Law constitutes the principles and regulations established in a country by some authority, applicable to its people, whether in the form of legislation or of customs and practices recognized and enforced by judicial decision. It is the implementation of social order and justice created by adherence to such a system. The system of judicial administration puts the laws of a community into effect, e.g. all citizens are equal before the law.
The banking business flourishes on the support and confidence of public because they contribute to the capital and deposits of money in the banks. This confidence is strengthened as and when the people find that their interests are being looked after properly by the government and it’s authorized regulatory agencies.
Banks and bank accounts are regulated by Federal statutory law. Banks are established in Pakistan under the Banking Companies Ordinance 1962, regulated by SBP through Prudential Regulations, and Exchange Control Manual. Bank accounts may be established by private and state-owned banks (National Bank of Pakistan) and National Savings centres. All are regulated by the Federal laws. Cheques and related matters (bearer, order, crossing, protection to the bankers, etc) are governed under the Negotiable Instruments Act 1881.
There is an elaborate legal framework for regulation and supervision of banking business in Pakistan. This regulatory process is basically maintained by the State Bank of Pakistan as the central bank of the country, which derives its authority and support from the laws which have been enacted and enforced for banking business.
For smooth running of the banking system it is vital that the public should have confidence in it and be assured that their interest is protected by the government through regulators. One of the most important functions of the State Bank of Pakistan is protection of customers' rights. Most bank customers are laymen, they have very little knowledge of finance to judge the stability and soundness of a bank. Through appropriate laws the state ensures that the money entrusted to a bank by the public is not placed at risk. The failure of a bank is a serious event specially due to the possibility of ‘contagion’-----one bank’s failure can lead to lack of confidence in the financial system resulting in the collapse of the entire system. Hence the need to ensure safety and security of all banks.
Banking in Pakistan is governed by laws enacted by the Government and regulations framed by other state functionaries namely State Bank of Pakistan and the Securities and Exchange Commission of Pakistan. The far reaching influence on banking operations includes rules incorporated in the Foreign Exchange Regulations, Prudential Regulations and circulars issued by State Bank of Pakistan from to time. All banks in Pakistan (except SBP and NBP) are companies incorporated under the Companies Ordinance 1913 and 1984 as amended from time to time and to that extent fall within the purview of Securities and Exchange Commission of Pakistan (“SECP”) but all the Non-Banking Financial Institutions are totally governed by SECP. As such banks have overlapping supervision of SBP and SECP in many respects.
The major laws applicable to banking institutions are:
1. Banking Companies Ordinance (BCO) 1962
2. State Bank of Pakistan Act 1956
3. Negotiable Instrument Act 1881
4. Bankers’ Book Evidence Act 1882
5. Electronic Transactions Ordinance 2002
6. Foreign Exchange Regulation Act 1947
7. Financial Institutions (Recovery of Finance Ordinance) 2001*
8. SBP Banking Service Corporation Ordinance 2001
9. Payment Systems and Electronic Funds Transfer Act 2007
10. Banking Tribunals Ordinance 1984
11. Banking Companies Tribunals (Validation of Orders) Act 1994
12. Microfinance Institutions Ordinance 2001
The above listed Acts/laws are briefly discussed below wherever applicable.
Criteria for Directors Appointment - Under Section 13
No person shall be or shall continue to be a director of SBP, if he is a MNA or MPA,
is a salaried Government official,
is or has been adjudicated an insolvent, or
has suspended payments or has compounded
{(meaning of Compounded = To settle (a debt, for example) by agreeing on an amount less than the claim; adjust.}
with his creditors,
is lunatic or
of unsound mind or
is a director of another commercial bank.
The elected directors shall hold office for a term of three years. A director loses his office if
he abstains from three consecutive meetings of the Central Board without obtaining leave.
SBP’s Functions - Under Section 17, the SBP’s business and functions extend to a very wide area including;-
1. extension of loans and advances to the Federal and Provincial Governments,
2. providing finance to financial institutions including banks,
3. sale and purchase of government securities including foreign exchange,
4. dealing in gold and bullion, {Bullion = gold or silver in large amounts or in the form of bars}
5. purchase and sale of debentures, (Corporate Bonds are called debentures)
6. custody of monies and securities,
7. acting as banker to the Government and as
8. banker’s bank and
9. last but not the least the Note-Issuing Authority
Prohibitions on SBP functions - Under section 20, the
SBP is not allowed to engage in trade or direct interest in any commercial, industrial or other undertaking except that it may acquire in the course of satisfaction of any of its claims, which shall be disposed of at the earliest.
The SBP is not allowed to purchase its own shares or shares of any other bank or extend loans or advances against the security of such shares or advance money on mortgage or security of an immoveable property (except to its own staff) or make unsecured loans.
Custodian of Foreign Exchange - Under Section 23, the SBP is custodian of foreign exchange and may buy or sell foreign exchange from or to an authorized dealer.
