non banking fi

Mohammad Yousaf BhattiIMPGCC

NON BANKING FINANCIAL INSTITUTIONS

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Book Recommended

Financial Institutions in Pakistan

By: Khawaja Amjad Saeed

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Course OutlineIntroduction

Financial InstitutionsRole of Financial Institutions in economic

developmentScope of NBFI’S and NBIFC’S in PakistanGovernance of NBFI’S in Pakistan

Performance review of Non-Banking Institutions in Pakistan

SECP as a Regulatory body of NBFC’SRegulatory Frame work Companies

Ordinance 1984 IMPGCC

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Course Outline (Cont…)

Mutual FundsDFI’SInvestment Finance CompaniesLeasingHouse Building Finance Corporation

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Non Banking Financial InstitutionsDefinition

An establishment that focuses on dealing with financial transactions such as investment, loans and deposits. Conventionally financial institutions are composed of organizations such as Banks, DFI’s, Leasing Companies, Insurance Companies, Investment Banks and Modaraba Companies.

In financial economics a financial institution is an institution that provides services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries.

Almost everyone has deal with a financial institution on regular basis. Every thing from depositing money to taking out loans and exchange currencies must be done through financial institutions.

Since all people depend on services provided by financial institutions, it is imperative that they must be regulated by the Federal Government.

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Non Banking Financial InstitutionsTypesA. Development Finance InstitutionsB. Leasing CompaniesC. Investment BanksD. Modaraba CompaniesE. Discount & Guarantee HousesF. House Finance CompaniesG. Venture Capital Companies

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Non Banking Financial InstitutionsA. Development Finance Institutions

1 Equity Participation Fund2 Investment Corporation of Pakistan3 National Investment Trust Ltd.4 Pakistan Kuwait Investment Company (Pvt) Ltd.5 Pakistan Industrial Credit & Investment Corporation

Ltd.6 Pak-Libya Holding Co. (Pvt) Ltd.7 Saudi Pak Industrial and Agricultural Investment Co.

(Pvt) Ltd.8 Pak Oman Investment Co.Pvt.Ltd

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Non Banking Financial InstitutionsB. Leasing Companies

1 Asian Leasing Corporation Ltd.,2 Askari Leasing Company Ltd.3 Capital Assets Leasing Corporation Ltd.4 Crescent Leasing Corporation Ltd.5 Dawood Leasing Company Ltd.6 English Leasing Ltd.7 First Leasing Corporation Ltd.8 Grays Leasing Ltd.

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Non Banking Financial InstitutionsC. Investment Banks

1 Asset Investment Bank Ltd.2 Atlas Investment Bank Ltd.3 Crescent Slandered Investment Bank Ltd.4 Escorts Investment Bank Ltd.5 Fidelity Investment Bank Ltd.6 First International Investment Bank Ltd.7 Islamic Investment Bank Ltd.8 Jahangir Siddiqui Investment Bank Ltd.

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Non Banking Financial InstitutionsD. Modaraba Companies

1 Al-Zamin Leasing Modaraba2 B.F.Modaraba3 B.R.R.International Modaraba4 Financial Link Modaraba5 First Allied Bank Modaraba6 First Alnoor Modaraba7 First Constellation Modaraba8 First Elite Capital Modaraba

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Non Banking Financial InstitutionsE. Discount & Guarantee Houses

1.First Credit & Discount Corporation (Pvt) Ltd.

2.First Prudential Discount & Guarantee House Ltd.

3.National Discounting Services Ltd.

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Non Banking Financial InstitutionsF. House Finance Companies

1.Citibank Housing Finance Company Ltd.2.House Building Finance Corporation3.International Housing Finance Ltd

G. Venture Capital Companies

1.Pakistan Venture Capital Ltd.

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Importance Of Mobilization Of Deposits In Banking System or Role Of Commercial Banks In Economic Development• Banking business can broadly be defined as

mobilization of deposits for onward lending in an economy for a better & faster rate of economic growth

• To receive deposits is one of the basic functions of all commercial banks.

• Borrowing funds from outside sources is all the more vital for banks because the entire banking system is based on it.

