The State Bank of Pakistan (SBP) is responsible for supervising the banking sector in Pakistan. SBP has powers granted by laws like the Banking Companies Ordinance to regulate banks and take corrective actions if needed. It monitors banks through off-site analysis of financial reports and on-site inspections to ensure compliance with prudential regulations. SBP's supervision aims to promote a safe, sound and stable banking system.

1. MBF
LEGAL AND REGULATORY
ASPECTS OF BANKING
SUPERVISION

2. SUMMARY OF LAST SESSION
Examples of Bank Supervision Approaches
 Bank Supervision in Britain
 Bank Supervision in Continental Europe
 Bank Supervision in United States
 Bank Supervision in Pakistan
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3. AGENDA OF THIS SESSION
Banking sector Supervision in Pakistan
Financial sector of Pakistan
Banking Companies Ordinance
Powers of State Bank of Pakistan
Prudential Regulation for Banks
Off site --- On site Monitoring at SBP
Monitoring policy of SBP
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4. BANKING SECTOR
SUPERVISION IN PAKISTAN
State Bank of Pakistan (SBP) which is the Central Bank of
the country has been inter-alia entrusted with the
responsibility for an ongoing effective supervision of the
banking sector.
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5. BANKING SECTOR
SUPERVISION IN PAKISTAN
(CONTD.)
The relevant provisions of law which vest powers in State
Bank of Pakistan (SBP) to carry out inspection of banks
are contained in the Banking Companies Ordinance,
1962.
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6. BANKING SECTOR
SUPERVISION IN PAKISTAN
(CONTD.)
Besides, State Bank of Pakistan Act, 1956 and the Bank’s
Nationalization Act, 1974, The Financial Institutions
(Recovery of finances) Ordinance, 2001, Companies
Ordinance, 1984 and Statutory Regulatory Orders (SROs)
are the relevant legislations, which cover the activities
concerning the banking sector.
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7. FINANCIAL SECTOR OF
PAKISTAN
The financial sector in Pakistan comprises of:
 Commercial Banks,
 Development Finance Institutions (DFIs),
 Microfinance Banks (MFBs),
 Non-banking Finance Companies (NBFCs)
 Modarabas,
 Stock Exchange and
 Insurance Companies
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8. FINANCIAL SECTOR OF
PAKISTAN (CONTD.)
Non-banking Finance Companies (NBFCs) include;
leasing companies,
Investment Banks,
Discount Houses,
Housing Finance Companies,
Venture Capital Companies,
Mutual Funds
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9. FINANCIAL SECTOR OF
PAKISTAN (CONTD.)
• Under the prevalent legislative structure the supervisory
responsibilities in case of Banks, Development Finance Institutions
(DFIs), and Microfinance Banks (MFBs) falls within legal ambit of State
Bank of Pakistan
• While the rest of the financial institutions are monitored by other
authorities such as Securities and Exchange Commission and
Controller of Insurance.
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10. FINANCIAL SECTOR OF
PAKISTAN (CONTD.)
Under the WTO commitments the operational status of
branch network of foreign banks operating in Pakistan as
on 31-12-1997 has been protected and frozen.
However, existing foreign banks having less than 3
branches can have branches to the extent of maximum
number of 3 only.
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11. FINANCIAL SECTOR OF
PAKISTAN (CONTD.)
New foreign banks desirous of entering banking
business in Pakistan will now be required to incorporate
as domestic bank under the local laws.
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12. FINANCIAL SECTOR OF
PAKISTAN (CONTD.)
The branches of foreign banks operating in Pakistan can
also be converted into a local commercial bank by
incorporating under the local laws and subject to a
minimum paid up capital of Rs.1 billion provided foreign
share holding is restricted to a maximum of 49%.
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13. FINANCIAL SECTOR OF
PAKISTAN (CONTD.)
At present there are;
 41 scheduled banks,
 6 DFIs, and
 2 MFBs operating in Pakistan.
Whose activities are regulated and supervised by State
Bank of Pakistan.
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14. FINANCIAL SECTOR OF
PAKISTAN (CONTD.)
The commercial banks comprise of;
 3 nationalized banks,
 3 privatized banks,
 15 private sector banks,
 14 foreign banks,
 2 provincial scheduled banks, and
 4 specialized banks.
