The document summarizes major laws and regulations for financial institutions in Pakistan. It discusses objectives of bank regulations such as prudential requirements and reducing systemic risk. It also outlines general principles of regulation including minimum capital requirements, supervisory review, and market discipline. Specific laws covered include capital adequacy, reserve requirements, governance standards, reporting obligations, inspections, audits, and restrictions on activities. Regulations for non-bank financial institutions are also summarized regarding exposure limits, borrowing conditions, and operational requirements.

1. Financial institutions’ laws
and regulations
{
Major laws of depository and non-depository
financial institutions

2. Presented by:
{
Raasti Shabbir
Arzoo
Aneela Arshad
Abid Ali
1186
1184
1227
1188

3. MAJOR BANK LAWS AND
REGULATIONS

4. Introduction
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Definition
Bank regulations are a form of
government regulation which subject
banks to certain requirements,
restrictions and guidelines. This
regulatory structure creates transparency
between banking institutions and the
individuals and corporations with whom
they conduct business, among other
things.

5. Objectives Of Bank
Regulations
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Prudential—to reduce the level of risk to which bank
creditors are exposed (i.e. to protect depositors)
Systemic risk reduction—to reduce the risk of disruption
resulting from adverse trading conditions for banks
causing multiple or major bank failures
Avoid misuse of banks—to reduce the risk of banks being
used for criminal purposes, e.g. laundering the proceeds of
crime
To protect banking confidentiality
Credit allocation—to direct credit to favored sectors
It may also include rules about treating customers fairly
and having corporate social responsibility(CSR)

6. General Principles Of Bank
Regulation
Minimum Requirements
Requirements are imposed on banks in order to promote
the objectives of the regulator. The most important
minimum requirement in banking regulation is
maintaining minimum capital ratios.
 Supervisory Review
Banks are required to be issued with a bank license by
the regulator in order to carry on business as a bank.
 Market Discipline
The regulator requires banks to publicly disclose
financial and other information.
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7. Principles Of Bank
Regulation
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Instruments And Requirements Of Bank
Regulation
Capital requirement
The capital requirement sets a framework on how banks must
handle their capital in relation to their assets.
 Reserve requirement
The reserve requirement sets the minimum reserves each bank
must hold to demand deposits and banknotes.
 Corporate governance
Corporate governance requirements are intended to encourage
the bank to be well managed, and is an indirect way of
achieving other objectives.
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8. Principles Of Bank
Regulation
Financial reporting and disclosure
requirements
Among the most important regulations that are placed
on banking institutions is the requirement for
disclosure of the bank's finances. Particularly for banks
that trade on the public market.
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Credit rating requirement
Banks may be required to obtain and maintain a
current credit rating from an approved credit rating
agency, and to disclose it to investors and prospective
investors. Also, banks may be required to maintain a
minimum credit rating.
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9. Principles Of Bank
Regulation
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Banks may be restricted from having imprudently large exposures
to individual counterparties or groups of connected counterparties.
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Large exposures restrictions
Activity and affiliation restrictions
a pervasive regulatory scheme for the public offering of securities
for generally prohibiting commercial banks from underwriting and
dealing in those securities. It prohibits affiliations between banks
and securities firms , eliminating the possibility that companies
owning banks would be permitted to take ownership or controlling
interest in insurance companies, manufacturing companies, real
estate companies, securities firms, or any other non-banking
company.

10. Principles Of Bank
Regulation
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Too Big To Fail and Moral Hazard
Among the reasons for maintaining close
regulation of banking institutions is the
concern over the global repercussions that
could result from a bank's failure; the idea
that these bulge bracket banks are "too big to
fail". The objective of federal agencies is to
avoid situations in which the government
must decide whether to support a struggling
bank or to let it fail.

11. ARZOO
1184
BANKING LAWS AND
REGULATIONS IN
PAKISTAN

12. Banking Regulatory
Authority:
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The central bank of Pakistan i-e State
Bank of Pakistan (SBP) is considered the
banking regulatory authority that
formulates and enacts laws for all
depository financial institutions or
commercial banks.