• The borrowed Capital of a bank is much greater than its own Capital.

• Bank’s borrowing is mostly in the form of deposits. Commercial banks do not receive these deposits for safe keeping purposes only, but they accept deposits as debts.

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Importance Of Mobilization Of Deposits In Banking System or Role Of Commercial Banks In Economic Development

• When the bank receives the deposits as a debtor it becomes the owner of it. It may therefore use it as it deems appropriate.

• Those deposits are lent out to different parties.

• The borrowing needs are to be met , prudently so as to ensure that in the net analysis it does not become counter productive for the bank.

• Therefore it is imperative that while financing average cost of deposits and average return on reinvestment of deposits are always kept in view.

•

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• The larger the difference between the rate at which these deposits are borrowed and the rate at which these are lent out , the greater will be the profit margin of the bank.

• Moreover, the larger the deposits the larger will be the funds available for investment and larger the funds lent out the greater will be the profit margin for the bank.

• It is because of this inter-related relationship that deposits are referred to as the life blood of a bank.

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– However in deposit mobilization a prudent banker should always follow a policy of deposit mix for better profitability.

– Therefore the strategy should be – Deposit- mix with a standard rate of return to

depositors.– Lower the return payable better is the deposit-

mix adjustment .– Qualitative deposit rather than quantitative

deposit.– Preference for cost free or lower return payable

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Role of Financial Institutions in Economic DevelopmentModern Day RoleBanking system and the Financial Institutions play very

significant role in the economy. First and foremost is in the form of catering to the need of credit for all the sections of society. The modern economies in the world have developed primarily by making best use of the credit availability in their systems. An efficient banking system must cater to the needs of high end investors by making available high amounts of capital for big projects in the industrial, infrastructure and service sectors. At the same time, the medium and small ventures must also have credit available to them for new investment and expansion of the existing units. Rural sector in a country like Pakistan can grow only if cheaper credit is available to the farmers for their short and medium term needs.

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Credit availability for infrastructure sector is also extremely important. The success of any financial system can be measured by finding out the availability of reliable and adequate credit for infrastructure projects

The banks and the financial institutions also cater to another important need of the society i.e. mopping up small savings at reasonable rates with several options. The common man has the option to park his savings under a few alternatives, including the small savings schemes introduced by the government from time to time and in bank deposits in the form of savings deposits and time deposits. Another option is to invest in the stocks or mutual funds.

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Role of Financial Institutions in Economic Development

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In addition to the above traditional role, the banks and the financial institutions also perform certain new-age functions which could not be thought of a couple of decades ago. The facility of internet banking enables a consumer to access and operate his bank account without actually visiting the bank premises. The facility of ATMs and the credit/debit cards has revolutionized the choices available with the customers. The banks also serve as alternative gateways for making payments on account of income tax and online payment of various bills like the telephone, electricity and tax. The bank customers can also invest their funds in various stocks or mutual funds straight from their bank accounts. In the modern day economy, where people have no time to make these payments by standing in queue, the service provided by the banks is commendable.

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While the commercial banks cater to the banking needs of the people in the cities and towns, there is another category of banks that looks after the credit and banking needs of the people living in the rural areas, particularly the farmers. These banks, along with the cooperative banks, take care of the farmer-specific needs of credit and other banking facilities.

Banks today are free to determine their interest rates within the given limits prescribed by SBP. It is now easier for the banks to open new branches. But the banking sector reforms are still not complete.

Banks and financial intuitions have played major role in the economic development of the country and most of the credit- related schemes of the government to uplift the poorer and the under-privileged sections have been implemented through the banking sector. The role of the banks has been important, but it is going to be even more important in the future.

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Regulatory DevelopmentsDFI’s/ IB’s are regulated by SBP. NBFC’s, Mutual Funds and

Modarabas are regulated by SECP.

Over the last many years the non-bank financial sector has carved out a place for itself in Pakistan financial market, even though a large portion of financial assets continue to be managed by commercial banks.

The regulatory requirement in Pakistan has strengthened over time with increased comprehensiveness in Prudential Regulations and improved standards of corporate governance.