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15. BANKING COMPANIES
ORDINANCE
Under the Banking Companies Ordinance, 1962 the State
Bank of Pakistan is fully authorized to regulate and
supervise banks and development finance institutions.
During the year 1997 some major amendments were
made in the banking laws, which gave autonomy to the
State Bank in the area of banking supervision.
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16. BANKING COMPANIES
ORDINANCE(CONTD.)
Under Section 40(A) of the said Ordinance it is the
responsibility of State Bank to systematically monitor the
performance of every banking company to ensure its
compliance with the statutory criteria, and banking rules
& regulations.
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17. BANKING COMPANIES
ORDINANCE(CONTD.)
In every case in which the management of a bank is
failing to discharge its responsibility in accordance with
the applicable statutory criteria or banking rules &
regulations or is failing to protect the interests of the
depositors or for advancing loans and finance without
due regard for the best interests of the bank or for
reasons other than merit, the State Bank is empowered to
take necessary remedial steps.
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18. POWERS OF STATE BANK OF
PAKISTAN
The State Bank of Pakistan can, inter-alia, exercise the
following powers vested upon it under the Banking
Companies Ordinance:-
 Prohibiting the bank from giving loans, advances & credits.
 Prohibiting the bank from accepting deposits.
 Cancel license of a bank.
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19. POWERS OF STATE BANK OF
PAKISTAN (CONTD.)
 Give directions to the bank as it deem fit.
 Remove chairman, directors, chief executive or other managerial
persons from the office and
 appoint a person as chairman, director or chief executive.
 Supersede the Board of Directors.
 Direct prosecution of directors, chief executive or other officer.
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20. POWERS OF STATE BANK OF
PAKISTAN (CONTD.)
 Caution or prohibit bank against entering into any particular
transaction(s).
 Require bank to make changes in management.
 Appoint its officers to observe the manner in which affairs of bank/its
branches/office are conducted.
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21. POWERS OF STATE BANK OF
PAKISTAN (CONTD.)
 Winding up the bank through high court.
 Impose penalties including civil money penalties.
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22. PRUDENTIAL REGULATIONS
FOR BANKS
The State Bank has framed Prudential Regulations for
banks and Rules of Business for DFIs that present a
prudent operating framework within which banks and
DFIs are expected to conduct their business in a safe and
sound manner taking into account the risks associated
with their activities.
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23. PRUDENTIAL REGULATIONS
FOR BANKS (CONTD.)
These regulations incorporate the spirit and essence of
BIS regulations and are constantly watched for possible
improvement so that their enforcement yields the best
results to promote the objectives of supervision.
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24. PRUDENTIAL REGULATIONS
FOR BANKS (CONTD.)
The State Bank is empowered to determine Statutory
Liquidity and Cash Reserve Requirements for banks/DFIs.
Presently the Cash Reserve Requirement is 5% on weekly
average basis subject to daily minimum of 4% of Time &
Demand Liabilities.
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25. PRUDENTIAL REGULATIONS
FOR BANKS (CONTD.)
In addition to that banks are required to maintain
Statutory Liquidity Requirement (SLR) @ 15% of their
Time & Demand Liabilities.
Similarly, DFIs are required to maintain SLR of 14% and
Cash Reserve of 1% of their specified liabilities.
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26. PRUDENTIAL REGULATIONS
FOR BANKS (CONTD.)
The Banking Companies Ordinance had been amended in
1997 which empowers the State Bank to prescribe capital
requirements for banks.
In exercise of these powers the State Bank has laid down
Minimum Capital Requirements for banks based on Basle
capital structure.
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27. PRUDENTIAL REGULATIONS
FOR BANKS (CONTD.)
The banks have to maintain a Capital Adequacy Ratio in a
way that their capital and unencumbered general
reserves are, at the minimum, 8% of their risk weighted
assets, and effective from 1st January, 2003 banks are
required to maintain a minimum paid up capital level of
Rs.1 Billion.
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28. OFF-SITE AND ON-SITE
MONITORING
While the off-site monitoring aspect is looked after by
the State Bank of Pakistan’s Banking Supervision
Department the responsibility for the on-site
examination of the banking system in Pakistan lies on
the shoulders of the Banking Inspection Department.
