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BANKING LAWSPart - 1 Objectives This course has been designed with the view to focus special emphasis on the following aspects: · Developing interpretational skills and clear understanding of the students regarding prevalent banking and ancillary laws in Pakistan. · Developing professional skills so as to apply these laws in real life situations. · Enabling them to manage legal requirements pertaining to banks and banking transactions.
Course management: The entire course would comprise of the following modules, detail of the topics covered under these modules is also given hereunder:
Module 1 It would cover the following topics: Course Management Introduction to legal system of Pakistan Introduction to Banking Laws
Module 2 Financial system and banking: it would cover the following topics/contents:
Evolution of Banking: it would cover in detail the following topics/contents:
Following topics shall be covered at length in this module: Direct finance, indirect finance, Foreign exchange market, Stock markets, Bond markets, Financial Intermediaries including: Commercial Banks, Credit Unions, Savings and Loan Associations, Mutual Saving Banks, Mutual Funds, Finance Companies, Pension Funds etc. Key Services Provided by Financial Institutions like Risk Sharing, Liquidity Information services. We shall also discuss concept and scope of Debt and equity markets, Primary Markets and secondary markets, Exchange markets and over-the-counter markets (OTC), including Forward contracts and future markets. money market Instruments and Capital market instruments.
Module 3 Some important statutes regarding banking-- This would cover the following statutes: Banking Companies Ordinance, 1962: it would comprise the following topics/contents:
SBP Act, 1956: it would cover in detail the following topics/contents:
SBP Banking Services Corporation, Ordinance, 2001 --Pakistan banking & finance services commission Act, 1992 -- The co-operative societies and co-operative banks (re-payment of loans ordinance, 1966) -- The establishment of federal bank for co-operative and regulation of co-operative banking Act, 1977 -- Micro finance institutions Ordinance, 2001 -- The corporate and industrial re-structuring corporation Ordinance, 2000
Module 4 Banker - Customer relationships: it would cover in detail the following topics/contents:
We shall focus special attention on the following topics: Banker , customer , Rights and Duties of Customer, Duties of the Agent, Rights of the Agent, Duties of Principal, Essentials of Bailment, Duties of Bailee, Rights of Mortgagee, Essentials of a Valid Contract, Classification of Contracts, Termination of Banker- Customer Relationship.
Module 5 Types of Customer’s Account: it would cover in detail the following topics/contents:
Module 6 Law relating to Negotiable instruments: it would cover in detail the following topics/contents: · Introduction · Promissory note · Bill of exchange · Negotiation of instruments · Negotiation by delivery · Negotiation by endorsement · Holder in due course
Module 7 Principles and Forms of Lending: it would cover in detail the following topics/contents:
Securities for Advances: it would cover the following topics/contents:
· Mortgage
Module 8 Non-funded facilities: it would cover the following topics/contents: · Letter of credit · Definition of letter of credit · Revocable and irrevocable credits · Types of letter of credit · Opening of letter of credit
· Rules regarding Non-funded facilities
Designing of legal documents: it would cover in detail the following topics/contents:
· Letter of hypothecation
Module 10 Designing of legal documents: it would cover in detail the following topics/contents:
· Termination of the agreement
Prudential regulations of SBP: it would cover in detail the following topics/contents:
- Statutory Definitions - Regulations - Classifications · For small and medium enterprises financing - Definitions - Regulations - Classifications · Prudential regulations for corporate/ commercial banking - Definitions - Risk management - Corporate governance
Guidelines for banks by SBP: it would cover in detail the following topics/contents:
· Components of credit risk management · Managing problem credits
· Elements of market risk management · Risk management committee · Managing liquidity risk
· Managing operational risks
Module 11 Financial institutions ( Recovery of Finances) Ordinance, 2001: It would cover in detail the following topics/contents:
Module 12 It would cover the following topics:
Besides text books and reference books, sufficient reading material shall be available in the form of handouts. It is believed that students shall be duly benefited from the multiple resources at their disposal.
LEGAL SYSTEM OF PAKISTAN
We know that every body around talks about law according to one’s own perception. Before studying the statutory provisions of law, interpretation and significance of law, it is important to know what law is all about. Law in general sense is defined as under: “The law consists of rules that regulate the conduct of individuals, businesses, and other organizations within society” Significance of law Law is to maintain rights, uphold justice and redress wrongs. Law ensures public order, balance, harmony, peace among the persons within the state and inter-states. We can easily conceive that in the absence of law and legal system there would have been disorder, unrest and chaos all around us.
Jurisprudence For understanding law, we must have preliminary understanding of jurisprudence. The legal experts term civil law as science of jurisprudence. Some concepts of jurisprudence are given below: “Jurisprudence means the knowledge of law, or knowledge of just and unjust” It deals with laws that are enforceable by the courts.
Kinds of Jurisprudence The jurisprudence has been classified as under:
Analytical jurisprudence It covers the following areas: It analyses the prevalent law that is the principles of law as exist now. It also studies theory of legislation, precedent and customs and study of different legal concepts such as property, possession, trust, contract, negligence etc
Scope of Analytical jurisprudence It analyses the basic principles of civil law, it does not pay any attention to the evolutionary process and their ethical aspects that is whether they are good piece of law or otherwise. We can say that analytical jurisprudence does not consider the historical and ethical aspects. Its scope can be underlined as given below: - An analysis of the law - Treatment of a complex idea or concept in its elementary sub-divisions - Examination of the relations between civil law and other forms of law - A study of the legal source of law - An investigation of the theory of legislation, precedent and custom - Classification of the entire body of law with reasons thereof. - A treatment of rights, their kinds and classes, their creation, transfer and extinction - Dealing with legal liability, its kinds, extent and incidence - To investigate such legal concepts as property, possession, trust, contracts, persons, acts, intention, motive, negligence. etc. Historical jurisprudence It studies history of law and evolution of law over a period of time and also amendments, introduction of new principles of law.
Scope of Historical Jurisprudence: It studies the principles of law in their origin and developments that take place over a period of time. This branch is not the same thing as legal history. Ethical jurisprudence It deals with the law that should be in an ideal state. It lays down the different purposes which should be fulfilled in an ideal state. It studies the modifications in the existing law in order to achieve these purposes and objects. The main object of ethical jurisprudence is the attainment of justice.
Scope of Ethical Jurisprudence: Ethical jurisprudence deals with the law in the ideal state with law as it should be. Law exists to fulfill certain purposes. It is for this branch of jurisprudence to lay down what those purposes are and whether they are fulfilled by the law existing at any given time. It considers the modifications necessary in the existing law so that it may fulfill the objects for which it exists. The other two branches are concerned with an analysis of the law as it is or as has been without being concerned with its adequacy or inadequacy. Ethical jurisprudence has as its object the attainment of justice.
Advantages of study of jurisprudence The following are the advantages of studying this science: Jurisprudence is the “grammar of law” and teaches the lawyers and the legislator's proper use of legal terms. It ensures homogeneity and accuracy in legal phraseology. A person who has studies jurisprudence will be able to study foreign laws intelligently if need be, Concepts/ Definition of Law Some of the definitions/concepts from the writings of eminent jurists are given below: According to Blackstone:-- “Law signifies a rule of action, and is applied indiscriminately to all kinds of action”.
According to Holland:-- “Law refers to a general rule of action, taking cognizance only of external acts enforced by a determinate authority, which authority is human, and among human authorities is that which is permanent in a political society”. According to Hobbs “The commands of him and them that have coercive power”
According to Austin “A law is a rule of conduct imposed and enforced by the sovereign”
According to Salmond “Law is the body of principles recognized and applied by the State in the administration of justice”
According to John Erskine “Law is the command of a sovereign, containing a common rule of life for his subjects and obliging them to obedience”.
According to De Montmorency “Coercion is a weapon of law which law has forged, but it is not the basis of law.”
According to Pound “Law is the body of principles recognized or enforced by public and regular tribunals in the administration of justice”
According to Wilson “Law is that portion of the established thought and habit which has gained distinct and formal recognition in the shape of uniform rules backed by the authority and power of Government.”
According to Green “Law is the system of rights and obligations which the state enforces.”
According to Lord Radcliff “You will not mistake my meaning or suppose that I depreciate one of the great human studies if I say that we cannot learn Law by learning Law. If it is to be anything more than just a technique it is to be so much more than itself; a part of history and sociology, a part of ethics and a philosophy of life
Classification of Law The law is classified into the following branches: Imperative Law - Physical or Scientific Law - Natural or Moral Law Imperative Law The three ingredients of imperative law are explained in detail Imperative law is a general rule It is a rule of general application as distinguished from particular application. A rule which applies only to one individual or one set of circumstances at a given time but never afterwards will not be a rule of imperative law. The rules of conduct laid down by a father for the guidance of his son; or by a master for his servant, though laid down by a superior and enforced by physical force, are not imperative law, because they are not of general application. On the other hand, ‘general’ does not mean absolutely general, or applicable to all. Thus traffic rules, though applicable to drivers of vehicles only, are imperative law, for they apply generally to all drivers. The rules requiring ministers or the President to take an oath on entering upon office, though applicable to a few or even one individual form part of imperative law for the oath is to be taken by President after President, Minister after Minister, etc. thus “General” here signifies the fact that wherever a particular set of circumstances comes into existence, the rule should be invariably applicable, with exception –though the one affected may be an individual (the Minister) or to class of persons ( the drivers of vehicles).
Imperative law has some authority behind it: It is given by some superior, may be human or divine. Every rule of imperative law is given by some authority –whether divine or religious or political.
Imperative law is enforced by superior power: There must be some punishment on breach of imperative law. Rules of imperative law are enforced by some superior power, and the punishment takes such form as bodily or mental suffering. The superior enforces it by either physical force or any other form of compulsion, such as ridicule, contempt or censure. Those subject to imperative law are bound to follow it; thus compulsion is necessary. A rule which people may or may not observe cannot form a part of imperative law.
Illustrations Divine law is imperative law on the following basis: (i) It is laid down by a superior authority (God); (ii) It is followed compulsorily; (iii) Its breach constitutes a sin and is punished with divine wrath.
Civil law (the law of the land) is also a form of imperative law on the following basis; --The superior power is the sovereign --the compulsion is fear of punishment by the state. --it is enforced by the physical force of the state. Civil law decides whether an act is innocent or criminal.
International Law International law has been differently defined by different jurists. Salmond takes it as “those rules which govern sovereign states in their relations and conduct towards each other”. Other definitions are: “ the body of rules which by custom or treaty civilized states regard as binding upon themselves in their relations with one another, and whose violation gives the injured party a legal right to redress”; ( Wheaton), “The aggregate of rules to which nations have agreed to conform in their conduct towards one another”; (Lord Russel).
Sources of law According to Salmond, following are the main sources: - Formal sources - Material sources
Formal Sources Formal sources are comprised of statutes and decision of the courts.
Material sources Material sources are comprised of legal sources and historical sources. Legal sources are comprised of the following: - Legislation - Precedent - Customs - Agreement The main instruments under the legal sources are legislation and precedent. First of all Precedent is explained.
Precedent or Case Law: The decisions made by superior judiciary contain interpretation of law are called case law or precedents. The decisions can be relied upon/cited as precedents in future at the time of adjudication of the cases.
