More powers to the SBP

The Banking Companies (Amendment) Bill, 2010, unanimously passed by the National Assembly on 24th February, 2011 would greatly add to the authority of the State Bank of Pakistan (SBP) so far as its supervision and control of the financial system in the country is concerned.
The provisions of the Bill would enable it to change management in banks, impose losses on shareholders by writing down their capital, intervene and take control of banks, appoint administrators to manage banks and restructure banks when symptoms of the crisis are determined. According to various clauses of the Bill, the State Bank, if satisfied, may require any banking company to increase its paid-up capital by such amount and within such a period as may be specified in its order.
In case the State Bank determines that a banking company is carrying on its business in a manner detrimental to the interest of depositors or is materially unable to discharge its financial obligations or has failed to meet cash, liquidity or provisioning requirements, the SBP may impose conditions or restrictions on the banking company on accepting deposits. Also, if the State Bank is satisfied that one or more of the circumstances exist under which a banking company is carrying on its businesses in a manner detrimental to the interests of its depositors, creditors or other stakeholders, has failed to meet capital requirements, is wilfully engaged in or is being used for criminal activities etc., actions of various sorts as prescribed in the Amended Bill could be taken against the said company, keeping in view the gravity of the situation and the compliance behaviour of the banking company.
According to a new sub-section, cash deposited by a banking company or financial institution under the SBP Act, 1956 (XXXIII of 1956) should be deemed to be a part of the assets of the banking company, but shall not be subject to any encumbrance, nor shall it be available for the discharge of any liability of the banking company or the financial institution other than an order of liquidation made by the High Court.
Another provision in the Bill, which is likely to be quite contentious, relates to the shareholding of an individual in a banking company. According to the amendment in the Banking Companies Ordinance, if the State Bank has determined that a person is holding or is a beneficial owner of five percent or more shares of a banking company, without prior approval of the State Bank, or a person that acquired shareholding with prior approval of the State Bank subsequently fails to meet the fit and proper test, such a person could be required to divest or transfer his shareholding to a fit or proper person. However, the reasons would be stated for such an order and the State Bank would exercise its powers reasonably, fairly and justly.
The amended Bill, 2010 would, of course, give more authority to the State Bank in certain crucial areas to regulate the financial system of the country thoroughly and in a confident manner. If used judiciously, such a step could improve viability and enhance the soundness of the banking system in the country. Better risk management and timely intervention of the central bank could avoid bank failures, increase intermediation process between savers and investors and help the economy to grow faster. The financial system of a country was too important to be left unattended in certain aspects or only partly regulated due to lack of authority of the regulator.
Some of the provisions were also direly needed to stop suspicious financial activities and money laundering. For instance, if a financial institution was "wilfully engaged in or is being used for criminal activities," it has to be stopped from engaging in such activities legally and through punitive measures as provided under this Ordinance.
However, while most of the provisions would give more teeth to the State Bank for justifiable reasons, the authority to force an individual to divest his shares and transfer them to a fit and proper person is arguable and could, at times, be used arbitrarily by the State Bank. Some analysts could even interpret this newly gained authority of the SBP as draconian or, at least, excessive because it would be the State Bank that is going to determine the definition of "fit and proper person" and pass judgement on that.
Such apprehensions are based on the fact that in an angry mood, the sitting government, through the State Bank, could use such a clause against its opponents in the financial circles and victimise them. Given the previous history and prevailing culture in Pakistan, such doubts are not entirely unfounded.