Business & Finance Club Magazine - Global Forum- Pakistan introduced a new law to strengthen banks and ensure financial health of those in trouble.

Banking is the most booming sector in the country in the last several years. It has increased its profitability and dividend pay out, even in these years when the country is facing a business slowdown, and educed fresh investment in domestic industry and projects of a long term nature.

As a result of this performance, the sector has attracted considerable investment in existing and new domestic and foreign-based banks in Pakistan. The new law will ensure that the banks stand on still stronger footing, provide good service to customers and high profits to investors in the financial sector.

The new law empowers the State Bank of Pakistan, or SBP, the Central Bank, with additional authority to regulate shareholders of banks. The SBP is also being authorised to take control of banks in trouble and ask “unfit shareholders to sell their shares.”

The Banking Companies Act 2010 has been amended to give effect to this enhanced authority to the SBP.

SBP Governor Syed Salim Raza says “the Central Bank possesses a lot of information about banks and it can see red light in the tunnel, if any bank is found making any blunder.” However, “certain situations can arise where the SBP as the regulator should have some powers to act promptly, but judiciously in order to protect the rights of all the stakeholders.”

The approved law lays down that the banking sector regulator, SBP, needs to be “reasonable, fair and judicious,” prior to asking a bank to raise its paid-up capital and shareholder to sell shares and taking over an insolvent bank. This is why the new law authorises the SBP to ask any bank at any time to inject more capital, considering the bank’s loan book.

In case the SBP determines that a person or shareholder is holding five per cent or more shares of a banking company without its prior permission, the Central Bank can ask the shareholder to sell the shares to a “fit and proper person,” determined under the SBP regulations.

It provides that if the shareholder does not sell the shares, then “the SBP can forcibly sell these shares in the stock market or publically auction them.” It bars a guilty person to hold shares of a bank or a baking company.

The law also empowers the SBP to take over an insolvent bank after observing specific circumstances. “If a bank is fast becoming insolvent, the SBP will invoke its powers and ask the bank’s management to submit an action plan, and upon failure to do so the SBP will then seek the board of director’s commitment letter.

Persons desirous of holding more than five per cent or more shares of a banking company will have to meet the “Fit and Proper” test of the SBP. In case such persons, fail to meet the test, the SBP will be empowered to order the person to divest the same in a reasonable period • three months. In case of non-compliance, the SBP can sell such an investment through the stock exchange or in a public auction. During the interim period, the SBP can prohibit transfer of such shares, exercise of voting right, payment of cash or stock dividends, or issuance of right shares.

Persons convicted of cases of fraud, deceit, and dishonesty, and involved in tax and bank default, will not be considered “Fit and Proper” persons as per prescribed regulations to hold shares in a banking company. No lien can be declared on the cash deposited by a banking company as per the prescribed Cash Reserve requirements with the SBP by any authority other than through an order by the High Court for liquidation.

The new law has been prepared, following the recent financial crisis which had clear linkages with weak supervisory regime. “Therefore, it is necessary to provide matching tools to bank regulators for corrective measures with the view to maintain financial stability.” The law will enable the SBP to: (1) change managements in banks, (2) impose losses on shareholder by writing down their capital, (3) intervene and take control of banks, (4) appoint administrators to manage banks, and (5) restructure banks when symptoms of crises are determined.