Cash Reserve mandatory for Banks - Under Section 36, all the scheduled banks are required to maintain a Cash reserve with the State Bank at the rate as may be determined by the Bank. {What is Cash Reserve? A percentage usually about 5% of the total Customer deposits in a bank must be deposited with SBP as Cash Reserve on which SBP does not pay any profit.} This rule is intended to bolster the liquidity and financial strength of the commercial bank.
Scheduled Bank — Under Section 37 the State Bank may declare any bank to be the scheduled bank; a bank which is carrying business of banking in Pakistan, has a paid up capital of not less than the amount stipulated and that the State Bank is satisfied that the affairs of such a bank are not conducted in a manner detrimental to the interest of depositors.
Duty to secrecy - Section 52 imposes a duty to maintain secrecy on every officer of the SBP as to the affairs of the Bank or the affairs of any other financial institution that come to his knowledge in performance of his duties.
Banking Business
a. Section 7 of the Ordinance has defined the forms of business in which banking companies may engage. These include accepting deposits, lending or investing funds, making remittances, opening letters of credit, issuing guarantees, underwriting share or bond issue, foreign exchange dealings, etc.
I. Section 9 of the Ordinance defines those forms of business which banking companies are not al¬lowed to engage in. The prohibited activities list includes, buying/selling or bartering of goods or engage in any trade.
II. Section 10 prohibits a banking company from holding of a non-banking asset (immoveable property) for a period exceeding seven years from the date of acquisition except as may be permitted by the State Bank or as is required for its own use.
Prohibition on employment of certain persons - Section 11 prohibits employment by a banking company of a person who is, or at any time has been, adjudicated “insolvent”, or has suspended payment, or has compounded with his creditors, or who is or has been convicted by a criminal court of an offence involving moral turpitude. { turpitude = very immoral behaviour SYN wickedness}
Capital of a Banking Company
a. Section 13 of the BCO, 1962 has authorized the State Bank of Pakistan to determine and pre¬scribe the minimum paid up capital for a bank¬ing company from time to time. (2013 Rs 10 Billion)
b. Minimum General Reserve - Section 13 stipulates maintaining by banks of General Reserves as may be determined and notified by the State Bank from time to time.
{General Reserve is an amount deducted from banks Profits and retained in Reserves Account, which is part of Equity to meet any Bad Debts or other Loss situations for the Bank.}
Board of Directors
Election and tenure of directors – If the Governor SBP finds that the management of a commercial bank is doing acts which are seriously harmful for the sound operation of the bank, under section 15 the State Bank may order any Banking Company to call a general meeting of the shareholders to elect fresh directors of that bank.
A director of a banking company (other than the Chief Executive) shall not hold office for more than six years.
Under Section 15(b) a director shall not hold office for more than 6 consecutive years and under Section 15(c) a director of a banking company shall vacate his office if he has failed to pay any advance or interest thereon and not more than 25% of the total directors could be the “paid executive directors”.
Statutory Cash Requirement. (SCR)
Section 22 of the Ordinance prescribes that every banking company must maintain a certain per¬ cent of its total demand and time liabilities as on the last working day of the week, with the State Bank of Pakistan. The percentage will be noti¬fied by the SBP from time to time. (2013 --5%) (This requirement ensures liquidity of the bank)
Lending against security of own shares - Section 24 prohibits any banking company to give loans and advances against the security of its (banks) own shares or grant unsecured loans or advances to or make loans and advances against guarantee of any of its director or any of the family members of any of its directors, nor to a firm or company in which any of its director is interested as partner, director or guarantor.
Powers of State Bank of Pakistan
Banking Companies Ordinance 1962 has conferred the following powers on SBP:
The Section 31 requires that banks maintain record of all unclaimed items and if these remain unpaid or unclaimed for a period of ten years, transfer them to State Bank. This includes all deposits and unpaid instruments such as dividend, drafts, bills of exchange, shares or valuable articles held in safe custody, for which there has been no transaction or no claim except those of a minor or a court of law or a government. The SBP has created a website where information regarding such unclaimed deposits is available.
Trade Unions — At the initiative of the Governor, State Banking Section B was inserted by the Banking Companies (Amendment) Act 1997 which barred any officer or member of a trade union in a banking company from using any bank car or telephone to promote union activities or to carry weapons into the bank premises etc. Any person violating any provisions of this section shall be guilty of an offense punishable with imprisonment that may extend to three years or with fine or with both.
Secrecy Section 33-A of the Act has made it obligatory for each bank to maintain complete secrecy and fidelity relating to the affairs of its customers except when law and practices so permit. In or¬der to enforce this provision this section pre¬scribes that every President, Chairman, Member Board, Auditor, Officer or Employee is required to make a declaration of fidelity and secrecy at the time of joining institutions which are cov¬ered under Banking Companies Ordinance, 1962.
Disclosure of Write Offs Moreover, this section has made it obligatory for every banking company to publish in its annual accounts all such loans as written off or financial relief provided to any customer amount of which is Rs.500,000/- or more.
