Handouts BNK601

Banking Laws and Practices-BNK 601 VU
Table of Contents
LESSON 1..................................................................................................................1
....................................................................................................8
..................................................................................................19
..................................................................................................57
................................................................................................153
................................................................................................153
..............................................................................................164
NEGOTIABLE INSTRUMENTS........................................................177
NEGOTIABLE INSTRUMENT..........................................................187
PARTIES TO PROMISSORY NOTES, BILLS AND CHEQUES................200
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Banking laws and practices-BNK 601 VU
LESSON 1
COURSE MANAGEMENT
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:
• Financial institutions
• Financial markets & Financial instruments
Evolution of Banking: it would cover in detail the following topics/contents:
• Historical background
• Nationalization of banks
• The (banks nationalization Act, 1974)
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:
• Introduction of the ordinance
• Important statutory definitions
• Forms of business in which banking companies may engage
• Regulations regarding Paid- up capital, Subscribed capital and Authorized
capital
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• Election of new directors
• Cash reserve
• Powers of State bank to control advances by banking company
• Licensing policy of State Bank of Pakistan
• Guidelines by State Bank
• Accounts & balance sheet
• Power of State Bank to remove directors
• Prosecution of directors, chief executive or other officers
• Transaction of banking business illegally by companies, etc.
• Suspension of business
• Winding-up of banking company
• Special provisions for speedy disposal of winding up proceedings
• Banking Mohtasib
• Procedure for making complaints to Banking Mohtasib
• Penalties
• Power of federal government to make rules
• Banking companies rules, 1963
SBP Act, 1956: it would cover in detail the following topics/contents:

• Establishment and incorporation of the banks
• Management
• Business and functions of banks
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:
• Banker and customer relationship
• Debtor and creditor relationship
• Agency relationship
• Bailor- Bailee relationship
• Mortgagor-Mortgagee Relationship
• Pledger-pledgee relationship
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:
• Opening of account
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• Classified account
• Partnership account
• Account of companies
• Joint accounts
• Trust account
• Accounts of executors/ administrator
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
• Presentation of instruments
• Payment and interest
• Discharge from liability
Module 7
Principles and Forms of Lending: it would cover in detail the following
topics/contents:
• Principles of lending
• Forms of lending
• Over drafts, loans
Securities for Advances: it would cover the following topics/contents:

• Pledge
• Hypothecation
• 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
• Negotiation of letter of credit
• Reimbursement of letter of credit
• Rules regarding Non-funded facilities
• Uniform customs and practices for documentary credit (UCP 600)
• Uniform Rules for Contract Guarantee URCG-325
• Uniform Rules for Demand Guarantee URDG-458
• Module 9
Designing of legal documents: it would cover in detail the following

topics/contents:
• Termination of the agreement, Mortgage deed

• Redemption deed
• Redemption of mortgage
• Letter of hypothecation
Module 10
Designing of legal documents: it would cover in detail the following
topics/contents:
• Hire- purchase agreement
• Termination of the agreement
• Mortgage deed
• Redemption deed
• Redemption of mortgage
• Letter of hypothecation
Prudential regulations of SBP: it would cover in detail the following

topics/contents:
• Regulations for consumer financing
- 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:
• Defining risk
• Risk management
• Risk management framework
• Managing credit risk
• Components of credit risk management
• Managing problem credits
• Managing market risk
• Elements of market risk management
• Risk management committee
• Managing liquidity risk
• Early warning indicators of liquidity risk
• Liquidity risk strategy
• Managing operational risks
• Operational risk management principles
• Risk reporting
Module 11
Financial institutions ( Recovery of Finances) Ordinance, 2001:
It would cover in detail the following topics/contents:
• Introduction
• Definitions
• Establishment of banking court
• Power of banking court
• Procedure of banking court
• Leave to defend
• Interim decree
• Power to set aside decree
• Disposal of suit
• Sale of mortgage property
• Attachment before judgment
• Banking documents
• Execution of decree, appeal
Module 12
It would cover the following topics:
• Application of limitation Act, 1908
• Ancillary statutes
• Limitation Act, 1908
• Stamp Act, 1899
• Arbitration Act, 1949
• Contract Act, 1872
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.

LESSON 2
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
• Historical Jurisprudence
• Ethical Jurisprudence
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.
Sources of
Law
Material
Formal
Sources
Sources
Legal Historical
Sources Sources
Legislati Precede Custom Agreeme

on nt s nt
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.

Process of
Legislation
When National When National Assembly is

Assembly is in not in Session
Session
Money All Other Bills

Bill Presiden
t
National
Assembl Senat Ordinanc
y e e
Preside
nt Sent for
Asse reconsideration to
nt Parliament (Joint
Reject
sitting of National
Act/Law Assembly and Senate)

LESSON 3
FINANCIAL SYSTEM & BANKING
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:

Indirect Fin
Financial
Intermediaries
Funds
Those who have saved and lending funds, the Lender Savers are at the left side &
those who must borrow funds to finance their spending, the Borrower-Spenders are
at the right. The arrows show that Funds flow from lender savers to Borrower –
spenders via two routes i.e.; through financial markets (Direct Finance) and
through Financial intermediaries i.e. Banks etc. (Indirect Finance)
Lender-Savers:
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.
 Households.
Types of Financial Markets
 Business Firms.
Financial markets are divided as under:
1. Foreign exchange market.
Financial
2.
3.
Stock market.
 Government.
Bond market. Market
Financial markets are one arena in which savers’ surpluses are transferred to
 Foreigners .
borrowers. Savers can buy stocks and Bonds and Business borrowers can obtain
funds by issuing stocks and Bonds
Financial Institutions: (Global Perspective)

Direct Financ
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 fi-
nancial 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)

LESSON 4
FINANCIAL INSTRUMENTS & BANKING LAWS & PRACTICES
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:
1. It must in writing
2. It must contain an order to pay and addressed to some person
3. The order must be unconditional
4. The order must be signed by the maker
5. The order must direct to pay or demand or at a fixed or determinable future
time.
6. The sum ordered to be rapid must be certain.
7. The payment should be ordered to be paid to a certain person, or to his
order, or to the bearer.
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' ac-
ceptances 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 households, 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.

LESSON 5
EVOLUTION OF BANKING
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.

LESSON 6
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.

LESSON 7
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
94 of this Ordinance shall, with such modifications as the State Bank may
determined from time to time in relation to activities which have implications
for the monetary or credit policies of the State Bank, apply to the Investment
Corporation of Pakistan, the National Investment Unit Trust, the Pakistan
Industrial Credit and Investment Corporation, the House Building Finance
Corporation, the National Development Finance Corporation, the Bankers
Equity Limited, the Pak-Libya Holding Company Limited, the Pakistan Kuwait
Investment Company Limited, the Saudi-Pak Industrial and Agricultural
Investment Company Limited, the Small Business Finance Corporation, the
Regional Development Finance Corporation, Investment Finance Companies,
Venture Capital Companies, Housing Finance Companies Corporations or
Institutions which carry on one or more of the businesses enumerated in
section 7 of this Ordinance, save and except for leasing companies and
modaraba companies, as the Federal Government may from time to time, by
notification in the Official Gazette, specify in this behalf.
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”
“banking”
“banking company”
“branch” or “branch office”
“creditor”
“company”
“debtor”
“demand liabilities”
“family members”
“gold”
“loans, advances and credit”
“managing director”
“prescribed”
“private company”
“registrar”
“scheduled bank”
“secured loans or advance”
“securities”
“State Bank”
“substantial interest”
- Ordinance to override memorandum, articles, etc
PART II
Business of Banking Companies
Following topics are covered under this Part
• 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.
Following topics are covered under this part
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
Suspension of Business and winding up of Banking Companies
following topics are covered under this part
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
Special Provisions for Speedy Disposal of Winding up Proceedings
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
Banking Mohtasib
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
Miscellaneous
following topics are covered under 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.

LESSON 8
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.
• Contents of Memorandum—these are discussed below:

• Memorandum of association is required to be subscribed by at least three
persons in case of public company and at least by one person in case of
private company.
• Name Province in which the registered office of the company is to be
located.
• Objects
• Liability of the members—limited or unlimited
• Authorized capital
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,-

the memorandum shall state--
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:
• Regulations concerning the internal management of the company which is
outlined here under:
• Definition of important terms
• Issue of shares and allotment of shares
• Share capital, rights of share holders.
• Transfer of shares
• Alteration of share capital
• Dividend
• Directors—appointment, election, removal, powers, duties
• Meetings, voting, powers
• Borrowing powers
• Accounts and Audit
• Winding up
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:
Provided that, where such alteration affects the substantive rights or liabilities of
members or of a class of members, it shall be carried out only if a majority of at
least three-fourth of the members or of the class of members affected by such
alteration, as the case may be, personally or through proxy vote for such
alteration.
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--
(a) where the order of refusal has been passed by an additional registrar, a
joint registrar, a deputy registrar or an assistant registrar, to the registrar; and
(b) where the order of refusal has been passed, or upheld in appeal, by the
registrar, to the Authority.
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.

LESSON 9
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
Ingredients of a bill of exchange

Some of the ingredients of bill of exchange are outlined below:
1. It must in writing
2. It must contain an order to pay and addressed to some person
3. The order must be unconditional
4. The order must be signed by the maker
5. The order must direct to pay on demand or at a fixed or determinable future
time.
6. The sum ordered to be paid must be certain.
7. The payment should be ordered to be paid to a certain person, or to his
order, or to the bearer.
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
default of payment of one or more installments or interest or return in any other
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.
(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

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
The legal relation between a merchant in one country and a commission agent in
other is that of principal and agent, and not seller and buyer, though this is
consistent with the agent and principal, when the agent consigns the goods to the
principal, being in a relation like that of seller and buyer for some purposes. A
merchant, therefore, in this country who orders goods through a firm of
commission agents in Europe cannot hold the firm liable as if they were vendors
for failure to deliver the goods. And the result is the same if the goods are ordered
through a branch in this country of a firm of commission agents in another
country. For the same reason, where a commission agent buys goods for a
merchant at a price smaller than the limit specified in the indent, he cannot charge
any price higher than that actually paid by him, except in the case of a custom to
the contrary. An agent may have, and often has, in fact, a large discretion, but he
is bound in law to follow the principal's instructions provided they do not involve
anything lawful. To this extent an agent may be considered it’s a superior kind of
servant; and a servant who is entrusted with any dealing with third persons on his
master's behalf is to that extent an agent. But a servant may be wholly without
authority to do anything as an agent, and agency, in the case of partners, even an
extensive agency, may exist without any contract of hiring and service. ]
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.

LESSON 10
Forms of business carried out by the banking company under section 7

of the Ordinance:
In previous Lesson we have discussed some forms of business that can be carried
out by a banking company, there are other forms of business that can be carried
out by a banking company under the provisions of this ordinance, and the same
are enumerated and discussed hereunder:
o undertaking the administration of estates as executor, trustee or otherwise;

[The concept of executor, trustee and administrator is explained below. An
executor is a person who is nominated by the testator (writer of the Will). The
authority in executor is vested by virtue of the Will. Executor has just to carry out
the directions contained in the will. However in certain cases, the person
appointed as executor may not have the legal competency to execute the Will, for
instance the person appointed as executor may be a minor and minor is the
person who does not have the capacity to enter into any contract.
As such in such situations, the court of law shall appoint a person as administrator
to look after to execute the directions contained in the Will.
The person who accepts the confidence reposed under a trust is called the trustee.
The trust has been defined in section 3 of the Trust Act 1882 as under:
A "trust" is an obligation annexed to the ownership of property, and arising out of

a confidence reposed in and accepted by the owner, or declared and accepted by
him, for the benefit of another, or of another and the owner the person who
reposes or declares the confidence is called the "author of the trust": the person
who accepts the confidence is called the "trustee": the person for whose benefit
the confidence is accepted is called the "beneficiary ": the subject matter of the
trust is called "trust property" or "trust money": the "beneficial interest" or
"interest" of the beneficiary is his right against the trustee as owner of the trust
property; and the instrument, if any, by which the trust is declared is called the
"instrument of trust": a breach of any duty imposed on a trustee, as such, by
any law for the time being in force, is called a "breach of trust": and in this Act,
unless there be something repugnant in the subject or context, "registered" means
registered under the law for the registration of documents for the time being in
force: a person is said to have "notice" of a fact either when he actually knows that
fact, or when, but for willful abstention from inquiry or gross negligence, he would
have known it, or when information of the fact is given to or obtained by his agent,
under the circumstances mentioned in the Contract Act, 1872, section 229; and all
expressions used herein and defined in the Contract Act, 1872, shall be deemed to
have the meanings respectively attributed to them by that Act.
Purpose of the trust must always been lawful, this concept is contained in section
4 of the Act which is reproduced for reference:
A trust may be created for any lawful purpose. The purpose of a trust is lawful
unless it is
a. Forbidden by law, or is of such a nature that, if permitted, it would defeat the
provisions of any law, or
b. Is fraudulent, or
c. Involves or implies injury to the person or property of another, or
d. The Court regards it as immoral or opposed to public policy.
Every trust of which the purpose is unlawful is void. And where a trust is created
for two purposes, of which one is lawful and the other unlawful and the two
purposes cannot be separated, the whole trust is void.
Explanation In this section the expression "law" includes, where the trust
property is immoveable and situate in a foreign country, the law of such country.
Form of Business is continued below:

o Establishing and supporting or aiding in the establishment and support of
associations, institutions, funds, trusts and conveniences calculated to benefit
employees or ex-employees of the company or the dependents or connections
of such persons; granting pensions and allowances and making payments
towards insurance; subscribing to or guaranteeing moneys for charitable or
benevolent objects or for any exhibition or for any public, general or useful
object;
o The acquisition, construction, maintenance and alteration of any building or

works necessary or convenient for the purpose of the company;
o selling, improving, managing, developing, exchanging, leasing, mortgaging,
disposing of or turning into account or otherwise dealing with all or any part of
the property and rights of the company;
Mortgage is a very important concept particularly as collateral in lending
operations. The concept and scope of mortgage is explained in the following
paragraphs.
Mortgage has been defined in section 58 of the Transfer of Property Act; the said
definition is given below:
(a) A mortgage is the transfer of an interest in specific immoveable property for

the purpose of securing the payment of money advanced or to be advanced by
way of loan, an existing or future debt, or the performance of an engagement
which may give rise to a pecuniary liability.
Mortgagor:
The transferor is called mortgagor
Mortgagee:
The transferee is called mortgagee
Mortgage Money:
The principal money and interest of which payment is secured for the time being
are called the mortgage-money
Mortgage Deed:
The instrument (if any) by which the transfer is effected is called a mortgage
deed.
Scope of Mortgage:

According to the provisions of sec 58 of the Act, Mortgages can be made as
outlined below:
Of specific immovable property
Purpose--securing the payment of:
Money advanced or to be advanced by way of loan
For an existing debt or future debt or
For performance of an engagement which may give rise to pecuniary liability

Rights of Mortgagee
• Mortgagee has the right to sell the mortgaged property in case of default by
mortgagor.
• Right of fore-closure is also vested in the mortgagee.
• Mortgagee also has the right to file suit before a court of law.
Types of Mortgages:
In practice there are two types of Mortgages which are given below:
Registered Mortgage
Equitable Mortgage
Registered or Legal Mortgage

This is created through a formal document called mortgage deed.
Mortgage deed is registered with the Registrar of titles.
It is comparatively expensive as it involves stamp duty and registration fee.
Equitable Mortgage
This is created by deposit of title deed by the mortgagor.

