also taken to ensure compliance in future.

Guidelines on Internal Controls: Internal controls go a long way in preventing financial crimes in the financial institutions. As a part of its ongoing efforts to encourage banks/DFIs to adopt robust risk management practices, the State Bank of Pakistan has prepared detailed Guidelines on Internal Controls. The guidelines were circulated amongst banks in May 2004. These guidelines require all banks/DFIs to ensure existence of an effective system of internal controls, which is commensurate with the nature, size and complexity of their business; minimizes the risk inherent

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in their activities; and responds to changes in the business and general economic environment in which the banks/DFIs operate.

Rupee Travellers Cheques (RTCs): The banks in Pakistan were issuing Traveller Cheques in local currency called “Rupee Travellers Cheques” (RTCs) in exceptionally high denomination of up to Rs.500,000 which was not in line with the true spirit and purpose of Traveller Cheques. Instead of using RTCs to meet the needs of travellers, the holder of these instruments often used them as a mode of settling undocumented transactions, thereby, defeating the objective of the Government of documentation of the economy. SBP, therefore, prohibited the issuance of RTCs in denominations exceeding Rs.10,000/- since May, 2002. State Bank of Pakistan is now considering to revisit the issue keeping in view the recent development on AML issues.

Formation of Exchange Companies: Through an amendment in Foreign Exchange Regulation Act, 1947, money changers have been replaced with Exchange Companies. These companies are subject to proper monitoring and on-site inspection by SBP. With the powers to conduct on-site inspection of such companies, State Bank keeps an eye on their activities. Banks/ DFIs and Exchange Companies are encouraged to provide competing services in the formal sector in order to remove any incentives being provided by Hawala operators. SBP has issued effective regulations for Exchange Companies which are updated from time to time.

Money Laundering and Islamic Banking: Anti-money laundering safeguards are inherent in Islamic Banking.

Policy for discouraging use of Alternate Remittance System (ARS): The SBP’s regulatory measures of licensing the Exchange Companies to undertake the business of sale/purchase of foreign currencies, transfer of funds in a legitimate manner has helped in switching remittances from hawala/ hundi operators to the Exchange Companies which are monitored / supervised regularly by the State Bank of Pakistan. However, to eliminate illegal networks of hawala/hundi, coordination and cooperation between law enforcing agencies is required across jurisdictions on an ongoing basis.

Establishment of Financial Monitoring Unit (FMU): Financial Monitoring Unit was established pursuant to the enactment of AML Ordinance-2007, the requirement of reporting suspicious transactions to different agencies now stands revoked / overridden and now the Financial Monitoring Unit (FMU) is the designated authority to receive, analyse and disseminate the Suspicious Transaction Reports (STRs). FMU is a financial intelligence unit established immediately after the enactment of AML Ordinance and is housed in the Central Bank i.e. State Bank of Pakistan.

Mutual Evaluation Process by a WB/APG: A joint team of World Bank and Asia Pacific Group on Money Laundering conducted an onsite Mutual Evaluation (ME) of Pakistan from 26th January 2009 to 7th February 2009. The Mutual Evaluation was coordinated by FMU. As a part of their evaluation, the team held more than 60 meetings with concerned stakeholders and a number of private and public sector entities. The Mutual Evaluation process represents a central pillar of the work of the APG/FATF. Through this process, the APG/FATF monitors the implementation of the FATF Recommendations and assesses the effectiveness of the anti-money laundering and counter-terrorist financing systems in APG/FATF member jurisdictions. The ME process involves several steps which include offsite information gathering and onsite visit followed by a draft ME report and a final report on the basis of representations / submissions / by and discussions with the concerned jurisdictions. The team gives rating on FATF 40+9 recommendations in the categories as Compliant, Largely Compliant, Partially Compliant and Non-Compliant. The report is then finally adopted at the APG annual meeting.

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The ME process is an intrusive evaluation with extraordinary details and despite limited resources it was accomplished in a professional manner with the coordination of SBP, SECP, Ministry of Finance, Ministry of Foreign Affairs, Ministry of Social Welfare, Ministry of Interior, NAB, FIA, ANF, FBR etc. APG’s annual meeting was held at Brisbane Australia from 6-10 July 2009 in which besides some other countries, Pakistan’s ME report was discussed and adopted. The ME report is based on ratings on FATF 40+9 recommendations.

Human Resource Development SBP has been able to achieve major milestones through the TABs funding project. HR has since seen a gradual process of improvement and the basic HR systems and structures have been formalized as a result of this funding. SBP has been able to have major breakthroughs in HR systems and process in the following areas: Performance Management System

a. The new Performance Management System is successfully being implemented in SBP.

The approach of evaluating the objectives along with the efforts carried out in the achievement of objectives i.e. goals and competencies, makes a well balanced system towards evaluating performance of an individual.

b. Performance planning process i.e. the planning of goals and competencies is carried out in the beginning of the financial year while the evaluation is done at year end. Both these key phases involve a participative approach toward managing the performance of an individual. The Performance Management system has been implemented in the Bank after rounds and rounds of testing and then subsequently mass dissemination to the Bank employees.

c. The Performance Management System has long since been automated with the Planning and Appraisal process completely being done on Oracle Applications, thus making it a paperless Performance Management system. The launch of the automated PMS in its second round of completion and is running smoothly in SBP.

d. An appeal process is also put in place to provide an avenue to individuals who are not satisfied with their Performance evaluation.

e. The reward, based on the Performance evaluation has been made increasingly competitive through the time. Last year the Annual Merit Increase has been substantially improved to reward high performers. The AMI rate for top performers has increased from 7% in 2002-03 to 22% in 2009.