Power of the State Bank of Pakistan to take the corrective measures against Banking Companies
a. Sections 41, 41-A and 41-B of the Banking Companies Ordinance, 1962 have conferred the powers to State Bank of Pakistan not only to give directions to the banking companies in Pakistan to manage themselves properly but to impose corrective measures. These powers in¬clude the removal of Chairman and members of the Board of Directors and/or Chief Executive; and appoint its nominees to manage the banking companies. This period can be upto three years.
b. Section 41-C of the Banking Companies Ordi¬nance, 1962 allows that if any persons or bank¬ing company is aggrieved with the orders made under section 41-A, 41-B of State Bank of Paki¬stan may make an appeal to the Central Board of Directors of the State Bank of Pakistan. Their decision shall be final.
Inspection by State Bank of Pakistan
a. Section 40 of the Banking Companies Ordi¬nance. 1962, has made it obligatory for the State Bank of Pakistan to inspect banking companies from to time in order to evaluate their manage¬ment and performance. Sub Section (4) makes it obligatory for banking companies to produce all such books and documents to the inspecting of¬ficer as desired by him.
b. Based on the inspection report State Bank of Pakistan is authorized to impose fines and penal¬ties including the winding up of the banking company under Section 49 of the BCO.1962.
XI. Amalgamation and Winding up of a Banking Company
a. Section 48 of the Banking Companies Ordi¬nance. 1962, allows the amalgamation of banks according to a defined procedure. It includes preparation of a well designed scheme of amal¬gamation containing terms and conditions. This scheme has to be placed in draft form to the shareholders of each of the banking companies concerned separately. When it is approved by a resolution passed by a two-third majority of shareholders of each of the concerned banking companies, it should be submitted to the State Bank of Pakistan for their approval and the merger will take place only after their formal approval.
b. Section 59 of the Banking Companies Ordi¬nance, 1962, clearly lays down that no banking company which holds a licence under section 27 of the Act can voluntarily wind up without first obtaining a certificate from State Bank of Paki¬stan about its inability to repay the creditors.
Sections 60 to 82 of the Ordinance describe the legal and procedural framework for the winding up proceeding. According to these provisions, only the High Courts in Pakistan can allow winding up and in such cases State Bank of Pakistan will be the official liquidator.
Specific methods/areas of regulations – Under BCO 1962 the SBP have the following specific areas for regulating banking institutions:
i. Authorization for banking license
ii. Rules regarding ownership of financial institutions
iii. Criterion regarding adequacy of capital in banks.
iv. Reserves and liquidity ratios compliance by commercial banks
v. Rules regarding foreign currency and other exposures
vi. Deposit insurance
vii. Professional management
viii. Classification of advances (Special meaning of ‘classification’)
ix. Per party limits on banks lending
x. Control on deposit and lending rates
xi. Policy of scheduled banks borrowings
xii. Bank charges and penal (penalty) rates
xiii. Loan write-off procedure
The Banking Companies Ordinance, 1962, (BCO) consolidated basic legal framework and strengthened the Regulatory powers of State Bank.
It empowers:-
a) SBP for close supervision over the affairs of banking companies;
b) prescribes maintenance of required advances/ deposits ratio;
c) give directions to banking companies generally;
d) make advances to banking companies
Banking Mohtasib
Banking Mohtasib - Section 82A was added to BCO which relates to appointment of Banking Mohtasib with powers and responsibility of:
Banking Mohtasib / Ombudsman
Ombudsman means a commissioner appointed by the Government to investigate any complaints against the body concerned. In Pakistan, ombudsman is called Mohtasib. For the banking sector, government has appointed a separate Mohtasib who is appointed for a period of three years and is not be eligible for any extension.
The office of the Banking Mohtasib (BM) was established under banking companies ordinance 1962 by inserting seven sections from 82-A to 82- G on 2nd June, 1997 through the banking companies amendment Act 1997. The purpose of the establishment of Banking Mohtasib is to resolve any complaints from customers against their banks and those of scheduled banks against another bank. This is a free service for the public which covers all banking services.
Powers of Banking Mohtasib (BM)
a) BM can entertain complaints from, customers, borrower, utility bill depositors, banks or from anybody or organization.
b) Banking Mohtasib can award compensation for actual loss suffered and grant of reasonable expenses can be considered by the banking Mohtasib.
c) Banking Mohtasib cannot award damages against the bank. Facilitate amicable settlement of the complaints.
d) Banking Mohtasib shall not entertain any complaint already disposed of by SBP or any court of law.
e) Banking Mohtasib cannot issue a stay order to entertain any complaint, if the matter is pending before any court of law.
Authorities of Banking Mohtasib
Banking Mohtasib is authorized to entertain complaints of the following nature:
A) Banks failure to act according to the banking laws and regulation. Delays or frauds in relation to the payments, collection of instruments or fund transfer.
B) Fraudulent or unauthorized debit entries in the account.
C) Complaints from exporters or importers relating to the banking services.
D) Complaints from holders of foreign currency accounts whether resident or non-resident.
E) Unauthorized operation of lockers.
F) Complaints related to foreign remittances.
