EFFECTIVENESS OF FINANCIAL REGULATORY AUTHORITIES IN PAKISTAN

A STRATEGIC APPRAISAL

EXECUTIVE SUMMARY
Effectiveness of financial regulatory authorities is imperative for continuous
economic development and overall macroeconomic stability. State Bank of Pakistan, being
the central bank is mandated to regulate the monetary policy of the country. It is empowered
to exercise supervisory control over scheduled banks, the exchange rate, foreign reserves and
debt servicing etc. Monetary policy has been liberalized in line with the international
practices. The local and foreign investors are allowed to maintain foreign currency accounts
with local as well as foreign banks. This is a double edge sword, as it enhances compatibility
with the international banking practices and at the same time, facilitates outflow of capital
and tax evasion in a way. State Bank of Pakistan has introduced series of reforms to improve
financial regulations and facilitate trade and investment. Computerization of banking system
has taken place significantly. Online banking services are being offered by most of the
domestic scheduled banks.
Security and Exchange Commission of Pakistan replaced the Corporate Law
Authority in 1997. It exercises supervisory control on the non-banking sector like insurance
companies, corporate sector and stock exchanges etc. Corporate sector also suffers from nondocumentation like other economic and financial sectors. A team of World Bank experts has
carried out detailed survey and study to improve the corporate governance in Pakistan by the
SECP. The mandatory requirements of internal and external auditors are not being complied
with in the corporate sector.
Public finances suffer from budget deficit requiring structural support from domestic
as well as foreign loans from IMF and World Bank etc. Fiscal policy mainly relies on indirect
taxation instead of direct taxation. Broadening of tax net and plugging of leakages in tax
collection are essential for improvement of tax collection in order to bridge the widening gap
of budget deficit. Discretional SROs need to be checked to avoid pilferage of revenues.
Similarly, prudent financial management and prioritization of public funds are very important
for development of social, economic and infrastructure schemes and improvement of service
delivery for good governance. Supplementary budgetary arrangements and mid-course
fiddling with approved budgets need to be discouraged strictly. Constitutional role of Auditor
General of Pakistan is paramount in ensuring financial management accountability.

ii

At the moment, effectiveness of financial regulatory institutions is lax. A number of

loopholes are being exploited by the banking and non-banking sectors, primarily because of
non-documentation culture. Money kept in foreign banks and foreign currencies is mainly out
of the taxation net. Similarly, monetary policy is not being implemented in letter and spirit to
control currency exchange rates, resulting in increase in inflation and devaluation of Pak
rupee viz-a-viz dollar, pound and other foreign currencies. The heads of SECP are being
taken from the private sector who are not formally trained regulators. Resultantly,
effectiveness of regulatory mechanism is badly affected.
In nutshell, the solution of improving the effectiveness of financial regulatory
institutions lies in documentation of economy and adoption of modern technology in the
regulatory institutions as well as public and private entities and ensuring serious
implementation of existing regulatory regime of financial regulatory authorities i.e. SBP,
SECP and Public Sector financial regulations.

iii

ABBREVIATIONS
BATS:

Bond Automated Trading System

BCO:

Banking Companies Ordinance

BSAL:

Banking Sector Adjustment Loan

CCG:

Code of Corporate Governance

CIB:

Credit Information Bureau

CLA:

Corporate Law Authority

COT:

Carry-over Transactions

DFIs:

Development Finance Institutions

EMG:

Employees Management Group

ESOP:

Employees Stock Ownership Plan

FBR:

Federal Board of Revenue

GATS:General Agreement on Trade in Services

IAS:

International Accounting Standards

ICAP:

Institute of Chartered Accountants of Pakistan

ICM:

Institute of Capital Markets

IFRS:

International Financial Reporting Standards

IMF:

International Monitory Fund

IPOs:

Initial Public Offerings

NBFIs:

Non-bank Financial Institutions

NCBs:

National Commercial Banks

NFC:

National Finance Commission

NIBAF:

National Institute of Banking and Finance

NPL:

Non-Performing Loans

PBSRPP:

Pakistan Banking Sector Restructuring and Privatization Project

PTE:

Pure Technical Efficiency

SBP:

State Bank of Pakistan

SBP BSC: State Bank of Pakistan-Banking Services Corporation

SECP:

Security and Exchange Commission of Pakistan

SMC:

Single Member Company

WTO:

World Trade Organization

iv

CONTENTS
PREFACE..................................................................................................................................i
EXECUTIVE SUMMARY......................................................................................................ii
ABBREVIATIONS.................................................................................................................iv
INTRODUCTION....................................................................................................................1
Statement of the Problem.......................................................................................................2
Significance of the Research..................................................................................................2
Scope of the Research............................................................................................................3
Review of Literature...............................................................................................................3
Methodology...........................................................................................................................4
Organization of Paper.............................................................................................................4
SECTION 1............................................................................................................................5
STATE BANK OF PAKISTAN BANKING SECTOR FINANCIAL REGULATIONS....5
1.1

Historical Background.................................................................................................5

1.2

Regulatory Framework................................................................................................6

1.3

Assessment of Effectiveness of Regulatory Regime.................................................10

SECTION 2..........................................................................................................................14
SECURITY AND EXCHANGE COMMISSION OF PAKISTAN (REGULATIONS OF
NON-BANKING SECTOR)..................................................................................................14
2.1

Legal and Regulatory Framework.............................................................................15

2.2

Assessment of Regulatory Effectiveness...................................................................18

2.3

Competition Commission of Pakistan (CCP)............................................................21

SECTION 3..........................................................................................................................23
PUBLIC SECTOR FINANCIAL REGULATORY REGIME...........................................23
3.1

Budget 2014/15.........................................................................................................23

3.2

Budgetary Problems/Issues.......................................................................................24

3.3

Audit and Accounts...................................................................................................25

CONCLUSION AND RECOMMENDATIONS..................................................................27

Conclusion............................................................................................................................27
Recommendations................................................................................................................29
BIBLIOGRAPHY..................................................................................................................31

INTRODUCTION
In this paper an attempt has been made to review the effectiveness of financial
regulatory authorities of Pakistan and their importance for economic growth and
macroeconomic stability. Public sector finances are regulated by the Finance Division
through the instrument of Annual Budget. Whereas, public funds/ revenues are primarily
generated by collecting direct and indirect taxes by the Federal Board of Revenue. However,
the main focus of research paper will be on the regulatory regime of two main financial
sectors i.e., Banking and Non-Banking sector. The banking sector is governed by the State
Bank of Pakistan (SBP) and the non-banking sector is regulated by the Security and
Exchange Commission of Pakistan (SECP), the succeeding statutory body of Corporate Law
Authority (CLA). Another modern institution namely Competition Commission of Pakistan
has been set up in 2007 to promote competitive environment in the country, in order to
protect the rights of the consumer.
Part VI of the Constitution of Islamic Republic of Pakistan deals with Finance,
Property, Contracts and Suits.1 Chapter 1 deals specifically with public finance and the
National Finance Commission (NFC). Award of share to the provinces from the Federal
Consolidated Fund (NFC) is decided by the NFC, which is commonly known as NFC Award.
State Bank of Pakistan performs its functions according to the provisions of the State Bank
of Pakistan Act, 1956. Similarly, Security and Exchange Commission of Pakistan derives
legal powers from The SECP Act 1997. Article 18 of the Constitution grants all citizens
freedom of trade, business or profession as a fundamental right.
World has seen liberalization of regulations in the financial sector in the last few
decades. Government of Pakistan has undertaken a number of reform initiatives and efforts to
improve the financial regulatory regime. 2 The focus of this paper has been on critical analysis
of the assessment of effectiveness of financial regulatory regime in Pakistan for its
improvement in order to have a robust regulatory regime for the financial authorities of the
country. The outcome of study suggests that like other developing countries, Pakistani
economy suffers from non-documentation trends which hamper the regulatory effectiveness
seriously. Despite the fact that SBP has an established regulatory mechanism, but still
1

The Constitution of the Islamic Republic of Pakistan, 1973.