Principles of binding precedent are underlined below - The decision relied upon must be based upon the interpretation of law. -The precedent must have nexus to the central point of the case. - The facts of the precedent being cited and the case being adjudicated upon must be the similar.
Process of legislation
Parliament: Law/ statutes are made by the parliament. It is also called legislature and consists of, National Assembly, Senate and President of Pakistan.
Process of legislation—Explained Parliament/federal legislature has been given powers to make laws by the constitution of Pakistan (1973) 4th schedule in two lists that is: A bill can be presented in either house whether national assembly or senate and after being passed by simple majority shall be transmitted to other house. When the bill is passed by both houses of the parliament, it is then presented to the president for assent. If the bill presented to President is not given assent or sent back to the parliament for any amendments, it will be considered in the joint sitting of the both houses of the parliament and if passed shall be again presented to the President for his assent. Now the bill will become the act of parliament and president does not have powers to withhold assent. The bill when passed by the parliament is called an Act.
Money Bills Money bill shall originate in the national assembly and after being passed shall be presented to the president for assent. Money bill shall not be presented to the senate. The rest of the procedure is the same as explained above. Ordinance Under the constitution of Pakistan, the President can promulgate an ordinance, if any house of parliament is not in session. The ordinance shall stand repealed after one hundred twenty days, if it is not presented or passed by the parliament. The process of legislation has also been explained through a figure on next page.
Financial System Complete and complex ever changing set of rules, regulations, procedures, practices policies, conducts; role of institutions (financial institution), Governments, Policy makers and central bank taken together may be called financial system.
The financial system does have its impacts on individuals, businesses, corporations and governments alike. At times in your life, you will be a saver and at other times, you may be a borrower. The financial system channels funds from savers to borrowers and makes it possible for both to achieve their objectives. When the financial system works efficiently, it leads to better health of the economy.
Purpose of the financial system Most of us at one time or another may need more funds than you have on hand for one purpose or another. At the same time, others spend Jess than their incomes. Those who have surplus funds may be willing to let someone else use their savings if they are compensated for doing so. The mismatch of income and spending for individuals and organizations / creates an opportunity to trade. The investor can use the funds saved by different classes of people. The investor would be better off by earning a profit from investing funds in a new venture and savers who have lent their money would be better off 'by receiving the return that the investor pays them for lending their funds. Now we can easily understand the functions provided by the financial system in an economy. It moves funds from those who want to spend less than they have available to those who have a desire to purchase durable goods or those who have productive investment opportunities. This matching process increases the economy's ability to produce goods and services. In addition, it makes house- holds and businesses better off by allowing them to time purchases according to their needs and desires. A smoothly functioning financial system thus improves the economy's efficiency and people's economic welfare. The financial system provides channels to transfer funds from individuals and groups who have saved money to individuals and groups who want to borrow money. Savers (or lenders) are suppliers of funds, providing funds to borrowers in return for promises of repayment of even more funds in the future.
The financial system brings together savers and borrowers in following two ways. Direct Finance In direct finance, individual savers through financial markets hold the claims issued by individual borrowers. Indirect Finance In indirect finance individual savers through financial intermediaries hold claims over the portfolio of assets of the borrowers.
Financial markets provide play field to the financial instruments. Financial instruments are traded by household, business firms, government and foreigners in wide variety of financial markets or markets for financial instruments. Financial market can at preliminary stage be termed as market for bonds and stock markets.
Functions of Financial Markets and Financial Intermediaries The function is explained through the following figure:
In direct finance borrowers borrow funds directly from lenders in financial markets by selling them securities or bonds which are claim on borrowers’ future income or assets.
Types of Financial Markets Financial markets are divided as under: 1. Foreign exchange market. 2. Stock market. 3. Bond market.
Financial markets are one arena in which savers’ surpluses are transferred to borrowers. Savers can buy stocks and Bonds and Business borrowers can obtain funds by issuing stocks and Bonds
Financial Institutions: (Global Perspective) Financial institutions are also called Financial Intermediaries, these include the following: Commercial Banks Credit Unions Savings and Loan Associations Mutual Saving Banks Mutual Funds Finance Companies Pension Funds etc. The role of Financial Institution is to act as Financial Intermediary or to provide function of Financial Intermediation, role of go-between for savers and borrowers. Banks are the largest financial intermediaries. Banks lend to many sectors of the economy. However, banks and other financial institutions compete with one another and this competition has advantage for savers, borrowers and system as a whole.
Key Services Provided by Financial Institutions In addition to matching individuals who have excess funds with chose who need them, the financial system provides three key services for savers and borrowers. These services are risk sharing, liquidity, and information. Financial markets and financial intermediaries provide these services in different ways, making various financial assets and financial liabilities more attractive to individual savers and borrowers. Many financial decisions made by savers and borrowers are shaped by the availability of these services.
Risk Sharing One advantage of using the financial system to match individual savers and borrowers is that it allows the sharing of risks. Risk is the chance that the value of financial assets will change relative to what you expect. Most individual savers are not gamblers and would like to seek a steady return on their assets rather than erratic swings between high and low earnings. Indeed, individuals prefer stable returns on the collection of assets they hold. A collection of assets is called a portfolio. For example, you might hold some government treasury securities, some shares of stock, and some shares in a mutual fund. Although one asset or set of assets may perform well and another may not perform as well, but overall returns tend to average out. This splitting of wealth into many assets is known as diversification. As long as the individual returns do not vary in the same way, the risk of severe fluctuations in a portfolio's value will be reduced. The financial system provides risk sharing by allowing savers to hold many assets. .
Liquidity The second service, the financial system offers to savers and borrowers is liquidity, which is the ease with which an asset can be exchanged for money to purchase other assets or exchanged for goods and services. Savers view the liquidity of financial assets as a benefit. When they need their assets for their own consumption or investment, they can exchange them easily. In general, the more liquid an asset, the easier it is to exchange the asset for something else. You can easily exchange the currency notes for purchasing a book or anything else because it is highly liquid. You can also cash a check within a short period of time to buy clothes. However, selling a car would take more time because personal property is not very liquid. By holding financial claims (such as stock or bonds) on a factory, individual investors have more liquid savings than they would if they owned the machines in the factory. The reason is that the investor can more easily sell the claim than a specific machine in order to buy other assets or goods. Liquid assets allow an individual or firm to respond quickly to new opportunities or unexpected events. Financial assets created by the financial system, such as stocks, bonds, or checking accounts, are more liquid than cars, machinery, or real estate. Financial markets and intermediaries provide trading systems for making financial assets more liquid. In addition to creating financial assets, the financial system provides mechanism for increasing the liquidity of financial assets. Investors can readily sell their holdings in government securities and stocks and bonds of large corporations, making those assets very liquid. During the past two decades, the financial system has made many other assets liquid besides stocks and bonds. One measure of the efficiency of the financial system is the extent to which it can transform illiquid assets into the liquid claims that savers want.
Information A third service of the financial system is the collection and communication of information, or facts about borrowers and expectations about returns on financial assets. The first informational role the financial system plays is to gather information. That includes finding put about prospective borrowers and what they will do with borrowed funds. Obtaining such information would be costly and time-consuming for savers, who of course want all the facts before lending their money. Working through the financial system, a prospective investor is likely to learn more about the borrower than he would if he tried to make the investment on his own. Another problem that exists in most transactions is asymmetric information. This means that borrowers possess information about their opportunities or activities that they don't disclose to lenders or creditors and can take advantage of this information. Sometimes, financial arrangements have to be structured so that borrowers do not take advantage of asymmetric information at the expense of lenders. The financial system specializes in information gathering and monitoring, and arrangements exist for solving problems of asymmetric information." The second informational role the financial system plays is communication of information. Savers and borrowers receive the benefits of information from the financial system by looking at asset returns. As long as financial market participants are informed, the information works its way into asset returns and prices. Information is communicated to borrowers as well as to savers. The incorporation of available information in asset returns is the distinguishing feature of well-functioning financial markets.
Structure of Financial Market Financial markets are categorized as under: - Debt and equity markets. - Primary Markets and secondary markets. - Exchange markets and over-the-counter market. (OTC) - Forward contracts and future markets.
Debt and Equity Markets Debt instruments such as issuing bonds. These may be short term (Maturity less than one year), long-term (maturity ten year or longer) and intermediate term (maturity between one and ten years). Second method of raising funds is by issuing equities
Primary Market and Secondary Markets Primary Market is a financial market in which new issues of a security such as Bonds or stocks are sold to initial buyers whereas in secondary Markets there is further sale of already issued securities.
Exchange and Over-the-Counter Markets Secondary Markets can be organized in the following ways: Through organizing/establishing Stock Exchange through Over-the-Counter (OTC) markets, (Dealers in these markets are in computer contact and know the prices set by one another, OTC markets are very competitive.
Money Market and Capital Market Money Market is a financial market which deals in short term debt instruments. Capital market deals in long term debt instruments
Forward Contracts and Futures Market Under Forward Contract, buyers and/sellers agree to trade certain quantity of commodity for a specific price at a specified date in future, contracts are formally made in commodities exchange markets. Financial Regulations Respective Governments regulate financial markets and financial institutions around the world, which is necessary for the maintenance of financial stability, build confidence of all stake holders in the system.
There are also international norms, practices and protocols which are required to be observed by all participants, trading across the borders such as Uniform customs and practices for documentary credits (UCP 600)
Financial Instruments We have discussed financial system and financial institutions, now shall move on to financial instruments. Financial instruments are the vehicles by which financial markets channel funds from savers to borrowers and provide returns to savers. We shall discuss major instruments or securities, traded in the financial system. For convenience, we analyze money market and capital market instruments separately. Both money market and capital market assets are actively traded in financial markets.
Money Market Instruments The short maturity of money market assets doesn't allow much time for their returns to vary. Therefore these instruments are safe investments for short-term surplus funds of households and firms. However, ill making investment decisions, savers must still consider the possibility of default—the chance that the borrower will be unable to repay the entire amount borrowed plus interest at maturity.
Government Treasury Bills Government Treasury securities are short-term debt obligations of the government. They are also the most liquid money market instrument because they have the largest trading volume. The federal government can raise taxes and issue currency to repay the amount borrowed, so there is virtually no risk of default. Treasury securities with maturities of less than one year are called Treasury bills (T-bills). Although individuals can hold them, the largest holders of T-bills are commercial banks, followed by other financial intermediaries, businesses, and foreign investors.
Bill of exchange and other Commercial Papers Commercial paper provides a liquid, short-term investment for savers and a source of funds for corporations. High-quality, well-known firms and financial institutions use commercial paper to raise funds. Because these borrowers are generally the most creditworthy, the default risk is small, but the interest rate is higher than that on Treasury bills. The growth in the commercial paper market during the past two decades is part of a shift by many corporations toward direct finance (and away from bank loans).