G) Complaint in relation to the mark-up based on the ground of violation of an agreement or SBP directives.
H) Complaints relating to the utility bills.
Banking Mohtasib shall not pass any order against bank without giving notice and opportunity of hearing.
Before filing a complaint with the Mohtasib, the complainant should intimate bank in writing about the intention of doing so. In case of no reply or unsatisfactory reply, the complainant can send complaint to banking Mohtasib within 45 day.
The complaint should be made in writing under solemn affirmation or oath, narrating full details of the case / transactions disputed, and also name and address of the complainant.
The Mohtasib can adopt any procedure, he considers appropriate for investigating the complaint.
Banking Mohtasib has the power for the purpose of disposing a case, to require any information documents from banks which are relevant for the purpose of deciding a complaint, subject to the following conditions:
a) Maintain confidentiality as per banking laws and procedure.
b) The documents shall not be provided which may compromise banks position in relation to the other customers account.
c) If banks do not provide information / documents, the bank Mohtasib can add adverse comments in his finding regarding non provision of information/ documents.
Mohtasib will try for an amicable settlement if satisfied with the genuineness of the complaint. In case of failure it may direct concerned bank to:
a) Reconsider the matter.
b) Modify earlier decision
c) To pay compensation fixed by Mohtasib.
d) To take steps to improve efficiency of the bank.
e) Recommend SBP to initiate inquiry against the bank for violation of law, regulations, etc.
• In no case Mohtasib will direct bank to provide finance/ loan to any complainant.
If any bank or its official or complainant is not satisfied with the decision of Mohtasib, he may file an appeal with the Governor of the State Bank of Pakistan within 30 days of passing the order by the Mohtasib. The governor shall decide appeal within 30 days.
Finding of the Mohtasib should be implemented within 40 days of the decision or finalization of appeal from the Governor SBP as the case may be.
If no appeal is filed, the decision of Mohtasib shall be treated as final. If decision of the Mohtasib is not implemented by the concerned bank, SBP may penalize it or may ask for disciplinary action against its officials.
Banking Mohtasib can ask the bank to disclose any information required for disposing the case, ensuring confidentiality as per requirement of law.
Banker’s Books Evidence Act, 1891:
Prior to passing of Bankers’ Book Evidence Act 1891 bankers were required to produce in the court of law one or more of their original ledgers or other books of account as an evidence, thereby causing inconvenience and disruption to their normal business operations. To remove these formalities, Bankers Book Evidence Act 1876 was passed which was replaced by Bankers Book Evidence Act 1879 with extended provisions.
Banker’s Convenience - Section 5 of the said Act reads as under:
“A banker or officer of a bank shall not in any legal proceeding to which the bank is not a party, be compellable to produce any bankers books, the contents of which can be proved under this Act or to appear as a witness to prove the matters, transactions and accounts therein recorded, unless by order of a Judge made for special cause.
The Act thus absolves banks from:
• Production of original books and
• Appearance in person of banks personnel.
“Certified copy”.
Under section 4, a certified copy of any entry in a bankers book shall in all legal proceedings be received as prima facie evidence of the existence of such an entry and shall be admitted as evidence of the matters, transactions and accounts therein recorded in every case where, and to the same extent, as the original entry itself is now by law admissible, but not further or otherwise.
A certified copy means a copy of any entry in the books of a bank as defined by Section 2(2) bearing at the foot of the entry, a certificate dated and subscribed by the Accountant/Manager of the bank with his name and official designation to the effect:
i. that the entry is contained in one of the ordinary books of the bank.
ii. that the entry was made in the usual and ordinary course of business.
iii. that the book containing the entry is still in the custody of the bank.
Copies of bank record that are not certified within the meaning of Section 2(8) cannot be received as prima facie evidence of existence of entries of which they are copies nor can such copies be admitted as evidence of matters, transactions and account therein recorded.
Electronic Transactions Ordinance 2002
Electronic Transactions. - To cope with the requirements of present day changes involving electronic transactions, the Government promulgated the Electronic Transactions Ordinance 2002. This law is meant to recognize and facilitate documents, records, information, communications and transactions in electronic form and to provide for the accreditation of certification service provider. Various terms used in the Ordinance have been defined as under:
The banking business flourishes on the support and confidence of public because they contribute to the capital and deposits of money in the banks. This confidence is strengthened as and when the people find that their interests are being looked after properly by the government and it’s authorized regulatory agencies.
Banks and bank accounts are regulated by Federal statutory law. Banks are established in Pakistan under the Banking Companies Ordinance 1962, regulated by SBP through Prudential Regulations, and Exchange Control Manual. Bank accounts may be established by private and state-owned banks (National Bank of Pakistan) and National Savings centres. All are regulated by the Federal laws. Cheques and related matters (bearer, order, crossing, protection to the bankers, etc) are governed under the Negotiable Instruments Act 1881.
There is an elaborate legal framework for regulation and supervision of banking business in Pakistan. This regulatory process is basically maintained by the State Bank of Pakistan as the central bank of the country, which derives its authority and support from the laws which have been enacted and enforced for banking business.