In November 2008 the SECP implemented some measures to revamp the regulatory frame work for the non banking finance companies, the concept of which was introduced in 2002 when the regulatory responsibility of these financial institutions was transferred to SECP from SBP.

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Regulatory DevelopmentsKeeping in view the dynamics of the broad financial sector in

which the NBFCs operate SECP amended the non banking finance companies rules 2003 in addition to issuing the non banking finance companies & notified regulations 2007.

Notified Entities:-A company or a class of companies or corporate body or trust or person as notified by the federal government. These entities are engaged in business not covered under section 282A(a).

While the emended rules are based on SECP’s experience with the NBFC sector since 2002. The new NBFCs regulations incorporate SECPs enhanced powers as laid down in the finance act 2007. The new regulation specifies the requisite parameters for the formation of various types of NBFCs and address all operational aspects & issues for NBFCs & their notified entities .

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Regulatory DevelopmentsNotably all the previously issued Prudential Regulations for

NBFCs have been merged into these regulations.

In August 2009 SECP issued a revised version of the 2007 Regulations in the form of Non Banking Finance Companies and Notified Entities Regulations 2008 to clarify the certain legal interpretations of the 2007 Regulations and address market related operational issues.

Consequently the new regulatory framework now consists of NBFCs Rules 2003(amended ) and Non Banking Finance Companies and Notified Entities Regulations 2008.

The main concern of the new regulations is to enable NBFCs to increase equity capital significantly and to expand the deposit resource mobilization capability of the NBFCs

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Regulatory Developments Another major cause of concern far NBFCs commercial viability

stems from the limited source for resource mobilization. The extensive reliance on credit lines from banks & other financial institutions has continued to pose problems for NBFCs in terms of the high cost of funding. While some NBFCs are allowed to raise retail deposits in the form of Certificates of Investments ( CoIs), the amount so raised is generally not sufficient for them to finance their business activities & expand their operations. As a result NBFCs continue to operate at a disadvantage in comparison with the banking sector which has access to relatively low cost funds.

The 2008 Regulations allow NBFCs offering leasing, housing finance and investment finance services to raise deposits from CoIs with tenors of 30 days & above as opposed to the previous restriction on the minimum tenor of deposits to be of 3 months.

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Operating EnvironmentA public limited company engaged in the business of asset

management, investment finance, leasing, housing finance, venture capital investment, discounting and investment advisory or a combination of these services, is categorized as an NBFC. For each financial service that an NBFC provides, it needs a separate license from the SECP. Prior to the issuance of the 2008 Regulations , any business entity which compiled with the progressively tiered capital requirements for each type of business (adding up to Rs 835 million for all types of NBFC licenses) could undertake all businesses allowed under the NBFC framework. The new regulatory framework, however, has created necessary firewalls between investment advisory & asset management services on one hand and leasing, housing finance , discounting & investment finance services on the other.

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Operating EnvironmentThis essentially means that companies which undertake the

business of asset management & investment advisory cannot at the same time offer leasing, discounting, housing finance, investment finance services or venture capital investment simply by complying with the minimum capital requirements. In a way, this measure is a contravention of the universal banking model of financial services provided under the NBFC framework, but is essentially intended to minimize the functional overlapping that often leads to conflict of interest within the NBFC sector. An additional requirement in the new regulations is that an NBFC engaged in a combination of leasing, investment finance and housing finance services, needs to invest at least 20 per cent of its assets in each such form of business.

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Operating EnvironmentAnother important change in the regulations is the amendment

criteria for the classification of non performing loans applicable until Ist July 2010, where the classification criteria has been made more stringent (severe) by the elimination of the OAEM category, with direct classification into sub – standard loans after an overdue period of 90 days.

New requirements, applicable from 1st July 2011 distinguish between short, medium and long term financial facilities, along with increased provisioning requirements.