Bill of exchange Defined and Explained It is an important form of a negotiable instrument and has been defined in section 5 of the Negotiable Instruments Act, 1881 the said definition is reproduced below: “A bill of exchange is an instrument in writing containing an unconditional order, signed by maker, directing a certain person, to pay on demand or at fixed or determinable future time a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument”. The following are the ingredients of a bill of exchange:
Explanation of different features of a bill of exchange A promise or order to pay is not “conditional, within the meaning of this section and section 4, by reason of the time for payment of the amount or any installment thereof being expressed to be on the lapse of a certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain. The sum payable may be “certain” within the meaning of this section and section 4, although it includes future interest or return in any other form or is payable at an indicated rate of exchange, or is payable at the current rate of exchange and although it is to be paid in stated installments and contains a provision that on default of payment of one or more installments or interest. Or return in any other form the whole or the unpaid balance shall become due. A promise order to pay is not ‘conditional’ nor is the sum payable uncertain within the meaning of this section or section 4 by reason of the sum payable being subject to adjustment for profit or loss, as the case may be of the business of the maker. Where the person intended can reasonably be ascertained from the promissory note or the bill of exchange; he is a ‘certain person’ within the meaning of this section and section 4, although he is misnamed or designated by description only. An order to pay out of a particular fund is not unconditional within the meaning of this section; but an unqualified order to pay, coupled with— (a) an indication of a particular fund out of which the drawee is to reimburse himself or a particular account to be debited to the amoun, or \ (b) a statement of the transaction which gives rise to the note of bil, in unconditional An essential character of a bill of exchange is that it shall contain an order to accept or to pay and that acceptor should accept it, in the absence of such a direction to pay the document will not be a bill of exchange or a hundi.
Bankers' Acceptances These instruments are designed to facilitate international trade, bankers' acceptances are instruments that establish credit between parties who do not know each other. A banker's acceptance is a check like promise that the bank will pay the amount of funds indicated to the recipient. It is issued by a firm (usually an importer) and is payable on a date indicated. The bank that marks the draft "accepted" guarantees the payment to the recipient (usually an exporter or its representing bank). The issuing firm is required to deposit funds in the bank sufficient to cover the draft; if it does not do so, the bank is still obligated to make good on the draft. The bank's good name is likely to enable an importer to buy goods from an overseas exporter that lacks knowledge about whether the importer will be able to pay. In recent years, acceptances have generally been resold in Secondary markets and held by other banks, households, and businesses.
Repurchase Agreements, Repurchase agreements, also known as repos or RPs, are used for cash management by large corporations. They are very short-term ' loans, typically with maturities of less than two weeks. In many cases, a firm gives money as loan to a bank overnight. For example, if a large company has idle cash, it purchases T-bills from a bank that agrees to buy them back the next morning at a higher price, reflecting the accumulated interest. The T-bills serve as collateral; that is, if the borrower defaults, the, lender receives the T-bills.
Federal (Fed) Funds (in U.S Perspective) Federal funds instruments represent overnight loans between banks of their deposits with the Federal Reserve System (the U.S. central bank). Banking regulations require that banks deposit a percentage of their deposits as reserves with the Fed. If a bank is temporarily low on reserves, it can borrow funds from another bank that has reserves greater than the required level. The federal funds market reflects the credit needs of commercial banks, so money market analysts watch the federal funds rate (the interest rate \charged on these overnight loans) closely. When it is high, banks need additional funds; when it is low, banks have low credit needs
Eurodollars Eurodollars are U.S. dollars deposited in foreign branches of U.S. banks or in foreign banks outside the United States (not necessarily in Europe). Rather than being converted into the currency of the foreign country, the deposits remain denominated in dollars. U.S. banks can then borrow these funds. Eurodollar funds raised abroad have become an important source of funds for U.S. banks.
Negotiable Bank Certificates of Deposit A certificate of deposit (CD) is a fixed-maturity instrument sold by a bank to depositors; it pays principal and interest to the certificate holders. This is an American terminology for terms deposits.
Capital Market Instruments Since capital market instruments have longer maturities than money market instruments, they are subject to greater fluctuations in their returns. For this reason, borrowers who seek to use funds for a long period of time and savers with long investment horizons invest in them. All capital market debt instruments contain some risk of default; however, since government securities are backed by sovereign undertaking hence carry little risk.
Government Treasury Securities Securities and bonds are issued by the government to finance budget deficits such as Federal Investment Bonds issued by Govt. of Pakistan with maturity of 5 to 10 years. These are traded through Stock Exchange, hence liquidity is ensured.
U.S. Government Agency Securities (In U.S Perspective) U.S. government agency securities are intermediate-term or long-term bonds issued by the federal government or government-sponsored agencies. For example, the Farm Credit System issue bonds to raise money to finance agricultural activities, and the Government National Mortgage Association (GNMA) issues bonds to finance home mort gages. Many such securities are officially guaranteed by the government (with a pledge of the government's "full faith and credit"); others, are implicitly guaranteed, so the default risk is still low.
State and Local Government Bonds issued in United States State and local government bonds (often called municipal bonds) are intermediate-term or long-term bonds issued by municipalities and state governments. These governmental units use the fund borrowed to build schools, roads, and other large capital projects. The bond are exempt from federal income taxation (and also income taxation by the issuing state). These bonds are often held by high-tax-bracket house- holds, commercial banks, and life insurance companies.
Stocks Stocks are issued as equity claims by corporations and represent the largest single category of capital market assets.
Corporate Bonds Corporate bonds are intermediate-term and long-term obligations issued by large, high-quality corporations to finance plant and equipment spending. Typically, corporate bonds pay interest twice a year and repay the principal amount borrowed at maturity. There are many variations, however. Convertible bonds, for example, allow the holder to convert the debt into equity (for a specified number of shares). By using such variations, firms can sometimes lower their borrowing costs by giving bond buyers an extra return if the firm does exceptionally well. Corporate bonds are not as liquid as government securities because they are less widely traded. Corporate bonds have greater default risk than government bonds, but they generally fluctuate less in price than corporate equities. Although the corporate bond market is smaller than the stock market in the United States, it is more important for raising funds because corporations issue new shares infrequently. Most funds raised through financial markets take-the form of corporate bonds. Investors in corporate bonds are a diverse group, including households, life insurance companies, and pension funds.
Mortgages Mortgages are loans (usually long-term) to households or businesses to purchase buildings or land, with the underlying asset (house, plant, or piece of land) serving as collateral. Residential mortgages are issued by commercial banks. Mortgage loans for industrial and agricultural borrowers are made by life insurance companies and commercial banks.
Commercial Bank Loans Commercial bank loans include loans to businesses and consumers made by banks and finance companies. Secondary markets for commercial bank loans are not as well developed as those for other capital market instruments, so loans are less liquid than mortgages.
WAPDA Bond It is an instrument of capital market in Pakistan. It serves as source of funds to this institution Bonds in general are issued as equity claims on corporations and represent largest single category of capital market assets.
Debentures: (Corporate Bonds) --- Global Perspective Through debentures intermediate-term and long-term loans are raised by the company of strong credit rating.
An Overview of Banking Laws & Practices There are different laws/ statutes promulgated by the legislature. There are also laws/ statutes relating to banks and banking business. Some of the statutes relating to banking and other fields are stated below for reference purposes: - Banking Companies Ordinance - Negotiable Instrument Act - Limitation Act - Arbitration Act - Criminal Procedure Code. (CrPC) - Civil Procedure Code (CPC) - Contract Act. - Sales Tax Act
What is banking practice? A banking practice refers to’ normal banking practice’ carried on over a long period of time. Such normal banking practices carry the sanctity of law and courts do recognize such practices while deciding cases. Banking practices are complimentary to law not contradictory to law.
Some of Banking Practices Secrecy concerning customer’s affairs: A banker is required to maintain secrecy of its customers account however under special circumstances; banker may produce statement of account under some statutory requirements to a court of law or to authorized persons/ department. Exchange of inter-bank credit reports is one of the global banking practices.
Banker’s Right of Set-Off: Law entitles banks to set—off its claims from customer credit balances. However, courts have formulated rules, which require business norms to be followed as well.
Safe-Custody Services (Lockers Facility) This relationship is governed by the law of bailment. (Legal relationship of Bailer and Bailee is established between the customer and the banker while availing lockers facility). Courts while adjudicating cases also pay due consideration to normal banking practices.
Banking Practice of Closing a Customer’s Account under Following Circumstances: - Frequently drawing cheques without sufficient balance in the drawer’s account. - Depositing cheques for collection which are frequently returned uncollected. - Issue cheques and then issue stop-payment instruction to the bank.
Banks may close account of such customers after issuing reasonable notice. From the above discussion, we can conclude that in banking statutory provisions and banking practices move side by side. It is important to understand that banking practices are complimentary to law these are in no case contradictory to law. Law shall always prevail over practices.
Historical Overview of Banking Before we move on to evolution of banking in Pakistan, it would be quite interesting to have a glimpse of historical evolution of banking over a period of time.
Today, we look around us chain of banks rendering host of services to their customers. These banks cater to the commercial and industrial needs of all countries which include die highly developed and industrialized countries, the less developed countries and the countries which are at the take-off stage. Thus there are the industrial banks, the commercial banks, the joint stock banks, the co-operative banks, the agricultural banks, rural development banks, lead banks and so many other types of banks and credit institutions which are functioning. They not only meet the requirements on a national basis, but also on an international basis and what may be called as an ever expanding advancement in banking. The Banks now-a-days are performing so many functions that it would not be a misnomer to suggest that they have become the custodian of the monetary economies of the world. When we talk of great scientific developments and inventions, banking as it stands today is also a wonder of the world.
Banking as we see today is the result of evolutionary development during the course of centuries. It would also be necessary to see how Banking has come to its present stage. There has been all round development in the world and the banking today is not what it was in the earlier rudimentary form. To develop true perception, we need to know as to in what manner Banking today has come to be what it is and in what manner this transition has taken place.
The banking system, as it exists today, is the product of a number of centuries and is not the development of any particular period. In all the countries of the world. Banking has been in existence in one form or the other. So far as the present system is concerned, the word, bank is said to be of Germanic origin, cognate with the French word banque and the Italian word, banca, both meaning bench. In fact, this word may have derived its meaning from the practice of Jewish money-changers of Lombardy, a District in North Italy, who, in the middle ages, used to do business sitting on Benches in the market place. In case such an interpretation is provided, then it also finds support from a number of other derivations of the word such as the French word, Bancjue Route and the Italian word, Banka Rotta, both of which mean Broken Bench. This practice can be understood if we analyze the situation when a money-changer failed and his bench was broken as a result of his failure.
Macleod, however, does not agree with this view and says, "The Italian money-changers as such were never called Benchieri in the middle ages". It may be more correct to say that the word bank is derived from the German word back which means a Joint Stock Fund, which was Italianized into Banco, when the Germans were me masters of a major part of Italy. Professor Ram Chandran Rao has said: "whatever be the origin of the word bank, it would trace the history of banking in Europe from the middle ages
When we come to the Roman age, the State Banks were not functioning but there were private banks duly regulated by the Government. Aristotle stated that: "Charging of interest on money was unnatural and immoral and on this account, banking could not develop for sometime." . We should also remember that in ancient times, commercial banking was associated with the business of money-changing. They also met the financial requirements of the ruling government. Adam Smith has stated as under: "The earliest banks of Italy, where the name began, were finance companies..... to make loans to and float loans for the government of cities in which they were formed.... After these banks had been long established, they began to do what we call banking business, but at first they never thought of it. It was only in the 12th century that the Banks, in the modem sense of the term, were established in Venice and Geneva, which were doing the business of receiving deposits and lending money, and were not only money-lenders. In Florence alone, there were about 80 bankers known to the whole of Europe such as Bardi, Medici, Peruzzi and others of great repute. The Bank of Venice founded in 1157, was the first Public Banking Institution. The Bank of Barcelona and the Bank of Geneva were established in 1401 and 1407 respectively and the Bank of the Venice and the Bank of Geneva continued to operate until the end of the 18th Century. The private banking houses such as the famous house of Fuggers and Augsburg enjoyed more eminence than Peruzzi and Bardi in the 14th Century and the Medici in the 15th Century in Italy. The bankers of Lombardy settled in the locality which is now known as the famous Lombard Street in London and to them belonged the credit of planting the seed of modem banking in England. Public banks like the famous Bank of Amsterdam was established in 1609 and these banks helped in the development of trade and commerce. These banks received heterogeneous metallic money and credited deposits in their books which were transferable through bank cheques. Thus, the mercantile payments now began to be settled by means of payment through cheques.
