Non Banking Financial Institutions

Zahra Fatima 13226

Definition A non bank financial institution (NBFI) is a

financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency.

Examples Insurance firms Currency exchangesMicroloan organizations.

Major Differences between NBFI and Banks

•A NBFC cannot accept demand deposits

• NBFC’s cannot issue cheques to its customers as they are not a part of the transactions system.

• Deposit insurance facilities are also not available for NBFC depositors unlike in case of banks. 

Advantages

Provide loan and credit facilitiesSupport investment in

propertiesProvide retirement planningWealth Management such as

managing of portfolios of stocks and shares.

NBFC regulatory setup by SECP

Funding Options

NBFI’s can raise funds through the following options as stated by SECP:

Borrowing Issuance of Ordinary and Preference

Shares Loans from Sponsors

Present Status 2003-2012

Analysis Apart from mutual funds industry which showed a

CAGR of 26% rest of the NBFI players had dismal performance. Leasing and investment banking are continually shrinking whereas housing finance has ceased to exist. Pension funds industry is at nascent stage while sectors like REITs & Private Equity despite having potential have remained untapped. Modaraba, an Islamic mode of business, despite having incomparable adv of a tax holiday, has not been able to attract entrepreneurs.

Recommendation by SECP

Proposal by SBP

 To regulate the 23 non-bank financial companies (NBFCs), (12 leasing and three housing financing companies and eight investment banks) besides dozens of bank subsidiaries. This will leave 98 NBFCs mostly modaraba and leasing companies that will remain under SECP control.

SECP or SBP? It would be rather prudent enough if SBP focused its

attention to its basic function of looking toward economic stability of the country i.e. monetary policy, exchange rate etc.

SECP should be given a chance to implement the new regulatory framework as it is based on a study of five international jurisdictions namely India, USA , Japan, Singapore and Malaysia as a strong banking and financial sector is very crucial for facilitating higher economic growth and NBFCs have a definite and very important role in the financial sector, particularly in a developing economy like ours.

References

http://jang.com.pk/thenews/aug2008-w

http://forum.secp.gov.pk/NBF-ReformCommitteeReport.pdf

http://secp.gov.pk/CS/ChairmanSpeeches/PDF/211205_IBAP_lunch_Lhr.pdf