Time Based Classification Provisioning

- Substandard after 90 Days 25%

- Doubtful - do - 180 Days 50%

- Loss - do - One Year 100%

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Non – Banking Financial InstitutionsNon - Banking Finance Companies + Others

( i ) Investment Finance Services (viii) M0darabas

( ii) Leasing (ix ) Mutual Funds

( iii) Housing Finance Services (x ) Development Finance

(iv ) Venture Capital Investment Institutions

( v ) Discounting Services

( vi) Investment Advisory Services

(vii) Asset Management Services

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Performance Review NBFI’s

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Table: Assets of NBFIs Growth rates and share in percent FY04 FY05 FY06 FY07 FY08 FY09 Assets (Rs. Billion) 318.1 393.7 462.3 567 585.6 470.1 Growth rate 22.7 23.8 17.4 22.7 3.3 -19.7 Share in Assets Mutual Funds 32.4 34.6 38.3 55.3 58.5 47.9 DFIs* 29.8 27.4 25.3 16.8 14.5 24.2 Leasing 14.1 13.6 13.8 11.3 11.0 11.9 Investment Finance 11.2 13 11.8 7.9 7.4 6.6 Modarabas 5.7 5.5 5.2 4.6 5.1 4.9 Housing Finance* 6.1 4.7 4.3 3.1 3.1 4.0 Venture Capital 0.3 0.3 0.7 0.7 0.3 0.5 Discounting 0.4 0.4 0.4 0.2 0.0 0.0

*Assets of HBFC, a DFI engaged in providing housing finance, have been included in the Housing Finance category

Performance Review NBFI’sAs is clear from the above data the assets of NBFIs after

increasing during FY07-FY08 declined by 19.7% by the end of FY09.

The relative position of various NBFIs is also given in the above table.

Mutual funds lead the sector with share 47.9%. Their share also after increasing during FY07-FY08 declined to 47.9% by the end of FY09. Similarly shares of investment finance companies and modaraba companies have also reduced to 6.6% and 4.9% respectively. On the other hand shares of investment finance companies which had been previously declining improved to 24.2% in FY09, while those of leasing companies and venture capital companies also improved during the year.

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Performance Review NBFI’sNotably mutual funds represents the only sub

category which has recorded remarkable growth year after year.

The above data also reflects that NBFIs faced a rather difficult operating environment in FY09. Struggling to remain commercially viable even in normal circumstances these financial institutions were particularly hit hard by the slow down in the economy and associated deterioration in the macro economic indicators.

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Performance Review NBFI’sThe composition of NBFI’s sectors at the end of FY10 is as

given below.

Discount Houses 0

Venture Capitals 3

HFCs 1

DFIs 8

IFCs 8

Leasing 9

Modarabas 26

Mutual Funds 121

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Performance Review NBFI’sAs SECP allows each NBFC to hold multiple

licenses 72 NBFCs hold 78 licenses for providing various financial services as permissible under the NBFCs rules.

During FY10 SECP granted 19 new licenses all of which were for conducting asset management services through mutual funds while no new license was granted for any other business category.

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Meaning and Origin of Banking in the WorldDefinitionDefinitionA place of exchange of moneyA place of exchange of moneyA financial intermediary between the A financial intermediary between the

depositor & the borrowerdepositor & the borrowerA company carrying on the business of A company carrying on the business of

receiving money from the public for the receiving money from the public for the purpose of lending or investment repayable purpose of lending or investment repayable on demand or otherwise and withdrawable by on demand or otherwise and withdrawable by cheque, draft, order or otherwisecheque, draft, order or otherwise

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Early GrowthBanking business is based on ‘Truth’Banking business is based on ‘Truth’The trade was the favorite profession of many The trade was the favorite profession of many

messengers of Allah Almightymessengers of Allah AlmightyOur Prophet Muhammad (P.B.U.H.) the last Our Prophet Muhammad (P.B.U.H.) the last

messenger was recognized as ‘Amin’ among messenger was recognized as ‘Amin’ among ArabsArabs

At that point of time the banking was not realized At that point of time the banking was not realized as proper systemas proper system

However it is admitted that Babylonians had However it is admitted that Babylonians had developed the banking system as early as 2000 developed the banking system as early as 2000 B.C.B.C.