In Britain, people used to deposit their cash and bullion at the Royal Mint having faith in the King and the royal family as an institution.
Edward III exchanged various foreign coins and provided foreign exchange to the travelers and also supplied British money.
This faith was betrayed by Charles I in 1640 A.D. by capturing a very big amount of £1, 30,000 bullion left for safe custody with the Royal Mint. The merchants then started entrusting their valuables and cash to their cashiers, who also misappropriated them, and the merchants took resort to goldsmiths for keeping custody of valuables in their strong rooms. These goldsmiths used to give receipts which were known as Goldsmith's Note, which was made payable to the bearer and on demand which transformed the said receipt into the position of a bank-note which gained circulation and currency in due course of time. These notes with the passage of time became payable to the bearer on demand and enjoyed circulation. Thus, we can say that the goldsmiths became the precursor of the modern, bank-note and the fore-runners of the modem banking institutions.
Thus the development of banking in England was greatly helped by the activities of the London goldsmiths during the age of Queen Elizabeth L For sometime, the deposits were made without interest. Later on, the goldsmiths tarred lending these amounts to others like that of Dutch Bankers and when it was found profitable by them, they started giving interest on this money to their customers instead of charging any fee for safeguarding their money. The goldsmiths started giving loans for long duration and some money was kept by them for daily payments. The trouble arose when Charles 11 under the Cabal Ministry borrowed heavily from them and repudiated all debts there by the goldsmiths as well as English Banking received a rude setback.
Walter Bagehot has stated that the government perpetrated one of those monstrous frauds which are likewise gross blunders. Charles II set up the Exchequer. He would pay to none and as has been stated by Geoffrey Crowther the goldsmiths were ruined. As a result of this, there was the growth of private banks which finally led to the establishment of the Bank of England in 1694. It is again interesting to refer to Geoffrey Crowther to trace the history of modem English banking, who has stated as under:
"The present-day banker has three ancestors of a particular note. One we have already met; the merchant, whose high and widespread reputation or credit enables him to issue documents that will be taken all over the known world as titles to money. To this day the title of "merchant banker” is reserved by usage to the older cosmopolitan and more exclusive private banking firms, nearly every one of which can trace its ancestor to a trader in commodities, more tangible (though hardly more profitable) than money. The banker's two other ancestors are the money-lenders and the goldsmiths. Lending and borrowing arc almost as old as money itself and the village money-lender is found even in quite primitive communities. He is not usually regarded as a very lovely object; usurer is one of the oldest terms of abuse. But the services he performs are undoubtedly useful and necessary, even though the reward he extracts in return may usually be rapacious..... The goldsmith ancestor of the modern bank is purely an English affair.
The goldsmiths were loosing their faith and earned a bad reputation for sometime and people doubted their bona fides. However, they started a new system of having current account with them and the borrowers could withdraw money at any time. This was the stage which gave birth later on to the present banking system. Till then, there was no public bank: The Bank of England was started in 1694 A.D. with its monopoly of issue of notes. There were joint stock companies doing banking business- and they were flourishing in London. These companies introduced deposit banking and cheque currency and many other services which a bank can offer. So far as the Bank of Amsterdam is concerned, it was one of the greatest banks of the 17th century and its position was not less than the position which was held by the Bank of England. In fact, it had importance in the international world as a whole and one can get a good reference about the working of these banks from Alfred Marshal} who in his book, "Money, Credit and Commerce, 1923", has slated that these famous banks besides, acting as the fiscal agents for the government, were also responsible for the counterpart of such of the work of the modem stock exchanges. In fact, these banks acted as go-between the lenders and borrowers of funds and also as the holders of cash and old securities. In this connection, it would be interesting to refer to Adam Smith who in his famous book, "Wealth of Nationsf/, published in 1776, has described the main function of the Bank of Amsterdam as under:
"This bank received both foreign coin, and light and worn coin of the country at its intrinsic value in the gold standard money of the country, deducting only so much as necessary for defraying the expense of coinage, and the other necessary expense of management. For the value which remained, after this deduction was made, it gave a credit in its books. This credit was called bank money which, as it represented money exactly according to the standard of the mint, was always of the same real value, and intrinsically worth more than current money...., it could be paid away by a simple transfer, without the trouble of counting or the risk of transporting it from one place to another.
We have already seen that the Bank of England was started in 1694 as a result of the actions of Charles II who had borrowed very heavily from the goldsmiths and like his father had repudiated his debts. The Bank of England was also started on account of the financial difficulties of William III who was at war with France. Patterson suggested a way out of difficulties and offered to rise of £1,200,000 which he was prepared to loan to the government if certain concessions including the right to issue notes were given to the proposed institution. For this purpose the Tonnage Act was passed. In the year 1708 another important Act was passed which prohibited any other bank with more than six partners from issuing promissory notes and bank-notes. This Act gave the monopoly of note issue to the Bank of England, so far as the Joint Stock Banks were concerned, but left private banks having not more than six partners free to issue notes. These banks however, thought that the business of note issue was not profitable and they gave it up. Printed cheques were issued for the first time between 1749-59. The Bank of England did not have any branch outside and the private banks started playing an important role. After the middle of the 18th century there were about 300 banks. Then came the crisis of 1825 and it tolled the death knell for the small country banks and of the note as the foundation of the banking system. In 1826 an Act was passed which allowed the banks to be started with unlimited liability, consisting of more than six partners, with the right to issue note provided they had no office within the radius of sixty-five miles from London. Thus the new joint stock banks were started. Even at this time the monopoly of note issue given to the Bank of England by the Act of 1708, was interpreted to mean monopoly of Joint Stock Banking in London because during those days note issue was regarded as the most important as well as the most paying function of banks. The modem banking institution had to wait for another century and four decades until the passage of the Banking Act of 1833 which provided for the establishment of the Joint Stock Banks.
In 1833, when the Charter of the Bank was revised, as a result of the studies made by one Joplin, a new clause was added and it gave legislative sanction for the establishment of Joint Stocks Banks in London and in 1834, The London and Westminster Bank was started in England, which is the first of the big five ones. In 1844 Peel Act was passed which provided for the extinction of the right of note issue and laid the foundation of the note by Bank of England. With the passing of the Peel's Act, 1844, new banks with the right of note issue could not be started and those which already existed could not increase their circulation and thus greater emphasis was thereby laid on deposit banking and cheque currency.
There was amalgamation of banks after 1890 and the number of Joint Stock Banks in England and Wales came down from 104 in 1890 to 12 in 1956 although the number of bank offices increased from 2203 to 10700 by the end of 1961. The Currency and Bank Note Act, 1920 also regulated the issue of bank-note. The Securities Management Trust Ltd. was organized in 1929. In 1930 Bankers Industrial Development Corporation was formed. In 1947, the Labor Government nationalized the Bank of England and the power to appoint its Governor, Deputy Governors and Directors was vested in the Crown. This Act of the Labor Government had significant impact throughout the world.
“An Act to regulate the acceptance of deposits in the course of '. business; to confer functions on the Bank of England with respect to the control of institutions carrying on deposit-taking businesses; to give further protection to persons who are depositors with such institution to make provision with respect to advertisements inviting the making of deposits; to-restrict the use of names and descriptions associate with banks and banking; to prohibit fraudulent inducement to make deposit; to amend the Consumer Credit Act, 1974 and me law wit respect to instruments to which section 4 of the Cheques Act, applies; to repeal certain enactments relating to banks and banking; and for purposes connected therewith.”
The significance in law of the terms 'bank’, banker' and 'banking business" depends upon the particular operation which is in question an upon the particular statute/if any, under which the question arises. To take an obvious instance, only a banker may reap the benefit of the protective sections contained in different statutes.
In short the effect of the Banking Act, 1979 is, generally speaking, that a person or institution may accept deposits in the course of carrying on deposit taking business for the purposes of the Act unless he or it is a party recognized or licensed by the Bank of England or he or it is exempted or its business falls within the exceptions of section 1(3) or, again, the deposit is I the type included in sub-section (5). Vide section 1(4), 'deposit' is defined as sum of money paid on terms:
(a) Under which it will be repaid, with or without interest or premium, and either on demand or at a time or in circumstances agreed by or on behalf of the person making the payment and the person receiving it; and
(b) Which are not referable to the provision of property or service or the giving of security? The penalty for contravention is liability to a fine or imprisonment both; but the civil liability of the acceptor of the deposit is not affected.
Thus so far as the English banking system is concerned, the entire matter is now covered by the Banking Act, 1979 which governs all the important aspects of the banking life in England
As per Sheldon's "Practice and Law of Banking", 10th Edn., p. 163, so far as the classification of banks is concerned, firstly, there is the Bank of England, incorporated by Royal Charter and not affected by the Companies Act. Secondly, there are the National Saving Banks, the National Giro and the Trustee Saving Banks. Thirdly, there are the great Joint Stock Banks, registered under the Companies Act with limited liability. Fourthly, there is at least one Joint Stock Bank with unlimited liability, namely, C. Hoare & Co., Coutts & Co. which is now a wholly owned subsidiary of National Westminster Bank Ltd. though it is still a clearing bank in its own right. There used to be many banking partnerships with unlimited liability but, with N.M. Rothschild & Sons becoming a limited company in 1970, it seems that there remains no banking partnership in England and Wales of any size. , Fifthly, there are the Scottish, .Irish, Overseas and Foreign Banks whose principal places of business are outside the precincts of England and Wales. Some of the earlier overseas banks were incorporated by Royal Charter, e.g., the Chartered Bank, British Bank of the Middle East, and so on. Sixthly, there are so called Merchant Banks, which are now without exception incorporated under the Companies Act, the shares of many of them being quoted on the London Stock Exchange. These banks are engaged in deposit banking but their more important role is in the provision of finance, both by way of loan and acceptance credit and in acting as financial advisers to a large range of commercial companies/especially where 'take-over bids', mergers and amalgamations are concerned. Most of them are also prepared to act as investment advisers.
In conclusion, we can say that banking is not a static rather it is a dynamic concept. It is product of centuries and the development which has taken place is the product of the method of trial and error and experiences which were made and the results that followed relating to the acceptance of money and valuables as deposits, keeping them as such, lending them, whether to private individuals or to states or other bodies and for controlling the multifarious and multi-dimensional activities which in the beginning were only trivial and could be ignored but with the growth of time, became international in character and multi-dimensional in nature calling for actions on the part of the states as the actions on the part of the individuals failed and state control became eminent. Thus, one cannot understand the development of banking merely by looking at a particular period of time and one will have to consider the development by taking into account the progress as it has taken place during the centuries and by understanding the movement from one stage to the other.
