Introduction to Banking and Finance: Structure, Regulation and Products
Introduction to Banking and Finance tests the structure of Pakistan's banking system, the State Bank of Pakistan's regulatory role, deposit and lending products, credit assessment, risk management and Islamic banking. Expect questions that connect a product or transaction to its regulatory treatment.
Structure and regulator
The State Bank of Pakistan conducts monetary policy, acts as lender of last resort, manages foreign exchange reserves, operates payment systems and supervises banks. Scheduled banks include commercial banks, Islamic banks and Islamic windows, microfinance banks and development finance institutions. Prudential rules cover capital adequacy, liquidity, single-borrower limits, asset classification and provisioning.
Deposits, lending and compliance
Current accounts pay no profit; savings and term deposits pay profit or markup. Account opening requires KYC and customer due diligence, including source of funds and beneficial ownership. Suspicious transactions are reported to the financial monitoring unit. Credit assessment uses character, capacity, capital, collateral and conditions.
Islamic banking
Islamic modes avoid interest and gharar. Murabaha is cost-plus sale; ijarah is leasing; musharakah and mudarabah are profit-and-loss sharing partnerships. Profit is disclosed and fixed at sale for murabaha, unlike a floating conventional interest rate.
Worked example
A bank buys machinery for PKR 1,000,000 and sells it to a client under murabaha for PKR 1,150,000, payable in 12 equal monthly instalments. Each instalment is 1,150,000 / 12 = PKR 95,833.33. The bank's profit of PKR 150,000 is disclosed upfront and fixed for the tenure, so the client knows the total cost. Calling this 'interest' is wrong because the bank owns and sells the asset.
Traps
Treating Islamic markup as interest, ignoring SBP approval requirements, confusing CRR with SLR, and assuming deposit insurance covers unlimited amounts.