The temples of Babylon were used as banks, The temples of Babylon were used as banks, keeping in view the nobility & respect of this keeping in view the nobility & respect of this professionprofession

Meaning and Origin of Banking in the World

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Meaning & Origin of Banking in the worldSome authors are of the opinion that the word Some authors are of the opinion that the word

‘Bank’ is derived from the words ‘Bancus’ or ‘Bank’ is derived from the words ‘Bancus’ or ‘Banque’ which means a bench‘Banque’ which means a bench

Jew’s from Lombardy transacted the business of Jew’s from Lombardy transacted the business of money exchange on benches in market placemoney exchange on benches in market place

When this business idea failed, the word When this business idea failed, the word ‘Bankrupt’ was originated‘Bankrupt’ was originated

Other authors are of the opinion that Bank is a Other authors are of the opinion that Bank is a German word meaning “Joint Stock Fund”German word meaning “Joint Stock Fund”

The origin of the word Bank is not known even The origin of the word Bank is not known even after elapse of many centuriesafter elapse of many centuries

It is however true that banking is as old as It is however true that banking is as old as human societyhuman society

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Early Growth (cont…)Bank of Venice was established in 1157Bank of Venice was established in 1157German Public Bank was established in 1401German Public Bank was established in 1401Bank of Genoa was established in 1407Bank of Genoa was established in 1407State Bank under the name ‘Banco di Rialto’ State Bank under the name ‘Banco di Rialto’

was formed in Genoa in 1587was formed in Genoa in 1587Bank of Amsterdam was founded in 1609Bank of Amsterdam was founded in 1609Bank of Hamburg came into existence in Bank of Hamburg came into existence in

16901690


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Modern BankingLombardy Merchants activities in Britain in Lombardy Merchants activities in Britain in

the 14the 14thth century in respect of deposit century in respect of deposit acceptance & lending of deposited money laid acceptance & lending of deposited money laid the foundation of modern bankingthe foundation of modern banking

The era of goldsmiths may also be included in The era of goldsmiths may also be included in the modern banking evolutionthe modern banking evolution

Goldsmiths transacted the business in gold & Goldsmiths transacted the business in gold & silver therefore safe custody services in silver therefore safe custody services in modern banking started from this point of modern banking started from this point of timetime

Bank of England was formed by a number of Bank of England was formed by a number of goldsmith bankers in 1695goldsmith bankers in 1695


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Modern Banking (cont…)The Bank of England was nationalized in The Bank of England was nationalized in

19461946In 1955 the British banks made a departure In 1955 the British banks made a departure

from traditional banking and started modern from traditional banking and started modern banking practices by investing in different banking practices by investing in different projects (buying industrial plants & projects (buying industrial plants & machinery) and took interest on hire-machinery) and took interest on hire-purchase financepurchase finance


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Brief History of Development of Banking in Pakistan

The Indian society was quite familiar with banking The Indian society was quite familiar with banking right from the beginningright from the beginning

In the sub-continent informal banking practices were In the sub-continent informal banking practices were started since money became the medium of exchangestarted since money became the medium of exchange

At that time lending of funds to people by rich At that time lending of funds to people by rich merchants, landlords was popularmerchants, landlords was popular

Loans were given to the people against personal Loans were given to the people against personal guarantees and against other securities such as guarantees and against other securities such as ornaments & immovable propertiesornaments & immovable properties

For transfer of funds from one place to another Hundi For transfer of funds from one place to another Hundi was the famous credit instrument in those dayswas the famous credit instrument in those days

During the Muslim rule in India substantial During the Muslim rule in India substantial encouragement to the formers was provided by giving encouragement to the formers was provided by giving them interest free loans which resulted in bumper them interest free loans which resulted in bumper food productionfood production

Banking in Indo-Pak Sub-continent

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Banking in Indo-Pak Sub-continent (cont…)

In India the first formal bank was established in In India the first formal bank was established in 1809 with the name ‘Bank of Bengal’1809 with the name ‘Bank of Bengal’

The bank gained the power of issuance of notes The bank gained the power of issuance of notes in 1823in 1823

During 1906 to 1913 a number of joint stock During 1906 to 1913 a number of joint stock banks were formed in Indiabanks were formed in India