Evolution of banking in Pakistan: Commercial banks constitute the most important source of institutional credit in the economy. As the country’s largest deposit institutions and the main source of short-term credit, they form the heart of the financial system.
At the time of independence, there were two banks incorporated in the undivided India in first half of 1940s’ whose owners were Muslims. After independence they decided to establish their head office in Pakistan, thus laying the foundation of banking in this country.
The National Bank of Pakistan was set up in November 1949 in crises conditions following the first trade deadlock with India. The original intention was to establish it sometime in 1950. The plans for its establishment had to be advanced in view of the critical situation, which developed especially in the jute trade as a result of India’s refusal to accept the exchange rate of the Pakistani Rupee following the Indian devaluation of 1949. The bank was set up through an Ordinance on 19 November 1949 and started its operations with five offices located at important jute centres. It played a notable role in financing the jute trade in collaboration with the Jute Board. In 1952, the National Bank of Pakistan took over the agency work of the State Bank of Pakistan to transact government business and manage currency chests at places where the state bank did not have an office of its own.
Prior to nationalization, the government owned 25 percent of the share capital while others held the remaining 75 percent. Following nationalization, the capital held by others was transferred to and invested in the federal government. Prior to nationalization, a Central Board of Directors governed the National Bank but consequent upon nationalization, the Central Board was dissolved and in its place an Executive Board consisting of a President who is the chief executive and four other members were appointed for the general direction and superintendence of the affairs and business of the bank. All Pakistan banks were nationalized with 100 percent federal government ownership in 1974 and by now all nationalized banks stand disinvested and privatized. These aspects shall be discussed in detail in due course of time’ There were as many as thirty-four foreign banks with 172 branches at the time of in dependence. With the closure of many of the banks, the number had declined to twenty-one by June 1980. The Indian Banks, which numbered nine were entrusted to the Custodian of Enemy Property after the 1965 Indo-Pak war. Among foreign banks, a distinction was usually made between banks having their head offices in India and those with head offices in other countries. Foreign banks, other than the Indian banks, were commonly known as exchange banks in the early years. The term owed its origin to the fact that, prior to independence; foreign banks in the Indo-Pakistan subcontinent were engaged primarily in the financing of foreign trade. Seven exchange banks incorporated abroad were operation in Pakistan at the time of independence. Most of thse banks were of British origin. There were twenty-nine Indian Banks operating in the territories of Paksitan at the time of Independence but they gradually curtailed their business and their number stood at nine in 1965 when they were taken over by the Custodian of Enemy Property. The banks that were taken over were: (1) State bank of India; (2) Central Bank of India Ltd.; (3) Bank of India Ltd.; (4) United Commercial Bank Ltd.; (5) Punjab Commerce Ltd.; (7) United Bank of India Ltd.; (8) Bank of Baroda Ltd.; and (9) United industrial bank Ltd. Besides, there were as many as twelve non-schedule Indian banks which were also taken over by the Custodian of Enemy property following the 1965 Indo-Pakistan War.
Very few foreign banks have been attracted to Pakistan during the financial liberalization period. Indeed several have sold out to private Pakistani banks and terminated operations in Pakistan.
Evolution of Commercial Banks in Pakistan As already discussed that at the time of independence, there were only two banks, which were incorporated in undivided India and whose owners were Muslims ,they opted to shift their Head Offices in Pakistan. With the establishment of SBP, the other banks also came into existence and by 1973 number of banks increased to fourteen.
Nationalization of Banks in Pakistan: In 1974, the banks in Pakistan were nationalized through an Act called Nationalization Act, 1974. From 1991, the policy of liberalization of economy has been adopted whereby, nationalized banks have been de-nationalized and banking sector has been disinvested. At present banking sector is visibly growing at tremendous pace. These aspects shall be discussed at length in due course.
THE BANKS (NATIONALIZATION) ACT, 1974
Nationalization of Banks We have gone through the evolutionary process of banking in Pakistan. We know that by June 30th 1948 the number of branches in Pakistan was only eighty one. However with the establishment of State Bank of Pakistan and efforts of the government, the number of schedule bank increased to 14 with 3323 branches all over Pakistan and also 74 branches in foreign countries by Dec 31st 1973. The commercial banks grew at tremendous speed and mobilized savings from the public and also contributed a lot in financing business and corporate sector. However it was considered that although banking sector was growing but the fruits of development were limited only to the urban population and corporate sector whereas most of the sectors, people and under develop regions were not getting due share. As such it was decided that banks should be nationalized. For the implementation of this objective Nationalization Act 1974 was promulgated.
Objectives of Nationalization The nationalization was carried out with a view to achieve the following objectives: -- Disbursement of funds to the desired channels to achieve the priorities set out by the government for social welfare projects. -- Equitable distribution of credit to different classes, sectors and regions.
Salient features of The Bank (Nationalization) Act, 1974 The Act extends to the whole of Pakistan. Act to override other laws.- This Act shall have effect not withstanding anything contained in any other law for the time being in force or in any agreement, contract, award memorandum or articles of association or other instrument.
Statutory Definitions
The followings definitions as contained in section 3 of the Act, which are reproduced below
1. "Bank" means a. A company registered under the Companies Act, 1913 (VII of 1913), and transacting, in or outside Pakistan, the business of banking as defined in clause (b) of section 5 of the Banking b. Companies Ordinance, 1962 (LVII of 1962), in respect of which no proceedings under Part III or Part IV of the said Ordinance have been taken or are pending immediately before the commencing day; and
c. A banking company incorporated by or under any law within the legislative competence of d. Parliament, including the State Bank, the National Bank of Pakistan, the Industrial
I. Development Bank of Pakistan and the Agricultural Development Bank of Pakistan, but does not include;- II. A bank which is an enemy firm within the meaning of the Defense of Pakistan Rules, or III. A banking company incorporated outside Pakistan and transacting banking business in Pakistan, or IV. A co-cooperative bank registered under the Co-operative Societies Act, 1925 (VII of V. 1925), or any other law for the time being in force relating to co-operative societies, not being a co-operative bank which is a scheduled bank; or VI. A Government Savings Bank to which the Government Savings Bank Act, 1873 (V of 1873), applies, or VII. A corporation or company owned or controlled by a Province and carrying on banking business only within that Province, or VIII. va corporation or company established in Pakistan in pursuance of an agreement between the Government of Pakistan and Foreign Government or institution for transacting banking business in or outside Pakistan; IX. (1A) “board" means Board of Directors constituted under this Act; 2. "Commencing day" means the Ist day of January, 1974; (4A) “Loans and advances" means "loans, advances and credit" as defined in the Banking Companies Ordinance, 1962 (LVII of 1962), 3. "Prescribed" means prescribed by rules made under this Act; 4. "State Bank" means the State Bank of Pakistan established under the State Bank of Pakistan Act, 1956 (XXXIII of 1956); and Other words and expressions used but not defined in this Act shall have the same meaning as in the Banking Companies Ordinance, 1962 (LVII of 1962).
Provisions regarding transfer of ownership of banks are contained in section 5 of the Act which is reproduced below
1. The ownership, management and control of all banks shall stand transferred to, and vest in, the Federal Government on the commencing day. 2. All shares in the capital of a bank held by persons other than the Federal Government, a Provincial Government, a corporation owned or controlled by the Federal Government or the State Bank shall stand transferred to, and vest in, the Federal Government on the commencing day, free of all trusts, liabilities and encumbrances. (2A) if any bank issues any additional share capital after the commencing day, then, without prejudice to the provisions of sub-section (1), a Provincial Government, a corporation owned or controlled by the Federal Government and the State Bank may contribute to the share capital so issued. 3. The vesting of any shares in the Federal Government under sub-section (2) shall not affect the right inter se of a shareholder and any other person who may have an interest in such shares and such other person shall be entitled to enforce his interest against the compensation awarded to the shareholder under section 6. 4. The safety of all deposits in banks shall stand guaranteed by the Federal Government. 5. The provisions of this Act and the vesting of the shares of the banks in the Federal Government thereunder shall not in any way affect the status of the banks as bodies corporate 6. The Federal Government or a corporation owned or controlled by the Federal Government may, from time to time, sell all or any of its shares in the capital of a bank, other than the State Bank, to such persons, and on such terms and conditions, as it may determine.
Procedure regarding compensation for transfer of ownership of shares in a bank is contained in section 6 which is reproduced below: (1) Every person who stands registered as the holder of any share of a bank the ownership, management and control of which stands transferred to the Federal Government by virtue of section 5 shall be entitled to receive from the Federal Government by way of compensation per share an amount determined in accordance with the provisions of section 7 in the form of bonds of the Federal Government, repayable at par at any time within a period of fifteen years in accordance with a redemption programmed formulated by the Federal Government and bearing interest at the rate of one per cent above the bank rate notified by the State Bank from time to time:
Provided that, in formulating the redemption programmed, the Federal Government may make provision for preferential redemption of the bonds of such class of persons who are of meager means such as orphans, widows and pensioners, and the amount of compensation payable to whom does not exceed such maximum amount, as the Federal Government may deem fit:
Provided further that, where the amount so determined is not exact multiple of one hundred rupees, the amount in excess of the nearest lower multiple of one hundred rupees shall be paid in cash.
(2) The bonds shall be negotiable and eligible as security for advances.
The previous management was removed as per provisions contained in section 8 of the Act which is reproduced below: 1) Every person holding office in any bank as chairman, director or chief executive by what-ever name called, other than a person who holds such office by virtue of his appointment or nomination by the Federal Government or the State Bank, shall stand removed from his office on the commencing day and this removal shall not entitle him to any compensation and no such claim shall be entertained by any court, tribunal or other authority. 2) The vacation of his office by a Chairman, Director or Chief Executive under subsection (1) or otherwise shall not in any way absolve him of his liability, if any, under any law, contract or otherwise howsoever subsisting immediately before the commencing day or the day on which he ceases to hold such office. 3) A Chairman, Director or Chief Executive by whatever name called ceasing to hold office under any of the aforesaid provisions shall entrust or cause to be entrusted to the person succeeding him in that office, intact and in as good order as they existed on the day immediately preceding the commencing day all properties, all books of accounts and other records and documents belonging to or in the custody or control or pertaining to the affairs, of the bank. 4) Central Board of the banks mentioned in the Schedule, and all local bodies, area boards, managing committees, executive committees and similar other bodies for the management of any bank shall stand dissolved, and all members of such bodies shall stand removed from office, on the commencing day.
Pakistan Banking Council
1) At the time of promulgation of this Act, Pakistan banking council was established to oversee the working and performance of nationalized banks. However, the council was dissolved vide Banks (Nationalization) (Amendment) ordinance 1997, the main features as contained in section 9 of the Act are given below: 2) The Pakistan Banking Council (hereinafter referred to as the Council) shall stand dissolved forthwith. 3) All assets, properties and rights of the Council shall stand transferred to and vest in, and all liabilities and other encumbrances of the Council shall stand transferred to and become the liabilities and encumbrances of, the State Bank. a) Employees of the Council, including its members,- b) who are on deputation or secondment from any public sector financial institution shall revert to, and continue to be employed by, their parent institutions on terms and conditions governing their employment in their parent institutions; and c) Who do not fall in clause (a) shall become employees of the State Bank on terms and conditions governing their employment with the Council. d) Every contract or instrument to which the Council is a party shall continue to be in force and effective as if the State Bank had been a party thereto instead of the Council. e) Any legal proceedings or, as the case may be, any application pending before any authority by or against the Council may be continued by or against the State Bank. f) Where under any statute or statutory instrument, the Chairman or a member of the Council is nominated for a specified assignment of task, the vacancy caused by operation of this section shall be filled by a person nominated by the State Bank.