For smooth running of the banking system it is vital that the public should have confidence in it and be assured that their interest is protected by the government through regulators. One of the most important functions of the State Bank of Pakistan is protection of customers' rights. Most bank customers are laymen, they have very little knowledge of finance to judge the stability and soundness of a bank. Through appropriate laws the state ensures that the money entrusted to a bank by the public is not placed at risk. The failure of a bank is a serious event specially due to the possibility of ‘contagion’-----one bank’s failure can lead to lack of confidence in the financial system resulting in the collapse of the entire system. Hence the need to ensure safety and security of all banks.
Banking in Pakistan is governed by laws enacted by the Government and regulations framed by other state functionaries namely State Bank of Pakistan and the Securities and Exchange Commission of Pakistan. The far reaching influence on banking operations includes rules incorporated in the Foreign Exchange Regulations, Prudential Regulations and circulars issued by State Bank of Pakistan from to time. All banks in Pakistan (except SBP and NBP) are companies incorporated under the Companies Ordinance 1913 and 1984 as amended from time to time and to that extent fall within the purview of Securities and Exchange Commission of Pakistan (“SECP”) but all the Non-Banking Financial Institutions are totally governed by SECP. As such banks have overlapping supervision of SBP and SECP in many respects.
The major laws applicable to banking institutions are:
1. Banking Companies Ordinance (BCO) 1962
2. State Bank of Pakistan Act 1956
3. Negotiable Instrument Act 1881
4. Bankers’ Book Evidence Act 1882
5. Electronic Transactions Ordinance 2002
6. Foreign Exchange Regulation Act 1947
7. Financial Institutions (Recovery of Finance Ordinance) 2001*
8. SBP Banking Service Corporation Ordinance 2001
9. Payment Systems and Electronic Funds Transfer Act 2007
10. Banking Tribunals Ordinance 1984
11. Banking Companies Tribunals (Validation of Orders) Act 1994
12. Microfinance Institutions Ordinance 2001
The above listed Acts/laws are briefly discussed below wherever applicable.
Criteria for Directors Appointment - Under Section 13
No person shall be or shall continue to be a director of SBP, if he is a MNA or MPA,
is a salaried Government official,
is or has been adjudicated an insolvent, or
has suspended payments or has compounded
{(meaning of Compounded = To settle (a debt, for example) by agreeing on an amount less than the claim; adjust.}
with his creditors,
is lunatic or
of unsound mind or
is a director of another commercial bank.
The elected directors shall hold office for a term of three years. A director loses his office if
he abstains from three consecutive meetings of the Central Board without obtaining leave.
SBP’s Functions - Under Section 17, the SBP’s business and functions extend to a very wide area including;-
1. extension of loans and advances to the Federal and Provincial Governments,
2. providing finance to financial institutions including banks,
3. sale and purchase of government securities including foreign exchange,
4. dealing in gold and bullion, {Bullion = gold or silver in large amounts or in the form of bars}
5. purchase and sale of debentures, (Corporate Bonds are called debentures)
6. custody of monies and securities,
7. acting as banker to the Government and as
8. banker’s bank and
9. last but not the least the Note-Issuing Authority
Prohibitions on SBP functions - Under section 20, the
SBP is not allowed to engage in trade or direct interest in any commercial, industrial or other undertaking except that it may acquire in the course of satisfaction of any of its claims, which shall be disposed of at the earliest.
The SBP is not allowed to purchase its own shares or shares of any other bank or extend loans or advances against the security of such shares or advance money on mortgage or security of an immoveable property (except to its own staff) or make unsecured loans.
Custodian of Foreign Exchange - Under Section 23, the SBP is custodian of foreign exchange and may buy or sell foreign exchange from or to an authorized dealer.
Cash Reserve mandatory for Banks - Under Section 36, all the scheduled banks are required to maintain a Cash reserve with the State Bank at the rate as may be determined by the Bank. {What is Cash Reserve? A percentage usually about 5% of the total Customer deposits in a bank must be deposited with SBP as Cash Reserve on which SBP does not pay any profit.} This rule is intended to bolster the liquidity and financial strength of the commercial bank.
Scheduled Bank — Under Section 37 the State Bank may declare any bank to be the scheduled bank; a bank which is carrying business of banking in Pakistan, has a paid up capital of not less than the amount stipulated and that the State Bank is satisfied that the affairs of such a bank are not conducted in a manner detrimental to the interest of depositors.
Duty to secrecy - Section 52 imposes a duty to maintain secrecy on every officer of the SBP as to the affairs of the Bank or the affairs of any other financial institution that come to his knowledge in performance of his duties.
Banking Business
a. Section 7 of the Ordinance has defined the forms of business in which banking companies may engage. These include accepting deposits, lending or investing funds, making remittances, opening letters of credit, issuing guarantees, underwriting share or bond issue, foreign exchange dealings, etc.