Competency Model for SBP

a) The Performance Management System is derived from the Competency based

Management approach based on the Hay Iceberg Model. Competencies models have been integrated into various systems in HR which include Career Development process (Promotion), Recruitment, Training and Performance Management System. With the change in the promotion process from a year end process to the concept based on internal job postings, the use of competencies has been further enhanced. The internal job postings process also integrates the competency whereby a list of behavioral based questions is given to interviewers to assess the potential of a candidate.

b) In PMS competencies are divided into three broad clusters, The Core competencies, Functional specific competencies and Roles specific Competencies. A total of 29

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competencies have been divided into these three clusters, with each competency having four levels, i.e. the Individual Contributor, Unit Head Divisional Head and HOD.

c) Competencies in recruitment have been integrated by introducing behavior based interview questions, while in Training, soft skills training components was completed under the TAB program on a Bank wide level.

Recruitment

To fill the short and long term skill gap in SBP and vigorous but merit based hiring process has been going on in SBP. Qualified professionals have been indicted at various levels in regular as well as on contract basis. Other reforms have been introduced in the recruitment process by hiring executive search firms for senior and specialized positions, development of a web based recruitment systems to shorten the recruitment lead time etc.

Currently 8% of the officers in monetary and research cluster are PhDs while in 2004 only 3% staff was PhDs.

57% of the officers working in SBP lie in the age bracket of 40 and below as compared to 40% in 2004. Hence the induction of employees in the lower age bracket has contributed toward the performance based culture.

SBP talent base comprises of professionally qualified people having qualifications of CISA, CPA, CIA, ACMA, ACA, FRM, PHR, e-commerce, information technology.

Since the last 5 years, SBP has been able to recruit professionals possessing the relevant professional qualifications and skills set at different levels in the specialized areas like housing finance, IT, HR, research, treasury, economics, Banking etc.

The career development policy has been firmed up and revised to make it purely on merit.

Market aligned Compensation and Benefits Structure

A list of benchmark institutions was indentified for SBP and the first salary survey was conducted in year 2006. Based on the findings of the survey the New compensation and Benefits structure was launched for employees in OG-2 and above positions in 2007. The main features of the NCBS were introduce the market based compensation structure in SBP by launching market based salary scales, revised retirement benefits by introducing defined contribution plans. The NCBS was a voluntary scheme in which options were required to be given by employees in SBP to opt for the revised package. The NCBS was successful scheme with almost half the population of OG-2 and above employees moving to the new structure by forgoing their pensionery benefits. This market alignment was further improved and built upon through the second Compensation and benefits survey conducted in year 2009 under which the Total Remuneration approach has been adopted as the philosophy of benchmarking with comparator institutions.

As a result of various initiatives of retention, attraction and engagement retention has improved since the turnover has shown a declining trend.

2006 2007 2008 2009 7.31% 8.36% 5.37% 2.5%

Voluntary Separation Scheme

After a detailed and comprehensive analysis, a Voluntary Separation Scheme was launched in SBP and SBPBSC OG-1 and below on 2nd April 2007. The VSS scheme provided the incentive

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for remaining as well as completed years of services, optional medical encashment, prize Bonds, Leave encashment and 50% Commutation. Employees who opted for the scheme for the package were relived on 5th June 2007. HR Automation

Various HR processes have been automated along with a strong centralized employee information data on the Oracle Platform. Other modules which are integrated with the centralized data base are the PMS, Leave, Payroll, medical, Funds, Advances, Travel payments etc. The HR centralized data base is increasingly used for advanced decision making process and input for various other processes such as career advancement, recruitment, manpower planning, budgeting etc.

Organizational Structure

a) A massive restructuring of SBP was carried out in SBP in September 2006, which

included creating of various new departments, merging Departments and creation of various committees to improve the overall decision making process. SBP was divided into the following groups of distinct clusters each headed by a DG/ED.

i. Banking Supervision, regulation and Development Finance Groups ii. Monetary Policy and Research

iii. Financial Markets and Reserve Management iv. Corporate Services Group

b) A new scale of OG-8 was also created so as to streamline the grade hierarchy in SBP

Restructuring of HRD

A Training Department was created to specially focus on training in SBP, while a separate Business Support Services Department was created to cater to all corporate functions. HRD was restructured by forming 3 divisions, Reward Management and HRIS Division, Talent Management Division and Regulation and Compliance Division. Employee Engagement Surveys:-

SBP has been conducting employee motivation/engagement surveys through an external consultant to obtain feedback on the HR policies. The first survey was done in 2003, then 2004, 2005 and then in 2009 the results of the surveys provided an input in formulating the future strategy of related departments.