Provisions regarding management of banks are contained in section 11 which is reproduced below:
1) Subject to sub section (2) a bank shall have a Board consisting of- a) A President, who shall be its Chief Executive; and b) Not less than five and not more than seven other members. 2) The Federal Government may, if it deems necessary, appoint a Chairman of the Board in respect of a bank. 3) The Chairman, the President and other members of the Board- a) shall be appointed by the Federal Government in consultation with the State Bank, for a term of three years, on such terms and conditions as may be fixed by the General Meeting of the bank: b) provided that the Chairman and the President shall be appointed from amongst professional bankers whose names are included in a panel of bankers qualified to be the Chairman or the President, c) which panel shall be determined, maintained and varied, from time to time, by the State Bank; d) may be removed for misconduct or physical and mental incapacity before the expiry of the three years term by the Federal Government in consultation with the State Bank; e) shall stand removed if he becomes ineligible on any of the grounds specified in sub-section(12); f) May be re-appointed by the Federal Government, in consultation with the State Bank of Pakistan, for a further period of three years. 4) The general direction and superintendence of the affairs and business of a bank, and overall policy making in respect of its operations, shall vest in its Board. 5) The Board shall determine-
I. the credit policies of the banks;
II. evaluation criteria for the performance of the employees of the bank other than the President; III. personnel policies of the bank including appointment and removal of officers and employees; IV. guidelines for entering into any compromise with borrowers and other customers of the bank; and V. Any other policy matter.
8) The Chief Executive and other officers of the bank shall act in accordance with the policies, criteria and guidelines determined by the Board. 9) The board shall appoint committees from amongst the executives of the bank, and determine the powers, functions and duties of such committees. 10) Where the Federal Government has appointed a Chairman he shall preside over the meetings of the Board, and in case a Chairman has not been appointed, then the president shall preside over the meetings of Board. In the absence of the Chairman or the President, as the case may be the directors may elect one of its members to preside over the meetings. 11) The President, subject to the control and directions of the Board, shall exercise powers of management of the affairs of the bank. 12) All selections, promotions and transfers of employees of banks except the President and decisions as to their remuneration and benefits shall be made by the President in accordance with evaluation criteria and personnel policies determined by the Board. 13) The Board, the President and other officers shall exercise their powers and discharge their duties in accordance with sound banking principles and prudent banking practices and shall ensure compliance with regulations and directions that may be issued by the State Bank from time to time. 14) No person shall be eligible for appointment as the Chairman, the President, or a member of the Board if- a. he is or has at any time been, adjudged an insolvent or has suspended payment or has compounded with his creditors; or b. he is a minor or is found a lunatic or of unsound mind; or c. he is not citizen of Pakistan; or d. he was at any time in the service of Federal Government or a corporation controlled by any such Government or in the service of a bank and was dismissed; or e. he is a person against whom any action has been taken or any proceedings are pending under section 412 of the Companies Ordinance, 1984, (XLVII of 1984), or section 83 of the Banking Companies Ordinance, 1962 (LVII of 1962); or f. he is, or has been convicted for tax evasion under any law for the time being in force; or g. he is a member of the Senate, National Assembly, any Provincial Assembly or an elected Member of a local council constituted under any law relating to local councils; or h. He is holding an office in a political party.
Effects of Nationalization Pros:
- Availability of funds to the government for meeting its social sector targets - Equitable distribution of credit to the different sectors, industries and regions. - Centrally coordinated policy frame work Cons: - Excessive government control leading to the decisions on non professional considerations. - Lack of fair market competition leading to absence of availability of innovative and diversified products to the customers. - Neglect of personalized services to the customers. - Mismanagement leading to alarming size of nonperforming loans portfolio.
Nationalization Act is an important part of our statutory history. We have, at length discussed objectives merits and grey areas of nationalization. At present the world is heading forward with the notions of disinvestment, privatization and free market and banking industry is no exception to it. At present banking industry is passing through this phase and visibly performing well.
Banking Companies Ordinance, 1962 Introduction Law relating to Banking Companies is governed by Banking Companies Ordinance, 1962. As we have seen that there are other laws which are related to the banking transactions and are of interest to different stake holders as such we shall take into account these ancillary statutes/ laws besides this ordinance.
Application of other laws shall not be barred under section2
This ordinance shall have limited application to certain financial institutions
1.
The provisions of sections
6,25A, 25AA, 29,31,32,33,40, 41,41A, 41B, 41C, 41D, 42, 83, 84, and 2. All notifications issued by the Federal Government which are inconsistent with the provisions of sub-section (1) including such notifications in respect of the National Development Leasing Corporations, Leasing Companies and Modaraba Companies shall stand rescinded with immediate effect.
The Federal Government shall have powers to suspend the operations of Ordinance under section 4. The Federal Government, if on a representation made by the State Bank in this behalf is satisfied that it is expedient so to do, may by notification in the Official Gazette suspend for such period, not exceeding sixty days, as may be specified in the notification, the operation of all or any of the provisions of this Ordinance, either generally or in relation to any specified banking company. The Federal Government may, by notification in the official Gazette, extend from time to time, the period of any suspension under sub-section (1) for such period or periods, not exceeding sixty days at any one time, as it thinks fit so however that the total period does not exceed one year. A copy of any notification issued under this section shall be laid on the table of the Federal Legislature— - if it is in session, within three days of the issue of the notification; and - If it is not in session, as soon as it meets after the issue of the notification. The banking companies Ordinance 1962 has been divided in five parts, comprising of 94 sections. We shall also cover the banking companies rules, 1963. We shall discuss this ordinance in greater detail but to have a glimpse of the scope of the ordinance, the main topics to be covered are given below for ready reference.
PART 1 – Preliminary
Following topics are covered under this
Part - Title, extent and commencement - Application of other laws not barred - Limited application of Ordinance to certain financial institutions - Power to suspend operation of Ordinance - Definitions:
“Approved securities”
“family members” - Ordinance to override memorandum, articles, etc
PART II
Business of Banking Companies · Forms of business in which banking companies may engage. · Use of the word ”Bank” or any of its derivatives. · Prohibition of trading. · Disposal of non-banking assets. · Prohibition of employment of managing agents and restrictions on certain forms of employment. · Restrictions on removal of records and documents. · Requirement as to minimum paid-up capital and reserve. · Regulation of paid-up capital subscribed capital and authorized capital and voting rights of shareholders. · Election of new directors. · Appointment of director by State Bank. · Restriction on term of office of directors. · Vacation of Office. · Restriction on commission, brokerage discount, etc., on sale of shares. · Prohibition of charge on un-paid capital. · Prohibition of floating charge on assets. · Restrictions as to payment of dividend. · Prohibition of common directors. · Reserve Fund. · Cash Reserve. · Restriction on the nature of subsidiary companies. · Restrictions on loans and advances. · Power of State Bank to control advances by banking companies. · Power of State Bank to collect and furnish credit information. · Preparation of special reports. · Recovery of certain dues of banking companies as arrears of land revenue. · Power of Federal Government prohibit acceptance of deposits by banking companies incorporated outside Pakistan. · Deposits. · Licensing of banking companies. · Prohibition of advertising for deposits and collection. · Disruptive union activities. · Restrictions on opening of new, and transfer of existing place of business. · Maintenance of liquid assets. · Assets in Pakistan. · Unclaimed deposits and articles of value. · Half-yearly returns and power to call for other returns and information. · Power to publish information. · Fidelity and secrecy. · Guidelines by the State Bank. · Accounts and balance-sheet. · Audit. · Submission of returns. · Copies of Balance Sheets, and Accounts to be sent to Registrar. · Display of audited balance sheet by banking companies · Incorporated outside Pakistan. · Accounting provisions of this Ordinance not retrospective. · Inspection. · Responsibility of State Bank. · Power of the State Bank to give directions. · Power of the State Bank to remove directors or other managerial persons from office. · Power of the State Bank to supersede Board of Directors of a banking company. · Limitations. · Prosecution of directors, Chief Executives or other Officers. · Further powers and functions of the State Bank. · Certain provisions of the Ordinance not to apply to certain banking companies.
Part –IIA
Transaction of Banking Business Illegally By
Companies, etc. o Power to call for certain information, etc. o Special provisions. o Power to make declaration. o Consequences of a declaration under section 43B. o Deposit of cash and preservation of assets, etc. o Statement of assets and liabilities to be submitted to State Bank. o Consequential provisions for winding up, etc. 54
Part –III o High Court defined. o Restriction on stay order. o Restriction on compromise or arrangement between banking companies and creditors. o Power of State Bank to apply to Federal Government for suspension of business by a banking company and to prepare scheme of reconstruction or amalgamation. o Procedure for amalgamation of banking companies. o Winding up by High Court. o Court Liquidator. o State Bank to be Official Liquidator. o Application of Companies Act to Liquidators. o Stay of Proceedings. o Preliminary report by official liquidator. o Notice to preferential claimants and secured and unsecured creditors. o Power to dispense with meetings of creditors, etc. o Booked depositors’ credits to be deemed proved. o Preferential payments to depositors. o Restriction on voluntary winding up. 71
Part –IV
o Power of High Court to decide all claims in respect of banking companies. o Transfer of pending proceedings. o Settlement of list of debtors. o Special provisions to make calls on contributories. o Documents of banking company to be evidence. o Public examination of directors and auditors. o Special provisions for assessing damages against delinquentdirectors, etc. o Duty of directors and officers of banking company to assist in the realisation of property. o Special provisions for punishing offences in relation to banking companies being wound up. o Public examination of directors and auditors, etc., in respect of a banking company under scheme of arrangement. o Special provisions for banking companies working under scheme of arrangement at the commencement of the Ordinance. o Appeals. o Special period of limitations. o State Bank to tender advice in winding up proceedings. o Power to inspect. o Power to call for returns and information. o District Magistrate to assist. official liquidator in taking charge of property of banking company being wound up. o Enforcement of orders and decisions of High Court. 84 o Power of High Court to make rules. 84 o References to directors, etc., shall be construed as including references to past directors, etc. o Part II not to apply to banking companies being wound up. o Validation of certain proceedings.
Part--IVA o Appointment of Mohtasib. o Terms and conditions of the Banking Mohtasib. o . Reference to Banking Mohtasib by Court. o Procedure for making complaints. o Recommendations for implementation o Power to call for information. o Report of Banking Mohtasib.
Part –V o Penalties. o Dishonest removal of pledged goods. o Cognizance of offences, etc. o Application of fines. o Special provisions for private banking companies. o Restriction on acceptance of deposits withdraws able by cheques. 95 o Change of name by a banking company. o Alteration of memorandum of a banking company. o Certain claims for compensation barred. o Application of certain provisions to banking company incorporated by special enactments of the Federal Legislature. o Application of other laws barred. o Removal of difficulties. o Power of Federal Government to make rules. o Power to exempt in certain cases. o Exemption of Officers, etc., from liability o Exemption from requirement of license. o Exchange of information. o Continuance of charge and priority. o Protection of action taken in good faith. 98 Statutory definitions: We shall discuss the statutory definitions as contained in section 5 of the ordinance, definitions of banking and banking company have already been briefly discussed and we shall focus on explanation of important aspects in coming Lessons.