I. Section 9 of the Ordinance defines those forms of business which banking companies are not al¬lowed to engage in. The prohibited activities list includes, buying/selling or bartering of goods or engage in any trade.
II. Section 10 prohibits a banking company from holding of a non-banking asset (immoveable property) for a period exceeding seven years from the date of acquisition except as may be permitted by the State Bank or as is required for its own use.
Prohibition on employment of certain persons - Section 11 prohibits employment by a banking company of a person who is, or at any time has been, adjudicated “insolvent”, or has suspended payment, or has compounded with his creditors, or who is or has been convicted by a criminal court of an offence involving moral turpitude. { turpitude = very immoral behaviour SYN wickedness}
Capital of a Banking Company
a. Section 13 of the BCO, 1962 has authorized the State Bank of Pakistan to determine and pre¬scribe the minimum paid up capital for a bank¬ing company from time to time. (2013 Rs 10 Billion)
b. Minimum General Reserve - Section 13 stipulates maintaining by banks of General Reserves as may be determined and notified by the State Bank from time to time.
{General Reserve is an amount deducted from banks Profits and retained in Reserves Account, which is part of Equity to meet any Bad Debts or other Loss situations for the Bank.}
Board of Directors
Election and tenure of directors – If the Governor SBP finds that the management of a commercial bank is doing acts which are seriously harmful for the sound operation of the bank, under section 15 the State Bank may order any Banking Company to call a general meeting of the shareholders to elect fresh directors of that bank.
A director of a banking company (other than the Chief Executive) shall not hold office for more than six years.
Under Section 15(b) a director shall not hold office for more than 6 consecutive years and under Section 15(c) a director of a banking company shall vacate his office if he has failed to pay any advance or interest thereon and not more than 25% of the total directors could be the “paid executive directors”.
Statutory Cash Requirement. (SCR)
Section 22 of the Ordinance prescribes that every banking company must maintain a certain per¬ cent of its total demand and time liabilities as on the last working day of the week, with the State Bank of Pakistan. The percentage will be noti¬fied by the SBP from time to time. (2013 --5%) (This requirement ensures liquidity of the bank)
Lending against security of own shares - Section 24 prohibits any banking company to give loans and advances against the security of its (banks) own shares or grant unsecured loans or advances to or make loans and advances against guarantee of any of its director or any of the family members of any of its directors, nor to a firm or company in which any of its director is interested as partner, director or guarantor.
Powers of State Bank of Pakistan
Banking Companies Ordinance 1962 has conferred the following powers on SBP:
- a. Section 25 has authorized SBP to control ad¬vances by banks. SBP lays down conditions to be fulfilled which are given in Risk Prudential Regulations.
- b. Section 25-A authorized the SBP to collect credit information from banking companies and furnish them to other banking companies with¬out disclosing the source of information.
- Section 25AA has authorized SBP to prepare and submit to the Federal Government every year a special report on cases of write off of loans, mark up and other dues or financial relief through rescheduling and restructuring of loans, etc., where banking companies have deviated from the established banking practices.
- Section 26 authorises the State Bank of Pakistan to prohibit banking companies incorporated in Pakistan or incorporated outside Pakistan but operating in Pakistan from accepting deposits.
- No individual, association or a company is authorised to carry on banking business in Paki¬stan without obtaining a licence from the State Bank of Pakistan under Section 27.
- When banking companies or their branches do not perform their functions properly, Section 27 (4) has authorized the State Bank of Pakistan to cancel the license granted to them. Preparation/display of Balance Sheet. Section 34 prescribes that every banking com-pany operating in Pakistan whether local of for¬eign, shall prepare balance sheet and profit and loss accounts as on the last working day each year, in the format given in Second Schedule of the BCO.
- Section 38 makes it obligatory to display the copy of this balance sheet & profit and loss ac¬count at appropriate places in branches and prin¬cipal offices in Pakistan.
The Section 31 requires that banks maintain record of all unclaimed items and if these remain unpaid or unclaimed for a period of ten years, transfer them to State Bank. This includes all deposits and unpaid instruments such as dividend, drafts, bills of exchange, shares or valuable articles held in safe custody, for which there has been no transaction or no claim except those of a minor or a court of law or a government. The SBP has created a website where information regarding such unclaimed deposits is available.
Trade Unions — At the initiative of the Governor, State Banking Section B was inserted by the Banking Companies (Amendment) Act 1997 which barred any officer or member of a trade union in a banking company from using any bank car or telephone to promote union activities or to carry weapons into the bank premises etc. Any person violating any provisions of this section shall be guilty of an offense punishable with imprisonment that may extend to three years or with fine or with both.
Secrecy Section 33-A of the Act has made it obligatory for each bank to maintain complete secrecy and fidelity relating to the affairs of its customers except when law and practices so permit. In or¬der to enforce this provision this section pre¬scribes that every President, Chairman, Member Board, Auditor, Officer or Employee is required to make a declaration of fidelity and secrecy at the time of joining institutions which are cov¬ered under Banking Companies Ordinance, 1962.