The foreign banks had also started their The foreign banks had also started their operations in 20th century as Exchange Banksoperations in 20th century as Exchange Banks

The Imperial Bank of India came into existence in The Imperial Bank of India came into existence in 19211921

Reserve Bank of India as central bank was Reserve Bank of India as central bank was formed in 1935formed in 1935

The Imperial Bank of India was renamed as State The Imperial Bank of India was renamed as State Bank of India in 1955Bank of India in 1955


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Banking in PakistanAfter partition as a new country without

resources it was very difficult for Pakistan to run its own banking system independently

Therefore it was decided that Reserve bank of India will continue to serve and run the Pakistani financial system till 30th Sep 1948

Banking companies ordinance was promulgated by the government of Pakistan in 1947 to safeguard the mutual interest of bankers and customers because Reserve bank of India was not willing to run the financial system on sound footing


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Banking in Pakistan (cont…)

At that time only Habib Bank Limited (HBL) and Australasia Bank (Now ABL) were the main stream banking players

The State bank of Pakistan as Central bank of Pakistan came into being on 1st July 1948

Thus a landmark was made in the history of banking when State bank of Pakistan assumed full control of banking and currency in Pakistan

The first Pakistan notes were issued in Oct. 1948 in the denomination of Rs 5, 10 and 100

State bank of Pakistan withdrew the Reserve bank of India Notes from the economy by August 1949


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Various Types of Banks, Nature, Scope and their Functions

Major Functions 1. Mobilization of Savings Commercial banks inculcate the habit of savings

among people through their different innovative / attractive saving

products. 2. Capital Formation Once the deposit money is financed to any individual

/ business, it becomes capital for the business. So the role of

banks in capital formation is crucial.

Commercial Banks

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Banking in Pakistan (cont…)Encouraged HBL to expand its network of

branches for creating a National Banking systemRecommended to government to establish a new

bank which could serve as an agent of the State bank

Resultantly NBP was established in 1949Banking companies ordinance was promulgated

in 1962More scheduled bank continued to be established

and by June 1965 the number of scheduled banks stood at 36

Specialized credit and financial institutions also developed over the years to cater the needs of specific sectors


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Banking in Pakistan (cont…)With the hope the banking would enter a new era of

further development and progress the commercial banks were nationalized in 1974

Later on it was realized that this step has proved counter productive hence reversal has been initiated since 1991

Besides privatization of nationalized commercial banks establishment of commercial banks in private sector has also been encouraged

Consequently a large number of commercial and other banks have come into operation in private sector offering prompt, courteous, and efficient service to the customers

At present about 40 scheduled banks are operating in an environment of strong competition


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Major Functions (Commercial Banks)

3. Provide Funds for Investment Commercial banks are also engaged in

providing funds for projects initiation which in turn

generates economic activity.

Summary (1 - 2 - 3) Acceptance of deposits from general public

and lending for earning revenue / profit.


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Major Functions (Commercial Banks)

4. Maintenance of chequing accounts5. Purchasing or discounting of bills or cheques and

other negotiable instruments for their customers6. Providing of agency services to their customers by

collecting bills, cheques and other instruments.7. Issuance of drafts, mail transfers, telegraphic transfer

and traveler cheques for transfer of money from one place to other8. Rendering of socio-economic services by

providing credit to small business, industry and agriculture under

mandatory targets providing free Hajj services to Hajj pilgrims collecting utility bills


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Savings Banks

The function of these banks is to inculcate the habit of saving among people. Post Office Savings Banks and Savings Accounts in National Savings Centers are treated in this category.


Mortgage Banks These Banks mainly provide loans for

construction, acquisition of real estate against mortgages as security. The existence of these banks is minimal due to active diversification of operations by commercial banks in this fieldIMPGCC

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Merchant Banks These banks were involved in financing of

domestic and international trade in UK. Due to active role of commercial banks in almost every field of banking the existence and use of merchant bank term is faded away.


Consumer Banks They provide finance for purchasing

consumer durables / consumption goods. The involvement of commercial banks in consumer banking operations aggressively has faded away their separate existence

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Investment Banks They assist businesses, governmental bodies

in raising money through the sales of stock and bonds for meeting long term requirements. These banks may also convert the idle money for productive use. They also provide consultation services to corporate sector.


