Leasing companies, mutual funds oppose transfer under SBP

The Leasing Association of Pakistan and Mutual Funds Association of Pakistan have opposed any move to transfer the regulatory framework of the non-banking finance companies (NBFCs) from the Securities and Exchange Commission of Pakistan (SECP) to the State Bank of Pakistan (SBP).
In separate communications to the Ministry of Finance, these entities said they wanted to remain within the regulatory framework of SECP. It is learnt that the Investment Banks Association of Pakistan has also arranged a meeting with the State Bank of Pakistan (SBP) Governor, Dr Shamshad Akhtar to discuss the issue relating to the regulatory framework of NBFCs.
Meanwhile, the Leasing Association of Pakistan said that the proposed regulations would create duplicity of jurisdiction with some entities regulated by SBP and other by SECP. This would lead to confusion and inevitably an "uneven playing field" despite the undoubted standing and expertise of both SBP and SECP.
Secondly, the proposal goes against the current global trend of reducing the supervisory role of central banks, particularly in respect of NBFCs. Similarly, no countries have been found where companies in the same business are being supervised by separate regulators.
The leasing association said that the NBFCs engaged in deposit taking activities would be excluded from the definition of NBFC and would come under the purview of SBP.
It is reported that 12 leasing companies, 8 investment banks and 3 housing finance companies (23 in all) will be regulated by SBP and 98 NBFCs, mostly Modarabas, some leasing companies and other NBFCs would remain under SECP''s supervision. The proposed changes would enable SBP to oversee banking group with non-banking investments on consolidated basis.
The association said that the supervision of NBFCs, excluding development finance institutions (DFIs), was transferred wholly to SECP at SBP''s initiative only five years ago. This was part of the overall financial sector reforms and followed the international trend.
Prior to December 2002, SBP and SECP shared regulatory responsibilities for NBFCs. The change removed the overlap of regulatory responsibilities between SBP and SECP. In order to provide a uniform platform for conducting operations and monitoring of NBFCs, the NBFCs (Establishment and Regulation) Rules were notified in 2003.
The SECP, during last five years, has not only played the role of supervisor and regulator but has also facilitated and created an enabling environment for the emerging and diversified NBFC sector. In November 2007, SECP issued the new Non-Banking Finance Companies and Notified Entities Regulation 2007 and revised the NBFC (Establishment and Regulation) Rules 2003 after detailed consultation with all stakeholders.
The SECP has been effective in ensuring that NBFCs management and boards conduct their business in conformity with prescribed rules and regulations. Furthermore, the Code of Corporate Governance was issued requiring all listed companies to induct independent board members and set up audit committees to ensure compliance with laws, regulations and rules applicable to each company.
NBFCs which include leasing companies, modarabas and investment finance companies (investment banks) are playing vital role in developing the country''s economy.
The sector has historically focused on providing financing to small and medium enterprises (SMEs) and its support to almost all sectors of the economy has contributed significantly to the growth of vital sectors including transport, fuel and energy, textile, automobiles, automotive vendors, construction, healthcare and most recently agriculture and micro finance.
The main focus of the sector is asset-based financing as opposed to collateral based financing which is the focus of commercial banks. This distinction and advantage is significant particularly for SMEs which are unable to provide collateral and thus are not able to approach formal banking sector.
Leasing Association of Pakistan said it believes that commercial banks and NBFCs are primarily geared towards different markets and their regulatory requirements and sectoral challenges are totally different from each other. The association''s main concern is that the proposal would create duplicity of jurisdiction, with some entities regulated by SBP and others by SECP.
In view of existing situation, any decision for the change of the regulatory environment of NBFCs should be taken after consultation with all the stakeholders including the representative associations of NBFCs, the Leasing Association of Pakistan added.
On the pattern of leasing association, Mutual Funds Association of Pakistan has also said that it is important for the SBP to regulate credit creation and asset price bubbles created through over-leveraging. SBP can have the right to ask for information and must regulate the overall credit creation but their role, as far as mutual funds are concerned, must be restricted to that. However, to regulate any other aspects of mutual funds activity it would be a huge setback for the mutual fund industry.
The asset management companies, managing mutual funds, are presently regulated by the SECP. Over a period of time, the SECP has developed a fairly satisfactory infrastructure and expertise to regulate the mutual funds.
The association feels that the ongoing capacity building at SECP should continue, so as to further enhance its regulatory capabilities. All over the world, the capital markets, of which mutual funds are a part, are regulated by the SECs.
The mutual fund industry in Pakistan is in a development stage. It should be noted that the mutual funds industry only started taking off after the only mutual fund management companies (NIT and ICP) ceased being regulated by SBP. If the SBP wishes to regulate deposit taking it should get control of National Savings Schemes; mutual funds do not take deposits.
The mutual fund industry should be spared any new experimentation of management by the SBP or of having two regulators. Any arrangement where mutual funds arc regulated by two regulators is not likely to work and would be a very serious setback for the mutual funds industry, the association said.