Disclosure of Write Offs Moreover, this section has made it obligatory for every banking company to publish in its annual accounts all such loans as written off or financial relief provided to any customer amount of which is Rs.500,000/- or more.
Power of the State Bank of Pakistan to take the corrective measures against Banking Companies
a. Sections 41, 41-A and 41-B of the Banking Companies Ordinance, 1962 have conferred the powers to State Bank of Pakistan not only to give directions to the banking companies in Pakistan to manage themselves properly but to impose corrective measures. These powers in¬clude the removal of Chairman and members of the Board of Directors and/or Chief Executive; and appoint its nominees to manage the banking companies. This period can be upto three years.
b. Section 41-C of the Banking Companies Ordi¬nance, 1962 allows that if any persons or bank¬ing company is aggrieved with the orders made under section 41-A, 41-B of State Bank of Paki¬stan may make an appeal to the Central Board of Directors of the State Bank of Pakistan. Their decision shall be final.
Inspection by State Bank of Pakistan
a. Section 40 of the Banking Companies Ordi¬nance. 1962, has made it obligatory for the State Bank of Pakistan to inspect banking companies from to time in order to evaluate their manage¬ment and performance. Sub Section (4) makes it obligatory for banking companies to produce all such books and documents to the inspecting of¬ficer as desired by him.
b. Based on the inspection report State Bank of Pakistan is authorized to impose fines and penal¬ties including the winding up of the banking company under Section 49 of the BCO.1962.
XI. Amalgamation and Winding up of a Banking Company
a. Section 48 of the Banking Companies Ordi¬nance. 1962, allows the amalgamation of banks according to a defined procedure. It includes preparation of a well designed scheme of amal¬gamation containing terms and conditions. This scheme has to be placed in draft form to the shareholders of each of the banking companies concerned separately. When it is approved by a resolution passed by a two-third majority of shareholders of each of the concerned banking companies, it should be submitted to the State Bank of Pakistan for their approval and the merger will take place only after their formal approval.
b. Section 59 of the Banking Companies Ordi¬nance, 1962, clearly lays down that no banking company which holds a licence under section 27 of the Act can voluntarily wind up without first obtaining a certificate from State Bank of Paki¬stan about its inability to repay the creditors.
Sections 60 to 82 of the Ordinance describe the legal and procedural framework for the winding up proceeding. According to these provisions, only the High Courts in Pakistan can allow winding up and in such cases State Bank of Pakistan will be the official liquidator.
Specific methods/areas of regulations – Under BCO 1962 the SBP have the following specific areas for regulating banking institutions:
i. Authorization for banking license
ii. Rules regarding ownership of financial institutions
iii. Criterion regarding adequacy of capital in banks.
iv. Reserves and liquidity ratios compliance by commercial banks
v. Rules regarding foreign currency and other exposures
vi. Deposit insurance
vii. Professional management
viii. Classification of advances (Special meaning of ‘classification’)
ix. Per party limits on banks lending
x. Control on deposit and lending rates
xi. Policy of scheduled banks borrowings
xii. Bank charges and penal (penalty) rates
xiii. Loan write-off procedure
The Banking Companies Ordinance, 1962, (BCO) consolidated basic legal framework and strengthened the Regulatory powers of State Bank.
It empowers:-
a) SBP for close supervision over the affairs of banking companies;
b) prescribes maintenance of required advances/ deposits ratio;
c) give directions to banking companies generally;
d) make advances to banking companies
Banking Mohtasib
Banking Mohtasib - Section 82A was added to BCO which relates to appointment of Banking Mohtasib with powers and responsibility of:
Banking Mohtasib / Ombudsman
Ombudsman means a commissioner appointed by the Government to investigate any complaints against the body concerned. In Pakistan, ombudsman is called Mohtasib. For the banking sector, government has appointed a separate Mohtasib who is appointed for a period of three years and is not be eligible for any extension.
The office of the Banking Mohtasib (BM) was established under banking companies ordinance 1962 by inserting seven sections from 82-A to 82- G on 2nd June, 1997 through the banking companies amendment Act 1997. The purpose of the establishment of Banking Mohtasib is to resolve any complaints from customers against their banks and those of scheduled banks against another bank. This is a free service for the public which covers all banking services.
Powers of Banking Mohtasib (BM)
a) BM can entertain complaints from, customers, borrower, utility bill depositors, banks or from anybody or organization.
b) Banking Mohtasib can award compensation for actual loss suffered and grant of reasonable expenses can be considered by the banking Mohtasib.
c) Banking Mohtasib cannot award damages against the bank. Facilitate amicable settlement of the complaints.
d) Banking Mohtasib shall not entertain any complaint already disposed of by SBP or any court of law.
e) Banking Mohtasib cannot issue a stay order to entertain any complaint, if the matter is pending before any court of law.
Authorities of Banking Mohtasib
Banking Mohtasib is authorized to entertain complaints of the following nature:
A) Banks failure to act according to the banking laws and regulation. Delays or frauds in relation to the payments, collection of instruments or fund transfer.