Mohammad Zubair Khan, Liberalization and Economic Crisis in Pakistan, A Study of Financial Markets.
http://aric.adb.org/pdf/aem/external/financial_market/Pakistan/pak_mac.pdf (accessed 05 April, 2015).
2

2
inflation and money laundering could not be controlled effectively. SECP has more focus on
facilitation than enforcement of regulations.

Statement of the Problem

Modern international trends dictated by the international treaties and covenants like
World Trade Organization (WTO) and General Agreement on Trade in Services (GATS)
suggest and promote liberalization of financial regulatory regime. Basically, regulatory
framework of financial authorities has direct effect on the economic growth and
macroeconomic stability of any country. However, international financial systems having
direct bearing and being prone to destabilization, necessitate a robust financial regulatory
regime in Pakistan. The regulatory regime of public sector is under the auspices of Finance
Division, Government of Pakistan. Banking sector is being regulated by the State Bank of
Pakistan and non-Banking sector by the Security and Exchange Commission of Pakistan
(SECP). The complication of situation is relatively smaller size of economy, need for up
gradation and improvement of existing systems to bring them at par with the international
standards and simultaneously ensuring effective implementation of regulations. Non
documentation of large segment of economy has added great degree of complexity. The
question is how we can improve the effectiveness of financial regulatory authorities of
Pakistan and make them compatible with the international standards.

Significance of the Research

In the recent past, world faced economic meltdown in 2008/9. Leading world
economic powers like America, Britain and other countries of European Union along with
some Middle Eastern and Asian countries were badly affected. A large number of banks and
mortgage companies went bankrupt. The governments of USA and some other countries had
to provide financial support packages worth hundreds of billions of dollars to mitigate the
financial emergency. Similar kind of situations are apprehended by the international
economic experts of and on. The best seller books of Clash of Civilizations and Clash of
Economic and Political Ideas support this preposition. Luckily, Pakistan survived the
adverse effects. However, the trade as well as budget deficits and non-documentation of
significant portion of economy pose serious challenges. Devaluation of Pakistani currency viz
a viz dollar, pound and other international currencies is direct indicator of fragility of our
financial position. Under these circumstances, a robust and effective financial regulatory

3
regime is imperative. State Bank of Pakistan is the main financial regulatory institution which
issues the monetary policy. Security and Exchange Commission of Pakistan has played vital
role in regulating the non-banking sector, especially the capital market. Federal Finance
division is mandated with framing of annual budget, which shapes the contours of financial
and economic trends. Similarly, Federal Board of Revenue has the vital assignment of
collection of revenues for the government. Budget deficit allows intervention of domestic and
foreign loaning. Much talked about conditionalities of IMF and World Bank come into play,
which have direct bearing on the economic and financial set ups. In the complex gambit of
finances, it is essential to have an efficient and effective financial regulatory institutional
framework. A critical and strategic appraisal of the existing regulatory regime of financial
institutions will enable us to find out the weaknesses and help in formulation of set of
appropriate policy options /recommendations to be followed for further improvement, in
order to attain economic self-reliance and to avoid any economic crisis in the country.

Scope of the Research

Scope of study covers the financial and monetary regulations of the State Bank of
Pakistan, the regulatory framework of Security and Exchange Commission of Pakistan and
the legal framework of Public Sector Finances. The scope also included study and critical
analysis of effectiveness of the implementation of regulations.

Review of Literature
Financial provisions of the Constitution of Pakistan, Annual Budget, Fiscal and
Monetary policies of the Government and related material of books, journals and internet
search engines have been extensively consulted. The retired and serving heads/ office bearers
of Finance Division, FBR, SBP, SECP and academia have also been consulted through the
forum of NMC as primary sources. The book Financial Sector Reforms and Efficiency of
Banking in Pakistan by Mr. Abdul Qayyum, Registrar PIDE, contains historical evolution,
reforms and their impact on the financial sector. Another book State Bank of Pakistan:
Evolution, Functions and Organization by Mr. Muhammad Farooq Arby, covers
comprehensive summary of state bank. Similarly, the Security and Exchange Commission of
Pakistan, annual reports give detailed progress, performance and suggestions for
improvement of its regulatory framework. The quarterly reports published by the State Bank
of Pakistan on The State of Pakistans Economy, encompass the impact of regulatory

4
framework of financial institutions on the national economy. An international study carried
out by consultants of the World Bank namely A Blueprint for Regulation and Development
of Corporate and Financial (non-banking) Sectors, is an exhaustive study for the
improvement of corporate governance in Pakistan.

Methodology
Analytical approach has been adopted on the basis of available data and the regulatory
legal framework. Secondary as well as primary sources have been explored. Archives of
NMC Library have provided significant theoretical material and guidance for the purpose.

Organization of Paper
After the preliminaries, the paper contains three main sections. Section 1 explains
financial regulations of State Bank of Pakistan. Section 2 elaborates the regulatory regime
of Security and Exchange Commission of Pakistan and its effectiveness. Section 3 deals
with Public Sector financial regulatory effectiveness which is followed by conclusion and
recommendations. First section deals with the banking sector, second section explains the
non-banking sector and the third section elaborates the public sector finance. The highly
regulated section of public sector finances, has been added to give a comparison with
regulations applicable to the private sector.