Management development program under TABS

Total cost of the project: Rs. 34.7 million Duration of the project: July 2004 – August 2006

As per the Contract

End-Project Actual

Excess (+)/ Shortfall (-)

No. of Sessions 51 62 (+)11

No. of Trainees 1285 1543 (+)258

Session Days 169 168 (-)1

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Employee's Foreign Training Program Financing Under TABS ( 2002-2008) No. of Trainees: 384 and almost all the trainings were of technical nature i.e., Central / Commercial Banking or IT issues

Q 2: Evaluation of the borrower’s own performance during the preparation and implementation of the operation, with special emphasis on lessons learned that may be helpful in the future The SBP has applied the required administrative procedures under the loan agreement. It has applied its normal financial controls to the loan via internal and external audits. The SBP has addressed the topics covered by the project’s terms of reference. Overall, the SBP has shown commitment by designating necessary resources to achieve the project objectives as set out in TABS. State Bank has a very advance human resource and service support structure in place; which has evolved over the years. However, when TABS was conceived and implemented, it did not assess the specialized project management capacity needed for this intervention. Thus in this technology intensive, multi-sectoral intervention, establishment of a stand-alone dedicated project coordination unit was not considered. Thus, there were some delays related to administration and proper allocation of funds under different categories. SBP has greatly benefited from the digitization of all the employee benefits support system. Moreover the residual capacity; particularly in IT procurements, has helped Bank in undertaking much larger and complex IT projects subsequently. SBP’s performance has significantly improved during the last ten years, as a whole. Doing a high-tech and complex project like the RTGS was an excellent experience as it greatly enhanced the technical and project management skills and business knowledge of the teams involved. The following are major achievements & lessons learnt during implementation of the project:

There has been considerable improvement in SBP staff’s technical expertise since the inception of this project in 2002.

There has been a significant change in SBP’s understanding of the financial markets as compared with the position in 2002.

SBP is significantly better equipped to deal with issues of banking sector. SBP’s expectations of banks in terms of anti-money laundering are now very clear and

understandable. Banks are much stronger in anti-money laundering since the inception of this project in

2002. The new law on anti-money laundering has made significant changes on the standards of AML.

Timely and relevant trainings are extremely important. It was ensured that the teams involved receive adequate training on all aspects of the system being implemented prior to the roll out of the program.

Effective maintenance, support and service level agreements are also extremely important and have been be given high priority during the project.

SBP’s internal procurement processes should be upgraded and fast tracked by adequately staffing and undertaking capacity building of the Procurement Division in order to bring it in line with the IT needs.

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Due to security situation, there have been travel issues with foreign consultants which have significantly contributed to project delays. Accordingly, new methods of project execution like formation of virtual teams, use of internet connectivity etc should be explored and adopted where required.

Reliance on single technology for communications is not practical, for such a big and critical setup. Dual media approach wired and wireless are essential for the continual time sensitive banking, currency and ERP operations, especially where public dealing is required.

SBP (project team) had to compensate the technical lacking where vendor suffered shortage of capable resources to design and configure connectivity solutions. This enabled project teams to acquire greater product knowledge.

Output of all clusters within State Bank of Pakistan is now more analytical, thorough and, comprehensive, which has been acknowledged by all the stakeholders.

The co-ordination with Ministry of Foreign Affairs and Law Division has significantly improved.

The handling of issues and development of new policy guidelines is now being done efficiently and within set timelines.

E-mail facility/ service in all offices facilitates users in timely communication, setting up meetings and meet deadlines of critical activities.

National Institute of Banking and Finance (NIBAF) provides training to domestic and foreign central banking professionals. A number of officers from State Bank of Pakistan trained under TABS deliver lectures in various training programs organized by NIBAF.

State Bank of Pakistan is now being witnessed by all stakeholders as more efficient, modern, professional and equipped with latest technology. Q 3 Evaluation of the performance of the Bank, any co-financiers, or of other partners during the preparation and implementation of the operation, including the effectiveness of their relationships, with special emphasis on lessons learned, along with providing feedback on the quality of the Bank’s contribution, from identification to supervision; The Bank has met efficiently the project needs for timely and appropriate payments to the SBP and vendors under the loan agreement. The bank has held number of meetings with SBP and taken a close interest in the progress of the project. The Bank has been reviewing the applications of SBP for funding authorizations and funding variations to ensure that they fall within the project scope and funding agreement and sought clarification as necessary and also provided requisite NOCs where expenses crossed the given threshold. All other expenses were reviewed during World Bank Missions. The World Bank has been supporting SBP by providing reference of experts and engaging them to successfully implement various TABS initiatives ( e.g HR Advisor from Malaysia, RTGs Advisor from the World Bank in Washington). This supplemented with the lending and supervisory performance has enabled SBP to reach this far in terms of successful achievement of the project’s objectives. SBP’s project team would like to acknowledge the support and advice provided by the concerned teams of the World Bank especially the missions that visited SBP during the entire course of the project. Their advice in both the technical and business areas as well as financial assistance whenever required has been wonderful. The missions acted as connoisseurs when it came to project implementations and provided succinct but erudite advice to the concerned teams and this helped to goad the project further.

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IDA missions provided implementation support to the Banking Sector Technical Assistance Project (TABS) over the period and reviewed the progress in implementation of the project with various officials of the State Bank of Pakistan (SBP) focusing specially on the status of the remaining activities and the likelihood of their completion within the current Closing Date. The missions always expressed its appreciation and gratitude to all the officials that gave their time generously and shared their views, ideas, and suggestions for improving the implementation and effectiveness of this project. It may be informed that World Bank Mission has been reviewing the implementation progress of the project from time to time. The mission also noted that most of the reforms activities are broadly on track and reform objectives of the project are being met. In addition to that, the World Bank Mission recommended the Disaster Recovery Component, which too has been successfully completed. The State Bank of Pakistan appreciates the timely and accurate allocation of funds under different categories. This made possible for SBP to meet the objectives under different heads in timely manner. Q4: Description of the proposed arrangements for future operation of the project; and The development of the financial sector has also been an important theme in the Country Assistance Strategy of the World Bank in Pakistan which notes that the World Bank will support further financial sector reforms in several areas including, strengthening and further deepening capital markets; mortgage loans; SME financing; and improving financial markets infrastructure and legal framework. A brief description of the present arrangements to further strengthen financial sector of Pakistan is in the ensuing paragraphs. This would provide a glimpse that State Bank of Pakistan is already working on different areas to achieve these objectives.