• Memorandum regarding deposit of title deed is also signed by respective
parties.
• Clear title of the mortgagor must be ascertained by the mortgagee.]
Form of business--- continued

Acquiring and undertaking the whole or any part of the business of any person or
company, when such business is of a nature enumerated or described in this sub-
section;
o Doing all such other things as are incidental or conducive to the promotion
or advancement of the business of the company;
o Any other form of business which the federal government may, by
notification in the official gazette, specify as a form of business in which it is
lawful for a banking company to engage.
o No banking company shall engage in any form of business other than those
referred to in sub-section (1).
Use of the word “Bank”: Sec 8

Every company carrying on the business of banking in Pakistan shall use the word
“bank”, or any of its derivatives as part of its name and no company other than a
banking company shall use in its name any word calculated to indicate that it is a
banking company:
Provided that nothing in this section shall apply to-

subsidiary of a banking company formed for one or more of the purpose
mentioned in sub-section (1) of Section 23 whose name indicates that it is a
subsidiary of that banking company; and
Provided that nothing in this section shall apply to- any association of banks
formed for the protection of their mutual interests and registered under section 42
of the Companies Ordinance 1984(XLVII of 1984):

Provided further that the State Bank may, subject to such conditions, if any, as it
may deem fit, by notification in the Official Gazette, authorize a company, not
being a banking company to use in its name the word ‘bank’ or any of its
derivatives
Prohibition of trading: Sec 9

Except as authorized under section 7, no banking
company shall directly or indirectly deal in the buying or selling or bartering of
goods or engage in any trade or buy, sell or barter goods for others, otherwise
than in connection with bills of exchange received for collection or negotiation.
Explanation._ For the purpose of this section, “goods” means every kind of
movable property, other than actionable claims, stocks, shares, money, bullion
and species, and all instruments referred to in clause (a) of sub-section (1) of
Section 7.
Disposal of non-banking assets: Sec 10

Notwithstanding anything contained in section 7, no banking company shall hold
(except as may be permitted by the State Bank from time to time or as is required)
for any period exceeding seven years from the acquisition thereof or from the
commencement of this Ordinance, whichever is later or any extension of such
period as in this section provided, and such property shall be disposed of within
such period or extended period, as the case may be:
Provided that the banking company may, within the period of seven years as
aforesaid, deal or trade in any such property for the purpose of facilitating the
disposal thereof:
Provided further that the State Bank may in any particular case extend the
aforesaid period of seven years by such period not exceeding five years where it is
satisfied that such extension would be in the interests of the depositors of the
banking company.
Explanation.—For the purpose of this section property, a substantial portion of
which is in use by banking company for its own genuine requirements shall be
deemed to be property for its own use.
Prohibition of employment of managing agents and restrictions on

certain forms of employment: (Sec 11)
(1) No banking company—

(a) Shall employ or be managed by a managing agent; or
(b) Shall employ or continue the employment of any person—
Who is, or at any time has been, adjudicated insolvent or has suspended payment,
or has compounded with his creditors, or who is, or has been, convicted by a
criminal court of an offence involving moral turpitude; and shall employ or
continue the employment of any person— whose remuneration or part of whose
remuneration takes the form of commission or a share in the profits of the
company:
Provided that nothing contained in sub-clause (ii) shall apply to the payment by a
banking company of any bonus in pursuance of a settlement or award arrived at
or made under any law relating to industrial disputes or in accordance with any
scheme framed by such banking company or in accordance with the usual practice
prevailing in banking business; or any commission to any broker (including
guarantee broker), cashier-contractor, clearing and forwarding agent, auctioneer
or any other person, employed by the banking company under a contract

otherwise than as a regular member of the staff of the company; or shall be
managed by any person—
(i) Who is a director of any other company not being a subsidiary company of
the banking company or a company registered under section 26 of the
Companies Act, 1913 (VII of 1913), except with the previous approval of the
State
Bank; or shall be managed by any person— who is engaged in any other business
or vocation; or who has a contract with the company for its management for a
period exceeding five years at any one time:
Provided that any contract with the company for its management may be renewed
or extended for a further period not exceeding five years at a time if and so often
as the directors so decide:
Provided further that nothing in this clause shall apply to a director, other than the
managing director, of a banking company by reason only of his being such
director.
(2)Where a person holding the office of a chairman or director or manager or chief

executive officer (by whatever name called) of a banking company is, or has been
found by any tribunal or other authority (other than a criminal court) to have
contravened the provision of any law and the State Bank is satisfied that the
contravention is of such a nature that the association of such person with the
banking company is or will be detrimental to the interest of the banking company
or its depositors or otherwise undesirable, the State Bank may make an order that
person shall cease to hold the office with effect from such date as may be
specified therein and thereupon, that office shall, with effect from the said date,
become vacant.
(3)Any order made under sub-section (2) in respect of any person may also provide
that he shall not, without the pervious permission of the State Bank in writing, in
any way, directly or indirectly, be concerned with, or take part in the management
of, the banking company or any other banking company for such period not
exceeding five years as may be specified in the order.
(4)No order under sub-section (2) shall be made in respect of any person unless
he has been given an opportunity of making a representation to the State Bank
against the proposed order:
Provided that it shall not be necessary to give any such opportunity if, in the
opinion of the State Bank, any delay would be detrimental to the interests of the
banking company or its depositors.
(5)Any decision or order of the State Bank made under this section shall be final
for all purposes.
Restrictions on removal of records and documents: Sec 12

No banking company shall remove from Pakistan to a place outside Pakistan any of
its records and documents relating to its business at is branches, whether they are
functioning or not, without the prior permission in writing of the State Bank.
Explanation.— In this section the term “records” means ledgers, day books, cash
books, accounts books and all other books used in the business of a banking
company and the term “documents” means vouchers, cheques, bills, pay orders,
securities for advances and any other documents supporting entries in the books
of, or claims by or against, a banking company.
From the provisions of section 12 of the ordinance it is mandatory for a banking

company to seek prior permission in writing in case it desires to shift any record
from Pakistan to any place outside Pakistan.

LESSON 11
In this Lesson we shall cover the following aspects:

o Requirement as to minimum paid-up capital and reserve.
o Regulation of paid-up capital subscribed capital and authorized capital and
voting rights of shareholders.
o Election of new directors.
o Appointment of director by State Bank.
o Restriction on term of office of directors.
Requirement as to minimum paid-up capital and reserves: these

requirements are contained in section 13 of the Ordinance which is reproduced
hereunder for reference.
Subject to sub-section (2) no banking company incorporated in Pakistan shall:—

a. Commence business unless it has such minimum paid-up capital as may be
determined by the State Bank; or
b. carry on business unless the aggregate value of its paid-up capital and
unencumbered general reserves is of such minimum value within such period
as may be generally determined by the State Bank from time to time, subject
to a maximum of ten per cent of the total demand and time liabilities of the
banking company at any time:
(2)No banking company incorporated outside Pakistan shall be deemed to have

complied with the provisions of sub-section (1) unless it deposits, and keeps
deposits, with the State Bank an amount by transfer of funds from outside Pakistan
or in the form of assets acquired out of remittable profits made by it from deposits
in Pakistan which is not less than what is required to be maintained under sub-
section (1), in any one or more of the following forms, namely:—
i. Interest-free deposit in cash in Pakistan rupees

ii. Interest-free deposit in a freely convertible approved foreign exchange within
the meaning of the State Bank of Pakistan Act, 1956 (XXXIII of 1956), specified
by the State Bank in respect of such banking company; and
iii. Deposit of un-encumbered approved securities.
Explanation.— In this section and in sections 22 and 29, ‘liabilities’ shall not
include the paid-up capital or the reserves or any credit balance in the profit and
loss account of the banking company or the amount of any loan taken from the
State Bank or the amount received as loan in Pakistan currency by the banking
company from the Federal Government, whether out of a foreign currency loan
contracted by the Government or otherwise, or the amount of foreign currency
loans obtained by the banking company directly from any foreign agency:
(3)Without prejudice to the provisions of section 83, the Sate Bank may, by order
in writing, require any banking company which has failed to comply with the
provisions of clause (b) of sub-section (1), within the period determined under that
clause to deposit with the State Bank such amount on such terms and conditions
as the State Bank may determine; and every banking company which is so
required shall be bound to comply with the order

Provided that the amount of the deposit so required shall not exceed the amount
by which the aggregate of the time and demand liabilities of the banking company
exceeds the amount of such liabilities computed on the basis of [the aggregate
value of its paid-up capital and unencumbered general reserves] @ determined
under clause (b) of sub-section (1).
Any amount deposited and kept deposited with the State Bank under the proviso
to sub-section (3) by any banking company incorporated outside Pakistan shall, in
the event of the company ceasing for any reason to carry on banking business in
Pakistan, be an asset of the company on which the claims of all the creditors of the
company in Pakistan shall be a first charges.
The State Bank may, if it thinks fit, extend the period referred to in sub-section
(1)or sub-section(3) either generally or in any particular case.
If any dispute arises in computing the aggregate value of the paid-up capital [and
unencumbered general reserves] of any banking company, a determination
thereof by the State Bank shall be final.
For the purposes of this section, (a) expression “value” means the real or
exchangeable value or, if the real or exchangeable value exceeds the nominal
value, the nominal value; and (b) the expression ‘capital and unencumbered
general reserves’ means paid-up capital and such other items as may be notified
by State Bank.
MINIMUM CAPITAL REQUREMENTS FOR BANKS/DFIs: as setout by State

Bank of Pakistan are given below:
Minimum Paid-up Capital Deadline by which to be increased
a) Rs 3 billion By 31-12-2006
b) Rs 4 billion By 31-12-2007
c) Rs 5 billion By 31-12-2008
d) Rs 6 billion By 31-12-2009
Regulation of paid-up capital subscribed capital and authorized capital

and voting rights of share-holders:
These regulations are contained in section 14 of the Ordinance; these are very
important concepts and shall be explained in detail. However provisions or section
14 are reproduced below:
1) No banking company incorporated in Pakistan shall carry on business in

Pakistan unless it satisfies the following conditions, namely:-
i. that the subscribed capital of the company is not less than one half of the
authorized capital and paid-up capital is not less than one half of the
subscribed capital and that if the capital is increased it complies with the
conditions prescribed in this clause within such period not exceeding two years
as the State Bank may allow;
ii. that the capital of the company consists of ordinary shares only;
That, subject to the provisions contained in clause (iv), the voting rights of any
one shareholder are strictly proportionate to the contribution made by him to
the paid-up capital of the company;
iii. That the voting rights of any one shareholder, except those of the Federal
Government or a Provincial Government do not exceed five per cent of the total
voting rights of all the shareholders.
2) Notwithstanding anything contained in any law for the time being in force or in
any contract or instrument no suit or other proceeding shall be maintained against
any person registered as the holder of a share in a banking company on the
ground that the title to the said share vests in a person other than the registered
holder: Provided that nothing contained in this sub-section shall bar a suit or other
Proceeding— (a) by a transferee of the share on the ground that he has obtained
from the registered holder a transfer of the share in accordance with any law
relating to such transfer; or (b) on behalf of a minor or a lunatic on the ground that
the registered holder holds the share on behalf of the minor or lunatic.
3) Every chairman, managing director or chief executive officer by whatever name
called of a banking company shall furnish to the State Bank through that banking
company returns containing full particulars of the extent and value of his holding
of shares, whether directly or indirectly, in the banking company and of any
change in the extent of such holding or any variation in the rights attaching
thereto and such other information relating to those shares as the State Bank may,
by order, require and in such form and at such time as may be specified in the
order.
To understand the above we need to know the concept of share of a

company, different type of shares, and categories of share capital that is
authorized capital, issued capital, unissued capital, subscribed capital
and paid up capital.
Meaning of Share
A share in a company is one of the units into which the total capital of the
company is divided. Thus share means a share in the capital of a company a share
is a proportion of capital which each shareholder is entitled to. A share is not a
sum of money, but an interest measured by a sum of money and made up of
various rights and liabilities of the shareholders. A share involves rights and
liabilities. In simple words, a share indicates the pecuniary interest of the
shareholders and their rights and liabilities. Therefore, in this sense a share may
be defined as an existing bundle of rights and liabilities.
A share is an abstract right to participate in profits and in the capital and assets of
a company. Shares are deemed to be situated at a place at which the rights of
members are kept, and where the shares can be dealt with.
Kinds of Shares Allowed Under Law:

A company limited by shares may have different kinds of shares and classes
therein as provided by its memorandum and articles. The shares which a company
can issue are of following types
1. Ordinary or equity shares
2. Preference shares
3. Deferred shares
Ordinary or Equity shares:

The equity shares are those which are not preferential shares, i.e. these shares do
not enjoy any preferential rights. Thus, for the purpose of dividend and repayment
of capital, the equity shares rank after the preference shares. Generally, their rate
of dividend is not fixed. It may vary from year to year depending upon the profits
of the company, they may get higher dividend if the profits are huge, and may get
nothing if there are no profits. The rate of dividend is determined by the directors
of the company, the sum total of equity shares is the equity share capital.
Preference Shares

