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Re-modelling of non-banking sector

Jan-21 - 27, 2002


The non-banking financial sector is likely to play a greater role in Pakistan's economy as a result of re-modelling strategies introduced by the State Bank of Pakistan.

The incentives given in the new policy may also encourage consolidation of the non-banking financial services through mergers of the small entities likely to take place in the forthcoming financial year started from July 2002.

Currently, 47 Modaraba companies, 32 leasing companies and 15 investment banks are in operation in the non-banking financial sector in Pakistan.

The new policy offers financial incentives aiming at encouraging mergers/consolidation of banks/NBFIs. Appropriate amendments in the income tax Ordinances are underway to provide financial incentives to the companies, which opt for mergers.

Modarabas are not covered under this remodelling plan as they are already undertaking multipurpose functions.

Fiscal incentives will be provided to the existing institutions to merge, consolidate and transform themselves into the new NBFIs structure. Amendments are being made to Income Tax Ordinance to allow these incentives.

Effective from July 1, 2002, all non-bank financial institutions will be regulated by the SECP, which will eliminate existing overlapping of the regulatory jurisdiction over NBFIs, by SECP and SBP.

Salim Chamdia, newly elected Chairman of Karachi Stock Exchange, has welcomed the move with the opinion that now the exclusive attention of the SECP to regulate this sector would certainly produce better results regarding performance of the non-banking sector in Pakistan.

This is a good move for the capital market because growth of non-banking financial companies on sound footings would help capital formation process as well.

During last two years, a number of reforms have been implemented under the direction of each of these regulators, however, decision of separation of non-banking financial services from the commercial banking system certainly is deep rooted reform which would go a long way in systematic growth of NBFIs in Pakistan.

So far, SBP and SECP regulated both these institutions, now the decision to change the mechanism regulate these institutions is in line with the present and future requirement of the economy.

The non-banking financial sector represented by a number of non-commercial banking institutions like investment banks and leasing companies and DFIs which are playing a valuable role in deepening the financial markets by providing a range of services and introducing new financial instruments.

Before taking the decision to this effect, the State Bank carried out an in-depth review of the non-banking financial institutions, which indicated a number of deficiencies, and problems that needed policy intervention.

The review conducted by the SBP indicated that these institutions were suffering from a general malaise of low profitability, low return on equity and high cost of funds. Redesigning and implementation of a new model for the NBFIs was the need of the hour to address the problems faced by this sector. In order to adopt an appropriate strategy, the SBP and SECP worked together and formed a Task Force headed by Shamim Ahmed Khan, former Chairman of SECP. The Task Force held extensive consultations with the relevant market participants and various associations of non-bank financial sector.

NBFC will be allowed to establish undertaking all financial services except banking functions. The activities to be undertaken by NBFC include corporate advisory services, leasing, housing finance, venture capital and investment advisory for managing closed-end mutual funds and asset management for open-end mutual funds.

NBFC will have different tiers of capital linked to each activity. Minimum paid-up capital requirement for investment and corporate is Rs100 million, Advisory services for leasing Rs200 million, Housing Finance Rs100 million, Venture Capital Rs5 million for a company and Rs50 million for the Fund. Discounting Services Rs200 million, Investment Advisors Rs20 million and Asset Management Rs30 million.

Licence for each activity will be issued by the regulator on being satisfied about availability of expertise and resources.

NBFC will be the single legal entity and would have separate division for each category of business activity.

All non-bank financial institutions to be established in future will have to be incorporated as NBFCs even for performing a single business activity; the existing non-bank financial institutions will have the option to become NBFC.

Existing investment banks will be allowed to continue operating in accordance with the regulatory framework, in future no fresh licence will be issued for the investment bank in the present shape. Instead the licence will be issued to institutions desiring to perform investment and corporate advisory services, like underwriting and other capital market-regulated activity. Commercial banks proposing to undertake leasing business will have to establish subsidiaries for the purpose.