Necessary amendments in Banking Companies Ordinance (BCO) for enhanced powers of SBP were drafted and submitted to the cabinet. After approval of cabinet, these amendments have also been passed by the National Assembly. These are now pending with the Senate for consideration.

State Bank of Pakistan (SBP) has initiated Basle Core Principles(BCP) self assessment process and this will be completed by the end of year 2010. Previously a joint team of World Bank and IMF (Team) conducted a full scope BCP assessment under Financial Sector Assessment Program (FSAP) during 2004. Team assessed SBP compliant with 16 principles, Largely Compliant with 5 principles, and Materially non-compliant with 4 principles on essential criteria.

MOU between SBP and SECP has been signed and letter of understanding has also been exchanged to establish a Task Force for joint inspections of financial conglomerates as well as to establish a task force to review the supervisory architecture and to address regulatory arbitrage concerns.

In order to strengthen the autonomy and governance of the central bank and to develop a strategy for financial sector development, the creation of above task force would envision direction for the future of the financial sector as well as effective prudential and market

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conduct regulations. The task force will study the impediments towards achieving an inclusive financial sector and recommend medium term development strategy for the financial sector. As far as evaluating of performance in key functional areas of Central Bank, the implementation of the strategic goals and strategic planning is an ongoing process, which will involve embedding the values into the organizational culture and realignment of the SBP structure with the SBP’s vision in the periods ahead

Amendments were earlier incorporated in the AML Ordinance 2009 and subsequently made part of recently enacted AML Act 2010 through the Parliament. This has and would further strengthen the legal and regulatory framework for AML.

The consultants already engaged under TABS proposed a law titled “Credit Information Bureau Act” for effective regulation of Credit Information Bureau Business in Pakistan. This draft law is already with Ministry of Finance for enactment since 2007. After enactment of the above law, SBP shall be able to develop a mechanism to get the provisions of this act implemented, like developing licensing criteria, publication of rules, developing applications for applying to establish credit bureau, advertisement in newspapers and other rules and regulations.

SBP is working on Consumer Protection Law in consultation with legal consultants; the same shall be submitted to MoF after finalization. Once this law is enacted, this would definitely increase public confidence.

The Draft Deposit Protection Law has already been submitted to Ministry of Finance, Government of Pakistan. This would further safeguard the interest of small depositors.

PRISM System is capable to integrate with other NPSS (National Payment & Settlement Systems) like Central Depositary Company (CDC), NCCPL, and Commodity Exchange as well as with external payments system. In order to achieve this, a comprehensive National Payment System vision needs to be developed with the full ownership of SBP’s top management. This NPS Visions once developed should become a baseline for all the future developments related to Payment Systems

State Bank of Pakistan therefore suggests dedicated project coordination, commensurate with size of investment with effective exit strategy, in the areas highlighted above may be considered. SBP also suggests that a Project Steering Committee (PSC) may also be formed to look into future development and suggest that the projects are embedded into mainstream operations ab-initio. State Bank of Pakistan further suggests that monitoring mechanism of World Bank should take potential beneficiaries on board from inception which would entail real-time monitoring. Some of the consolidated requirement for future projects have already been documented, which aim to strengthen the existing IT infrastructure to provide quality service to the internal clients (SBP, SBP-BSC & NIBAF) and external clients ( Financial Institutes, FBR, MOF, Government organizations etc). These projects are mainly focused on

Business Applications upgrade i.e. Globus and Oracle ERP upgrade. Infrastructure upgrade of Hardware servers, UPS systems and Network

Communication systems. Developing and strengthening I.T security systems.

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As a way forward, World Bank should consider running programs of shorter period in area of IT where (a) sustainability warrants intensive integration of proposed technology with its roadmap, (b) a phased approach, is needed in area of training and development where next phase of training financing should be released on basis of efficacy and direct application of training; and (c) clear incentive structure should be established between required technology and business needs as there are some areas in technology which are under-utilized. Any downstream investment should duly incorporate lessons in designing the overall policy development content.

There are number of parallel investments going on in different areas through various international agencies/multilateral agencies. To extract maximum benefits, World Bank may discuss and evolve a strategy to consolidate the coordination and logistics of these programs to avoid potential duplications.

Q 5: Providing information to the Bank on the economic, financial, social, institutional and environmental conditions, and on implementation and operation results. State Bank of Pakistan, time and again intimated World Bank about the progress in economic, financial, social, institutional and environmental matters. SBP on the request of Government of Pakistan has also been providing progress report on the project for onward transmission to the World Bank. Besides, statements of expenditure, all other information relating to the project were also provided to the World Bank. In addition to the above, World Bank missions also visited Pakistan from time to time to review the implementation progress of the project. The way forward is to identify areas where further improvements are needed whereby new projects of similar nature can be developed for SBP.

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Comments received from the Banking Sector on TABS

S.No. Topics Inputs/Responses from the Banks 1 - Impacts of TABS

supported initiatives, such as technology up-gradation and regulatory capacity, on the banking system in general.