The preference shares are those which have some preferential rights over the
other types of shares i.e., which enjoy some priority over the equity shares. A
share to be preference share, must have both the following preferential rights:
1. A preferential right as to the payment of dividend: during the

continuance of the company, the preference shareholders must get some
dividend. The preference dividend may consist of fixed amount to be
distributed among the preference shareholders, or it may be paid at a fixed
rate e.g. 5 % of nominal value of shares.
2. A preferential right as to the repayment of capital: in the event of
winding up of the company, the amount paid on preference shares must be
paid back before anything is paid to the equity shareholders.
The sum-total of the preference shares is the “preference share capital of the
company.
Kinds of Preference Shares:
The preference shares may be of the following classes:
1. Cumulative and non-cumulative preference shares
2. Participating and non-participating preference shares
3. Convertible and non-convertible preference shares
4. Redeemable preference shares.
Deferred Shares
Deferred shares are also called Founders Shares or Management Shares. These
shares are usually issued to the promoters, vendor or their nominees, and are
generally for the purpose of indicating the promoter’s faith in the propositions.
These shares are generally used to remunerate the promoters or founders of the
company or the underwriters of the share capital. These are always few in
numbers. The holders of these shares usually receive no dividends until the
dividends on all other classes of shares are paid in full, or there has been paid in
each year a stated divided on the capital paid up on all the other issued shares.
There is usually no limit placed on the rate of divided that may be payable to
deferred shareholders, but it would be necessary to place some restriction on the
amount of dividend payable to the ordinary shareholders where deferred shares
have been issued. When surplus profits are large these shares become very
valuable. This type of shares may be deferred as to a claim of capital in a winding
up, in addition to or in lieu of its being deferred as to dividends.
Categories of Share Capital

The term share capital used in connection with the capital of a limited company is
used in several senses. So the capital of a company may be categorized as follows:
a. Authorized capital
b. Issued capital
c. Unissued capital
d. Subscribed capital
e. Paid-up capital
Authorized Capital
It is also called nominal capital, or registered capital. Authorized capital is the
maximum amount of share capital which a company sets out in the memorandum
of association and which it has power to issue. It is the amount of capital with
which a company proposes to be registered, the authorized capital depends upon
the business requirements of each company, there is no legal restriction upon the
maximum limit of authorized capital. The amount of authorized capital stated in
the memorandum may be increased by the company.
A company is not obliged to issue whole of its authorized capital at once. It may
issue the whole or any part of authorized capital and keep the balance for future
requirements. When the authorized capital is increased the extent of the increase
is not limited to the requirements of the company at the time, but also covers
probable requirements in the future.
Issued capital: is that part of the authorized capital which is actually offered
(issued) to prospective share holders for subscription. It represents the amount
which is available for subscription. Further issue is made as and when the need
arises. Thus the expression “issued capital” is used for the total number of shares
allotted by the company for the time being.
Unissued capital: the part of the authorized capital which is not issued, at any
given time, is called unissued capital.
Subscribed Capital:
The whole of the issued capital may not be taken up by the prospective
shareholders. Subscribed capital is that part of the issued capital which is actually
subscribed (taken up) by the public
Paid-up Capital
Paid-up capital is that part of the issued capital which has been paid-up by the
shareholders. Paid up capital is always equal to subscribed capital.
Election of new directors: Sec 15
1) The State Bank may, by order, require any banking company to call a general
meeting of the shareholders of the company within such time, not less than two
months from the date of the order, as may be specified therein or within such
further time as the State Bank may allow in this behalf, to elect in accordance
with the voting rights permissible under this Ordinance fresh directors, and the
banking company shall be bound to comply with the order.
2) Every director elected under sub-section (1) shall hold office until the date up
to which his predecessor would have held office, if the election had not been
held.
3) Any election duly held under this section shall not be called in question in any
court.
Appointment of director by the State Bank: Sec 15-A
Notwithstanding anything contained in the Companies Act, 1913 (VII of 1913), or in

the memorandum or articles of association of any banking company, the State
Bank may appoint not more than one person to be a director of a banking
company, whether or not he holds any qualification shares.
Restriction on term of office of directors: Sec 15-B
1) A director of a banking company, not being its chief executive, by whatever

name called, or a director nominated under section 15A, shall not hold office
for more than six consecutive years.
Explanation.—in computing the period of six consecutive years for the purpose
of this sub-section, any break of less than three years in the continuity of office
shall be disregarded.
2) A director of a banking company vacating office in pursuance of sub-section
(1) shall not be eligible for re-election as a director of that banking company
unless a period
of three years has elapsed since the date on which he so vacated his office:
Provided that a director who has to so vacate his office may continue in his office
for a period of not more than six months from the commencement of the Banking
Companies (Amendment) Act, 1972, or until a new director is elected or co-opted
in his place whichever is earlier.
We shall continue with section 15 and rest of the provisions of the

Ordinance in the coming Lessons.

LESSON 12
We shall cover the following aspects/ statutory provisions:
o Vacation of Office.
o Restriction on commission, brokerage discount, etc., on sale of shares.
o Prohibition of charge on un-paid capital.
o Prohibition of floating charge on assets.
o Restrictions as to payment of dividend.
o Prohibition of common directors.
o Reserve Fund.
o Cash Reserve.
o Restriction on the nature of subsidiary companies. Restrictions on loans and
advances.
o Power of State Bank to control advances by banking companies.
Vacation of Office of a Director of Banking Company: Sec 15-C

A director of a banking company shall vacate his office if in relation to the banking
company he has failed to pay any advance or loan or any installment thereof or
interest thereon or any amount due on any guarantee, or to do or perform any act
agreed to or undertaken in writing to be done or performed by him, and such
failure continues for a period of one month after notice in writing has been served
on him by the banking company calling upon him to make the payment or to do or
perform the act.
Restriction on commission, brokerage, discount, etc. on sale of shares:

Sec 16
Notwithstanding anything to the contrary in sections 105 and 105A of the
Companies Act, 1913 , no banking company shall pay out directly or indirectly by
way of commission, brokerage, discount or remuneration in any form in respect of
any shares issued by it, any amount exceeding in the aggregate two and one-half
per cent of the paid-up value of the said shares.
Prohibition of charge on unpaid capital: Sec 17

No banking company shall create any charge upon any unpaid capital of the
company and such charge, if created, shall be invalid.
Prohibition of floating charge on assets: Sec 18

Notwithstanding anything contained in section 7 no banking company shall create
a floating charge on the undertaking or any property of the company or any part
thereof, unless the creation of such floating charge is certified in writing by the
State Bank as not being detrimental to the interest of the depositors of such
company.
Any such charge created without obtaining the certificate of the State Bank shall
be invalid.
Any banking company aggrieved by the refusal of a certificate under subsection
(1) may, within ninety days from the date on which such refusal is communicated
to it, appeal to the Federal Government.
The decision of the Government where an appeal has been preferred to it under
sub-section (3) or of the State Bank where no such appeal has been preferred shall
be final.
No banking company shall pay any dividend on its shares until all its capitalized
expense (including preliminary expenses, organization expenses, share-selling
commission, brokerage, amounts of losses incurred and any other item of
expenditure not represented by tangible assets) have been completely written off.
Charge and floating charge are very important concepts which are
explained in the following paragraphs:
Charge:
According to transfer of property Act, charge has been defined as under:
“where immovable property of one person is by act of parties, or operation of law,
made securities for payment of money how another, and transaction does not
amount to a mortgage, the latter person is said to have a charge on the property;
and all the provisions here in before contained which apply to a simple mortgage
shall, so far as may be, apply to such charge. The concept of mortgage and simple
mortgage (registered mortgage) is explained below:
(Mortgage): A mortgage is the transfer of an interest in specific immoveable

property for the purpose of securing the payment of money advanced or to be
advanced by way of loan, an existing or future debt, or the performance of an
engagement which may give rise to a pecuniary liability.
(Registered or Legal Mortgage): This is created through a formal document
called mortgage deed. Mortgage deed is registered with the Registrar of titles. It is
comparatively expensive as it involves stamp duty and registration fee.
Charge as defined above is a right of payment out of a specified property. The

charge can be created by an agreement between the parties or by operation of
law. It is, worth mentioning that no doubt a property is offered as a security for
fulfillment of an obligation but this transaction cannot be termed as mortgage.
According to Lord Atkinson, the charge is explained in the following words
“ I think there can be no doubt that where in a transaction for value both parties
evince an intention that property, existing or future, shall be made available as
securities for the payment of a debt and that the creditors shall have a present
right to have it made available, there is a charge, even though the present legal
right which is contemplated can only be enforced at some future date; and though
the creditor gets no legal right of property, either absolute or special, or any legal
right to possession, but only gets the right to have the security available by an
order of the court. If on the other hand, the parties do not intend that there should
be a present right to have the security made available, but only that there should
be a right in future, by agreement such as a license to seize goods. There will be
no charge”
Registration of a Charge:
Though no interest in immovable property is transferred under a charge, the
document creating a charge would purport to declare a right to immovable
property; and its registration should be made under Section 17 (1-b) of the
Registration Act. For the enforcement of a charge, reasonable notice must be
serving on the counter party.
Floating Charge
A mortgage, debenture or other security documentation, is likely to create charges
over particular assets as security for borrowings or other indebtedness. There are
essentially two types of charge, floating and fixed. A floating charge is appropriate
to assets and material which is subject to change on a day to day basis, such as
stock. Individual items move into and out of the charge as they are bought and
sold in the ordinary course of events. The floating charge crystallizes if there is a
default or similar event. At that stage the floating charge is converted to a fixed
charge over the assets which it covers at that time. A floating charge is not as
effective as a fixed charge but is more flexible.
For the banking companies, it is advisable that while accepting properties as
collaterals to make arrangements to search the prior charges on the said
properties. A search should be made in the office of the Collector and Sub-
Registrar or the District Registrar to ensure that there exists no prior charge on the
property, because any transfer of interest in an immovable property, is subject to
all previous mortgages and charges which had been registered. The search for
possession should pertain to at least previous 20 years. If the title deeds of the
property are in the name of more than one person, the search should be directed
against the name of each person through whom the title is made.
When the banker is satisfied as to his borrower’s title, he should decide about the
execution of mortgage. In case of a registered mortgage, the deed should be
properly drafted, preferably with the help of a lawyer. The finalized mortgage deed
should be signed by the borrower who now becomes the mortgagor, and should be
witnessed by two independent person; and the deed should be properly stamped
and registered. In case of an equitable mortgage, a proper Memorandum of
Deposit of title deeds should be drafted and signed by the borrower in the
presence of two witnesses. As a matter of precaution the banker should see that
the borrower has insured the property against fire. In addition, the banker should
obtain the last premium receipt and see whether it is paid up to date. Bankers
should register the assignment with the insurance company; and when the policy
is renewed, it may be in the banker’s name.
The banker should see that the title deeds deposited as security are the original
title deeds of the property. If the title deeds relate to the site on which the building
is to be erected, the banker should take the written agreement to mortgage the
property after its construction.
Restrictions as to payment of dividend: sec 19

Notwithstanding anything to the contrary contained in sub-section (1) or in the
Companies Act, 1913 (VII of 1913), a banking company may pay dividends on its
shares without writing off— the depreciation, if any, in the value of its investment
in approved securities in any case where such depreciation has not actually been
capitalized or otherwise accounted for as a loss;
The depreciation, if any, in the value of its investments in shares, debentures or
bonds (others than approved securities) in any case where adequate provision for
such depreciation has been made to the satisfaction of the auditor of the banking
company;
the bad debts, if any, in any case where adequate provision for such debts had
been made to the satisfaction of the auditor of the banking company.
In section 19, it has been provided that dividend can be paid if adequate
provisions on account of depreciation and bad debts have been made by
the banking company to the satisfaction of the auditors. The concept of
dividend is very important and has been explained in the following
paragraph:
The term dividend has not been defined in the Companies Ordinance. It is used in
two different senses viz. while a company is a going concern earning profit and
distributing the same.

The term dividend when used in connection with the winding up of a company
means the division of company’s assets among the contributors (i-e. members at
the time of winding up) and companies’ creditors.
Dividend in the sense of share of profit means a distribution to the members of a
company and represents a return on capital invested by the members as a reward
for the risk of such investment. So a dividend may be defined as ‘ that portion of
the profits of the company that falls to the share of each individual shareholders of
the company, in other words, dividend is the return on the shares that each
shareholder gets from the company out if its profits. Thus it is that portion of the
company’s profits which is distributed among the eligible shareholders of the
company. So to say, a dividend means that portion of accumulated profit of the
company which is divided amongst the members in proportion to the number of
shares held by each.
Rules Regarding Divided:

Both the Board of Directors and the shareholders know that the inventors must be
given some incentive in the form of share of profits earned by the company. Every
company, after the determination of trading results intends to distribute some
portion of profit as dividend. The directors power to recommend and members
power to declare dividend need not expressly be given by the memorandum or
articles of association of the company. The company has an implied power to pay
dividends if there are distributable profits. The manner of paying may, however, by
regulated by inclusion of necessary provisions in the articles of association.
Prohibition of common directors: these are contained in section20 which is

given hereunder:
1. Except with the permission of the
State Bank, no banking company incorporated in Pakistan shall have as a director
any person
who is a director—
i. Of any other banking company; or
ii. Of companies which among themselves are entitled to exercise voting rights
in excess of twenty per cent of the total voting rights of all the shareholders
of the banking company.
(IA) No banking company incorporated in Pakistan shall have as a director any
person who is—
a. A Federal Minister, a Minister of State or a Provincial Minister; or

b. A person in the service of Pakistan who is not appointed or nominated by
Government as a director by virtue of his office.
2. If immediately before the commencement of this Ordinance any person holding
office as a director of a banking company is also a director of companies which
among themselves are entitled to exercise voting rights in excess of twenty per
cent of the total voting rights of all the shareholders of the banking company he
shall, within such period from such commencement as the State Bank may specify
in this behalf—
i. Either resign his office as a director of the banking company; or
ii. Choose such number of companies as among themselves are not entitled to
exercise voting rights in excess of twenty per cent of the total voting rights of
all the shareholder of the banking
companies as companies in which he wishes to continue to hold the office of a
director and resign his office as a director in the other companies.
Reserve Fund: Sec 21