SECTION 1
STATE BANK OF PAKISTAN
BANKING SECTOR FINANCIAL REGULATIONS
1.1 Historical Background
State Bank of Pakistan (SBP) has been established under the SBP Act, 1956 3 with
retrospective effect from 1st July, 1948. Before independence, Reserve Bank of India (RBI)
was the Central Bank of the subcontinent. After independence, the assets of RBI were divided
between India and Pakistan with ratio of 70:30. The 30% reserve was equal to Rs. 750
million. Qaid-e-Azam Muhammad Ali Jinnah inaugurated SBP. In the beginning, the SBP
was jointly owned by the government of Pakistan and private investors with capital share
ratio of 51:49. The banking sector remained under the control of public sector. In 1974, all
the banks were nationalized under the Nationalization Ordinance 1974. However, the Banks
(Nationalization) Act, 1974 was amended in 1991 after analyzing the performance of
nationalized institutions for a decade. The decision of revision of policy of nationalization
was taken to encourage private sector participation, enhance efficiency and promote
competition among banks.4 Later on almost all the national commercial banks were privatized
slowly and gradually under the privatization policy of the government of Pakistan.
The State Bank of Pakistan exercises control, regulation and supervision of financial
system through conduct of monetary and credit policies. The SBP strictly monitors the
working of all the banking companies to ensure compliance of the statutory criteria and
banking rules and regulations.5 It is Bankers Bank, Lender of Last Resort and Banker to
Government. It has monopoly over issuance of currency notes and fixation of interest rate,
thus having ultimate control over inflation. SBP is lender of last resort for the commercial
banks. For instance, when banks have shortage of cash reserve then the state bank rescues
them from the dangerous situation and safeguard the banks from liquidation. SBP collects
taxes and other payments for repaying external debts. As a banker to the government, SBP
keeps government deposits, provides short term advances and foreign exchange for
3

State Bank of Pakistan Act, 1956

Abdul Qayyum, Financial Sector Reforms and the Efficiency of Banking in Pakistan, (Pakistan Institute of
Development Economics (PIDE) Islamabad, Pakistan).
5
Mohammad Farooq Arby, State Bank of Pakistan: Evolution, Functions and Organization, 1st Edition,
(Karachi: SBP Press, 2004), 9.
4

6
purchasing foreign goods and repaying external debts. The secondary functions of SBP
include public debt management, management of foreign exchange, advisor to government
and dealing with International Financial Institutions (IFIs). SBP is custodian of foreign
exchange reserve. It manages the exchange control and fixes value of currency and also
checks currencies flight in and out. It is agent of the government and Pakistans
representative with IMF and World Bank. SBP maintains government deposit accounts,
effects domestic and foreign currency transactions and provides advice relating financial
matters. Non-traditional functions of SBP include development of financial institutions i.e.
Commercial Banks, Micro Finance and Islamic banking, training bankers, development of
specialized financial institutions and providing credit to private sector (Industrial,
Agricultural and Exportation).

1.2 Regulatory Framework

Being regulator of the banking sector SBP is empowered to issue prudential
regulations. It is code of conduct or guidelines through which state bank supervises the
banking institutions. The regulations show standard format for activities to decrease their risk
taking. Purpose is to provide safety to depositors funds, keep financial stability and ensure
uniformity in the sector. The regulatory framework of SBP comprises following laws,
legislations and regulations:6

State Bank of Pakistan Act, 1956

Ordinance to provide for the establishment of SBP Banking Services Corporation
The Financial Institutions (Recovery of Finances) Ordinance, 2001
Banking Companies Ordinance 1962 ( As modified upto 02 April 2011)
Banks Nationalization Act,1974
Foreign Exchange Manual
Microfinance Institutions Ordinance, 2001
Payment Systems and Electronic Fund Transfer Act, 2007
Prudential Regulations
Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)

Regulations & Guidelines

Pakistan Coinage Act,1906
Negotiable Act,1881

Central Board of Directors

State Bank of Pakistan, http://www.sbp.org.pk/ (accessed 20 June, 2015)

7
Central Board of Directors is constituted according to section 9 of the SBP Act 1956
for supervising the affairs and business of the Bank. The Central Board consists of:
a) The Governor
b) Secretary Finance
c) Eight directors, including at least one from each province:
Eminent professionals from the fields of economics, finance, banking and
accountancy, to be appointed by the Federal Government. The board members
should not have conflict of interest with the business of the Bank.
The Governor of SBP acts as the Chairman of the Central Board. All decisions of the
Central Board are taken by majority of members present and voting. In the event of equality
of the votes, the Governor has the authority to exercise a casting vote.
Functions and responsibilities of the Central Board are as under:
i.

Formulation and monitoring of monetary and credit policies in order to secure

monetary stability and soundness of the financial system.

ii.

Determination and enforcement of the limit of credit to be extended by the Bank to

the Federal, Provincial Governments and other governmental agencies.

iii.

Approval of the credit requirements of the private sector and intimation to the
Monetary and Fiscal Policies Coordination Board.

iv.

Tender advice to the Federal Government on the interaction of monetary policy with
fiscal and exchange rate policy.

v.

Analyze and advise the Federal Government on the impact of various policies on the
state of the economy.

vi.

Submit quarterly reports to the Parliament on the state of the economy in terms of
economic growth, money supply, credit, balance of payments and price developments.

Monetary and Fiscal Policies Co-ordination Board

According to section 9B of the SBP Act, the Co-ordination Board, for the
coordination of fiscal, monetary and exchange rate policies has been constituted with
following composition:
1.

Federal Finance Minister

2.

Federal Commerce Minister or

Chairman

(Secretary Commerce)

Member

3.

Deputy Chairman, Planning Commission

Member

4.

The Governor SBP

Member

5.

Secretary Finance

Member

6.

Two eminent macro or monetary economists with proven record of research

and teaching to be appointed by the Federal Government.

The functions of the co-ordination board are as under:

i.

Coordination of fiscal, monetary and exchange-rate policies.

ii.

Ensuring consistency among macro-economic targets of growth, inflation,

fiscal, monetary and external accounts.

iii.

To determine the extent of Government borrowings from commercial banks

before the finalization of the budget.

iv.

To review the consistency of macro-economic policies quarterly and to revise

limits and targets set at the time of the formulation of the budget, keeping in
view the latest developments in the economy.

v.

Considering limits of the Government borrowing before and after passage of

the annual budget.

vi.

Quarterly review of the level of Government borrowing.

vii.

Review of the expenditure incurred in terms of raising of loans and

Government borrowing.
Ministries of Finance, Commerce and Planning Commission are responsible to inform

the Board regarding the impact of monetary policy adopted by the SBP on investment,
growth and balance of payment.

9
The regulatory framework restricts banks from engaging in non-related commercial
activities to avoid conflict of interest between banks and diverse businesses like securities,
insurance underwriting, real estate investment, etc. Banks are also prohibited from taking any
obligation or guarantees on behalf of Non-Banking Financial Institutions (NBFIs). Bank
investment in any single scrip is limited to 5% of its own equity and total investment in listed
shares is capped at 20%. The margin requirement against the security of shares of listed
companies is 30%.7 The regulatory framework for banks can be categorized in the following
six categories:
i.
ii.
iii.

iv.
v.
vi.

