Re-modelling of non-banking sector
By AMANULLAH BASHAR
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
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
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
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
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