After coming under increased pressure from the IMF, International Monetary Fund, via a performance criteria decreed within the EFF agreement, the National Assembly of Pakistan finally got around to passing the “The State Bank of Pakistan (Amendment) Bill 2015″ on 9 November, 2015. The bill had already been passed by the senate and it just needed the president’s signature to become an actual Act of Parliament.
According to this bill, the SBP’s role is being strengthened through the substitution, when it’s required, of the Boards approval for the Federal Governments approval. In regards to the objects and the reasons within the bill, the existing clauses which pertain to local boards, shareholders and executive committees have now been omitted due to the introduction of various amendments as these were no longer seen as relevant following the proclamation of the Bank (Nationalisation) Act 1974. In order for the role Islamic banking plays in the country to be advanced, the SBP found it necessary to engage in instruments which were Shariah compliant. An amendment was introduced for this purpose which allowed the SBP to hold property for the use of these Shariah compliant tools. An MPC, Monetary Policy Committee was formed which consists of a governor, or deputy that would be nominated by the governor in his absence, 3 senior executives from the SBP, 3 board members and 3 external members which are economists and who the government appointed on the boards recommendations. The purpose of this MPC is to formulate, recommend and support both the Monetary Policy Statement and any other pertinent measures in terms of the monetary policy but their objective is to allow the SBP to execute its essential functions in the professional kind of way essential for keeping pace with an emerging and ever-changing financial environment. There is also an enabling clause that allows the SBP to establish a protection fund for depositors as well as a new section dealing with lenders of last resort which aims to provide legal certainty to that support which the SBP already offers to troubled banking establishments. A new section relating to regulatory powers was also added to the law which provides the SBP with explicit powers in terms of issuing directives and the imposing and recovering of penalties that the SBP already exercises under the Banking Companies Ordinance Act 1962.
The SBP (Amendment) Act 2015 is widely considered to be an important and much needed piece of legislation that could have a major influence on the formulations of the country’s monetary policy as well as enhance SBPs role in a supervisory capacity and strengthen confidence in the banking system for the ordinary depositors. Although this new act appears to have been thrust upon us by the IMF, the changes in the international environment combined with the need to formulate the monetary policy in a much more professional manner made such actions necessary. Whilst a weak, supervisory regime but take at least part of the blame for the global financial crisis, the constantly changing landscape in the banking business have created their own new challenges and, invariably, risks for banking regulators, depositors and the entire financial system. It was therefore essential to give central bankers matching tools in order to strengthen and maintain stability in the financial sector. In terms of the new amendments to the SBP Act, the establishment of the Monetary Policy Committee is a positive step forward as it was the general consensus was that SBPs central board appeared to be influence by the finance secretary who sat on the board as an ex-officio member. The new act enables both the board and the governor to nominate which members will sit on the MPC, and this will include the 3 external members who will be appointed, following the boards recommendations, by the government. As these members will all be professional economists it stands to reason that the quality of the formulations for the monetary policy will improve thus enabling it to be a sound defence for subsequent decisions regarding the monetary policy. According to the latest inflation data, current account balances, the growth rate of the economy and expansion within the private sector will provide the MPC with the materials necessary to make professional judgements. The minutes from both the monetary committee and the SBP central board meeting need to be transparent to the general public. Even though depositors haven’t suffered very much in the past, it’s been deemed necessary to establish a depositors protection fund which will give all depositors assurance that their money will be safe even if the worst case scenario occurs and their bank is declared insolvent. It is thought, however, that there will be a limit on the amount of deposit/s which can enjoy such protection. In line with other countries, this could be provided for those small depositors who have their life savings in the banking system and need both protection from their bank failing and staying under a tax purpose threshold that is determined by the FBR.
Other provisions within the new act are also aimed at giving the SBP more authority when it comes to dealing with, and monitoring, commercial banks with an onus being on those considered to be troubled. However, it also needs mentioning that this increase in authority will bring with it a major increase in responsibility which in turn means that the SBP will now have to answer for all its miscalculations and errors of judgement. Additionally, the SBPs experience would suggest that the authority the governor and the board have bestowed upon it could be well exercised by a professional and competent body which possesses a strong belief in its ability and could withstand the inevitable pressure coming from Islamabad. It is hoped that the current SBP board possesses the qualities needed to rise to the challenge it has been given but its officials should be disbarred from serving on boards of those institutions which are under the regulatory framework of the SBP in order to avoid any possible clashes of interest or be in a situation which could potentially undermine a persons impartiality.