Banking Companies Ordinance, 1962
Statutory definitions These definitions as contained in section 5 of the ordinance are given below:
(a) “approved securities” means the securities in which a trustee may invest money under clause (a), clause (b), clause (bb), clause (c) or clause (d) of section 20 of the Trust Act, 1882 (II of 1882), and for the purpose of—
(i) sub-section (2) of section 13, includes such other securities as the Federal Government may, by notification in the official Gazette, declare to be approved securities for the purpose of that subsection; and (ii) sub-section (1) of section 29, includes such types of Pakistan rupee obligations of the Federal Government or a Provincial Government or of a Corporation wholly owned or controlled, directly or indirectly, by the Federal Government or a Provincial Government and guaranteed by the Federal Government as the Federal Government may, by notification in the official Gazette, declare, to the extent determined from time to time, to be approved securities for the purpose of that sub-section;1 (b) “banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdraw able by cheque, draft, order or otherwise; (c) “banking company” means any company which transacts the business of banking in Pakistan and includes their branches and subsidiaries functioning outside Pakistan of banking companies incorporated in Pakistan2;
Explanation.— Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause;
(d) “branch” or “branch office”, in relation to a banking company, means any branch or branch office, whether called a pay office or sub-pay office or by any other name, at which deposits are received, cheques cashed or moneys lent, and for the purposes of section 40 includes any place of business where any other form of business referred to in sub-section (1) of section 7 is transacted;
(dd)“creditor” includes persons from whom deposits have been received on the basis of participation in profit and loss and a banking company or financial institution from which financial accommodation or facility has been received on the basis of participation in profit and loss, mark-up in price, hire-purchase, lease, or otherwise;
General Concept of Creditor From this definition, it is transpired that a banker can be a debtor as well as a creditor depending upon the nature of transaction. When the banker accepts deposits from his customers the bank becomes debtor and the customer is treated as creditor. However when a customer avails a loan or finance from the bank, the banker becomes creditor and customer shall be debtor. This relationship shall be explained in detailed while discussing banker’s customer’s relationship. However same is briefly discussed for understanding the said definition.
A bank performs a number of functions for the customer. After the account in the bank is opened and the relationship of a banker and customer is established, the bank not only undertakes to collect the cheques which are deposited in the account but also makes the payment on behalf of the customer, whenever there is a mandate from the customer. The cheques which are realized by the bank are deposited in this account of the customer and on many occasions, the bank performs certain other functions on behalf of the customer such as keeping the valuables, etc., deposited by the customer with the bank as a trustee. On many occasions, when the customer gives bills for collection to his bank and the said bank passes the bills for collection to another bank and the amount of the bills is reduced as a result of debiting the customer's account with collection charges as a result of an agreement between two banks, the bank is always acting on behalf of the customer. There are thus too many occasions relating to so many matters which arise during the mutual dealings between the banker and the customer and at each time, a question arises as to what is the relationship between a banker and a customer
When a bank grants loan or other credit facilities to the customer, relationship is reversed, that is now
Customer is Debtor & Banker is Creditor In such cases it is not the money of the customer in the hands of the banker but it is the money of the bank in the hands of the customer but in all such cases when a customer’s account is over drawn, the customer does not cease to be a customer.
(e) “company” means any company which may be wound up under the Companies Ordinance, 1984 (XLVII of 1984) and includes a branch of a foreign banking company doing banking business in Pakistan under a license issued by the State Bank in this behalf;
(ee) “Debtor” includes a person to whom, or a banking company or financial institution to which, finance as defined in the Banking Tribunals Ordinance 1984, has been provided;
(f) “Demand liabilities” means liabilities which must be met on demand, and “time liabilities” means liabilities which are not demand liabilities;
(ff) “Family members” in relation to a person means his spouse, dependent lineal ascendants and descendants and dependent brothers and sisters;
(ffa) “foreign banking company” means a banking company, not incorporated in Pakistan, which has a branch or branches doing banking business in Pakistan under a license issued by State Bank in this behalf;
(g) “Gold” includes gold in the form of coin, whether legal tender or not, or in the form of bullion or ingot, whether refined or not;
(gg)“ loans, advances, and credit” includes “finance” as defined in the Banking Tribunals Ordinance, 1984; The above definition is a referral definition. Definition of finance as contained in Banking Tribunal Ordinance, 1984 is reproduced here under:
‘Finance’ includes an accommodation or facility under a system which is not based on interest but provided on the basis of participation in profit and loss, mark-up or mark-down in price, hire-purchase, lease, rent sharing, licensing, charge or fee of any kin, purchase and sale of any property, including commodities, patents, designs, trade marks and copy rights, bills of exchange, promissory notes or other instruments with or without by-back arrangement by a seller, participation term certificate, musharika certificate, modaraba certificate, term finance certificate or any other mode other than an accommodation or facility based on interest and also includes guarantees, indemnities and any other obligation, facility the real beneficiary whereof is a person other than the person to whom or in whose name it was provided
(h) “managing director”, in relation to a banking company, means a director who, by virtue of an agreement with the banking company or of a resolution passed by the banking company in general meeting or by its Board of Directors or, by virtue of its memorandum or articles of association, is entrusted with the management of the whole, or substantially the whole of the affairs of the company, and includes a director occupying the position of a managing director, by whatever name called; (i) “Prescribed” means prescribed by rules made under this Ordinance; (j) “Private company” has the same meaning as in the Companies Ordinance, 1984 (XLVII of 1984); (k) “Registrar” has the same meaning as in, the Companies Ordinance, 1984 (XLVII of 1984); (l) “Scheduled bank” has the same meaning as in the State Bank of Pakistan Act, 1956 (XXXIII of 1956);
This is a referral definition; the same as contained in State Bank of Pakistan Act 1956 is given here under: "Scheduled bank" means a bank for the time being included in the list of banks maintained under sub-section (1) of Section 37;
Sub section (1) of Section 37 is also reproducing for ready reference. (I) The Bank shall maintain at all its offices and branches an up-to-date list of banks declared by it to be scheduled banks under Clause (a) of sub-section (2).
(m) “secured loan or advance” means a loan or advance made on the security of assets the market value of which is not at any time less than the amount of such loan or advance, and “unsecured loan or advance” means a loan or advance not so secured, or that part of it which is not so secured;
(mm) “securities” includes securities as defined in the Capital Issues (Continuance of Control) Act, 1947 (XXIX of 1947), (n) “State Bank” means the State Bank of Pakistan; (o) “substantial interest” in an undertaking shall be deemed to be possessed by a person if he or any of his family members is the owner, director or officer of or has control over the undertaking or if he or any of his family members holds shares carrying not less than twenty per cent of the voting power in such undertaking;
Explanation. — For the purpose of this clause,— (i) “control” in relation to an undertaking, means the power to exercise a controlling influence over the management or the policies of the undertaking, and, in relation to shares, means the Power to exercise a controlling influence over the voting power attached to such shares; (ii) “Person” includes a Hindu undivided family, a firm, an association or body of individuals, whether incorporated or not, a company and every other juridical person; and (iii)“undertaking” means any concern, institution, establishment or enterprise engaged in the production, supply or distribution of goods, or in the provision or control of any services relating to the provision of board, lodging, transport, entertainment or amusement, or of facilities in connection with the supply of electrical or other energy, or to the purveying of news, insurance or investment.
The Ordinance shall override memorandum, articles, etc of Banking Company under section 6 of the Ordinance: The provisions of this Ordinance shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a banking company, or in any agreement executed by it, or in any resolution passed by the banking company in general meeting or by its Board of Directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Ordinance; and
Any provision contained in the memorandum, articles, agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provisions of this Ordinance, become or be void, as the case may be. Memorandum of Associations and Article of Associations are very important concepts with regard to any company weather a banking company or a non banking company. The concepts are explained below: Memorandum of Association Memorandum of association is a legal document for incorporation of a company Memorandum of association is a fundamental legal document on the basis of which the company conducts its external affairs. This document signifies the powers of the company as well as the limitations of the company. It contains information regarding the purpose, capital, and place of business, liability of the members and acquisition of shares by the subscribers.
Memorandum of company limited by shares. This is contained in Section 16 of the ordinance which is reproduced below.
a.
In the
case of a company limited by shares,- i. the name of the company with the word "limited" as the last word of the name in the case of a public limited company, and the parenthesis and words "(Private) Limited" as the last words of the name in the case of a private limited company, ii. the Province or the part of Pakistan not forming part of a Province, as the case may be, in which the registered office of the company is to be situate; iii. the objects of the company, and except in the case of a trading corporation the territories to which they extend; iv. that the liability of the members is limited; and v. the amount of share capital with which the company proposes to be registered, and the division thereof into shares of a fixed amount: b. No subscriber of the memorandum shall take less than one share; and
c.
Each
subscriber of the memorandum shall write opposite to his name the number of
shares he takes. Memorandum of company limited by guarantee: sec 17 In the case of a company limited by guarantee,-
a.
whether or not
the company has a share capital, the memorandum shall state- i. the name of the company with the parenthesis and words "(Guarantee) Limited" as the last words of its name; ii. the Province or the part of Pakistan not forming part of a Province, as the case may be, in which registered office of the company is to be situate; iii. the objects of the company, and, except in the case of a trading corporation, the territories to which they extend; iv. that the liability of the members is limited; and v. that each member undertakes to contribute to the assets of the company in the event of its being wound up while he is a member, or within one year afterwards, for payment of the debts and liabilities of the company contracted before he ceases to be a member, and of costs, charges and expenses of winding up, and for adjustment of the rights of the contributories among themselves, such amount as may be required, not exceeding a specified amount; and b. if the company has a share capital,-- i. The memorandum shall also state the amount of share capital with which the company proposes to be registered and the division thereof into shares of a fixed amount: ii. no subscriber of the memorandum shall take less than one share: and iii. Each subscriber shall write opposite to his name the number of shares he takes.
Memorandum of unlimited company: sec 18 In the case of an unlimited company—
a.
whether or
not the company has a share capital, the memorandum shall stale i. the name of the company; ii. the Province or the part of Pakistan not forming part of a Province, as the case may be, in which the registered office of the company is to be situate; and iii. the objects of the company, and, except in the case of a trading corporation, the territories to which they extend; and
b.
if the
company has a share capital,- i. No subscriber of the memorandum shall take less than one share; and ii. Each subscriber shall write opposite to his name the number of shares he takes Requirements of memorandum Following requirements must be fulfilled before submission of the memorandum of association to the Registrar. · Required to be printed · Should be divided into paragraphs · Paragraphs to be consecutively numbered · To be signed by the subscribers · Signatures duly witnessed by at least one witness · Signature of each subscriber to be attested by the witness · Complete address/ occupation of the subscriber to be mentioned. · Address, occupation of the witness to be mentioned · Memorandum to be duly stamped under stamp Act.