- Contributions of the

TABS projects in helping Pakistan's banking system cope with the demands of the increasing integration of the global financial market.

- By SBP’s better capturing and providing data to the financial sector on domestic financial savings, foreign remittance, foreign capital inflows, balance of payments and other economic trends, the banks now have more capacity to finance and support every type of viable economic activity, including investment and consumption expenditure.

- TABS supported initiatives have played a pivotal role in introducing the culture of risk management in the

financial sector. The industry, by virtue of these initiatives is now better placed in terms of measurement, management and mitigation of risks.

- Through TABS supported initiatives, SBP has equipped itself with the latest banking systems which are beneficial to the banking industry as a whole. A recent achievement was the implementation of Globus Inter-Company Reconciliation System, which has helped SBP automate. Furthermore, implementation of RTGS has enabled the banks to settle their transaction in real-time with minimal systemic risks. SBP through its partnership with National Institutional Facilitation Technologies (NIFT) has arranged multilateral netting and centralized settlement of check clearing.

- SBP's website has improved, now giving the banks access to all its circulars and notifications.

- Owing to the implementation of RTGS system, the banks have particularly benefited in the following area; a) Deals are settled in real time b) Balances are updated in real time c) Paper work has been reduced d) Bank's current account position can also be generated at the end of day e) Inter-Bank transactions are done through this system efficiently f) Securities kept with SSP can be viewed online.

- Some improvements are needed in the system, such as allowing SSP cheque movement for payments of SSP Telegrahic Transfers, payment of Advance Tax, Zakat and cash withdrawal.

- One of the surveyed banks has architected a technology strategy that is in line with its business vision. The

strategy is reviewed and adjusted periodically to account for changes in business direction. - Another bank has strengthened its application portfolio by acquiring and implementing software to automate

processes across business domains. Policies and procedures have been implemented in IT to ensure that proper guidelines have been established for all areas of technology. The establishment of these policies and procedures

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help it monitor, identify and mitigate the risks as and when detected.

- SBP went through evolution by bringing in up to date data collection systems to ensure a vigilant watch over Pakistan Banking Industry. Firm implementation of these components at central bank must reflect over the Pakistan Banking industry to grow further with satisfaction and in controlled environment to align with global financial markets.

- TABS supported initiatives have enabled the banks to provide better customer service with improved safety

and controls. Introduction of ATMs and then their linking towards a single network is an example of technology up gradation. In addition, many branchless banking facilities are also being provided by different banks e.g. cash deposit through A TM, funds transfer from one account of a bank to another Bank's account, receipt of cheque book requisition. Almost all banks are also providing 24-hours phone banking facilities by which customer can make transactions, pay their utility bills, get information about their accounts/balances etc. Many banks are also providing mobile alert facility by which transactions in customers' accounts are promptly communicated to them.

- On most matters pertaining to mergers and group diversification, the banks found the SBP to be open to discussion and to have taken a balanced view. In some cases regulatory directives have not been in consonance with international best practices e.g. the removal of Forced Sales Value (FSV) benefit and then its subsequent piecemeal reintroduction. By materially impacting profitability of banks, this issue is of special concern to a foreign shareholder who may wish to invest for the long-term based upon certain assumptions of provisioning.

- Regulatory review has helped the microfinance banks to develop and implement secure practices. However, the

integration of microfinance banking systems into the mainstream RTGS is yet to be achieved.

2 Improvements in the monetary policy management and banking regulation and supervision as a result of capacity building of SBP in the last few years.

- The monetary policy management of SBP has undergone some major changes during the last few years. Principal among these measures has been the move from biannual review of monetary policy to bimonthly review, plus an independent Monetary Policy Committee (MPC) and an interest rate corridor have also been created. These measures have made monetary policy more responsive and pro-active to what is a rapidly changing and fluid economic environment. The volatility in inflation figures, high dependence of the country over pledges by other countries for foreign inflows and deteriorating balance of payments called for cautious stance by SBP, which to a large extent remained up to task, and provided updated data on foreign inflows, weekly inflation and liquidity situation, however to some extent the SBP has been guilty of reactive rather than proactive.

- The SBP now is in a better position to more comprehensively develop expectations on inflation and interest rates. The interest rate corridor will improve monetary transmission mechanism, liquidity management and

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reduce volatility in the inter-bank market. Bank can now park excess liquidity with SBP at the floor level that is 300 basis points lower than the discount rate. If there is shortage of liquidity in the market, banks can use the SBP discounting window to borrow the required amount of funds.

- Furthermore, in order to maintain a tight leash on liquidity the SBP is very active with regards to open market

operations (OMOs) and conducts them very frequently. Excessive use of OMOs going forward helps to promote transparency in the liquidity management framework.

- Over last 5-7 years, banking sector has seen revolutionary improvement in the area of regulation and

supervision. The banking prudential regulations are now at par, if not ahead, with the international best practices observed across the globe. The quality of central bank's inspection reports has improved, their contents are now more focused and highlight most of the operational issues faced by the banks.

- There has been remarkable improvement in monetary policy management by SBP. Regular publication of clear monetary policy statements and monetary policy press releases as per pre announced schedule has improved transparency and communication with the financial markets. SBP has also introduced an interest rate corridor to reduce interest rate volatility. The overnight rate is now targeted through frequent OMOs. These steps are positive and have improved the transmission effectiveness of the monetary policy.

- The SBP is implementing the Financial Inclusion Program (FIP) worth GBP 50 million. The program was

designed and developed through broader consultations with the stakeholders. This will help SBP implement Pakistan's Microfinance Strategy, which was approved by the Prime Minister.