Every banking company incorporated in Pakistan shall create a reserve fund to
which shall be credited—
if the amount in such fund together with the amount in the share premium account
is less than the paid-up capital of the banking company, a sum equivalent to not
less than twenty percent of the balance of profit of each year as disclosed in the
profit and loss account prepared under section 34 and before any dividend is
declared; and
If the amount in such fund together with the amount in the share premium account
is equal to or exceeds the paid-up capital of the banking company, a sum
equivalent to not less than ten per cent of the balance of profit disclosed as
aforesaid and before any dividend is declared
Where a banking company appropriates any sum or sums from the reserve fund
or the share premium account, it shall, within twenty-one days from the date of
such appropriation, report the fact to the State Bank explaining the circumstances
relating to such appropriation:
Provided that the State Bank may, in any particular case, extend the said period of
twenty-one days by such period as it thinks fit or condone any delay in the making
of such report.
Cash Reserve: Sec 22

Every banking company, not being a schedule bank, shall maintain by way of cash
reserve in cash with itself, or in current account opened with the State Bank or its
agent or partly in cash with itself and partly in such account or accounts a sum
equivalent to at least two per cent of its time liabilities in Pakistan and five per
cent of its demand liabilities in Pakistan and shall submit to the State Bank before
the fifteenth day of every month a return showing the amount so held on Thursday
of each week of the preceding month with particulars of its time and demand
liabilities in Pakistan on each such Thursday* or if any such Thursday is a public
holiday under the Negotiable Instruments Act, 1881 (XXVI of 1881), at the close of
business on the preceding working day.
Restriction on the nature of subsidiary companies: Sec 23

A banking company shall not form any subsidiary company except a subsidiary
company formed for one or more of the following purposes, namely:— the
undertaking and executing of trusts,
(aa) the carrying on of banking business strictly in conformity with the Injunctions
of Islam as laid down in the Holy Quran and Sunnah;’’ the undertaking of the
administration of estates as executor, trustee or otherwise,
(bb) the carrying on of business of modaraba under the provisions of the
Modaraba Companies and Modaraba (Floatation and Control) Ordinance 1980 the
providing of safe deposit vaults, with the previous permission in writing of the
State Bank, the carrying on of the business of banking exclusively outside
Pakistan;
(dd) the conduct of any from of business permitted by section 7; or
(e) Such other purposes as are incidental to the business of banking.
Save as provided in sub-section (1), no banking company shall hold shares in any
company whether as pledgee, mortgagee or absolute owner, of an amount
exceeding thirty per cent of the paid-up share capital of that company or thirty per
cent of its own paid-up share capital and reserves, whichever is less:
Provided that any banking company which is on the date of commencement of
this Ordinance holding any shares in contravention of the provisions of this sub-
section shall not be liable to any penalty therefore if it reports the matter without
delay, to the State Bank and if it brings its holding of shares into conformity with
the said provision within such period, not exceeding two years
Restrictions on loans and advances: (Sec 24)

No banking company shall— make any loans or advances against the security of
its own shares; or grant unsecured loans or advances to, or make loans and
advances on the guarantee of .— any of its directors;
(ii) any of the family members of any of its directors; any firm or private company
in which the banking company or any of the persons referred to in sub-clause (i) or
sub-clause (ii) is interested as director, proprietor or partner; or any public limited
company in which the banking company or any of the persons as aforesaid is
substantially interested.
No banking company shall make loans or advances to any of its directors or to
individuals, firms or companies in which it or any of its directors is interested as
partner, director or guarantor, as the case may be, without the approval of the
majority of the directors of that banking company, excluding the director
concerned.
Power of State Bank to control advances by banking companies: Sec
25
Whenever the State Bank is satisfied that it is necessary or expedient in the public
interest so to do, it may determine the policy in relation to advances to be followed
by banking companies generally or by any banking company in particular, and,
when the policy has been so determined, all banking companies or the banking
company concerned, as the case may be, shall be bound to follow the policy as so
determined.
(2)Without prejudice to the generality of the power conferred by sub-section (1),
the State Bank may give directions to banking companies either generally or to
any banking company or group of banking companies in particular.—as to the
credit ceilings to be maintained, credit targets to be achieved for different
purposes, sectors and regions, the purposes for which advances may or may not
be made, the margins to be maintained in respect of advances, the rates of
interest, charges or mark-up to be applied on advances and the maximum or
minimum profit sharing ratios.
We shall continue with the powers vested in State Bank under various
provisions of the Banking Companies Ordinance, 1962.

LESSON 13
We shall cover the following aspects of this Ordinance:
o Power of State Bank to control advances by banking companies.

o Power of State Bank to collect and furnish credit information.
o Preparation of special reports.
o Recovery of certain dues of banking companies as arrears of land revenue.
o Power of Federal Government prohibit acceptance of deposits by banking
companies incorporated outside Pakistan.
o Deposits.
o Licensing of banking companies.
o Prohibition of advertising for deposits and collection.
o Disruptive union activities.
o Restrictions on opening of new and transfer of existing place of business.
o Maintenance of liquid assets.
o Assets in Pakistan.
o Unclaimed deposits and articles of value.
Power of State Bank to control advances by banking companies: Sec 25

1. Whenever the State Bank is satisfied that it is necessary or expedient in the
public interest so to do, it may determine the policy in relation to advances to
be followed by banking companies generally or by any banking company in
particular, and, when the policy has been so determined, all banking companies
or the banking company concerned, as the case may be, shall be bound to
follow the policy as so determined.
2. Without prejudice to the generality of the power conferred by sub-section (1),

the State Bank may give directions to banking companies either generally or to
any banking company or group of banking companies in particular.— as to the
credit ceilings to be maintained, credit targets to be achieved for different
purposes, sectors and regions, the purposes for which advances may or may
not be made, the margins to be maintained in respect of advances, the rates of
interest, charges or mark-up to be applied on advances and the maximum or
minimum profit sharing ratios; and prohibiting the giving of loans, advances
and credit to any borrower or group of borrowers on the basis of interest, either
for a specific purpose or for any purpose whatsoever; and each banking
company shall be bound to comply with any direction so given.
3. If any default is made by a banking company in complying with the policy

determined under sub-section (1) or direction given under sub section (2),
every director and other officer of the banking company and every other
person who is knowingly a party to such default shall, by order of the State
Bank, be liable to a penalty of an amount which may extend to twenty
thousand rupees and, where the default is a continuing one, of a further
amount which may extend to one thousand rupees for every day after the first
during which the default continues.
4. Without prejudice to the provisions of sub-section (3), the State Bank may, for
the purposes of securing implementation of any special credit schemes or
monetary policy or observance of credit ceilings by a banking company, by
order in writing require banking companies generally, or any banking company
in particular, to make special deposits with it for such amount and on such
terms and conditions as may be laid down by the State Bank in this behalf.
5. The amount deposited with the State Bank under sub-section (4) or any part
thereof may, at the discretion of the State Bank, be released by it to the
banking company which deposited it as and when the State Bank deems fit
either unconditionally or on such terms and subject to such conditions as the
State Bank may, by order in writing, determine from time to time.
6. Any penalty imposed under sub-section (3) shall be payable on demand made
by the State Bank and, in the event of refusal or failure by the director, officer
or other person concerned to pay on such demand, shall be recoverable as
arrear of land revenue.
Power of the State Bank to collect and furnish credit information: Sec
25-A
1. Every banking company shall furnish to the State Bank credit information in
such manner as the State Bank may specify, and the State Bank may, either of
its own motion or at the request of any banking company, make such
information available to any banking company on payment, of such fee as the
State Bank may fix from time to time:
Provided that, while making such information available to a banking company, the
State Bank shall not disclose the names of the banking companies which supplied
such information to the State Bank:
Provided further that, a banking company which proposes to enter into any
financial arrangement which is in excess of the limit laid down in this behalf by the
State Bank from time to time shall, before entering into such financial
arrangement, obtain credit information on the borrower from the State Bank.
2. Any credit information furnished by the State Bank to a banking company under
sub-section (1) shall be treated as confidential and shall not, except for the
purposes of this section or with the prior permission of the State Bank, be
published or otherwise disclosed. No court, tribunal or other authority, including
an officer of Government shall require the State Bank or any banking company
to disclose any information furnished to, or supplied by, the State Bank under
this section.
Explanation.—For the purpose of this section,

i. “Borrower” means any person to whom any credit limit has been sanctioned by
any banking company, whether availed of or not, and includes—in the case of a
company or corporation, its subsidiaries;
ii. In the case of a Hindu undivided family, any member thereof or any firm in
which such member is a partner;
iii. In the case of a firm, any partner thereof or any other firm in which such
partner is a partner; and
iv. In the case of an individual, any firm in which such individual is a partner; and
“Credit information” means any information relating to—
i. The amounts and the nature of loans or advances or other credit facilities,
including bills purchased or discounted, letters of credit and guarantees,
indemnities and other engagements extended by a banking company to any
borrower or class of borrowers;
ii. The nature of security taken from any borrower for credit facilities granted to
him;
iii. The guarantees, indemnities or other engagements furnished to a banking
company by any of its customers; and
iv. Operations or accounts in respect of loans, advances and other credit facilities
referred to in this clause.
The State Bank shall prepare, and submit to the Federal Government, a special
report every year on cases of write off of loans, mark-up and other dues, or
financial relief through rescheduling and restructuring of loans and subsidized
loans provided by the banking companies, in which established banking practices
or authorized procedures have been departed from with a view to causing wrongful
loss to the bank or conferring wrongful loss to the bank or conferred wrongful gain
on any constituent. If the matters raised in the report relate to public interest, the
Federal Government may submit the report, or such part of it as relates to public
interest, to Parliament or to the Standing Committee of a House of Parliament
dealing with Finance
Recovery of certain dues of banking companies as arrears of land

revenue: Sec 25 B
Loans and advances made by a banking company for agricultural and other
purposes “and any other amounts decreed by any court in favor of a banking
company or a financial institution specified in “section 3A” shall be recoverable as
an arrear of land revenue as if the banking company were a local authority for the
purposes of Section 5 of the
Revenue Recovery Act, 1980

Provided that no sum shall be so recoverable unless the banking company has, by
notice in writing, informed the debtor, not less than fifteen days before proceeding
to have it so recovered, that he may repay by such installment as may be fixed in
the notice and that action to have the debt recovered as an arrear of land revenue
will be taken if he fails to pay any installment on or before the due date
Power of State Bank to prohibit acceptance of deposits by banking

companies incorporated outside Pakistan: Sec 26
The State Bank may, by notification in the Official Gazette, order that any banking
company or any class of banking companies incorporated outside Pakistan shall
from a date to be specified in the notification: discontinue to accept any deposits
or accept deposits only upon such terms and under such conditions as may be
specified in the notification:
Provided that no such notification shall be made earlier than three years after the
commencement of this Ordinance and the date specified in the notification shall
not be earlier than one year from the date of the notification.
Licensing of banking companies: Sec 27

No individual or association or body of individuals, not being a company, shall
carry on banking business in Pakistan and, save as hereinafter provided, no
company shall carry on banking business in Pakistan unless it holds a license
issued in that behalf by the State Bank; and any such license may be issued
subject to such conditions as the State Bank may think fit to impose.

Every banking company in existence on the commencement of this Ordinance,
before the expiry of six months from such commencement, and every other
company before commencing banking business in Pakistan, shall apply in writing
to the State Bank for a license under this section:
Provided that nothing in sub-section (1) shall be deemed to prohibit a banking
company in existence on the commencement of this Ordinance from carrying on
banking business until it is granted a license in pursuance of this section or is by
notice in writing informed by the State Bank that a license cannot be granted to it:
Provided further that the State Bank shall not give a notice as aforesaid to a
banking company in existence on the commencement of this Ordinance before the
expiry of the period of two years in the case of banking companies incorporated in
Pakistan and of six months in the case of banking companies incorporated outside
Pakistan.
Before granting any license under this section, the State Bank may require to be
satisfied by an inspection of the books of the company or otherwise that all or any
of the following conditions are fulfilled, namely:- that the company is or will be in a
position to pay its present or future depositors in full as their claims accrue; that
the affairs of the company are not being or are not likely to be conducted in a
manner detrimental to the interests of its present or future depositors; that in the
case of a company incorporated outside Pakistan, the Government or law of the
country in which it is incorporated provides the same facilities to banking
companies registered in Pakistan as the Government or law of Pakistan grants to
banking companies incorporated outside Pakistan and that the company complies
with all the provisions of this Ordinance applicable to banking companies
incorporated outside Pakistan.
The State Bank may cancel a license granted to a banking company under this
section,—
i. If the company ceases to carry on banking business in Pakistan; or
ii. If the company at any time fails to comply with any of the conditions imposed
upon it under sub-section (1); or
iii. If at any time, any of the conditions referred to in sub-section (3) ceases to be
fulfilled:
Provided that before canceling a license under clause (ii) or clause (iii) of this sub-
section on the ground that the banking company has failed to comply with or has
failed or ceased to fulfill any of the conditions referred to therein, the State Bank,
unless it is of opinion that the delay will be prejudicial to the interest of the
company’s depositors or the public, shall grant to the company on such terms.
Any banking company aggrieved by the decision of the State Bank canceling a
license under this section may, within thirty days from the date on which such
decision is communicated to it apply for review to the Central Board of the State
Bank.
The decision of the State Bank subject to the result of review under sub-section
(5), if any, shall be final.
Prohibition of advertising for deposits and collection: Sec 27-A

Notwithstanding anything contained in any other law for the time being in force,
no company, firm or person, not being a banking company or a corporation or
authority established by the Federal Government or a company duly authorized in
this behalf by the Controller of Capital Issues or the Corporate law Authority or the
Registrar
Co-operative Societies shall solicit or invite deposits of money from the public
through advertisements in the public media or by postal circulars, handbills,
displays in public places or by any other means, or collect or receive any deposits
of money in pursuance thereof.
Explanation.—For the purposes of this section, “deposits of money” shall be

deemed to include money called, invited or collected for the purpose, or declared
object, of investment or borrowing in any business carried on, or proposed to be
carried on, by the company, firm or person by whom, or on whose behalf, such
money is called, invited, collected or received irrespective or the nature of the
relationship, arrangement or terms offered or provided by such company, firm or
person to the person making the investment, deposits of money or payment or of
the basis or understanding or which the money is so called, invited, collected or
received.
Restrictions on opening of new, and transfer of existing place of

business: Sec 28
No banking company shall open a new place of business in any part of Pakistan or
change, otherwise than within the same city, town or village the location of an
existing place of business situated in any part of Pakistan and
No banking company incorporated in Pakistan shall open a new place of business
outside Pakistan or change, otherwise than within the same city, town or village in
any country or area outside Pakistan, the location of an existing place of business
situated in that country area without first obtaining the prior permission in writing
of the State Bank
Nothing in this section shall apply to the opening for a period not exceeding one
month of a temporary place of business within a city, town or village or the
environs thereof within which the banking company already has a place of
business, for the purpose of affording banking facilities to the public on the
occasion of an exhibition, a conference or a mela or any other like occasion
Provided intimation of such opening is given to the State Bank within one week of
the date of opening.
The State Bank may, before giving the permission to any banking company,
require to be satisfied by an inspection under section 40 or otherwise regarding
such aspects of the company’s affairs as the State Bank may deem necessary.
Maintenance of liquid asset: Sec 29