Articles of Associations Article of association is another important legal document which is subordinate to memorandum of association. It is concerned with the internal conduct and control of the company. Articles of association as provided in section 2 (1) (i) --"articles" means the articles of association of a company as originally framed or as altered in accordance with the provisions of any previous Companies Act, or of this Ordinance, including, so far as they apply to the company, the regulations contained in Table A in the First Schedule;
Contents of Articles of association is comprised of provisions, rules of Articles of Association:
Registration of articles is contained in section 26 which is given below: 1. There may, in the case of a company limited by shares, and there shall, in the case of a company limited by guarantee or an unlimited company, be registered with the memorandum, articles of association signed by the subscribers to the memorandum and setting out regulations for the company. 2. Articles of association may adopt all or any of the regulations contained in Table A in the First Schedule. 3. In the case of an unlimited company or a company limited by guarantee, the articles, if the company has a share capital, shall state the amount of share capital with which the company proposes to be registered. 4. In case of an unlimited company or a company limited by guarantee, if the company has not a share capital, the articles shall state the number of members with which the company proposes to be registered 5. In the case of a company limited by shares and registered after the commencement of this Ordinance, if articles are not registered, or, if articles are registered, in so far as the articles do not exclude or modify the regulations in Table A in the First Schedule, those regulations shall, so far as applicable, be the regulations of the company in the same manner and to the same extent as if they were contained in duly registered articles. 6. The articles of every company shall be explicit and without ambiguity and, without prejudice to the generality of foregoing, shall list and enumerate the voting and other rights attached to the different classes of shares and other securities, if any, issued or to be issued by it. Alteration of articles: sec 28
Subject to the provisions of
this Ordinance and to the conditions contained in its memorandum, a company may
by special resolution alter or add to its articles, and any alteration or
addition so made shall be as valid as if originally contained in the articles,
and be subject in like manner to alteration by special resolution:
Form of memorandum and articles: sec 29 a. The form of memorandum of articles shall be in accordance with the forms set out in tables, B,C,D and E of the first schedule the memorandum of association of a company limited by shares; b. The memorandum and articles of association of a company limited by guarantee and not having a share capital; c. the memorandum and articles of association of a company limited by guarantee and having a share capital;
d.
The
memorandum and articles of association of an unlimited company having a share
capital; Registration of memorandum and articles, etc: sec 30 1. The memorandum and the articles, if any, shall be filed with the registrar in the Province or the part of Pakistan not forming part of a Province, as the case may be, in which the registered office of the company is stated by the memorandum to be situated. 2. A declaration by such person as may be prescribed in this behalf, or by a person named in the articles as a director, or other officer of company, of compliance with all or any of the requirements of this Ordinance and the rules made there under shall be filed with the registrar; and the registrar may accept such a declaration as sufficient evidence of such compliance. 3. If the registrar is satisfied that the company is being formed for lawful purposes, that none of its objects stated in the memorandum is inappropriate or deceptive or insufficiently expressive and that all the requirements of this Ordinance and the rules made there under have been complied with in respect of registration and matters precedent and incidental thereto, he shall retain and register the memorandum and articles. if any.
4.
If
registration of the memorandum is refused, the subscribers of the memorandum or
any one of them authorized by them in writing may either supply the deficiency
and remove the defect pointed out, or within thirty days of the order of refusal
prefer an appeal-- 5. An order of the Authority under subsection (4) shall be final and shall not be called in question before any Court or other authority.
BANKING COMPANIES ORDINANCE, 1962
Forms of business carried out by a banking company under section 7 of the Ordinance:
A banking company may engage in any one or more of the following forms of business, namely: o Borrowing, raising, or taking up of money; o the lending or advancing of money either upon or without security; o the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundies, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, [The different instruments such as bill of exchange can be drawn, discounted and endorsed under the provisions of this Ordinance. All instruments including promissory notes, bills, bills of lading, drafts and debentures play an important role in various transactions carried out by the banks and provide liquidity to financial system. Role of bill of exchange is particularly very important. We shall discuss the concept of bill of exchange in greater details. Some aspects of bill of exchange are discussed so that the purpose and scope of these provisions may be duly understood. Bill of exchange is an important type of negotiable instruments, and has been defined in section 5 of the Negotiable Instruments Act, 1881; the said definition is reproduced below: “A bill of exchange is an instrument in writing containing an unconditional order, signed by maker, directing a certain person, to pay on demand or at fixed or determinable future time a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument”.
Ingredients of a bill of exchange Some of the ingredients of bill of exchange are outlined below:
Features of a bill of exchange Features of bill of exchange are discussed below: A promise or order to pay is not conditional by reason of the time for payment of the amount or any installment thereof being expressed to be on the lapse of a certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain.
The sum payable must be “certain” within the meaning of this section and section 4, although it includes future interest or return in any other form or is payable at an indicated rate of exchange, or is payable at the current rate of exchange and although it is to be paid in stated installments and contains a provision that on default of payment of one or more installments or interest or return in any other form the whole or the unpaid balance shall become due.
A promise to pay or order to pay is not ‘conditional’ nor is the sum payable uncertain within the meaning of this section or section 4 by reason of the sum payable being subject to adjustment for profit or loss, as the case may be of the business of the maker. Where the person intended can reasonably be ascertained from the promissory note or the bill of exchange; he is a ‘certain person’ within the meaning of this section and section 4, although he is misnamed or designated by description only.
An order to pay out of a particular fund is not unconditional within the meaning of this section; but an unqualified order to pay, coupled with—
(c) an indication of a particular fund out of which the drawer is to reimburse himself or a particular account to be debited to the amount, or \ (d) a statement of the transaction which gives rise to the note of bill, in unconditional
An essential character of a bill of exchange is that it shall contain an order to accept or to pay and that acceptor should accept it, in the absence of such a direction to pay the document will not be a bill of exchange or a hundi.
Besides the forms discussed above following forms of business may also be carried out by a banking company. o Dealing in (participation term certificates, term finance certificates, musharika certificates; modaraba certificates and such other instruments as may be approved by the State Bank) and other instruments. The State Bank of Pakistan issues securities on behalf of government of Pakistan. Concept and scope of government securities is explained below:
Government Securities shall include such types of Pak. Rupee obligations of the Federal Government or a Provincial Government or of a Corporation wholly owned or controlled, directly or indirectly, by the Federal Government or a Provincial Government and guaranteed by the Federal Government as the Federal Government may, by notification in the Official Gazette, declare, to the extent determined from time to time, to be Government Securities.]
o The granting and issuing of letters of credit. Under the provisions of this Ordinance, banking companies may engage in non funded facilities particularly letter of credit besides funded facilities. The concept of the letter of credit is discussed in the following paragraphs:
Letter of Credit in general terms is defined as under: ‘A letter of credit can be defined as an instrument issued by a bank in which the bank furnishes its credit which is both good and well known, in place of the buyer’s credit, which may be good but is not so well known. A bank issues a letter of credit on behalf of one of its customers authorizing an individual or firm to draw draft (bill of exchange) on the bank or one of its correspondents for the bank’s account under certain conditions stipulated in the credit.
The instrument of letter of credit is governed by Uniform Customs and Practices for documentary credit, called UCP 600 which is issued by the international chambers of commerce. According to UCP 600, letter of credit is defined as under: Credit means any arrangement, however named or described that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a complying presentation.
In a letter of credit the following parties are engaged: 1) Applicant (opener of L.C): means the party on whose request the credit is issued. 2) Issuing bank (opening bank): means the bank that issues a credit at the request of an applicant or on its own behalf. 3) Advising bank: means the bank that advises the credit at the request of issuing bank. 4) Confirming bank: means the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request. 5) Negotiating bank: means the bank where negotiation of documents is carried out. Negotiation means the purchase by the nominated bank of drafts and/ or documents under a complying presentation by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank. 6) Nominated Bank: means the bank with which the credit is available or any bank in the case of the credit available with any bank.
Form of business in which a banking company may engage is continued below: o Issuing of traveler's cheques and circular notes; o Underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities (participation term certificates, term finance certificates, musharika certificates, modaraba certificates and such other instruments as may be approved by the State Bank) and investment of all kinds; o The purchasing and selling of bonds, scripts or other forms of securities (participation terms certificates, term finance certificates, musharika certificates, modaraba certificates and such other instruments as may be approved by the State Banks)* on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips of valuables on deposit or for safe custody or otherwise; o “the providing of safe deposit vaults” o Collecting and transmitting of money and securities;
o The providing of finance as defined in the Banking Tribunals Ordinance, 1984.
Definitions of finance as contained in the Banking Tribunals Ordinance, 1984 is given below: ‘Finance’ includes an accommodation or facility under a system which is not based on interest but provided on the basis of participation in profit and loss, mark-up or mark-down in price, hire-purchase, lease, rent sharing, licensing, charge or fee of any kind, purchase and sale of any property, including commodities, patents, designs, trade marks and copy rights, bills of exchange, promissory notes or other instruments with or without by-back arrangement by a seller, participation term certificate, musharika certificate, modaraba certificate, term finance certificate or any other mode other than an accommodation or facility based on interest and also includes guarantees, indemnities and any other obligation, facility the real beneficiary whereof is a person other than the person to whom or in whose name it was provided.]
Form of business in which a banking company may engage is discussed below: o acting agents for any Government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a managing agent or treasurer of a company. [Agency service is a very important function of a bank and the relationship of Principal and Agent between customer and banker is one of important relationships.
The agency relationship is explained in the following paragraphs: In general terms, Agency refers to the relationship which exists between two persons, the Principal and the Agent in which the Agent has to perform different duties/ functions as per instructions of the principal and also enters into contract with the third party / parties on behalf of the principal. The relationship of agency plays an important role in business and commercial dealings. This relationship is legal created by virtue of agreement between Principal and Agent
Definition of Agent and Principal as contained in section 182 of the Contract Act, 1872 is given below: Agent is a person employed to do any act for another or to represent another in dealing with a third persons. The person for whom such act is done, or who is so represented, is called the Principal.
Explanation
Form of business is continued below: o Acting as “Modaraba Company” under the provision of the Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980. [The definition of modaraba company as contained in Modaraba Ordinance, 1980 is given below: Modaraba Company means a company engaged in the business of floating and managing modaraba. The definition of the modaraba is given hereunder. Modaraba means a business in which a person participates with his money and another with his efforts or skill or both his efforts and skill and shall include Unit, Trust and Mutual Fund by whatever name called. Modaraba certificate and Modaraba fund have also been defined in this Ordinance; the said definitions are also given here under for ready reference.
Modaraba Certificate: means a certificate of definite denomination issued to the subscriber of the modaraba acknowledging receipt of money subscribed by him.
o Contracting for public and private loans and negotiating and issuing the same;
o The effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue public or private, Government, municipal or other loans or of shares, stock debentures, (debenture stock or other securities) of any company, corporation or association and the lending of money for the purpose of any such issue;
o Carrying on and transacting every kind of guarantee and indemnity business;
o Purchase or acquisition in the normal course of its banking business of any property, including commodities, patents, designs, trade marks and copyrights with or without buy-back arrangements by the seller, or for sale in the form of hire-purchase or on deferred payment basis with mark-up or for leasing or licensing or for rent sharing or for any other mode of financing
o Managing, selling and realizing any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims; o Acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form security or part of the security for any loans or advances or which may be connected with any such secure
o Undertaking and executing trusts; We shall continue our discussion on this topic in the next Lesson.
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