WEB DESK: Pressurised by the International Monetary Fund (IMF) through a performance criterion under the EFF arrangement, National Assembly of Pakistan finally passed the “The State Bank of Pakistan (Amendment) Bill, 2015” on 9th November, 2015. This Bill was already passed by the Senate; it would become an Act of the Parliament once it is signed by the President.
According to the Bill, the role of SBP has been sufficiently strengthened by substituting the Federal Government’s approval, wherever required, with the Board’s approval. As per the objects and reasons of the Bill, the existing clauses pertaining to shareholders, executive committee and local boards have been omitted by introducing various amendments to the Act since these are no longer relevant after the promulgation of the Bank (Nationalisation) Act, 1974. In order to advance the role of Islamic banking in the country, it was necessary for the SBP to engage in Shariah-compliant instruments. For this purpose, an amendment has been introduced whereby SBP will be allowed to hold property for use of Shariah-compliant instruments. A Monetary Policy Committee (MPC) consisting of Governor (or a Deputy Governor nominated by the governor in his absence), three senior Executives of the SBP, three members of the Board and three external members who shall be economists and appointed by the government on recommendations of the Board was established to formulate, support and recommend the Monetary Policy Statement and other monetary policy measures. The main objective of this committee was to enable the SBP to perform its essential functions in a professional way in a changing and emerging financial environment. An enabling clause to allow SBP the establishment of depositors’ protection fund has been introduced. A new section on lender of last resort has also been included in the Act to provide legal certainty to the support that is already being provided by the SBP to the troubled banks. Another new section on regulatory powers was added to the law in order to provide explicit powers to the SBP for issuing directives, imposing and recovering penalties which are already being exercised by the SBP under the Banking Companies Ordinance, 1962.
The SBP (Amendment) Act, 2015, in our view, is an important piece of legislation which could influence the quality of monetary policy formulations in the country, enhance the supervisory role of the SBP and strengthen the confidence of ordinary depositors in the banking system. Though the new Act seems to have been thrust by the IMF yet the change in international environment and the formulation of monetary policy in a professional manner called for such an action. While global financial crisis was partly the result of weak supervisory regime, the ever-changing dimensions of banking business have created new challenges and risks for bank depositors, regulators and financial system as a whole. Therefore, it was essential to provide matching tools to the central bankers to maintain financial stability. Coming to the present amendments in the SBP Act, the establishment of Monetary Policy Committee was indeed a positive development as the Fund thought that the Central Board of Directors of SBP was appeared to be unduly influenced by the Secretary, Finance, who was an ex-officio member of the Board. The new Act would enable the Governor and the Board to nominate all the members of MPC of their choice including the three external members who would be appointed by the Federal Government on the recommendations of the Board. Since these members would be professional economists, the quality of the monetary policy formulations at the SBP would improve, enabling it to defend the monetary policy decisions on a sound basis. The latest data on inflation, current account balance, expansion in private sector credit and growth rate in the economy could provide the necessary material to the MPC for making its professional judgement. The minutes of monetary committees as well as the central board of SBP need to be made public – after a time lag. Although, depositors had not generally suffered much in the past, it was necessary to establish depositors’ protection fund in order to give confidence to depositors that their money was safe even if their bank was declared insolvent. However, a limit on deposits for such a protection, like other countries, could be prescribed to save the small depositors holding deposits as their life savings need to be protected from bank failures, under a threshold determined by the FBR for tax purposes. Other provisions of the new Act are meant to give more authority to the SBP to deal and monitor the commercial banks, especially the troubled financial institutions. However, it needs to be mentioned that more authority would automatically entail more responsibility and the SBP would now be answerable to its error of judgement and miscalculation. Also, the experience in the SBP suggests that the authority bestowed on the Governor and Board under the law could really be exercised by a competent and professional body that has strong belief in its conviction and could withstand the pressure from Islamabad. Hopefully, the present SBP Board has all the qualities to prove up to the task enjoined on it by the Parliament. Last but not least, the SBP officials need to be debarred from serving on BoDs of institutions under SBP’s regulatory framework with a view to avoiding the likelihood of clash of interest or a situation that has the potential to undermine the impartiality of a person or persons.