Entry requirements
Risk management guidelines
Corporate governance framework
Industry specific guidelines
Operational guidelines
Anti-money laundering regime

The banks / DFIs are required to meet capital requirements of $100 million since 31
December 2009. SBP has invoked partial suspension of new bank licenses in order to
encourage sector consolidation. The standard limits on single and group exposures of banks
are limited to 30% and 50%, including 20% and 35% fund based exposures. Exposure on
contingent liabilities cannot exceed 10 times of banks own equity. Similarly, clean lending to
single person is limited to Rs. 0.5 million which cannot exceed the equity of the bank in
aggregate. SBP has introduced a comprehensive handbook on Corporate Governance for
compliance by the banks. SBP has facilitated adoption of International Financial Reporting
Standards (IFRS) by banks, in collaboration with the Institute of Chartered Accountants of
Pakistan (ICAP). The auditing firms are approved by the SBP for external audit of all the
banks.
For effective regulation, SBP advised banks to set quarterly recovery targets, submit
their progress reports and formulate strategies to improve future recoveries. In 1997, SBP
directed the banks to submit their annual accounts on new format at par with international
accounting practices. Two new systems were adopted by SBP to monitor and evaluate the
performance of banks. First is called CAMELS (i.e. Capital adequacy, Asset quality,
Management quality, Earnings, Liquidity and Sensitivity to Market Risk Systems and

Dr. Shamshad Akhtar, Governor of SBP, Pakistan: Regulatory and Supervisory Framework, Institute of
International Bankers Annual Washington Conference, (Washington DC: USA, 5 March 2007).

10
controls). The second is CAELS (Capital adequacy, Asset quality, Earnings, Liquidity and
Sensitivity).
Reforms agenda was introduced by the SBP to upgrade the banking systems in
Pakistan at par with the international standard. The reforms were aimed at fostering
competition and increasing efficiency; diversify products and services; strengthening
supervision and regulation; and upgrading financial infrastructure. The reforms included
privatization of NCBs, liberalization of foreign exchange and investment regime, reducing
tax burden, e-banking, improvement in quality of human resource, consumer financing,
mortgage financing, micro-financing, SME financing, Islamic banking, agriculture credit,
enhanced supervision and regulatory capacity, corporate governance, capital strengthening,
improving asset quality, revised prudential regulations, credit rating, improved payment
systems, Credit Information Bureau (CIB) and legal reforms. According to Dr. Ishrat Hussain,
Ex-Governor SBP, the reforms have helped in broadening access to credit, financial
soundness and resilience, increased returns to the government and consolidation of banking
sector.8

1.3 Assessment of Effectiveness of Regulatory Regime

The State Bank of Pakistan is an established financial regulatory institution with
established authority of regulatory laws and implementation mechanism. However, stringent
policies and strict regulations sometimes put the banking sector in intermediate level liquidity
crunch.9 SBP maintains regular check on the transactions of all the commercial banks.
In a report submitted by SBP before the Senate Standing Committee on finance, it was
reported that legal action against 300 cases of money laundering was taken including 34 big
transactions made to suspected terrorists during the last five years as a follow up of AntiMoney Laundering (Amendment) Bill 2014. 270 suspected accused were arrested and
investigation was undertaken. Besides, the SBP froze 200 bank accounts under the Act.
Overall 5,775 money laundering cases were reported to the bank over the past five years. 10 In
order to enforce monetary regulations, SBP Banking Services Corporation (BSC) imposed
8

Dr. Ishrat Hussain, Paper Presented at the IMF High Level Seminar on Banking System Reforms, held at
Toledo, Spain, 2-3 November, 2006.
9
State Bank of Pakistan, Banking System Review, (Karachi: Printing Press, 2009), 4.
10
SBP tracking cases of money laundering, committee told, Pakistan the Banker, Financial Tribune of
Pakistan, http://www.thebanker.com.pk/state_bank/sbp-tracking-cases-of-money-laundering-committee-told
(accessed 20-06-2015).

11

penalty of fine of Rs. 9 million to the commercial banks for violating the bank regulations
and non-compliance of the clean note

policy of SBP. 11
Effectiveness of Financial Regulatory Authorities have also been assessed in terms of
data / indices maintained by the World Bank regarding rule of law, government effectiveness
index, regulatory quality index, inflation and external debt. Pakistani indicators have also
been compared with other well performing countries. The performance has been shown with
the help of bar and line charts.
Rule of law index: The average value for Pakistan during the period from 1996 to
2013 was -0.84 points with a minimum of -0.98 points in 2008 and a maximum of -0.67
points in 1996.12

Government effectiveness index: The average value for Pakistan during the period
from 1996 to 2013 was -0.58 points with a minimum of -0.81 points in 2011 and a maximum
of -0.37 points in 2006.13

11

Rizwan Bhatti, Clean note policy: Rs nine million penalties imposed on commercial banks, Business
Recorder, 22 January, 2013.
12
The Global Economy. Com, http://www.theglobaleconomy.com/Pakistan/Inflation/ (accessed 20-06-2015).
13
Ibid.

12
Regulatory quality index: The average value for Pakistan during the period from
1996 to 2013 was -0.63 points with a minimum of -0.88 points in 2004 and a maximum of
-0.45 points in 1996.14

Inflation: percent change in the Consumer Price Index: The average value for
Pakistan during the period from 1961 to 2014 was 8.28 percent with a minimum of -0.52
percent in 1962 and a maximum of 26.66 percent in 1974.15

External debt: percent of Gross National Income: The average value for Pakistan
during the period from 1970 to 2012 was 40.81 percent with a minimum of 0.02 percent in
1971 and a maximum of 69.53 percent in 1973.16

14

The Global Economy. Com, http://www.theglobaleconomy.com/Pakistan/Inflation/ (accessed 20-06-2015).

Ibid.
16
Ibid.
15

13
It is amply clear from the above mentioned data and reports of World Bank that the
overall quality of governance, rule of law and government effectiveness is negative in case of
Pakistan as compared to the developed countries. Therefore, SBP alone cannot perform better
than the overall government. However, SBP has not been able to control the inflation. Foreign
debt has also soared.
In nutshell, State Bank implements the monetary policy to control interest rate and
money supply. Purpose is to secure monetary stability and attain fuller utilization of
economys productive resources. In order to keep inflation low and price stabilization, SBP
strives to strike a difficult balance among multiple and often competing considerations. These
include controlling inflation, ensuring payment system and financial stability preserving
foreign exchange reserves and private investment. However, a controversy regarding
currency rates exists for which monetary policy of the SBP is often criticized. One is that in
order to pay the foreign and domestic debt servicing, additional currency is printed. Secondly,
to promote exports local currency is devalued. In both the cases, common man suffers. Due to
significant decrease in the oil prices in international market, the price of local currency
should appreciate and it should help in stabilization of prices of essential commodities.
Natural opportunity to control soaring inflation should be gainfully utilized by the
government.