Development Banks They provide finance to trade, commerce and

industry for long term development. For example PICIC, Industrial Development Bank of Pakistan, ZTBL etc. They are also known as DFI’s (Development Finance Institutions) IMPGCC

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These banks are registered as Cooperative Institute for providing banking facilities to the members of that cooperative. Federal Bank for cooperatives is the example of these types of banks in Pakistan


Eximp Banks They provide finance for promotion of import

and export to trade, commerce and industry. Their emphasis is to provide avenues of expansion for international trade.

Cooperative Banks

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Central Banks These banks are responsible for controlling

the money supply, interest rates and financial market of the country aiming to improve the economic development pace.

Examples

State Bank of Pakistan Pakistan Bank of England UK Reserve Bank of India India Federal Reserve System (FED) USA


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Shell Banks They have no physical presence in the

country where they are incorporated and licensed and are not affiliated to any financial services group that is subject to effective consolidated supervision. Typically a Shell bank maintains nothing but a registered agent in the country of incorporation with the agent having little knowledge of banking and simply providing an address for legal service in the jurisdiction. Such structures are a particular feature of some offshore centers.


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Offshore Banks The features of Offshore Banking Unit are

Less restrictive legal regulation Low or no taxation Protection against local political or financial instability

Where the legal jurisdictions of the country are not applicable. Where the regulations made by the Central Bank of the country are not operative.

Negative Aspect Opens the avenues of Money Laundering, this type of

banking falls in risky zone.


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Scheduled Vs. Non Scheduled Banks The major difference between scheduled and

non scheduled bank is that the scheduled bank is registered and commercial banking license holder from the central bank of the country to maintain chequing accounts of the customers whereas non scheduled banks cannot maintains chequing accounts. In Pakistan there is no non scheduled bank at the moment. There are scheduled banks or otherwise the financial institutions. It is pertinent to mention that DFI’s are the typical financial institutions. The other point of difference is the different capital requirements for scheduled and non scheduled banks.


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Central Bank Role & Functions In The EconomyState Bank of Pakistan is the Central Bank of the

country. It is also the apex regulatory body for commercial banks/ financial institutions in the country. The important functions of SBP are as mentioned below.

Sole authority for issuance of currency notes To maintain uniformity in currency circulation and to

meet the currency requirement of business and general public the privilege of issuing currency notes is the sole responsibility of SBP

The issuance of currency notes is backed by a proportional reserve system. It includes gold coins, gold bullion, silver bullion, approved securities and approved foreign exchange.

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Central Bank Role & Functions In The EconomyBanker to the Federal and Provincial

Governments It accepts deposits of cash, cheques or drafts

drawn on other banks. It supplies the government with the cash required for salaries, wages and other cash disbursements.

It also debits the government account with the amount of cheques and vouchers drawn by them and presented for payment. It also transfers government funds from one account to another or from one place to another.

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Central Bank Role & Functions In The EconomyAdvisor and Agent to the Federal and

Provincial Governments It makes recommendations on economic,

financial and monetary matters, agriculture credit, industrial finance, exchange control, mobilization of savings and planning & development.

It act as government’s agent for buying or selling approved foreign exchange from authorised dealers in Pakistan. Receives subscriptions for government loans and payment of interest or return on the national or provincial debts. IMPGCC

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Central Bank Role & Functions In The Economy Bankers Bank and the Lender of the Last

Resort The State Bank maintains a very close

relationship with the commercial banks. - All scheduled banks are required to

maintain a minimum reserve with State Bank. The present requirement being 5 percent of there demand and 2 percent of their time liabilities.

- They are entitled to loan and rediscount facilities from the Bank.

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Central Bank Role & Functions In The Economy - It makes loans to the institutions and banks

especially setup for the purpose of promoting agriculture or industrial development.

- The Bank also provide remittance facilities to the banks at confessional rates.

- It grants licenses for establishment of banks and permission for opening of branches in various parts of the country. It also grants permission for change of any branch premises.