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29. OFF-SITE AND ON-SITE
MONITORING (CONTD.)
This has been designed to ensure that institutions
operate in a safe and sound manner.
The focus of the supervisory efforts by the State Bank of
Pakistan is on the health and stability of the banking
system in Pakistan.
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30. OFF-SITE MONITORING AT
BSD
The objectives of off-site surveillance over the banking
system are:-
 to monitor the condition of individual banks,
 as well as condition within the banking system;
 to provide early identification of problems so that corrective action
can be effected; and
 to target scarce on-site supervisory resources to areas or activities of
greater risk.
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31. OFF-SITE MONITORING AT
BSD (CONTD.)
Off-site surveillance system revolves around;
 receipt, review and analysis of periodic financial statements and
returns submitted to the State Bank.
The off-site analysis facilitate monitoring of each bank’s
performance and its observance of supervisory
requirements over time, so that problems may be
identified as soon as these emerge.
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32. OFF-SITE MONITORING AT
BSD (CONTD.)
The process thus assists in making the most effective
use of scarce on-site inspection resources.
The system also works as an early warning to identify
those areas which reflect high probability of financial
difficulties so that policies and corrective actions can be
designed and implemented accordingly.
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33. ON-SITE MONITORING AT BID
In consonance with the responsibilities envisaged under
the Core Principles recommended by the Basle
Committee, the On-Site examination capabilities at the
State Bank of Pakistan have been substantially
augmented to bring them at par with the expected
international standards.
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34. ON-SITE MONITORING AT BID
(CONTD.)
While regulations have existed for some time aimed at
convergence of the essential industry indicators to the
globally accepted criteria, a risk-based approach to
evaluations has been adopted by the bank in all its
assessments.
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35. ON-SITE MONITORING AT BID
(CONTD.)
Periodic On-Site examinations of the financial condition
of institutions, falling within SBP’s jurisdictions, remains
the most effective supervisory tool, which support
Banking Supervision Departments in maintaining a
proactive approach in discharge of the statutory
responsibilities.
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36. MONITORING POLICY OF SBP
The State Bank of Pakistan’s policy for frequency of
inspection of banks and DFIs is designed to provide
flexibility in scheduling inspections consistent with the
need to maintain safety and soundness.
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37. MONITORING POLICY OF SBP
(CONTD.)
The policy provides a framework within which
supervisory ratings, surveillance and financial monitoring
results, and other appropriate indicators of banks
soundness, are to be considered in carrying out the State
Bank of Pakistan’s fundamental policy of subjecting each
bank and non-bank financial institution under its
supervision to a periodic on-site inspection.
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38. MONITORING POLICY OF SBP
(CONTD.)
With a view to streamline the approach and the
underlying procedures for effective and efficient banking
supervision State Bank of Pakistan has embarked upon a
major overhauling of its own capabilities so as to bring
them at par with international practices.
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39. MONITORING POLICY OF SBP
(CONTD.)
This entailed hiring of services of consultants of world
repute (M/s. Arthur Andersen) under the FSID Project of
the World Bank.
These Consultants have compiled extensive on-site and
off-site manuals. Besides qualified and professional
trained human resource have been recruited and
rigorous theoretical and hands-on training has been
provided to them.
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40. MONITORING POLICY OF SBP
(CONTD.)
With the shift in supervisory focus from ‘compliance
oriented’ to ‘Risk Assessment Approach’ State Bank of
Pakistan has developed a uniform bank rating system in
conformity with international standards/benchmarks.
Now each bank is appraised under the CAMELS Rating
System.
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41. MONITORING POLICY OF SBP
(CONTD.)
In order to portray a legitimate and true financial
condition of a bank the off-site surveillance system and
the on-site inspection functions of banking supervision
work extremely close together.
As a result of these close coordination bank ratings
reflects as accurately as possible, the true financial
condition of a bank and the banking system as a whole.
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42. SUMMARY OF THIS SESSION
Banking sector Supervision in Pakistan
Financial sector of Pakistan
Banking Companies Ordinance
Powers of State Bank of Pakistan
Prudential Regulation for Banks
Off site --- On site Monitoring at SBP
Monitoring policy of SBP
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43. THANK YOU
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