14

SECTION 2
SECURITY AND EXCHANGE COMMISSION OF PAKISTAN
(REGULATIONS OF NON-BANKING SECTOR)
Security and Exchange Commission of Pakistan (SECP) is a financial regulatory
authority in Pakistan. It has been setup under the Security and Exchange Commission of
Pakistan Act 1997 and became operational in January 1999. In order to carry out reforms,
SECP has been established through an Act in December, 1997 to effectively regulate the
capital markets, and supervise and control corporate entities. 17 As of 30 June 2004, there were
a total of 43,728 Companies in the country. Of these, 42, 681 companies were limited by
shares including 39,769 private companies, 2,768 public companies and 144 SMCs. Foreign
companies in Pakistan totaled 555; of these, 39 percent belonged to European countries, 18
percent to Asian countries and 17 percent to the United States of America (USA). New
companies registered during the course of the year totaled 2,207. The Karachi Stock
Exchange (KSE) was pronounced as one of the best performing markets in the world in 2004.
Aggregate market capitalization of KSE was recorded at Rs. 1,421 billion. The Karachi Stock
Exchange 100 shares index (KSE-100 Index) reached an all-time high of 5,620.7 in 2004.18
SECP was initially confined to regulation of corporate sector and capital market.
However, its mandate has expanded to supervision and regulation of insurance companies,
non-banking finance companies and private pensioners. The vision of SECP is development
of modern and efficient corporate sector and capital market, based on sound regulatory
principals. Mission is to develop a fair efficient and transparent regulatory framework, based
on international legal standards and best practices. Its strategy is to develop an efficient and
dynamic regulatory body, ensure proper risk management procedures in the capital market,
and protect investors through responsive policy measures and effective enforcement
practices.
The functions of SECP include regulating the issue of securities, the business in the
stock exchanges and any other securities markets, prohibiting fraudulent and unfair trade
practices relating to securities markets, supervising and monitoring the activities of any
17

Preamble to the Securities and Exchange Commission Act, (Islamabad: Official Press, 1997).
Security and Exchange Commission of Pakistan, Annual Report, A Blueprint for Regulation and Development
of Corporate and Financial (non-banking) Sectors (2004).
18

15
central depository and stock exchange clearing house; and encouraging the organized
development of the capital markets and the corporate sector in Pakistan. The SECP is divided
into following four divisions.19
1.
2.
3.
4.

Securities Market Division

Company Law Division
Specialized Companies Division
Insurance Division

2.1 Legal and Regulatory Framework

SECP is the successor organization of Corporate Law Authority (CLA) which was an
attached department of the Federal Ministry of Industries. The legal and regulatory
framework of SECP comprises following laws / statutes:
1. Security and Exchange Commission of Pakistan Act, 1997
2. Securities and Exchange Ordinance, 1969
3. Securities and Exchange Rules, 1971
4. Brokers and Agents Registration Rules, 2001
5. Members Agents and Traders (Eligibility Standards) Rules, 2001
6. Insurance Ordinance
7. Securities and Exchange Commission (Insurance) Rules, 2002
8. Companies Ordinance, 1984
9. Companies (Amendment) Ordinance, 2002
10. Code of Corporate Governance, 2002
11. The Central Depositories Act, 1997
12. Central Depository Companies (Establishment and Regulation) Rules, 1996
13. Listed Companies (Substantial Acquisition of Voting Shares and Takeovers)
Ordinance, 2002
14. Margin Trading Rules, 2004
15. Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003
16. Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980
17. Modaraba Companies and Modaraba Rules, 1981
18. Companies (General Provisions and Forms) Rules, 1985
19. Single Member Companies Rules, 2003
20. Credit Rating Companies Rules, 1995
SECP performs its functions under the legal provisions of SECP Act. The Act
provides for the securities and exchange policy board as the apex policy making and
regulatory body. The Act covers the composition of Commission and the securities and
exchange policy Board. It provides strict checks on conflict of interest of the office bearers.
There are provisions for powers and functions, finance, enforcement and investigation,
cognizance and prosecution of offences, rules and regulations.
19

http://www.secp.gov.pk/ (accessed 21 June, 2015)

16
The Securities and Exchange Policy Board
Securities and Exchange Policy Board is constituted in accordance with legal
provision of section 12 of the SECP Act 1997, comprising nine members; five ex officio
members from the public sector and four from the private sector with following composition:
a. Ex Officio Members
i.

Secretary Finance

ii.

Secretary Law

iii.

Secretary Commerce

iv.

Chairman SECP

v.

A Deputy Governor nominated by the Governor of SBP.

b.

Four members are appointed by the Federal Government from private sector.
The member should be well-known for his integrity, expertise and experience in
the spheres of commerce and industry (including in particular the securities
industry), corporate law, accountancy, financial services, investment, insurance,
banking, academia or other related relevant fields of expertise.20

The main objective of the Policy Board is to provide policy guidelines to the
Commission in all matters relating to its functions. It is responsible for advising the
Government on matters falling within the purview of the SECP Act and other corporate laws.
Board is mandated to express its opinion on policy matters referred to it by the Government
or the Commission.
Companies Ordinance covers registration of companies, their management and
administration, duties and liabilities of directors, allotment, issue, transfer of shares and
regulation of the deposits. Single Member Companies Rules were framed to adopt concept of
a single member company (SMC) and Code of Corporate Governance of the European Union
model. SECP regulates all aspects of the capital market including licensing and coordination,
regulation of secondary market and market intermediaries and public offerings. The
Securities and Exchange Ordinance, 1969 provides for the protection of investors, regulation
of markets and dealings in securities. There are further provision in the said ordinance
prohibiting insider trading, fraudulent acts, false statements and making fictitious and
20

SECP Act 1997.

17
multiple applications for new shares. Basic qualification for members of stock exchanges, the
parameters for transactions of members business and maintenance of accounts are covered in
the Securities and Exchange Rules, 1971. Book entry system replacing the manual system
with a modern and efficient electronic system has been achieved through the legislation of the
Central Depositories Act and Central Depository Companies (Establishment and Regulations)
Rules, 1996. Margin Trading Rules, 2004 have been framed to bring trading practices in
stock exchanges in line with international best practices. The Insurance Ordinance, 2000
provides for improved capitalization and administration of the insurance sector by ensuring
the protection of rights of policy holders. Modaraba Ordinance, 1980 and Modaraba Rules,
1981 cover the registration of Modaraba companies and the flotation, management and
regulation. Moreover, NBFCs have been allowed to function as companies. They cover the
following forms of businesses:
i.
ii.
iii.
iv.
v.
vi.
vii.

Asset Management Services

Discounting Services
Housing Finance Services
Investment Advisory Services
Investment Finance Services
Leasing
Venture Capital Investment

The commission exercises supervisory / regulatory control over professional service

providers like accountants, companys secretaries, administrators, receivers, liquidators, stock
brokers, agents, financial analysts, insurance surveyors, intermediaries, actuaries and credit
rating companies.

2.2 Assessment of Regulatory Effectiveness

According to a detailed study, A Blueprint for Regulation and Development of
Corporate and Financial (non-banking) Sectors carried out by international experts,
following regulatory issues have been pointed out:21
i.
ii.
iii.
iv.
v.
vi.
21

Regulatory Policy Vacuum

Regulatory Imbalance
Regulatory Arbitrage
Regulatory Costs
Regulatory Efficiency
Regulatory Compliance

Security and Exchange Commission of Pakistan, Annual Report, A Blueprint for Regulation and
Development of Corporate and Financial (non-banking) Sectors, (2004).

18
vii.
viii.
ix.

Regulatory Enforcement
Regulatory Capacity
Regulatory Assessment

In addition, it has been highlighted in the report that following major developmental
challenges are being faced by SECP:
i.
ii.
iii.
iv.
v.
vi.