13. Business Of Banks
Forms of business which banks may engage in
No bank shall carry on any business other than banking
business and the permissible activities, allowed by SBP.
 Restrictions on carrying on of trade
Except as may be specifically authorized by the State Bank, no
bank shall engage, in wholesale or retail trade, including
export and import trade.
 Advertisement for deposits
No person, other than a bank shall issue or publish or
otherwise facilitate any person to issue or publish an
advertisement for deposits.
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14. Banking Business Based
On Shariah Principles
Requirements of business according to Shariah
principles
A bank may carry on shariah compliant business through the
establishment of a branch ; or through the establishment of a
subsidiary
 Report of Shariah adviser
Where a Shariah adviser is appointed by a bank, a report by
the Shariah adviser shall accompany the annual audited
financial statements of the bank.
 Shariah Board
The Central Board of Directors established by State Bank of
Pakistan Act, 1956 may establish a Shariah Board to enable the
State Bank to seek views on Shariah matters.
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15. Ownership, Control And
Management Of Banks
Prior approval of State Bank for acquisition of substantial
interest in a bank
A bank shall obtain the prior approval of the State Bank for it to acquire
the business ,for its amalgamation, consolidation or merger with another
bank; and For it to enter into any agreement with another company.
 Board of Directors and Audit Committee
Every domestic bank shall have a Board of Directors consisting of not less
than seven members who shall be elected by the general meeting of the
shareholders. The responsibilities of the Board of Directors shall include
the over-seeing of the management of the affairs of the bank.
 Liability of directors, chief executive and officers
In addition to any liability imposed by SBP, any director, chief executive
or officer of a bank shall be liable for any loss or damage sustained by the
bank
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16. Financial and Operational
Requirements Of Banks
Responsibility of State Bank and prudential
requirements
It shall be the responsibility and duty of the State Bank to
continuously monitor the performance of every bank so as to
ensure that the bank is complying with all applicable
requirements, standards and regulations.
 Requirements relating to minimum paid-up capital and
reserves
No bank shall commence business unless it has such minimum
paid-up capital as may be specified in the regulations made by
the State Bank
 Reserve Fund.
Every bank shall maintain a reserve fund.
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17. Payment of dividends and transfers
No domestic bank shall pay any dividend on its shares until
all capitalized expenses (including preliminary expenses and
other items of expenditure not represented by tangible
assets) have been completely written off.
 Cash Reserve
Every bank shall maintain with the State Bank a balance the
amount of which shall not at the close of business on any
day is less than such proportion of demand liabilities and
time liabilities of such bank in Pakistan as may be specified
in the regulations made by the State Bank.
 Maintenance of liquid assets
The State Bank may specify in regulations made by the State
Bank that a bank shall hold such minimum, or minimum
average, amount of liquid assets in Pakistan at all times or
over such period of time, as may be set out in the regulations
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18. ANEELA ARSHAD
1227
BANKING LAWS AND
REGULATIONS IN
PAKISTAN (continued)

19. Financial and Operational
Requirements Of Banks(contd)
Restrictions on acquisitions of immovable property
by banks
A bank shall not purchase or acquire any immovable property
or any right therein except As may be authorized in writing by
the State Bank.
 Bank Holidays
The State Bank may, at any time by notice in the
Gazette, declare any day or days to be a holiday for all banks.
No bank shall do any business with the public on any day
declared a holiday for such bank
 Establishment of correspondent banking relationship
A bank may establish a correspondent banking relationship
with any other bank or financial institution outside Pakistan
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20. Restriction on investments by domestic banks in other
enterprises
A domestic bank shall not acquire or hold shares of, any enterprise
to a value of five percentum or more, unless the approval of the
State Bank
 Credit facilities and limits
A bank shall not:–
Grant credit facilities if the aggregate amount of such credit facilities
exceeds such amount of its capital funds as the State Bank may
specify in the regulations made it;
Grant substantial loans which in the aggregate of its total credit
facilities
 Records of transactions and commitments
A bank shall keep on file the relevant documents and records for
each one of its transactions and commitments, in such form as shall
render the documents admissible as evidence in court and until the
prescription of the rights under those transactions and
commitments.
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21. Reporting
Maintenance of Accounts and Records
Every bank shall maintain at all times accounts and records,
and prepare periodic financial statements, adequate to reflect
its operations and financial conditions, in such form and
manner as may be specified in regulations made by the State
Bank.
 Preparation of Financial Statements
Except as may be authorized by the State Bank, at the
expiration of each financial year, every bank shall prepare
with reference to that year, financial statements in respect of
the financial year.
“Financial statements” include the balance sheet, profit and
loss accounts, statement of changes in equity, cash flow
statement and notes to the accounts.
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22. Inspection
Inspection
The State Bank shall, from time to time and at intervals it
deems appropriate, examine, the books or other documents,
accounts and transactions of each bank and of any office
outside Pakistan of a domestic bank.
The inspection shall be carried out by such officer of the State
Bank as the State Bank may authorize who in this Part is
referred to as “inspecting officer”.
 Inspection report
The State Bank shall prepare an inspection report on the
financial condition, risk management and internal control, of
the bank and identify the significant weaknesses in the bank
that need to be addressed.
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23. Auditing
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The financial statements prepared shall be audited by
a person who is duly qualified, under the Chartered
Accountants Ordinance,1961, or any other law for the
time being in force, to be an auditor and whose name
appears on the panel of auditors maintained by the
State Bank as persons to be suitable auditors for
banks.
The panel of auditors so maintained by the State
Bank may classify auditors in different categories for
different banks taking into account the scope,
complexity and size of the operations of the banks.