- Current performance of the SBP's monetary policy management has given mixed signals because while inflation (YoY) and balance of payment position has improved; fiscal and real sector performance remains tenuous. Domestic financial markets functioned adequately but lending to private sector has remained subdued. From a forward looking perspective, expected improvement in external current account and emerging global economic recovery augur well for Pakistan's economy. But, limited progress on electricity shortages and stressed fiscal position dilute some of optimism. Similarly, inflation outlook is not completely benign yet as depicted by recent monthly trends. On data dissemination, however, an area that requires further improvement is providing numbers on corporate debt/commercial papers and liquidity in the market.

3 Noteworthy improvements in

banking regulation and supervision. Utility of supervision findings for bank management as compared to

- The banking supervision of SBP is now more specific and in-depth on all sectors. The supervision reports cover aspects like growth in credit to each sector, outstanding balances and possibility of bad debts which in turn alarms the banks to alter their credit disbursal approaches. The analysis of various current indicators provides projected performance of that particular sector for the coming period, the projected performance highlights the sectors where credit demand might increase in future, thus providing the banks with business

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few years back, especially in regard to highlighting early warning signals, key systematic risks and potential portfolio issues?

opportunity. - The CAMELS system of rating of financial institutions now addresses all essential elements of good

governance and accordingly rate financial institutions. Not only that the rating is improved, it is noted that the supervisor's comments in respect of financial/operational health of borrowers have proven essential tool to proactively address portfolio management issues and greatly assist management in devising remedial strategies accordingly.

- As a governing body for the country's banking sector, State Bank's horizon of governance and control has

expanded in breadth and profundity. SBP governance spectrum has expanded to cover several new initiatives and requisite modifications to existing rules & regulations. Considering the worsening of economic scenario and the consumer credit cycle in Pakistan, all actions by the SBP were executed timely and implemented when they were desired.

- Publishing of Fair Debt Collection Guidelines is an effective attempt by SBP to fix any emerging issue that can

be harmful to the consumer and organizations related to banking industry.

- New additions to the regulatory framework such as putting the ceiling on Maximum Debt Burden and Maximum Exposure in Unsecured Products, is a step towards risk and exposure management for the bank and the borrower.

- SBP inspections are now more comprehensive and interactive. The enhanced quality of findings assists banks

to improve controls, fix processes and make required amendments in policies for better risk management of the portfolios. However, the finalization of the inspection report needs to be expedited. Additionally the information in the inspection report should be rationalized.

- SBP has improved both its onsite and offsite surveillance. Now it can encourage banks to improve the

governance and controls while managing key risks. Generally, changes witnessed in the regulations ensure more safety & soundness of banking system and expanding banking net.

- SBP guidelines on various aspects like Basel-II, Internal Control Framework, CDD/ AML etc. were given to

banks to make them aligned with best international practices. Also off-site monitoring and assessment of bank's financials and systems is being conducted through a comprehensive questionnaire, called IRAF. Also, SBP keeps continuing vigilance over banks asset quality and soundness of their balance sheets.

- The annual review conducted by the SBP team now also includes other aspects such as; governance of the institution, business plan/strategy, human resource management, customer service quality etc.

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- The evolution of SBP's monitoring through development of various tools including stringent risk rating criteria,

checks on adequacy of banks' capital, monopoly control and corporate governance and assessment of overall health of the financial institutions have also kept the banks on their toes to keep improving their weak areas to avoid criticism/penalties (which sometimes is hefty) and down grading of their ratings. However, there are certain areas where banks need expansion of SBP's regulatory framework such as assessment and controls of service providers of security, custody, credit reports/market/industry checks and muqqadams etc.

- SBP now has very strict rules for the Non Performing Loans (NPL). It requires to classify the account as NPL

not only on objective basis but also, at times, on subjective basis. However, subjective basis creates huge burden on the part of the Bank as far as its profitability and position is concerned. Further, it depends upon the subjective decision of the concerned inspector which is not desirable as the subjective criterion should be sparingly exercised as against present trend of maximum classification on this basis. Moreover, this defeats the very purpose of SBP Prudential Regulations on objective basis.

- Some more work needs to be done on the SME Prudential. However, In the absence of adequate consumer

rights protection bodies, the SBP in trying to protect consumer rights, has at times given directives that have made it difficult for banks to pursue willful defaulters thereby having to incur avoidable loan losses.

- While the quality of field inspection staff has improved over the years, there is still room of further

improvement both on the technical side and also in terms of business knowledge. There is certainly value addition in qualitative assessments; however, the communication style of the report at times does not capture the message that needs to be conveyed. The materiality of issues identified need to be judged better by the SBP audit teams and should be quantified in the report. The focus of the inspection report now needs to shift to assessing the risks that the bank faces and perhaps reduce the emphasis on noting specific deviations from policies and regulations.

4 Impact of up-gradation of the

payment clearance system, especially in liquidity management and on bank's corporate and individual customers.