Every banking company “and every financial institution specified in section 3A ,
shall maintain in Pakistan in cash, gold or unencumbered approved securities
valued at a price not exceeding “the lower of the cost or” the current market price
an amount which shall not at the close of business on any day be less than “such
percentage” of the total of its time and demand liabilities in Pakistan, as may
be notified by the State Bank from time to time.
Provided that the State Bank may separately specify for banking companies or
financial institutions the applicable percentage either in general or in relation to
any class of banking companies or any class of financial institutions or to any bank
or financial institution in particular.
Explanation:
For the purpose of this section, “unencumbered approved securities” of a banking
company “or financial institution” shall include its approved securities lodged with
another institution for an advance or any other credit arrangement to the extent to
which such securities have not been drawn against or availed of ‘and the liabilities
shall not include the paid up capital or the reserves or any credit balance in the
profit and loss account of the Banking company or, as the case may be, the
financial institution or any such liabilities as may be notified by the State Bank for
the purposes of this in computing the amount provided for in sub-section (1), any
deposit required under the proviso to sub-section (3) of section 13 to be made with
the State Bank by a banking company incorporated outside Pakistan and any
balances maintained in Pakistan by a banking company in current account with the
State Bank or its agent or both including in the case of a scheduled bank the
balance required to be so maintained under section 36 of SBP Act, 1956
Every banking company shall, before the close of the month succeeding the month
to which the return relates, furnish to the State Bank a monthly return in the
prescribed form and manner showing particulars of the company’s assets
maintained in accordance with this section
Assets in Pakistan: Sec 30

At the close of business on any day the assets in Pakistan of every banking
company shall not be less in value than an amount representing such percentage
of its time and demand liabilities in Pakistan as may be prescribed by the State
Bank from time to time provided that the percentage so prescribed shall not
exceed eighty five per cent.
At the close of business on any day the assets in Pakistan of every banking
company shall not be less in value than an amount representing such percentage
of its time and demand liabilities in Pakistan as may be prescribed by the State
Bank from time to time provided that the percentage so prescribed shall not
exceed eighty five per cent.
Every banking company shall, before the close of the month succeeding that to
which the return relates, furnish to the State Bank, in the prescribed form and
manner a monthly return showing particulars of the company’s assets maintained
in accordance with this section and its time and demand liabilities in Pakistan at
the close of business in every Thursday
“assets in Pakistan” shall be deemed to include export bills drawn in, and import
bills drawn on and payable in Pakistan and expressed in such currencies as the
SBP may from time to time approve in this behalf and also such securities as the
SBP may approve in this behalf notwithstanding that all or any of the said bills or
securities are held outside Pakistan, but shall exclude such assets as in the opinion
of the SBP cannot properly be regarded as assets;
(b) “Liabilities in Pakistan” shall not include the paid-up capital or the reserves or
any credit balance in the profit and loss account of the banking company.
“Liabilities in Pakistan” shall not include the paid-up capital or the reserves or any
credit balance in the profit and loss account of the banking company.
Unclaimed deposits and articles of value: Sec 31

(1)Where—
(a) a debt payable in Pakistan currency is owing by a banking company by reason
of a deposit, not being a deposit in the name of a minor or a Government or a
court of law, at a branch of the banking company in Pakistan in respect of which
no transaction has taken place and no statement of account has been requested
or acknowledged by the creditor during a period of ten years reckoned—(i) in the
case of a deposit made for a fixed period, from the day on which the fixed period
terminated, and (ii) in the case of any other deposit, from the day on which the
last transaction took place or a statement of account was last requested or
acknowledged by the creditor, whichever is later; or (b) a dividend, bonus, profit or
other sum of money whatsoever which has become due on a deposit and
remained unpaid or unacknowledged by the creditor for period of ten years
reckoned from the date on which the dividend, bonus, profit or other sum of
money, as the case may be, became due and payable; or (c) a cheques, draft or
bill of exchange including an instrument drawn by one branch of the banking
company upon another such branch payable in Pakistan currency has been issued,
certified or accepted by a banking company at a branch of the banking company
in Pakistan and no payment has been made in respect thereof for a period of ten
years from the date of issue, certification or acceptance; or (d) a security share,
goods or any valuable article, hereinafter collectively and individually called
article, lying in safe custody with a banking company has not been inspected or
acknowledged by the person who deposited the article with the banking company
for a period of ten years from the day on which it was last inspected or
acknowledged by such person;
the banking company shall give forthwith a three months’ notice in writing by
registered post acknowledgement due to the creditor or the beneficiary of the
cheque, draft or bill of exchange or the person in whose name the article stands in
the books of the banking company on his address last made known by him to the
banking company, and if on the expiry of the three months’ period no
acknowledgement or reply is received from the addressee, the banking company
shall pay or deliver, as the case may be, to the State Bank an amount equal to the
amount, owing by the banking company in respect of the debt or to the amount
that would be owing if the instrument had been presented for payment, including
interest, if any, or the article, in accordance with the terms of the debt or
instrument or of the arrangement under which the article is lying in the safe
custody of the banking company, an payment or delivery accordingly shall
discharge the banking company from all liabilities in respect of the debt or
instrument or to the amount that would be owing if the instrument had been
presented for payment, including interest, if any or the article, in accordance with
the terms of the debt or instrument or of the banking company, and payment or
delivery accordingly shall discharge the banking company from all liabilities in
respect of the debt or instrument or article, as the case may be (2) A notice
required to be given by sub-section (1)— (a) may, in the case of a firm or a Hindu
undivided family be addressed to any member of the firm or the manager or any
adult male member of the family and, in the case of any other association of
persons, to the principal officer the roof; (b) may be given to a duly authorized
agent of the person whom it is required to be given or, where he has died, to his
legal representative or where he has been declared an insolvent, to his assignee,
provided the banking company has had notice of appointment of the agent or of
the death or insolvency of the person to whom it is required to be given; (c) shall,
in the case of joint creditor or more than one beneficiaries of a cheque, draft or bill
of exchange or article standing in the names of more than one person, be deemed
to be sufficient notice to all such persons if given to any one of them; and (d) shall,
notwithstanding the fact that it is miscarried or the addressee is dead or insane or
has become insolvent or the envelope or wrapper is returned with the postal
endorsement “addressee is untraceable” or any other like endorsement, be
deemed to have been served on the fifteenth day following the day on which the
envelope or wrapper in which it is contained is posted, if it is properly addressed,
prepaid and posted, provided the banking company has had no notice of the
death, insanity or insolvency of the person to whom it is required to be given. (3) A
certificate in writing under the signature of an employee of the banking company
whose duty it is to address, prepay and post letters on behalf of the banking
company to the effect that the envelope or wrapper containing a notice required
to be given by sub-section (1) was addressed, prepaid and posted shall be
conclusive evidence of its having been so addressed, prepaid and posted. (4) As
soon as an amount is paid by a banking company to the State Bank under sub-
section (1), it shall cease to bear interest [or rank for a share of profit or loss]*
notwithstanding anything to the contrary contained in the terms of the debt or
instrument or any law for the time being in force. (5) Where any banking company
has paid an amount or delivered an article to the State Bank under sub-section (1),
the banking company shall preserve and continue to preserve all signature cards
and signing authorities and other documents relating to the debt or instrument or
article, as the case may be, until it is informed by the State Bank in writing that
they need not be preserved any longer. (6) Nothing in the Limitation Act, 1908, or
in any other law for the time being in force shall affect the liability of a banking
company toward the State Bank under sub-section (1). (7) Every banking company
shall, within thirty days after the close of each calendar year, submit to the State
Bank a return in the prescribed form and manner of all unclaimed amounts and
articles remaining unpaid or undelivered, as the case may be, in the books of the
banking company, after the expiry of ten years as reckoned under sub-section (1).
(8) The State Bank shall publish in the Gazette of Pakistan and not less than two
newspapers once each quarter for a period of one year a list of the amounts and
articles received by the State Bank under sub-section (1) and not claimed by any
person: Provided that it shall not be necessary to include in a list so published such
amounts and articles of such value as the Federal Government may from time to
time determine. (9) Any banking company which has paid any amount or delivered
any article to the State Bank in accordance with sub-section (1) may, within thirty
days from the date of such payment or delivery, as the case may be, submit to the
State Bank its claim as regards lien, counter-claim or right of set-off in relation to
the amount so paid or article so delivered. (10) Any person who claims to be
entitled to any money or article paid or delivered to the State Bank under sub-
section (1) may submit his claim to the State Bank. (11) Subject to sub-sections
(9), (12) and (14), the State Bank may pass such order on a claim submitted to it
under sub-section (9) or sub section (10) as it may deem fit, and, where the State
Bank makes any payment or delivers any article to any person submitting a claim
under sub-section (10) a receipt given by him shall be a good discharge to the
State Bank. (12) If any action involving a dispute about the ownership of any
amount or article paid or delivered to the State Bank under sub-section (1) is
pending in any court before the expiry of one year following the year in which the
amount or article is so paid or delivered to the State Bank and the State Bank
receives an intimation from the court or otherwise about such dispute, it shall
retain the amount or article in the custody and dispose of it in accordance with the
decision of the court. (13) Subject to sub-sections (9), (12) and (14), any amount
or article in respect of which no claim is preferred or about the disposal of which
no information is received from any person before the expiry of one year following
the year in which the amount or article is received by the State Bank shall, on the
expiry of the said period of the said period of one year, cease to be climbable and
shall, become the absolute property of and vest.— (a) in the Government of the
Province in the territory of which the debt or instrument was payable or , as the
case may be the article was to be delivered, and (b) in the Federal Government in
any other case. (14) Notwithstanding anything contained in sub-section (1) about
the giving of a notice by a banking company to any creditor or beneficiary of any
cheque, draft or in subsection (8) about the publication by the State Bank of the
list of unclaimed amounts or articles, the procedure to be followed and the manner
of disposal of debts, instruments and articles in a case where the person
concerned is not for the time being residing in Pakistan shall be such as may be
determined by the Federal Government from time to time. (15) Any decision of the
State Bank under sub-section (11) about the acceptance, satisfaction or otherwise
of the lien, right of set-off or counter-claim of a banking company or, as the case
may be, the entitlement of any person to any money or article received by the
State Bank under sub-section (1) shall be final and shall not, except as provided in
subsection (16), be called in question in any manner by or before any court,
tribunal or other authority. (16) Any person aggrieved by a decision of the State
Bank under sub-section (11) may, within one month from the date of the decision,
prefer an appeal to such officer of the State Bank superior in rank to the officer by
whom the decision appealed against was given as may be authorized in this behalf
by the Governor or the State Bank. (17) For the purpose of adjudicating and
determining any claim under sub-section (9) or sub-section (10) or deciding any
appeal under sub-section (16) the State Bank shall follow such procedure as may
be prescribed and shall have the same powers as are vested in a court under the
Code of Civil Procedure, 1908 (Act V of 1908), when trying a suit in respect of the
following matters, namely:- (a) enforcing the attendance of any person and
examining him on oath; (b) compelling the production of documents and materials
objects; and (c) issuing commissions for the examination of witnesses. (18) Any
proceeding before the State Bank under this section shall be deemed to be a
“judicial proceeding” within the meaning of section 228 of the Pakistan Penal Code
, and the State Bank shall, for the purposes of any such proceeding, be deemed to
be a “Civil Court” within the meaning of section 480 of the Code of Criminal
Procedure, 1898 (19) No court fee shall be payable for filing, exhibiting or
recording any document in, or obtaining any document from, the State Bank in any
proceeding under this section.
We shall continue with some more provisions contained in the Banking

Companies Ordinance, 1962.

LESSON 14
In this Lesson we shall cover the following aspects of this Ordinance:
o Power to publish information

o Fidelity and secrecy.
o Guidelines by the State Bank.
o Accounts and balance-sheet.
o Audit.
o Submission of returns.
o Copies of Balance Sheets, and Accounts to be sent to Registrar.
o Display of audited balance sheet by banking companies Incorporated
outside Pakistan.
o Accounting provisions of this Ordinance not retrospective.
o Inspection.
o Responsibility of State Bank.
o Power of the State Bank to give directions.
o Power of the State Bank to remove directors or other managerial persons
from office.
o Power of the State Bank to supersede Board of Directors of a banking
company.
o Limitations.
o Prosecution of directors, Chief Executives or other Officers.
o Further powers and functions of the State Bank.
o Certain provisions of the Ordinance not to apply to certain banking
companies.
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.
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.
Half-yearly returns and power to call for other returns and information
Power to publish information: Sec 33

The State Bank, if it considers it in the public interest so to do, may publish any
information obtained by it under this Ordinance in such consolidated form as it
thinks fit.