B) Fraudulent or unauthorized debit entries in the account.
C) Complaints from exporters or importers relating to the banking services.
D) Complaints from holders of foreign currency accounts whether resident or non-resident.
E) Unauthorized operation of lockers.
F) Complaints related to foreign remittances.
G) Complaint in relation to the mark-up based on the ground of violation of an agreement or SBP directives.
H) Complaints relating to the utility bills.
Banking Mohtasib shall not pass any order against bank without giving notice and opportunity of hearing.
Before filing a complaint with the Mohtasib, the complainant should intimate bank in writing about the intention of doing so. In case of no reply or unsatisfactory reply, the complainant can send complaint to banking Mohtasib within 45 day.
The complaint should be made in writing under solemn affirmation or oath, narrating full details of the case / transactions disputed, and also name and address of the complainant.
The Mohtasib can adopt any procedure, he considers appropriate for investigating the complaint.
Banking Mohtasib has the power for the purpose of disposing a case, to require any information documents from banks which are relevant for the purpose of deciding a complaint, subject to the following conditions:
a) Maintain confidentiality as per banking laws and procedure.
b) The documents shall not be provided which may compromise banks position in relation to the other customers account.
c) If banks do not provide information / documents, the bank Mohtasib can add adverse comments in his finding regarding non provision of information/ documents.
Mohtasib will try for an amicable settlement if satisfied with the genuineness of the complaint. In case of failure it may direct concerned bank to:
a) Reconsider the matter.
b) Modify earlier decision
c) To pay compensation fixed by Mohtasib.
d) To take steps to improve efficiency of the bank.
e) Recommend SBP to initiate inquiry against the bank for violation of law, regulations, etc.
• In no case Mohtasib will direct bank to provide finance/ loan to any complainant.
If any bank or its official or complainant is not satisfied with the decision of Mohtasib, he may file an appeal with the Governor of the State Bank of Pakistan within 30 days of passing the order by the Mohtasib. The governor shall decide appeal within 30 days.
Finding of the Mohtasib should be implemented within 40 days of the decision or finalization of appeal from the Governor SBP as the case may be.
If no appeal is filed, the decision of Mohtasib shall be treated as final. If decision of the Mohtasib is not implemented by the concerned bank, SBP may penalize it or may ask for disciplinary action against its officials.
Banking Mohtasib can ask the bank to disclose any information required for disposing the case, ensuring confidentiality as per requirement of law.
Banker’s Books Evidence Act, 1891:
Prior to passing of Bankers’ Book Evidence Act 1891 bankers were required to produce in the court of law one or more of their original ledgers or other books of account as an evidence, thereby causing inconvenience and disruption to their normal business operations. To remove these formalities, Bankers Book Evidence Act 1876 was passed which was replaced by Bankers Book Evidence Act 1879 with extended provisions.
Banker’s Convenience - Section 5 of the said Act reads as under:
“A banker or officer of a bank shall not in any legal proceeding to which the bank is not a party, be compellable to produce any bankers books, the contents of which can be proved under this Act or to appear as a witness to prove the matters, transactions and accounts therein recorded, unless by order of a Judge made for special cause.
The Act thus absolves banks from:
• Production of original books and
• Appearance in person of banks personnel.
“Certified copy”.
Under section 4, a certified copy of any entry in a bankers book shall in all legal proceedings be received as prima facie evidence of the existence of such an entry and shall be admitted as evidence of the matters, transactions and accounts therein recorded in every case where, and to the same extent, as the original entry itself is now by law admissible, but not further or otherwise.
A certified copy means a copy of any entry in the books of a bank as defined by Section 2(2) bearing at the foot of the entry, a certificate dated and subscribed by the Accountant/Manager of the bank with his name and official designation to the effect:
i. that the entry is contained in one of the ordinary books of the bank.
ii. that the entry was made in the usual and ordinary course of business.
iii. that the book containing the entry is still in the custody of the bank.
Copies of bank record that are not certified within the meaning of Section 2(8) cannot be received as prima facie evidence of existence of entries of which they are copies nor can such copies be admitted as evidence of matters, transactions and account therein recorded.
Electronic Transactions Ordinance 2002
Electronic Transactions. - To cope with the requirements of present day changes involving electronic transactions, the Government promulgated the Electronic Transactions Ordinance 2002. This law is meant to recognize and facilitate documents, records, information, communications and transactions in electronic form and to provide for the accreditation of certification service provider. Various terms used in the Ordinance have been defined as under:
- “Authenticity” means in relation to an electronic document or electronic signature, the identification of an attribution to a particular person or an information system.
- Legal recognition; no document, record, information, communication or transaction shall be denied legal recognition, admissibility, effect, validity, proof or enforceability on the grounds that it is in electronic form and has not been attested by any witness.
- Attestation/Notarization; no electronic document shall require attestation and notarization for a period of 2 years from the date of the Ordinance.
To include the impact of the Electronic Ordinance the Qanun-e-Shahadat Order 1984 has been amended accordingly.
No comments:
Post a Comment