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SBP’s new
proposal to regulate non-bank financial companies
By Mohammad
Arifeen
The securities and exchange commission of Pakistan
(SECP) has strongly opposed State Bank of Pakistan’s proposal to
regulate the 23 non-bank financial companies (NBFCs), (12 leasing and
three housing financing companies and eight investment banks) besides
dozens of bank subsidiaries. This will leave 98 NBFCs mostly modaraba and
leasing companies that will remain under SECP control. This move is part
of $500 million an Asian Development Bank-fund accelerating economic
transformation proposal that SBP should retake from SECP powers to
regulate certain NBFCs.
State Bank’s argument is that these companies are
engaged in receiving deposits from the public and therefore they are
entitled to be regulated by Central Bank. It justify that the transfer of
regulatory power from SECP is based on the ground that now commercial
banks have become cheap funding sources for propping up bank’s leasing
investment, banking asset management, brokerage and insurance
subsidiaries.
The proposal has been vehemently criticised by SECP on
the ground that it would be a “retrogressive step” turning the SBP
into a corporate and security regulator having overlapping and
multiplicity jurisdiction with SECP. According to SECP it will create
problems for these entities and also increase their regulatory cost.
SECP has asked that the SBP proposal must be
thoroughly examined before it is implemented in toto. It contends that SBP
primary function is the formulation and implementation of monetary policy
and overall financial stability system. It stressed that NBFCs required
different regulatory treatment for those required for banks. In the past
the transfer of regulatory powers of NBFC from Central Bank to SECP took
place on the ground that complex regulation required specialised
regulators which SBP do not have. It argues that NBFCs are basically
equipped to deal with different markets. When both are operating in the
same market, they offer different products which lead to increase
competition. Therefore, in this context, NBFCs need to have different
regulatory treatment than those required for banks.
In 2002, SBP itself transferred all NBFCs to SECP on
the advice of Asian Development Bank (ADB). The basic reason for
transferring was that SBP will primarily focus on Banks only and not
NBFCs. Also due to its multifarious functions and different regulatory
functions of NBFCs the State Bank thought it wise enough that SECP play a
vital regulatory role for NBFCs.
A study of 143 countries revealed that in 54
countries, the Central Bank supervises banks and in 50 countries the
Central Bank has no direct supervisory role over bank and is responsible
for formulating monetary policy. After the BCCI collapse, UK government
assigned the function to separate regulator. At present, Bank of England
is performing smoothly the monetary and exchange rate policies.
It would be rather prudent enough if SBP focus its
attention to its basic function of looking toward economic stability of
the country i.e. monetary policy, exchange rate etc. In the present
circumstances both SBP and SECP lack manpower expertise having proper
market knowledge and forecasting abilities to perform efficiently the
regulatory functions of NBFCs. In view of this, if SBP take regulatory
functions of NBFC along with its major function of monetary policy and
exchange rate there is every possibility it will not be performing well
the monetary policy for the economic stability of the country. On the
other hand, if SECP is not performing satisfactorily the regulatory
functions for NBFCs it will not be doing justice to its pre-requisite
functions. This is a critical situation whether SBP retakes the function
of SECP or SECP continues to perform the present function or a ‘special
regulatory authority’ is to be established to perform regulatory
function for Banks and NBFCs. This has to be debated and discussed
thoroughly, keeping in mind the interest of stakeholders i.e. market
representative associations, ICAP etc.
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