Corporatization
Self-regulation and Market Abuse
Product Diversification and Outreach to Consumers
Market Integration
Level Playing Field
Professional Independence and Conduct

One of the resource persons stated that there is incremental increase in number of
companies being registered with SECP. Capital market in Pakistan is potentially poor of
investment. It is characterized by low risk returns, market capitalization and investment
leverage. Pakistan has sovereign credit rating. Regulations have improved over a period of
time. Companies are bound to share their quarterly accounts with SECP. Another resource
person commented that capacity of regulatory human resource of SECP is limited and its
impression and reputation is not good. However, the data and processes have been automated
and regulations have improved. Stock exchanges have grown significantly. Badla financing
has to be reported and the savings have to be disclosed. However, capacity of accountants and
auditors is still limited. As far as, regulations are concerned, political will is missing to
improve regulations. He further stated that judicial system just does not work. It is based on
ill-conceived ideas and concepts. It practically nullifies the regulatory regime and renders it
largely dysfunctional. Most of the times SECP head and members of board of directors have
conflict of interest. There is need to adopt proactive approach. Formidable, fair, efficient and
transparent regulatory framework and implementation mechanism should be put in place.
Reports regarding surveillance and monitoring by the SECP are available in the form
of press releases and subsequent publication in the print media. According to these reports,
the SECP has strengthened its monitoring and surveillance of trading activity at the stock
exchanges and reinforced its market surveillance and special initiatives department. It was
claimed that stringent measures would be adopted to ensure integrity and fairness in the
trading activity and to identify abusive, manipulative and irregular trading practices.
In the efforts regarding the protection of investors interests and checking market
abuse 30 actions were taken in 2013. 9 actions were taken on insider trading/front running, 2

19
orders were passed under Section 22 of the 1969 Securities and Exchange Ordinance (SEO),
4 prohibitory orders under the SEO were issued, along with 15 warning letters to market
participants. Three orders were passed against the KATS operators of three brokerage houses
for disclosing non-public material information to their close relatives pertaining to the trading
orders of the clients of the brokerage house whose trades were executed through the terminals
allocated to them. A penalty of Rs700,000 was imposed on the KATS operators under Section
15E(3) of the SEO. Simultaneously, 5 orders were issued against the individuals, who traded
on the basis of the inside information passed to them by the KATS operators of the brokerage
houses and a cumulative fine of Rs10.603 million was imposed under Section 15E(1) of the
SEO. In addition, the department also issued an order imposing a penalty of about 69 million
rupees on an individual for insider trading, on the basis of trading on prior information of
acquisition of a substantial amount of shares (11.24%) of a listed company by a company he
was associated with. The order was issued under section 15A of the SEO, making it the
largest penalty imposed by the SECP since its inception. Furthermore, two orders were
passed under Section 22 of the SEO, one which involved an associated person participating in
the book building process in an attempt to manipulate the Media and Corporate
Communications Department/Spokesperson SECP, strike price and therefore a penalty of Rs1
million was imposed. In another case, a penalty of Rs. 100,000 was imposed on a brokerage
house for lacking adequate Know Your Customer (KYC) requirements, which the SECP
viewed as the key requirement to document the identity of a client and ensure no
unscrupulous and/or criminal elements participate within our markets.22
Corporate sector also suffers from non-documentation like other economic and
financial sectors. A team of World Bank experts has carried out detailed survey and study to
improve the corporate governance in Pakistan by the SECP. The mandatory requirements of
internal and external auditors are not being complied with in the corporate sector. At the
moment, effectiveness of financial regulatory institutions is lax. A number of loopholes are
being exploited by the banking and non-banking sectors, primarily because of nondocumentation culture. The heads of SECP are being taken from the private sector who are
not formally trained regulators. Resultantly, effectiveness of regulatory mechanism is badly
affected.
International Trend towards Financial Sector Liberalization
22

Security and Exchange Commission of Pakistan, Press Release, for Immediate Release, 12 February, 2015.
http://www.secp.gov.pk/news/PDF/News_15/PR2_Feb12_2015.pdf (accessed 19 June, 2015).

20
There is international trend towards financial sector liberalization. The pace of
globalization is accelerating with the implementation of international accords like World
Trade Organization (WTO) and General Agreement on Trade in Services (GATS). GATS
deals with financial services and lays down the right of parties for the protection of investors,
deposit holders and policy holders. It further ensures the integrity and stability of the
financial system. While liberalization has positive effect of stimulating capital flows, it can
aggravate the problems of financial institutions in terms of confidence loss as capital flowing
in can just as easily flow out. Another challenge of financial sector liberalization is to look
after the risk of market abuse due to cross border transactions.
Holistic Regulation
In the computerized regulatory structures, it is highly important for the regulatory
bodies to have cohesive policies in order to ensure smooth and efficient functioning of the
financial sector. In order to achieve the objective of holistic regulation, the SECP and SBP
have setup a joint Coordination Committee. The meeting of committee is held on quarterly
basis to review the progress and discuss mutual concerns in the banking and financial (nonbanking) sectors. It is essential that SECP and SBP should devise an appropriate regulatory
mechanism to supervise the regulatory regime of banking and non-banking sectors jointly or
through subsidiaries.

2.3 Competition Commission of Pakistan (CCP)

CCP is relatively new authority which was established on 2 October 2007 under the
Competition Ordinance, 2007. The Commission is an independent quasi-regulatory and
quasi-judicial body, mandated to ensure that competitive forces are unhindered in all spheres
of commercial and economic activities to enhance economic efficiency and protect
consumers from exploitation by anticompetitive behavior across Pakistan. 23 After the
establishment of SECP, the regulation of non-banking financial sector was mostly supervised
by the private sector. A regulatory vacuum was created which resulted in monopolies and
cartelization in the open market. CCP has been setup to fill this vacuum. The Competition Act
of 2010, is a modern law which checks abuse of dominant position by companies and
undertakings through malpractices of monopoly and cartelization. It puts restrictions on
prohibited agreements, deceptive marketing, and collusive mergers. The commission is
23

Official website of Competition Commission of Pakistan, http://www.cc.gov.pk/index.php?

option=com_content&view=article&id=418&Itemid=200 (accessed 21-06-2015).

21
vested with powers of civil court, entry and search of a suspected premises and forcible entry
also. The commission is also empowered to impose penalty of pecuniary fine on the violating
undertakings. The jurisdiction of competition commission is extended to private as well as
public sector undertakings.
Functions and Powers
Functions and powers of the Commission are to:

Initiate proceedings and make orders

Conduct studies for promoting competition
Conduct enquiries
Give advice to any undertaking which has asked for it in relation to the consistency of

its proposed actions in relation to the law

Engage in competition advocacy
Take all other actions necessary for implementing the Competition Act
As far as assessment of implementation effectiveness is concerned, according to a

media report the CCP bench comprising Chairperson Rahat Kaunain Hassan and members
Abdul Ghaffar and Dr. Joseph Wilson passed an Order on June 28, 2012, imposing heavy
penalty of Rs. 770 million on the ATM service providers and the banks for uncompetitive
behavior and deciding the uniform service rate. Moreover, penalties of Rs. 50 million were
imposed on 1-Link Limited, Rs. 50 million each on its 11 founding member banks and Rs10
million on each of its 17 non-founding member banks for imposing uniform customer
charges for Off-Us ATM cash withdrawal transactions in violation of Section 4 of the
Competition Act 2010.24

24

Rs. 770m fines imposed on 1-Link, 28 banks, The Dawn, 03 July, 2012.