- Up-gradation of Payments Clearance System Banks are required to hold current accounts with (SBP) which are primarily used to settle large value inter-bank fund transfers between banks and to meet certain statutory requirements. These systems offer better mechanics for settlement of large value payments, because of their ability to allow market participants to monitor their positions and settle their transactions in real time. Furthermore, they give customers full and immediate utilization of their liquidity by enabling them to transfer their large payments across banks. Manual processing of checks has been discontinued and now it's being done by an automated clearing houses run by NIFT. All Payment instruments issued by the BSC field offices, commercial banks and other financial institutions now have been standardized and "Machine Readable" through usage of (MICR). Furthermore, in July 2008 SBP started posting of Multilateral Net Settlement Batches (MNSBs) of clearing in RTGS System while in August, 2008 SBP launched online Interbank

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Securities Trading Facility. - RTGS has not had significant impact on turnaround time for clearance. Generally it takes one day to collect the

cheque which is deposited within banking hours and funds to customers are available at third day except where customer can withdraw through ATM in the late evenings of 2nd day. Some banks facilitate intercity collections through on-line banking system and some still use legacy systems of sending cheques which generally take 3 - 4 working days.

- RTGS offers a much quicker and efficient method of transferring funds, and better payment mechanism for

large value payments e.g. inter-bank lending, borrowing, with the ability to allow market participants to monitor their liquidity positions on-line and accordingly settle their payments on gross basis in real time. It has also minimized the systemic risks that are inherent in large value net settlement systems.

- An offshoot of the RTGS is the Pakistan Remittance Initiative (PRI) which has enabled (in its initial stage), the

five large Banks in Pakistan, to exchange remittances received from abroad for their customers. These remittances are exchanged between the 5 banks twice daily enabling banks to credit their customers’ account same day, where as previously this process took at least 3 working days. Another important change due to the introduction of PRI is the customers' departure from using unauthorized/illegal Hawala and other such mechanism for transfer of funds/remittance.

- In previous days banks have to gather at SBP to exchange funds through SBP Cheque in long queues which is

now settled through RTGS at their own premises.

- Following areas in RTGS might still require improvements: o Balances of stations other than Karachi are not online therefore the remittance of funds is still done

through TT. o Islamic Export Refinance Finance balances are not credited on real time basis, if credited before close

of market than will help in making smart investment decisions o Online Statement should be provided through RTGS (Historical & Current both) o RTGS should be installed separately on Islamic Banking Divisions (banks with Islamic branches) in

order to eliminate SBP Cheque movements. o Statement of issue of securities showing movements of transactions of each day including opening and

closing balances cannot be viewed in DEPOIX. o Same day, intercity clearing return should be uploaded before close of RTGS. o RTGS for seamless inter-bank fund transfer should be deployed with all banks.

5 Impact of newly established - Pakistan's first consumer credit wave was triggered with the launch of e-CIB. The defaulters' pool is mainly

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Credit Information Bureau (CIB) on banking system's accessibility, timeliness, and reliability

comprised of customers with multiple products holding across the industry and availing much higher limits compared to their repayment capability. This over leveraged customer pool was formulated at the time when positive credit bureau was not available and low cost of credit was driving a rapid dispersion of consumer products. e-CIB holds great significance and is used in all credit decisions for new acquisitions to existing portfolio management such as extension of new facilities, enhancements in existing facilities, portfolio and remedial actions, collection / recovery activities and development of Scoring models.

- The CIB has proven to be an extensive facilitation tool in minimizing the risks associated with credit disbursement. The restrictions placed by SBP or by the banks' internal policy parameters on maximum exposure in a firm/borrower and credit history of a firm/borrower can be accessed easily. This certainly helps the banks to improve their credit quality and keep their portfolios clean.

- Banks are facing technical issues for data conversion & uploading to SBP’s e-CIB and innovation &

improvement in terms of technology is required. - SBP has recently instructed banks to report Obligor Risk Rating to the CIB, which will help SBP in comparing

risk rating of similar customers across all banks. This will further bolster the risk management framework of the local banking system.

- Presently, banks submit their data by 15th of each month. It takes around two to three weeks to update the data

at SBP and hence there is a lag of almost a month between the time the e-CIB is asked and the outstanding position of the customer. In addition, in case of Corporate Customers, e-CIB describes an overall outstanding position of the customer and bank-wise facilities are not being provided at this point in time. Presently, submission of data is the responsibility of the Banks which use different method for preparing the file to be submitted to SBP. During the process, there are possibilities of non-reporting, wrong reporting etc. which can create a question mark on the reliability of data at e-CIB site. It is also recommended that coverage of e-CIB be enhanced to cover instances of dishonored cheques, tax defaults and law suits.

- Although at times banks do face problems i.e. access and reliability of the data being reported. The group

reporting structure requires introduction of certain functions which will enable the banks to collect data of entire group in one e-CIB report.

- Other areas where some improvement is required:

- Longer repayment history such as 3 years - Availability of negative information (defaults) for the last 3-5 years - Availability of information related to settled / restructured accounts - Company details in e-CIB should be more elaborate & individual e-CIB format & fields should be

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incorporated along with relevant fields related to companies. - Availability of bureau score - PDF Format for individual e-CIB report to be changed to the format that can be easily uploaded to - the respective bank's system - Availability of consumer repayment behavior on different utilities such as electricity, gas,

telecommunications etc.

6 Impact on the banking system as a result of improvements in the system and procedures for strengthening anti-money laundering (AML) and reducing financial fraud.

- The prudential regulations issued by SBP cover the necessary features of AML regime for financial institutions as required under FATF recommendations. A major step is the replacement of Money Changers with properly regulated Exchange Companies; hence the business of money changing and the underlying transactions has been formalized. Bank accounts of proscribed entities and individuals are frozen by SBP as per UNSC Resolutions. Report of frozen accounts is called from banks and proper record of frozen account is maintained.