Fidelity and secrecy: Sec 33-A

Subject to sub-section (4), every bank and financial institution shall, except as
otherwise required by law, observe the practices and usage customary among
bankers and, in particular, shall not divulge any information relating to the affairs
of its customers except in circumstances in which it is , in accordance with law,
practice and usage customary among bankers, necessary or appropriate for a bank
to divulge such information.
Every president, chairman, member of the Board, administrator, auditor, adviser,

officer or other employee of any bank and financial institution shall, before
entering upon his office, make a declaration of fidelity and secrecy in such form as
may be prescribed.
Notwithstanding anything contained in sub-section (1) and (2), every balance
sheet and profit and loss account statement prepared by a bank and financial
institution shall include statements prepared in such form and manner as the State
Bank may specify in respect of written off loans or any other financial relief of five
hundred thousand repress or above allowed to a person as well as the provision, if
any, made for bad or doubtful debts.
The SBP may, if satisfied that it is necessary so to do at the time of holding general
elections under any law relating thereto, publish a list of persons to whom any
loans, advances or credits were extended by a bank or financial institution, either
in their own names or in the names of their spouses or dependents or of their
business concerns (if mainly owned and managed by them)which were due and
payable and had not been paid back for more than one year from the due date, or
whose loans were unjustifiably written off in violation of banking practices, rules or
regulations on or after such date as may be determined by the Government:
Provided the before publishing the name of any person in any such list he shall be,
given prior notice and, if he so requests, an opportunity of hearing.
Accounts and balance-sheet: Sec 34

1. At the expiration of each calendar year every banking company incorporated in
Pakistan, in respect of all business transacted by it, and every banking
company incorporated outside Pakistan, in respect of all business transact
through its branches in Pakistan, shall prepare with reference to that year a
balance -sheet and profit and loss account as on the last working day of the
year in the forms set out in the Second Schedule or as near thereto as
circumstances admit.
2. The balance sheet and profit and loss account shall be signed.— (a) in the case
of a banking company incorporated in Pakistan, by the manager or the principal
officer of the company and where there are more than three directors of the
company, by at least three of those directors, or where there are not more than
three directors, by all the directors, and (b) in the case of a banking company
incorporated outside Pakistan by the manager or agent of the principal office of
the company in Pakistan and by another officer next in seniority to the
manager or agent.
3. Notwithstanding that the balance sheet of a banking company is under
subsection (1) required to be prepared in a form other than the form marked ‘F’
in the Third Schedule to the Companies Act, 1913 (VII of 1913), the
requirements of that Act relating to the balance sheet and profit and loss
account of a company shall, in so far as they are not inconsistent with this
Ordinance, apply to the balance-sheet of profit and loss account, as the case
may be, of a banking company. The State Bank may, after giving not less than

fifteen days notice of its intention so to do, form time to time by a notification
in the official Gazette, amend the forms set out in the Second Schedule.
Audit: Sec 35
The balance sheet and profit and loss account prepared in accordance with section
34 shall be audited by a person who is duly qualified, under the Chartered
Accountants Ordinance, 1961 (X of 1961), or any other law for the time being in
force, to be an auditor of companies and is borne on the panel of auditors
maintained by the State Bank for the purposes of audit of banking companies.
1. An auditor shall hold office for a period of three years and shall not be removed
from office before the expiry of that period except with the prior approval of
the State Bank.
2. The State Bank may, from time to time, lay down guidelines for the audit of
banking companies and the auditors shall be bound to follow those guidelines.
3. Subject to the provisions of sub-section (2), the auditor shall have the powers
of, exercise the functions vested in, and discharge the duties and be subject to
the liabilities and penalties imposed on, auditors of companies by section 145
of the Companies Act, 1913 (VII of 1913).
4. In addition to the matters which, under the aforesaid Act and the guidelines laid
down by the State Bank under sub-section (3), the auditor is required to state
in his report, he shall also state—
a) Whether or not the information and explanations required by him have been
found to be satisfactory;
b) Whether or not the transactions of the banking company which have come
to his notice have been with in the powers of the banking company;
c) Whether or not the returns received from branch offices of the banking
company have been found adequate for the purposes of his audit;
d) Whether the profit and loss account shows a true balance of profit and loss
for the period covered by such account; and any other matter which he
considers should be brought to the notice of the shareholders of the banking
company.
Submission of returns: Sec 36

The accounts and balance-sheet referred to in section 34 together with the
auditor’s report as passed in the Annual General Meeting shall be furnished as
returns to the State Bank within three months of the close of the period to which
they relate:
Provided that the State Bank may in special circumstances extend the said period
of three months for the furnishing of such returns by a further period not
exceeding three months.
Suspension of business and winding up of banking companies

Important aspects under this head are outlined below:
-- Operations of a Banking Company may be suspended under this Ordinance.
-- High Court is the judicial forum for Winding up of Banking Company.
-- High Court may also stay proceedings against a Banking Company initiated by
SBP (maximum stay can be granted up to six months) copy of stay order shall be
forwarded to SBP by High Court. Special officer may be appointed by High Court.
-- Application may be submitted by SBP to High Court for winding up of a Banking
Company, if satisfied that affairs of Banking Company are being conducted in a
manner detrimental to the interests of depositors.
In this regard, the statutory provisions has contained in various sections of the
Ordinance are reproduced below:
High Court defined: Sec 44

In this Part and in Part IV “High Court”, in relation to a banking company, means
the High Court exercising jurisdiction in the place where the registered office of the
banking company is situated or, in the case of a banking company incorporated
outside Pakistan, where its principal place of business in Pakistan is situated.
Restriction on stay order: Sec 45

The High Court may, on the application of a banking company which is temporarily
unable to meet its obligations make an order staying for a fixed period on such
terms and conditions as it may think fit the commencement or continuance of all
proceedings against the company and may from time to time extend the period so
however that the total period including the period of any stay order granted under
the proviso to sub-section (2), shall not exceed six months.
Except as hereinafter provided no order of stay shall be granted upon such

application unless it is accompanied by a report of the State Bank showing that in
the opinion of the State Bank the banking company will be able to pay its debts if
the application is granted.
Provided that in the case of an application not so accompanied the High Court
may, if it thinks fit, grant stay for a period of not more than thirty days in
aggregate, and, if such stay is granted, shall call for a report from the State Bank
on the affairs of the banking company, on receipt of which it may either rescind an
order already passed or pass such further orders as it may consider just and
proper in the circumstances.
The High Court shall forward to the State Bank a copy of every stay order made
under this section.(4) Where an application is made under sub-section (1), the
High Court may appoint a special officer who shall forthwith take into his custody
or under his control all the assets, books, documents, effects and actionable claims
to which the banking company is or appears to be entitled and shall also exercise
such other powers as the interests of the depositors of the banking company.
Restriction on compromise or arrangement between banking companies

and creditors: Sec 46
Notwithstanding anything contained in any law for the time being in force, no High
Court shall sanction a compromise or arrangement between a banking company
and its creditors or any class of them or between such company and its members
or any class of them unless the compromise or arrangement is certified by the
State Bank in writing as not being incapable of being worked and as not being
detrimental to the interests of the depositors of such banking company.
Where an application under section 153 of the Companies Act, 1913 (VII of 1913),
is made in respect of a banking company, the High Court may direct the State
Bank to make an inquiry in relation to the affairs of the banking company and the
conduct of its directors and when such a direction is given, the State Bank shall
make such inquiry and submit its report to the High Court.
Powers of State Bank to apply to Federal Government for suspension of

business by a banking company and to prepare scheme of reconstruction
or amalgamation: Sec 47
Notwithstanding anything contained in the provisions of this Part or in any other
law or any agreement or other instrument, for the time being in force, where it
appears to the State Bank that there is good reason so to do, the State Bank may

apply to the Federal Government for an order of moratorium in respect of a
banking company.
The Federal Government, after considering the application made by the State Bank
under sub-section (1), may make an order of moratorium staying the
commencement or continuance of all action and proceedings against the company
for a fixed period of time on such terms and conditions as it thinks fit and proper
and may from time to time extend the period so however that the total period of
moratorium shall not exceed six months.
Except as otherwise provided by any directions given by the Federal Government
in the order made by it under sub-section (2) or at any time thereafter, the
banking company shall not during the period of moratorium make any payment to
any depositors or discharge any liabilities or obligations to any other creditors.
During the period of moratorium, if the State Bank is satisfied that(prepare scheme
for reconstruction in the public interest; or in the interests of the depositors; or in
order to secure the proper management or the banking company; or in the
interests of the banking system of the country as a whole-
Procedure for amalgamation of banking companies: Sec 48

Notwithstanding anything contained in any law for the time being in force, no
banking company shall be amalgamated with another banking company, unless a
scheme containing the terms of such amalgamation has been placed in draft
before the shareholders of each of the banking companies concerned separately,
and approved by a resolution passed by a majority in number representing two
thirds in value of the shareholders of each of the said companies, present either in
person or by proxy at a meeting called for the purpose.
1) Notice of every such meting as is referred to in sub-section (1) shall be given to
every shareholder of each of the banking companies concerned in accordance with
the relevant articles of association, indicating the time, place and object of the
meeting, and shall also be published at least once a week for three consecutive
weeks in not less than two newspapers which circulate in the locality or localities
where the registered offices of the banking companies concerned are situated, one
of such newspapers being in a language commonly understood in the locality or
localities.
Any shareholder, who has voted against the scheme, of amalgamation at the
meeting or has given notice in writing at or prior to the meeting to the company
concerned or the presiding officer of the meeting that he dissents from the scheme
of amalgamation, shall be entitled, in the event of the scheme being sanctioned by
the State Bank to claim from the banking company concerned, in respect of the
shares held by him in that company, their value as determined by the State Bank
when sanctioning the scheme and such determination by the State Bank as to the
value of the shares to be paid to dissenting shareholder shall be final for all
purposes.
2) If the scheme of amalgamation is approved by the requisite majority of
shareholders in accordance with the provisions of this section, it shall be submitted
to the State Bank for sanction and shall, if sanctioned by the State Bank by an
order in writing passed in this behalf be binding on the Banking by an order in
writing passed in this behalf be binding on the banking companies concerned and
also on all the shareholders thereof.
3) Where a scheme of amalgamation is sanctioned by the State Bank under the
provisions of this section, the State Bank shall transmit a copy of the order
sanctioning the scheme to the registrar before whom the banking companies
concerned have been registered and the registrar shall, on receipt of any such
order, strike off the name of the company which by reason of the amalgamation
will cease to function.
Winding up by High Court: Sec 49

Notwithstanding anything contained in section 153, section 162 and section 271 of
the Companies Act, 1913 (VII of 1913), but and section 271 of the Companies Act,
1913 (VII of 1913), but without prejudice to its powers under the sub-section (1) of
section 45 of this Ordinance, the High Court shall order the winding up of a
banking company— if the banking company is unable to pay its debts; or if an
application for its winding up has been made by the State Bank under section 45
or this section.
The State Bank shall make an application under this section for the winding up of a
banking company if it is directed so to do by an order under clause (b) of sub-
section (6) of section 40.
The State Bank may make an application under this section for the winding up of a
banking company— has failed to company with the requirements specified in
section 13; or has be reason of the provisions of section 27 become disentitled to
carry on banking business in Pakistan; or has been prohibited from receiving fresh
deposits by an order under clause (a) of sub-section (6) of section 40, or under
clause (b) a compromise or arrangement sanctioned by a Court in respect of the
banking company cannot be worked satisfactorily with or modifications; or the
returns, statements or information furnished to it under or in pursuance of the
provisions of this Ordinance disclose that the banking company is unable to pay its
debts; or the continuance of the banking company is prejudicial to the interest of
its depositors. A copy of every application made by the State Bank under sub-
section (1) shall be sent by the State Bank to the registrar.
Notwithstanding anything contained in the Companies Act,1913, no court shall
entertain an, application for winding up of banking company by the Court unless
such application is accompanied by a certificate in writing from the SBP certifying
that it has no objection to the making of application.
Court Liquidator: Sec 50

When, having regard to the number of proceedings for the winding up of banking
companies or the extent of the work involved in such proceedings, in any Province
or at any place in any Province, the Federal Government is of the opinion that it is
necessary or expedient to attach a court Liquidator to the High Court of that
province it may, in consultation with the State Bank, appoint a Court Liquidator,
the province or at a place in Province, and for such time as the Federal
Government may think fit, for the purpose of conducting all proceedings for the
winding up of banking companies and performing such duties in reference thereto
as the High Court may impose.
Where there is a court liquidator attached to a High Court and an order is passed
by the High court for the winding up of any banking company, then
notwithstanding anything contained in section 171A or section l75 of the
Companies Act, 1913 (VII of 1913), the court liquidator shall become the official
liquidator of the banking company.
where there is a court liquidator attached to a High Court and any proceeding, for
the winding up of a banking company in which any person other than the State
Bank or the court liquidator has been appointed as official liquidator, is pending
before the High Court immediately before the commencement of this Ordinance or
the date on which the court liquidator is so attached the High court, whichever is
later, then, notwithstanding anything contained a section 176 of the Companies
Act, 1913 (VII of 1913), the person appointed as official liquidator shall, on such
commencement or, as the case may be, on the aforesaid date, be deemed to have
vacated his office as such and the vacancy so caused shall be deemed to be filled
up by the appointment of the court liquidator as the official liquidator: Provided
that where the High Court, after giving the court liquidator and the State Bank an
opportunity of being heard, is of opinion that the appointment of the court
liquidator would be detrimental to the interests of the depositors of the banking
company, it may direct the person appointed as the official liquidator to continue
to act as such.
Provided that where the High Court, after giving the court liquidator and the State
Bank an opportunity of being heard, is of opinion that the appointment of the court
liquidator would be detrimental to the interests of the depositors of the banking
company, it may direct the person appointed as the official liquidator to continue
to act as such.
The remaining aspects of this Ordinance shall be discussed in the coming

Lesson

LESSON 15
We shall cover the following aspects:

Ombudsman—Defined
Historical Background
Scope of Banking Mohtasib
Ombudsman Defined:
• According to International Bar Association, Ombudsman is defined as an
“office” provided by the constitution or by an action of the legislature or
parliament and headed by an independent, high level public official which is
responsible to the legislature or parliament, who receives complaints from the
aggrieved person, official, and employees or who acts on his own motion and has
the power to investigate, recommend corrective action and issue reports.
• A man who investigates complaints and mediates fair settlements, especially
between aggrieved parties such as consumers or students and an institution or
organization.
• A government official, especially in Scandinavian countries, who investigates
citizens' complaints against the government or its functionaries.
Evolution
In the modern world, an ombudsman was first established in 1809 in Sweden. The
word “ombudsman” is of Swedish origin and means “representative or agent” of
the people. In 1919, more than a century after Sweden appointed an ombudsman,
another Scandinavian country, Finland, adopted the Swedish model for the
redressal of public grievances against agencies of state. The next country to follow
was Denmark - this happened more recently in 1955. The first country outside
Europe to establish such an office was New Zealand. This was in 1962 and
generated tremendous global interest inspiring many countries, in search of good
governance, to launch such schemes. Today, over 100 countries have such a
platform in place. In 1995, the European Union established the first European
Ombudsman under the Maastricht Treaty.
With the spread of education throughout the globe, the cognizance and awareness
as well as the desire for human rights, better living conditions, publics
participatory role in the governance of state and establishment of NGO’s and
availability of information, this desire for the rule of law and redressing the
grievances of the affected parties has emerged as predominant feature in the
modern society. Initially the role of of Ombudsman was restricted to the complaints
pertaining to the government departments. But now there is a shift of complaints
towards private sector and as such Ombudsman in the modern days entertains
complaints against public sector as well as private sector. However the aggrieved
party has the right to move to a court of law, in case one is not satisfied by any
decision of Ombudsman.
Important Features of Ombudsman's Law