22

SECTION 3
PUBLIC SECTOR FINANCIAL REGULATORY REGIME
Let us now see the effectiveness of financial regulatory authorities in the management
of public finances. Part VI of the Constitution of Islamic Republic of Pakistan deals with
Finance, Property, Contracts and Suits.25 Chapter 1 deals specifically with public finance and
the National Finance Commission (NFC). Award of share to the provinces from the Federal
Consolidated Fund (NFC) is decided by the NFC, which is commonly known as NFC Award.
Public finance is controlled by the Finance Division, Government of Pakistan through the
instrument of Annual Budget. It is meaningful what the government does and what it doesnt
do. The whole regime of taxation/ fiscal policy is announced in the annual budget. Much
talked about SROs have significant adverse impact on the revenue generation. Federal Board
of Revenue collects the taxes on behalf of the Federal Government to meet the needs of
public sector. Public funds are to be expanded in accordance with the provisions of Financial
Rules. Later on, the public fund expenditures are audited by the Auditor General of Pakistan.

3.1 Budget 2014/15

In order to have realistic view, lets have a look at the current budgetary allocations.

Total outlay
Resource availability
Net revenue receipts
Estimated provincial share in federal revenue
receipts
Net capital receipts
External receipts
Overall expenditure
Current
Development
Share of current expenditure in total budgetary
outlay
Estimated expenditure on General Public
Services
Size of Public Sector Development
Programme (PSDP)
25

2014-15
4,302

Rs. In Billion26
Higher than the (2013-14)
7.9%

4,074
2,225
1,720

3,011 (2013-14)
16%
14.5%

691
869
4,302
3,463
839
80.5%

40%
50.7%

2,543

73.4% of the current

expenditure

8.3%
2.4%
78.8%

1,175

The Constitution of the Islamic Republic of Pakistan, 1973.

Government of Pakistan, Ministry of Finance, Budget at a Glance, Federal Budget 2014-15, Annual Budget
Statement.
26

23
Provincial Allocation
Federal PSDP
Other development expenditure outside PSDP
To meet expenditure, bank borrowing

650
525
162
228

Source: Ministry of Finance ---http://business.onepakistan.com.pk/budget/#Salient features

3.2 Budgetary Problems/Issues

The major issues are soaring debt servicing and budget deficit. A significant portion of
economy is undocumented. Main reliance of taxation regime is on indirect taxation. In
addition, tax evasion is rampant. Without broadening the base/net of direct income tax regime
the problem of budget deficit cannot be overcome. Moreover, leakages in tax collection are
reported which need to be plugged. Financial liberalization has allowed foreign currency

24
accounts in the local and foreign banks. Money laundering is also quite common. Under the
circumstances, it is quite a difficult preposition to fill the gap of budget deficit. Resultantly,
budget deficit is met from domestic and foreign loaning. High interest rates swell the volume
of debt servicing every year.
For instance, the general sale tax was increased from 16% to 17% in the annual
federal budget 2013-14. It placed burden of approximately Rs. 55 billion on consumers at
large. This increased the burden on low and middle class. Prudent taxation measures suggest
direct taxation instead of indirect taxes. So that the burden of taxes is borne by the rich. The
economy is not expected to stabilize without broadening the tax net base. Similarly, for long
term solution involvement of FBR in terms of corruption in collection of taxes needs to be
strictly checked. Main reason of nonpayment of taxes is trust deficit of public in
the government. It is often said that quality of service delivery especially in social sectors is
not satisfactory. Tax payers are also facing lot of problems regarding electricity, education,
health, etc. Taxation problem can be equated with electricity crisis that needs to be solved.
Progressive taxation is used to charge high taxes from high income earners to reduce social
class gap in most of the countries. This practice is not being followed in Pakistan.
Resultantly, rich is getting richer and poor is getting poorer. Taxes should be imposed on the
production of products that produce negative externalities and subsidies should be given on
production of goods with positive externalities.27
One of the problems faced in public finance is of Supplementary grants.
Consequently, mini budgets keep pouring in throughout the year. The annual estimates are
significantly disturbed. This practice is more common in the provinces. Supplementary grants
upset the Annual Development Programmes thereby affecting the social and infrastructural
development adversely. One of the civil servants stated that this problem is resulting in
making graveyards of development schemes. As new schemes are started without completing
the ongoing schemes causing wastage of public exchequer.

3.3 Audit and Accounts

Articles 168, 169, 170 and 171 of the constitution of Islamic Republic of Pakistan
provide for Audit and Accounts of the public sector. Post of the Auditor General of Pakistan
is constitutional. The appointment is made in accordance with the provisions of Article 168.
27

Taxation Pakistans biggest problem! http://www.incpak.com/islamabad/taxation-pakistans-biggestproblem/ (accessed 29 April, 2015).

25
The Auditor General is empowered to perform audit of accounts of federal and provincial
departments and attached bodies, according to Article 169 and 180. The Federal and
Provincial public sector entities are legally bound to maintain accounts with principles and
methods as prescribed by Auditor General of Pakistan. As enshrined in Article 171, the
reports of Auditor General are to be submitted to the President. The President shall refer the
reports of Federal entities to the parliament and reports of the provincial departments shall be
sent to the respective Governors. The Governors shall cause these reports to be placed before
respective provincial assemblies28.
Audit paras are placed before the Parliamentary committees which take disciplinary
actions against embezzlement and misuse of public funds. However, misuse of accountability
mechanism for political victimization is often reported.
There is need to improve the financial accountability by improving institutional
framework and efficacy of Auditor General of Pakistan and its subordinates officers, instead
of coercive measures by National Accountability Bureau (NAB), Federal Investigation
Agency (FIA) and Anti-Corruption Establishments (ACE). Public Accounts Committee, in
return, is expected to become more effective parliamentary financial accountability
institution.
Dr. Ishrat Hussain, Ex-Governor, SBP, in his chapter Retooling Institutions, has
highlighted the problems of public sector institutions. He has recommended a reform agenda
to improve service delivery of the public sector institutions. His main focus is on prudent
management of finances by the public and private financial regulatory institutions like SBP,
Auditor General, Parliamentary Committees/Accounts Committee and SECP. He has
recommended that without retooling the financial regulatory authorities with modern
technological aids, the journey of progress cannot be coverd.29

28

Constitution of Islamic Republic of Pakistan, 1973

Dr. Ishrat Hussain, Retooling Institutions, Pakistan-Beyond the Crisis State, (Oxford University Press:
2012).
29