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Central Bank Role & Functions In The Economy- The State Bank also directs or prohibits the

scheduled banks to accepts particular type of deposits from time to time. No scheduled bank can at present accept interest bearing deposits of money.

- The State Bank can prohibit an unsound bank from accepting fresh deposits and it can move a court of law for liquidation of a bank which fails to fulfill various legal requirements.

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Central Bank Role & Functions In The Economy- The State Bank is also authorized to take

measures against the mismanaged banks.- Banker to the Banks (not banker to the public)- Lender of the last Resort (when no one is available for help State Bank

of Pakistan is there for the help of banks .)

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Central Bank Role & Functions In The EconomyController of Credit As controller of credits SBP has extensive

powers.- It is responsible for regulating credit.- It has the power to formulate and execute

policies to promote the expansion of banking and credit facilities.

- The State Bank of Pakistan also controls the credit through Bank Rate and Open Market Operations.

Bank Rate (Discount Rate- SBP Lending Rate to Banks)

Open Market Operations (Sale & Purchase of securities by SBP in open market)

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Central Bank Role & Functions In The Economy- State Bank of Pakistan can also use other

weapons for controlling credit such as allocation of credit ceiling, regulation of margin requirements & lowering or raising of minimum cash reserve whenever circumstances so require.

(Credit Ceiling means the maximum limit of total loans and advances & other assets which a bank should not exceed.)

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Central Bank Role & Functions In The Economy- It allocates mandatory targets for small loans

to each bank which implies that banks must disburse the targeted amount to specified sectors of economy and for catering to the needs of small business, industry and agriculture.

Exchange Control The authority of foreign exchange control has

been vested with SBP. The bank therefore exercises full control on both the visible and invisible payments to and from the country, such as exchange for business, travel, medical treatment and education etc.

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Central Bank Role & Functions In The Economy While on the other hand it ensures that all

foreign exchange receipts are accounted for & surrendered to the authorities. The Bank also issues licenses to other banks to function as authorized dealers in foreign exchange.

- Bank Inspection & Supervision State Bank conducts periodical Audits and

Inspections of the selected branches of scheduled banks to observe the standard of internal working and is also authorized to impose penalties on violations of the laid down procedure.IMPGCC

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State Bank Of Pakistan As Regulator– In addition to the denationalization of some

commercial banks the Government has also allowed the establishment of a number of commercial banks in the private sector.

– This change in banking sector has made it necessary that SBP should effectively regulate and monitor the banking operations so that the banking business is conducted in conformity with the laid down rules and regulations.

– SBP has introduced a set of Prudential Regulations for this purpose.IMPGCC

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State Bank Of Pakistan As Regulator– Prudential Regulations are the guidelines /

standards for the bankers for streamlining of banking activites.

– These Regulations have come into effect from 1st January 1992.

– Before 1992 the SBP was regulating the financial system through various circulars from time to time & the complete set of rules and regulations was not available for bankers as basic guidelines.

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State Bank Of Pakistan As Regulator– The following forces were the rationale for

introducing Prudential Regulations in the year 1992.

– Collapse of Bank of Credit & Commerce International (BCCI) in early nineties.

– Cooperative Companies Scandal in Pakistan.– Potential threats for money Laundering.– Sprouting of Finance Companies Fraud.– Changes, developments in Financial Markets.

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State Bank Of Pakistan As Regulator– First set of Prudential Regulations was

introduced in1992, but subsequent amendments have taken place.

– The present set of Regulations was introduced in the year 2004.

– The SBP Prudential Regulations are categorized on the basis of following sets.

– Corporate and Commercial Banking– Small and Medium Enterprises (SME)– Consumer Financing – Agriculture Financing

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State Bank Of Pakistan As Regulator– These Regulations have prescribed various

standards to be maintained on administrative and operational aspects of banking.

– SBP has also issued directives to all the banks that these Regulations should be strictly complied with.

– Deviations from the Prudential Regulations attract penalties and degrading of overall bank’s rating.

– It is expected that these Prudential Regulations will help in developing still healthier banking operations in Pakistan.

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