• Wide scope of Jurisdiction over Agencies and their functionaries.
• Powers for Suo Motu cognizance.
• Right to undertake Research and Studies on important issues involving mal-
administration.
• Provision for informal resolution of disputes.
• Spot inspection where required.
• Powers to grant compensations to aggrieve party both complainants and public
servants.
• To recommend disciplinary action against delinquent public servants.
Historical Background—in Pakistan’s perspective

Wafaqi Mohtasib: this was established in 1983
Federal Tax Ombudsman: this was established in year 2000
Banking Mohtasib: it became functional from 2005
Wafaqi Mohtasib:
The Constitution of 1973 included the Federal Ombudsman at item 13 of the
Federal Legislative List in the Fourth Schedule. The Institution of Ombudsman
was, however, actually brought into being through the Establishment of the Office
of Wafaqi Mohtasib (Ombudsman) Order, 1983 (President’s Order No. 1 of 1983,
which is a form of law). In order to ensure legal autonomy to the institution, it is
reflected in Schedule 7 of the 1973 Constitution implying thereby that any
amendment can be brought about by a two-third majority of the Parliament.
Objective
The main purpose of the Wafaqi Mohtasib is to diagnose, investigate, redress and
rectify any injustice done to a person through mal-administration on the part of a
Federal Agency or a Federal Government Official. The primary objective of the
office is to institutionalize a system for enforcing administrative accountability.
Functional Attributes of the Institution

• Easily accessible
• Free of cost
• Flexible in operation
• Informal procedure
• Prompt action
• Service at the citizen's door-step
Banking Mohtasib:
Scope:
In relation to all banks operating in Pakistan, the Banking Mohtasib has been
empowered to entertain complaints of the following nature:
Failure to act in accordance with banking laws and regulations including policy
directives or guidelines issued by the State Bank of Pakistan from time to time.
1. Delays or fraud in relation to the payment or collection of cheques, drafts or
other banking instruments or transfer of funds.
2. Fraudulent or unauthorized withdrawals or debit entries in accounts.
3. Complaints from exporters or importers, relating to banking services and
obligations including letters of credit.
4. Complaints from holders of foreign currency accounts whether maintained by
residents or non-residents.
5. Complaints relating to remittances to or from abroad.
6. Complaints relating to payment of utility bills.
7. Delays or fraud in relation to the payment or collection of cheques, drafts or
other banking instruments or transfer of funds.
8. Fraudulent or unauthorized withdrawals or debit entries in accounts.
9. Complaints from exporters or importers, relating to banking services and
obligations including letters of credit.

10. Complaints from holders of foreign currency accounts whether maintained
by residents or non-residents.
Complaints entertained by Banking Mohtasib

Complaints can be filed with the Banking Mohtasib for resolution of grievances
against scheduled banks operating in Pakistan. Also banks may lodge complaints
against another bank in case of dispute.
Types of Complaints
All complaints rejected by banks can be entertained by the Banking Mohtasib
provided these are not barred by time or records pertaining thereto have not been
destroyed by the bank in accordance with its laid down record destruction policies.
Rejected complaints may also be sent to Banking Mohtasib along with all related
correspondence and the Complaint Form, without the need to give 45 days notice
to the concerned bank.
The Banking Mohtasib handles complaints relating to violation of banking laws and
regulations, excessive delays and inefficiency, poor service, discriminatory actions,
etc.
Appeal Process:
Complainant's right of appeal A complainant not satisfied with the decision of
the Banking Mohtasib has the right to appeal to the Governor, State Bank of
Pakistan within 30 days from the date of the order of the Banking Mohtasib. If the
complainant does not choose to go into appeal or does not accept the decision of
the State Bank of Pakistan in appeal, the complainant has the right to go to a court
of law.
Bank's right of appeal In case a bank is not satisfied with the Banking
Mohtasib's order in the matter of a complaint, it may file an appeal with the
Governor, State Bank of Pakistan within thirty days. However, if no appeal is filed,
or the State Bank of Pakistan does not uphold the appeal, the Banking Mohtasib's
order shall become final, operative and binding upon the bank.
Benefits of Mohtasib Scheme:

o Globally a phenomenal success
o A cost free service
o Cost effective for both complainants and banks
o Unlike the courts, legal representation is neither required nor advantageous
o Accessible, friendly, informal and flexible
o Complainants retain the right to take the matter to court if not satisfied
o Ombudsmen are also successful because they may provide remedies where
none may be available through the formal system.
The provisions regarding establishment of the office of Banking mohtasib

are contained in section 82 of Banking Companies Ordinance, 1962. The
respective statutory provisions are reproduced hereunder.

Appointment of Mohtasib: Sec 82-A
1. There shall be a Banking Mohtasib who shall be appointed by the President in
consultation with the Governor of the State Bank of Pakistan.
2. The Banking Mohtasib shall be a person of high integrity and unimpeachable
banking or legal credentials who is not a share-holder of a banking company or
financial institution and is not or has not, been a bank defaulter.
3. The jurisdiction of the Banking Mohtasib in relation to banking transactions
shall be to— (a) enquire into complaints of banking malpractices; (b) perverse,
arbitrary or discriminatory actions; (c) violations of banking laws, rules,
regulations or guidelines; (d) inordinate delays or inefficiency and (e)
corruption, nepotism or other forms of maladministration.
4. The Banking Mohtasib shall hold office a period of three years and shall not be
eligible for any extension of tenure or for re-appointment under any
circumstances whatsoever.
5. The Banking Mohtasib shall not hold nay other office of profit in the service of
Pakistan or occupy any other position carrying the right to remuneration for the
rendering of services.
Terms and conditions of the Banking Mohtasib Sec 82-b

1. The Banking Mohtasib shall be entitled to the same salary and allowances as a
Judge of a High Court.
2. The Banking Mohtasib may be removed from office on the ground that he has
been guilty of misconduct or that he is incapable of properly performing the
duties of his office by reason of physical or mental incapacity. Provided that he
shall have the right to file an appeal before the Federal Services Tribunal.
3. The Banking Mohtasib shall be provided with a secretariat to be appointed in
consultation with the State Bank. Appointments to the Secretariat may be
made on deputation from the State Bank of Pakistan or other banks or
otherwise on the basis of professional qualifications and the costs of the
Secretariat shall be shared by banks in such proportions as may be determined
by the State Bank of Pakistan.
The Banking Mohtasib shall have the power and responsibility—
a) To entertain complaints from customers, borrowers, banks or from any
concerned body or organization;
b) To facilitate the amicable resolution of complaints after giving hearings to the
complainant and the concerned bank; and
c) In the event that complaints cannot be resolved by consent, to give finding
which shall be acted upon in the manner set out herein.
4. The Banking Mohtasib shall exercise his powers and authority in the following
manner:-
a) In relation to all banks operating in Pakistan.— The Banking Mohtasib shall be

authorized to entertain complaints of the nature set out herein below:-
a. failure to act in accordance with banking laws and regulations including policy
directives or guidelines issued by the State bank from time to time.
b. Provided that if there is a dispute as to the proper interoperation of any
regulations, directions or guidelines, the same shall be referred to the State
Bank for clarification. delays or fraud in relation to the payment or collection of
cheques, drafts or other banking instruments or the transfer of funds;
c. fraudulent or unauthorized withdrawals or debit entries in accounts;
i. Complaints from exporters or importers relating to banking services and

obligations including letter of credits;

ii. Complaints from holders of foreign currency accounts, whether maintained
by residents or non-residents;
iii. Complaints relating to remittances to or from abroad;
iv. Complaints relating to mark-up or interest rates based on the ground of a
violation of an agreement or of state bank directives; and
v. Complaints relating to the payment of utility bills.
b. In relation to banks in the public sector. — The Banking Mohtasib shall be

authorized to entertain complaints against such banks on the following
additional grounds as well—
i. Corrupt or mollified practices by bank officers;
ii. Gross dereliction of duty in dealing with customers; and
iii. Inordinate delays in taking decisions.
Reference to Banking Mohtasib by Court: Sec 82-C—

if at any time during the pendency of a case, a court trying a case relating to
recovery of loan by a banking company is of the opinion that the management of
the banking company has prima facie acted in a malafide manner, or in violation of
banking rules and regulations, it may reference to the Banking Mohtasib for
inquiring into the matter and passing such order in accordance with the provisions
hereof as may deem fit: Provided that the making of a reference shall not prevent
the court from deciding the claim before it on merits.
Procedure for making complaints: Sec 82-D

(1) A complaint shall be made on solemn affirmation or oath in writing addressed
to the Banking Mohtasib. The complaint shall set out the full particulars of the
transaction complained of and the name and address of the complainant. (2) Prior
to making a complaint the complainant shall intimate in writing to the concerned
bank his intention of filing a complaint and if the bank either fails to respond, or
makes a reply which is unsatisfactory to the complaint, within a period of three
months, the complainant may file a complaint at any time thereafter within a
further period of three months (3) The Banking Mohtasib may adopt any procedure
as he considers appropriate for investigating a complaint: Provided that the shall
not pass any order against a bank without first giving it a notice and an
opportunity of a hearing. (4) Subject to section 82C, the Banking Mohtasib shall
not have any power to issue an order in the nature of a stay order or to entertain
any complaints if the matter is pending before a court or other legal forum.
(5) The Banking Mohtasib may reject a complaint summarily or he may accept the
same or pass any other order he deems fit:
Provided that in each case he shall pass a reasoned order for his decision
The Banking Mohtasib shall hold office a period of three years and shall not be
eligible for any extension of tenure or for re-appointment under any circumstances
whatsoever.
Banking Mohtasib shall not hold any other office of profit in the service of Pakistan
or occupy any other position carrying the right to remuneration for the rendering
of services.
Recommendations for implementations 82-E

In the event the Banking Mohtasib comes to the conclusion that the complain is
justified, in part or in whole, he shall try and facilitate an amicable resolution or
settlement by resort to mediation and failing that communicate his findings to the
concerned bank with the direction—
a. to reconsider the matter; to modify or cancel the earlier decision, action or
failure to take the appropriate action;
b. To pay reasonable compensation to the complainant as fixed by the Banking
Mohtasib;
c. To take the requisite steps to improve the functioning or efficiency of the bank;
and
d. To take such other remedial steps or actions as may be specified by the
Banking Mohtasib.
The Banking Mohtasib may, in any case, he deems fit or proper, forward a report to
the State Bank recommending—
a. An inquiry, or the taking of the requisite steps or legal proceedings against a

bank which has acted in violation of banking laws, procedure, regulations or
directives of the State Bank; and
b. In the case of a bank in the public sector in cases of banking malpractices or
corruption, nepotism or gross and flagrant dereliction by bank officers of their
duties and responsibilities, the initiation of such action including a criminal
prosecution or disciplinary proceedings as the State Bank may deem fit, either
by itself, or through filing a report with the Government of Pakistan.
In no case whatsoever shall be Banking Mohtasib have the power to direct that
loans, advances or finances be given to a complainant. (4) Any bank, or official of
a bank or a complainant aggrieved by an order passed by the Banking Mohtasib
may file an appeal with the State Bank within thirty days which shall pass any
order thereon it deems fit.
Any order passed by the Banking Mohtasib which has not been appealed against,
or any order passed by the State Bank in appeal, as the case may be, shall
become final and operative and if not implemented shall render the bank
concerned to such action including the imposition of a fine or penalty as the State
Bank may deem fit, and in relation to a bank officer, to the appropriate disciplinary
or other proceedings.
Nothing contained herein shall prevent a complainant from filing a suit against a
bank in the event his complaint is rejected.
Power to call for information: Sec 82-F
The Banking Mohtasib shall have the power for purposes of disposing a case, to
require a bank to disclose to him any information subject to the following
conditions:-
a. The Banking Mohtasib shall make every endeavor to ensure that banking
confidentiality is maintained as required by banking law and procedure and
shall take no action which is volatile thereof.
b. The Banking Mohtasib may call for any or all such documents which are
relevant or pertinent for purposes of deciding a complaint: --Provided that he
shall not be entitled to call for unrelated documents or documents which may
compromise the bank’s position in relation to other customers:
c. In the event of a bank refusing to furnish information, or copies of relevant
documents, the Banking Mohtasib shall not be authorized to compel the bank
to comply with his order but he may draw an adverse inference and comment
on the same in his findings.
The banking companies rules, 1963
-- These rules may be called the Banking Companies Rules, 1963.