26

CONCLUSION AND RECOMMENDATIONS

Conclusion
State Bank of Pakistan (SBP) has formal regulatory control over banking sector which
is exercised through statute of State Bank of Pakistan Act, 1956 and the subordinate
legislation. Similarly, SECP established through SECP Act, 1997 exercises control over the
non-banking financial sector i.e. equity market. The public finances are administered by the
Finance Division of Government of Pakistan in accordance with provisions of the
Constitution. Provincial shares are distributed according to National Finance Commission
Award and the public finances are expanded as per provisions of Financial Rules.
SBP, being the central bank is the main regulator of monetary and fiscal policies.
Thus, it has control over the public and private sectors. SECP regulates the private sector and
Finance Division has essential regulatory control over the public finances.
Overall, regulatory standards of SBP are reasonably effective keeping in view the
world economic liberalization trends. However, control over inflation remained weak during
the last decade resulting in devaluation of Pak rupee viz-a-viz international currencies and
substantial increase in the Consumer Price Index (CPI). Despite the fact that SBP has tried to
enforce the regulations strictly and taken punitive actions against the banks involved in
violating the monetary regulations. But still lot needs to be desired to achieve satisfactory
levels of monetary controls and regulations. SBP has introduced an ambitious agenda of
reforms to upgrade the banking practices in Pakistan in order to bring them at par with the
international standards and world best practices. Computerization/automation of processes
has been carried out and most of the banks offer automatic/computerized services. For
instance, transactions through Automatic Transaction Machine (ATM) have become common.
Computerization of banks have not only improved the service delivery of banking sector to
the clients but it has also facilitated the monitoring of bank activities by the SBP, thus
improving the compliance to state regulations. However, despite all the initiatives of adoption
of modern computer technology and world best practices, there is issue of money laundering.
The provisions of Anti Money Laundering Act are being violated. Moreover, the regulatory
standards are poor in checking the innovative ideas of money laundering. Allowing foreign

27
currency accounts in the local as well as foreign currency accounts and money transfers
through hundi or some so called banking services allow unfair transfer of black money.
SECP is relatively new organization which has been established since 1999 to regulate
the equity market. Its predecessor Corporate Law Authority (CLA) was an attached
department of the Federal Industries Department. SECP is run by the Board of Directors.
Most of the members are drawn from the private sector. The principle of conflict of interest is
somewhat compromised. Moreover, the regulations are of civil nature and penalties are of
minor pecuniary value which do not serve sufficient deterrence. Although, SECP keeps
issuing press releases highlighting punitive actions taken, showing strict enforcement of
regulations. But they seem to be eye wash as the penalties imposed are of too meagre a value
as compared to the financial violations committed. A serious study was carried out by the
World Bank experts to improve corporate governance by the SECP. Practically speaking, the
effectiveness of regulatory regime by SECP is very poor. Something serious needs to be done
to improve the regulatory mechanism/enforcement of SECP. Complication is added by the
courts by staying the proceedings of SECP. Collusion of the SECP functionaries cannot be
ruled out. The mandatory regulations of internal and external auditors is not being complied
with resulting in almost zero regulations. Non-auditing of private companies is resulting in
tax evasion as well.
Public finances have also been discussed in the paper to provide holistic view of the
private and public sectors. Annual budget is passed as per requirements of the constitution.
Provincial shares are distributed according to NFC Award. Public funds are expanded
according to the provisions of Financial Rules. The regulatory legislations are followed more
strictly in the public sector. It is completely documented and audited. However,
improvements in terms of prioritization of funds, mini budgets through supplementary grants
and discretionary Special Regulatory Orders (SROs) need to be under taken.
Budget deficit has to be met by widening the direct taxation net base. Audit of the
public funds should be objective and free of political victimization. The bottom-line factor
adversely affecting the effectiveness of financial regulatory institutions in Pakistan is non
documentation of economy. Approximately sixty percent of the economy is undocumented. 30
This is oftenly called parallel economy or black economy also. In order to ensure hundred
percent effectiveness of the regulations of financial institutions the economy needs to be
documented completely.
30

Dr. Maleeha Lodhi, Pakistan-Beyond the Crisis State, (Oxford University Press: 2012).

28

Financial system managed by private sector can only bear fruits if certain prerequisites like healthy competitive environment, efficiently functioning markets, sound
financial infrastructure and strong and effective regulator, are met. If regulatory authority or
the Central Bank is weak in implementation of regulations, lacking required skills,
competencies and systems then the private sector can create serious systematic problems for
the financial sector and for the economy. In Pakistan, weak capacity of regulators has resulted
in centralization in goods market for sugar and cement etc. which is dominated by the private
sector.31
World trends suggest liberalization of financial regulatory systems as laydown in the
agreements of WTO and GATS. Financial systems are to be upgraded at par with
international standards. Moreover, the issues of money laundering and tax evasion through
innovative methods have to be simultaneously controlled.
The dilemma of governance, as pointed out by Dr. Ishrat Hussain, is deteriorated
effectiveness of implementation mechanism of the public sector institutions. The solution lies
in retooling of the institutions. Public sector institutions have to be equipped with modern
technological tools to cope up with the challenges of increased workloads and higher
international standards.

Recommendations

First

of

all

thorough

research/study

by

the

national

and

international

experts/consultants need to be carried out to undertake documentation of economy.

Then an integrated program/project for documentation of economy should be
launched by the Finance Division, State Bank of Pakistan and SECP jointly.

Existing regulatory framework should be implemented with more vigor which should
be followed up and monitored through computerized management information
systems.

Reforms agenda of SBP for adoption of world best banking practices should be
followed more vigorously for international compatibility. The banking systems should

31

Dr. Ishrat Hussain, Ex-Governor State Bank of Pakistan

29
be automated. All banks, local as well as foreign, operating in Pakistan should be
integrated/linked with SBP.

Monetary policy should be enforced effectively to control devaluation of Pakistani

currency viz-a-viz foreign currencies and Consumer Price Index.

Anti-Money Laundering Act should be enforced strictly to check money laundering

through hundi and other so called innovative liberal banking money transfers.

Regulators from the public sector should be posted in the management of SECP for
enhanced enforcement of regulations of SECP.

Cases of SECP pending in courts should be pursued in the relevant courts of law by
enhancing the capacity of legal wing of SECP.

The regulation of internal and external auditors, to carry out annual audit of all the
companies registered with the SECP should be enforced in letter and spirit.

Capacity building of the regulators of financial institutions i.e. SBP and SECP should
be done according to international standards.

In order to improve the efficiency of public sector finances, prioritization of resources

should be done prudently. Development and social sector budget allocations should be
enhanced. Malpractices of supplementary budgets and issuance of discretionary SROs
should be stopped immediately.

Audit of the public sector institutions should be carried out objectively and not as a
tool of political victimization.

Retooling of the government financial regulatory authorities/institutions is the way

forward.

30

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31

Resource Person

Dr. Omar Farooq Saqib, State Bank of Pakistan

Mr. Khalid Mirza, Ex MD. SECP
Mr. Javed Masud, Ex MD. SECP
Mr. Shahid Kardar, Ex. Governor SBP
Faqir Syed Ejaz Uddin, Expert Intellectual