24. ABID ALI
1188
LAWS FOR NONDEPOSITORY FINANCIAL
INSTITUTIONS

25. Corporate Borrowers
Limit on NBFC’s exposure to a single person
The total outstanding exposure by a NBFC to any single person
shall not at any point in time exceed 30% of the NBFC’s
equity, subject to the condition that the maximum outstanding
against fund based exposure does not exceed20% of the NBFC’s
equity.
The total outstanding exposure by a NBFC to any group shall not
exceed 50% of the NBFC’s equity, subject to the condition that the
maximum outstanding against fund-based exposure does not
exceed35% of the NBFC’s equity.
 Minimum conditions for grant of financing facilities
When considering proposals for fund/non-fund based facility
exceeding one million rupees, NBFCs should give due weightage to
credit report relating to the borrower and his group obtained from
Credit Information Bureau of the State Bank of Pakistan.If the credit
report indicates over-exposure/default, the facilities shall be
extended only after recording reasons to do so.
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26. Individuals Borrowers
Regulations for Housing Finance for
individuals
The maximum per party limit in respect of housing
finance by the NBFCs will be Rs. 7.5 million.
NBFCs are free to extend mortgage loans for housing,
for a period not exceeding twenty years (In case of
facilities granted by House Building Finance
Corporation the said period may be extended upto
twenty five years). NBFCs should be mindful of their
adequate asset liability matching.
The housing finance facility shall be provided at a
maximum Loan to Value ratio of 85:100 (85%).
The housing finance facility shall be provided at a
maximum of Income to installment ratio of 3:1.
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27. Operations of NBFCs:
Limit on NBFC’s exposure against liabilities
Liabilities, excluding contingent liabilities and security
deposits, of NBFC shall not exceed seven times of its equity
for the first two years of its operations. In the subsequent
years, the liabilities shall not exceed ten times of the equity of
the NBFC.
 Creation and building up of reserve
Every NBFC shall create reserve fund to which shall be
credited:
an amount not less than 20% of its after tax profits till such
time the reserve fund equals the amount of the paid up
capital; and
Thereafter a sum not less than 5% of its after tax profits.
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28. Operations of NBFCs:
Return on deposits. –
 Every NBFI shall provide return on deposits which
may be different for different volumes and maturities
of deposits provided that uniformity is observed
within each category but deposits of listed companies,
financial institutions, recognized charitable trusts and
statutory bodies shall, however, be exempt.
 Deposit Insurance. –
 When deposit insurance arrangements are in place,
every NBFC shall arrange full insurance cover for its
deposits/COIs etc. upto Rs. 100,000/.
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29. Controlling and auditing:
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1.Internal audit. - Every NBFC shall have an Internal
Audit Department whose head shall report to the board of
directors directly and shall, inter alia, be responsible for
compliance with these guidelines and for establishing an
effective means of testing, checking and compliance with
the policy and procedures established by it.
2. Submission of statistical returns. - Every NBFC shall
submit such periodical statements, information or reports
in such forms and manner and within such time as may be
prescribed by the Commission from time to time.
3. Code of conduct. - Every NBFC shall acquire and
maintain membership of an association constituted in
consultation with the Commission and NBFCs shall follow
the code of conduct prescribed by the said association(s).

30. Gratitude…….