- The banks were issuing Traveler Cheques in local currency called "Rupee Travelers Cheques" (RTCs) in exceptionally high denomination of up to Rs.500,000 which was not in line with the true spirit and purpose of travelers, the holder of these instruments often used them as a mode of settling undocumented transactions thereby, defeating the objective of the Government of documentation of the economy. SBP, therefore prohibited the issuance of RTCs in denominations exceeding Rs.10, 000. An important factor is the presence of terrorists out-fits and their needs for financing their activities through laundered money, all these factors demand that there should be more stringent policies and regulations in place for curbing money laundering practices.

- Each bank has issued its anti money laundering guidelines. Compliance of these guidelines is being checked on

continuous basis by internal, external and SBP auditors. System is also being improved to support the monitoring. Each bank also ensures correctness of the identity of the customer through verification of whereabouts by using" Verisys" system of NADRA.

- In line with SBP’s directives, all banks obtain information on the form "Know Your Customer". This

information includes depositor's sources of income, expected number of transaction (debit/credit) per month, expected value of transactions etc. This information is then checked with the actual transactions in the account and any suspicious activity is probed-in extensively. Identified suspicious activities are reported to SBP’s "Financial Monitoring Unit" (FMU).

- An effective AML regime is not possible without an efficient, strong and robust Financial Intelligence Unit

(FIU), under the country's respective AML Law. Pakistan's FMU is not adequately capacitated or engaged with banks. Cash Transaction Report (CTR) has yet to be introduced by the FMU. FMU needs to turn itself into an active, robust and effective institution for ensuring an effective AML regime in the country.

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- Monitoring AML is system dependent or resource intensive. Although SBP has guidelines / regulations; yet it

may take more time to mature since most of the banks / institutions are not operational with integrated banking systems. True sense of AML is only possible when entire banking system is integrated which may take time.

7 Areas that need further

strengthening, in respect of technology up-gradation and regulatory capacity, to meet: the growing demands of banking services within Pakistan, increasing sophistication of the banking system especially to manage systematic risks, and to cope with the increasing demand domestically and globally.

- Improved credit information and credit rating systems would facilitate efficiency, modernization of payment systems can attain certainty. In the area of financial transactions, upgrading land and property registries and improvement of procedural issues in the legal system is required for the protection of banks. In recent years, SBP has introduced a broad range of prudential regulations to strengthen risk management, internal controls, corporate governance and capital adequacy. SBP has also provided banks with guidance for promotion of development financing and consumer credit.

- Banking sector as a whole is passing through a critical phase. Enhanced supervisory reviews coupled with growing involvement of courts are affecting day to day decision making of banks. Under these circumstances, there is a need to create awareness on different restructuring aspects and introduction of best industry practices for addressing NPL's. Debt equity swaps, management takeovers and acquisitions by force, are few aspects that industry needs to be educated on in order to clean-up balance sheets of individual bank.

- Detailed regulations / guidelines on restructuring and remedial actions for Retail portfolios are required to

manage and regularize the development and execution of these actions across the industry.

- Availability of analysis on industry-wide consumer data and research reports on the overall consumer industry & specific products can help build a strong understanding of this banking sector and devise polices and action plans for consumer portfolios. Frequency of publication of these reports should be at least on quarterly basis.

- Greater assistance should be provided in implementation of Basel II requirements on consumer portfolio.

Execution should be phased out and extensive trainings related to the same should be conducted.

- Training areas should be identified through monitoring of regulatory issues, during inspections and regular feedback from banks. Training courses should be arranged or training material to be provided to the relevant bank staff in order to improve their processes, risk management techniques along with development of human resource pool.

- Acceptance of VaR based calculation as basis for Market Risk capital, which is currently only accepted on

standardized basis.

- More emphasis on future outlook, quality of financials, valuation and credibility of collaterals, sectoral

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exposure, customer ratings in a more scientific manner, product programs, will lead to further improving the overall environment.

- Guidelines on subjective provisioning be further clarified through guidance on the criteria to ensure improved

alignment between bank practice & policy and SBP Inspection recommendations.

- Penetration of banking system in Pakistan is low as compared to other countries. It requires lot of innovation and technology up-gradation to expand the banking frontiers. There is a need to launch technology led delivery models while ensuring minimum regulatory standards & controls which ensure cost affordability by clients and sustainability of financial system.

- Timely updating of liquidity position of all banks and the composition of the banking sector's deposit base,

which are updated with a significant lag.

- Volume related data may be provided for inter-bank foreign exchange market.

- There is an inevitable shift of bank customers into the individual salaried and self employed sectors as well as the lower tiers of SME and agriculture sectors. Banking regulators, in discussions with banks, will have to develop a detailed understanding of the characteristics of these customer segments and develop a detailed knowledge of inherent risks in these segments. The SBP will then be better equipped to mitigate risks through effective regulations that are tailor-made for each segment.

- Work needs to be done on "group based regulation" where a bank forms part of group consisting of NBFI's as

well as other corporate entities.

- Paperless and mobile banking are also areas which will demand specially tailored supervision and regulations.

- One thing that is required for better liquidity management is that SBP needs to have online connectivity / one account concept of their field accounts, so that balances at other centers can also be used at Karachi and vice versa. Moreover, bank to bank customer transaction through RTGS would also be beneficial for further development of electronic banking.

- The banking industry should now begin to move towards the Image Clearing System which will greatly

enhance the speed of payment settlements in the banking system.

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MAP