-- They extend to the whole of Pakistan.
-- They shall come into force on such date as the Federal Government may, by
notification in the official Gazette, specify in this behalf.
Definitions:
"Ordinance" means the Banking Companies Ordinance, 1962 (LVII of 1962):
"Principal office of the State Bank" means the office of the State Bank to
which the returns required under the Ordinance or these rules are to be submitted;
“Principal office of the banking company” means the office of the banking
company which shall be responsible for the submission of returns under the
Ordinance or these rules:
“Quarter” means a period of three months ending on the last day of March, June,
September and December of any year ; and
“Place of business” of a banking company includes any sub-office, pay-office,
sub-pay-office or any place of business at which deposits are received, cheques
cashed or moneys lent.
List of Officers: Sec 4

A banking company shall, within one month of the commencement of these rules
or of the commencement of its business, whichever is later, send to the principal
office of the State Bank a written statement containing a list of –
The names, the official designations and specimen signatures of the officers
authorized to sign on behalf of the banking company returns required under the
Ordinance or these rules; and the names and addresses of the directors of the
banking company.
Any change in the list referred to in clause (i) shall be intimated to the principal
office of the State Bank within one month of such change.
A banking company incorporated outside Pakistan, which at the commencement of
these rules has a place of business in Pakistan, and every such company which
after the commencement of these rules establishes a place of business in Pakistan,
shall, within one month of the commencement of these rules or of the
establishment of such place of business, as the case may be, furnish to the
principal office of the State Bank the full address of the principal place of business
declared in terms of clause (e) of sub-section (1) of Section 277 of the Companies
Act, 1913 and the name and address of one or more persons resident in Pakistan
authorized to accept on behalf of the company any notice or order required to be
served on the company under the Ordinance or these rules and shall intimate the
principal office of the State Bank any change in such name or address within one
month of such change:
Provided that information furnished by a banking company under rule 4 of the
Banking Companies (Control) Rules, 1949, shall be deemed to have been furnished
under this rule.
Withdrawals of Deposits: Sec 6

The principal office of the State Bank shall not be bound to return securities
actually deposited, but may substitute therefore new scrip of securities of the
same description and amount.
Changes in deposits: Sec 7

The office of the National Bank of Pakistan holding securities under sub-rule (1) of
rule 5 shall permit the withdrawal of foreign approved securities only under
instructions from the principal office of the State Bank.
When the form or amount of deposit is changed by reason of a subsequent deposit
or withdrawal, the principal office of the State Bank of Pakistan shall, as soon as
possible, send to the principal office of the banking company a fresh certificate in
Form 1.]
Maturing of security deposits: Sec 8

When a security in deposit matures or when any yield on such a security ceases to
accrue, the principal office of the State Bank shall not be bound to inform the
banking company; but upon the receipt of a requisition in writing from the banking
company, the principal office of the State Bank shall, as soon as possible, collect
the discharge value and hold the amount in deposit for purposes of sub-section (3)
of section 13 of the Ordinance.
Interest on deposits: Sec 9

No interest shall be payable on cash deposits
The principal office of the State Bank shall credit, as soon as possible, the current
account of the banking company maintained with it with the interest realised on
securities subject to the usual charges.]
Licensing of banking companies: Sec 10

A company desiring to have a license under section 27 of the Ordinance shall
apply to the Director, Banking Control Department, State Bank of Pakistan,
Central Directorate, Karachi.—
In Form IV in the case of a company incorporated in Pakistan and desiring to
commence banking business; In Form V in the case of a company incorporated in
Pakistan and in existence at the commencement of the Ordinance;In Form VI in
the case of a company incorporated outside Pakistan and desiring to commence or
carry on banking business in Pakistan.
Opening of new places of business: Sec 11

An application by a banking company for permission to open a new place of
business or change the location of an existing place of business under Section 28
of the Ordinance shall be submitted in form VII to– the Director, Banking Control
Department, State Bank of Pakistan, Central Directorate, Karachi in the case of
banking companies having their principal offices in West Pakistan, and the Deputy
Chief Officer, Banking Control Department; State Bank of Pakistan, Dacca, in the
case of banking companies having their principal offices in East Pakistan.
List of offices: Sec 12

A banking company shall, within a period of one month from the close of every
quarter, send to the principal office of the State Bank a list in Form VIII of all its
offices in Pakistan at which it was doing business during that quarter.
Manner of publication of accounts and balance-sheet: Sec 14

The balance-sheet and profit and loss account prepared in terms of Section 34 of
the Ordinance together with the auditor’s report shall be published within a period
of six months from the end of the period to which they relate in a newspaper which
is in circulation at the place where the banking company has its principal office.
Explanation.—For the purposes of this rule, the expression “newspaper” means

any newspaper or journal published at least once a week, but does not include a
journal other than a banking, commercial, financial or economic journal.
List of Debtors: Sec 15

The list of debtors under Section 63 of the Ordinance shall be in Form XIII or as
near thereto as circumstances permit.
Power to exempt in certain cases: Sec 16

The Federal Government may, on the recommendation of the State Bank, declare
by notification in the Official Gazette that any or all of the provisions of these rules
shall not apply to any banking company or to any class of banking companies
either generally or for such period as may be specified.

LESSON 16
STATE BANK OF PAKISTAN ACT, 1956
This extends to the whole of Pakistan. It shall come into force at once and except
Section 46, shall be deemed to have taken effect on and from the twelfth day of
May, 1948.
In this Act we shall cover the following aspects/ statutory provisions

o Definitions
o Establishment and incorporation of the Bank
o Share Capital Guarantee by Federal Government Notice of Trust
o Register of shareholders
o Offices, Branches and Agencies
o Central Board of Directors
o Functions and responsibilities of the Central Board
o Monetary and fiscal policies board
o Executive Committee Qualifications and disqualification of Directors and
Members
o Term of office of Directors and Members
o Directors and Members
o General and annual general meeting
o Business which State Bank may transact
o Issue Department
o Cash Reserve of Scheduled Banks to be kept with the Bank
o Scheduled Banks
o Power to require returns from Corporations
o Publication of consolidated statement by the Bank
o Submission of Returns by State Bank
o The Bank and its officers to be public officers
o Liquidation of the Bank
Definitions: the definitions as contained in the Act are given hereunder:

"Annual general meeting" means the annual meeting of the shareholders-of the
Bank;
"Approved foreign exchange" means currencies declared as such by any
notification under Sec19;
"The Bank" means the State Bank of Pakistan;
"Bank Notes" means notes made and issued by the Bank in accordance with
Section 24 and include currency notes of the Government of Pakistan issued by
the Bank;
“Central Board" means the Central Board of Directors of the Bank;
"Co-operative Bank" means a society registered under the Co-operative
Societies Act, 1912, or any other law for the time being in force in Pakistan
relating to co- operative societies, the primary object of which is to provide
financial accommodation to its members;
"Debentures" includes participation term certificates;
"Director" means a Director for the time being of the Central Board;
"General meeting" means the meeting of the share-holders ' of the Bank
convened for transacting such business as may be specified in the notice
convening the meeting;

"Governor" and "Deputy Governors" means respectively the Governor and
Deputy Governors of the Bank;
"Loans and advances" includes finances provided on the basis of participation in
profit and loss, mark up in price, leasing, hire-purchase of otherwise;
"Local Board" means a Local Board of Members;
"Member" means a Member for the Local Board;
"Rupee coin" means one-rupee coin and one-rupee notes which are legal tender
in Pakistan;
"Scheduled bank" means a bank for the time being included in the list of banks
maintained under sub-section (1) of Section 37;
"Securities" includes securities as defined in the Capital Issues (Continuance of
Control) Act, 1947 (XXIX of 1947);
"Shares" includes modaraba certificates.
Establishment and incorporation of the Bank: Sec 3:

As soon as may be after the commencement of this Act steps shall be taken to
establish, in accordance with the provisions of this Act, a bank to be called the
State Bank of Pakistan or Bank Dautat-e-Pakistan, for the purposes of taking over,
as from the first day of July, 1948, the management of the currency from the
Reserve Bank of India, and carrying on the business of Central Banking.
The Bank shall be a body corporate by the name of the State Bank of Pakistan or
Bank Daulat-e-Pakistan, having perpetual succession and a common seal, and
shall by the said name sue and be sued.
Share Capital: Sec 4

The original share capital of the Bank shall be three corers of rupees divided into
three hundred thousand fully paid-up shares of the nominal value of one hundred
rupees each, out of which not less than fifty one per cent shall be held by the
Federal Government and the balance by the public.
The share capital may be increased by a resolution of the Central Board subject to
the approval of the Federal Government, but not less than fifty-one per cent of the
additional share capital shall be issued to the Federal Government.
The nominal value, issue price, the manner in which the new shares may be issued
and allotted and their assignment to the registers of shareholders maintained
under sub-section (1) of Section 7 shall, subject to the approval of the Federal
Government, be determined by the Central Board
Guarantee by Federal Government: Sec 5

Notwithstanding anything contained in the Acts hereinafter mentioned in this
Section, the shares of the Bank shall be deemed to be included among the
securities enumerated in Section 20 of the Trusts Act, 1882 and to be approved
securities for the purposes of the Insurance Act, 1938 and the Banking Companies
Ordinance, 1962 (LVII of 1962).
Offices, Branches and Agencies: Sec 8

The head office of the Bank shall be situated in Karachi.
1) The Bank may establish branches, offices and agencies in Pakistan, or, with
the prior approval of the Federal Government any-where outside Pakistan.
2) The Bank shall create a special Agricultural Credit Department, the functions
of which shall be
3) To maintain an expert staff to study all questions of agricultural credit and
be available for consultation by the Federal Government, Provincial
Governments, Provincial Co-operative Banks and other banking
organizations;
4) To co-ordinate the operations of the Bank in connection with agricultural
credit and its relations with the Provincial Co-operative Banks and any other
organizations engaged in the business of agricultural credit.
Central Board of Directors: Sec 9
The general superintendence and direction of the affairs and business of the Bank
shall be entrusted to the Central Board of Directors which may exercise all the
powers and do all acts and things that may be exercised or done by the Bank and
are not by this Act expressly directed or required to be done by the Bank in
general meeting or in annual general meeting.
The Central Board shall consist of-
a. The Governor;
b. Secretary, Finance Division, Government of Pakistan; and
c. Seven Directors, including one Director from each Province, to be nominated by
the Federal Government ensuring representation to agriculture, banking and
industrial sectors.
The Governor shall be the chairman of the Central Board.

All decisions of the Central Board shall be taken by majority of members present
and voting and in the event of equality of the votes, the Governor may exercise a
casting vote
Functions and responsibilities of the Central Board: Sec 9-A
The Central Board shall, with a view to secure stability of monetary system:
Regulate and supervise monetary and credit system:
o Provided that in regulating the monetary and credit system, the Central
Board shall keep in view the National policy objectives of the Federal
Government,
o Provided further that the Governor may, in any emergency which in his
opinion requires immediate action, take measures under this clause as may
be necessary in the circumstances and shall, in the next meeting of the
Central Board, report to it for approval of such action;
o determine, in consultation with the Federal Government, the limit of credit
to be extended to the Federal Government and Provincial Governments
tender advice to the Federal Government on monetary policy and its
interaction with fiscal and exchange rate policy;
o Analyze and report periodically to the Federal Government on the impact of
the policies being followed on the state of the economy; and
o Discharge such other functions as may be necessary for regulating the
monetary system or as may be assigned by the Federal Government.
Monetary and Fiscal Policies Coordination Board Sec. 9B

i. Federal Minister for Finance Chairman
ii. Federal Minister for Commerce Member
iii. Deputy Chairman, Planning Commission Member
iv. The Governor Member
v. Secretary, Finance Division, Govt of Pakistan Member
The Board shall-

a. Coordinate fiscal, monetary, foreign trade and exchange rate policies;

b. Ensure consistency amongst macro-economic targets in the areas of fiscal,
monetary and external account aggregates and recommend adjustments for
the approval of the Federal Government;
c. Recommend monetary aggregates and Government borrowing for
consideration of the National Economic Council;
d. Review fiscal and monetary measures to secure monetary aggregate targets;
e. Consider limits of the government borrowing as revised from time to time in the
meetings to be held before and after passage of the annual budget; and
f. Review the level of Government borrowing in relation to the predetermined or
revised targets after every quarter; and
g. Review the expenditure incurred in connection with raising of loans and
Government borrowing
Executive Committee: Sec 11

There shall be an Executive Committee consisting of the Governor, Deputy
Governor, if any, three Directors elected by the Central Board to represent
respectively the areas specified in the Schedule and an officer appointed by the
Federal Government to act as Member of the Executive Committee.
Except when the Central Board is in session, the Executive Committee shall deal
with and decide any matter within the competence of the Central Board. Local
Boards, their constitution and functions
Qualifications and disqualification of Directors and Members: Sec 13

No person shall be or shall continue to be a Director or Member-
a. Who is a Member of the Central or Provincial Legislature; or
b. Who is a salaried Government official; or
c. Who is, or at any time has been, adjudicated an insolvent or has suspended
payment or has compounded with his creditors; or
d. Who is found lunatic or becomes of unsound mind; or
e. Who is an officer or employee of any bank; or
f. Who is a Director of any bank other than the Bank, but he shall not- be
disqualified or cease to be a Director if he is a Director of a co-operative bank.
g. Who is not, within six months from the date of his becoming a Director or
Member, as the case may be, registered as a holder of unencumbered shares of
the Bank of the nominal value of five hundred rupees;
h. Who absents himself from three consecutive meetings of the Central Board, or
Local Board without leave from the Central Board or Local Board as the case
may be?
Nothing in clause (b) and (g) of sub-section (1) shall apply to the Government
official nominated as a Director by the Federal Government.
The Federal Government shall sell shares at par to a Director or Member
nominated by it under Section 9 and 12, seeking to obtain the minimum shares
qualification required under this Section, but no such share shall be disposed of by
such Director or Member otherwise than by resale to the Federal Government at
par, and the Federal Government shall have the right to order the transfer at par of
all or any of such shares to itself, whereupon all or any of such shares shall be
deemed to have been transferred to it.
Term of office of Directors-and Members: Sec 14

The elected Directors and Members shall hold office for three years on the expiry
of which they shall cease to hold office.

A Director or member shall not be removed from his office before the completion
of his tenure except when he has done any act which is a breach of trust reposed
in him or is guilty of misconduct:
Directors and Members shall on the expiry of their term of office be eligible for re-
election or re-nomination, as the case may be.
Removal from and vacation of office of the Governor, Deputy Governors,

Directors and Members: Sec 15
Subject to sub section (2), the Federal Government may remove the Governor from
his office, if he becomes permanently incapable of performing his duties, or is
subject to any of the disqualification specified in sub-section (10 ) of section 10, or
has done any act which is breach of the trust reposed in him, or is guilty of
misconduct:
An elected Director or Member shall not be removed from his office except upon
a resolution passed by the Central Board in that behalf by in majority of not less
than six Directors.
a. The Governor, a Deputy Governor or a Director may resign his office by

statement to that effect in writing signed by him and addressed to the Federal
Government.
b. A statement of resignation by a Deputy Governor or Director shall be
addressed as above through the Governor
c. A Member may resign his office by a statement to that effect in writing signed
by him and addressed 'to the Central Board.
d. On the acceptance of such a resignation by the Federal Government or the
Central Board, as the case may be, the office shall become vacant.
Any Director or Member vacating office under this section shall not be eligible to
become a Director or Member, as the case may be, until the expiry of the term of
office for which he was nominated or elected.
In the event of a vacancy occurring amongst the nominated Directors or Members,
the Federal Government shall fill the vacancy by nominating another Director or
Member, as the case may be.
In the event of a vacancy occurring amongst the elected Directors or Members
before the expiry of their term of office, a new Director or Member, as the case
may be, shall be elected for the remainder of the term by and from amongst the
shareholders registered on the same register as that from which the vacating
Director or Member was elected.
General and annual general meeting: Sec 16

The annual general meeting shall be held annually at Karachi, or a place in
Pakistan where there is an office or branch of the Bank, within three months from
the date on which the annual accounts of the Bank are closed.
In the said meeting the shareholders present shall be entitled to discuss the
annual accounts, the report of the Central Board on the working of the Bank
throughout the year, and the auditors' report on the annual balance sheet and
accounts.
A general meeting may be convened by the Central Board at any other time.
Every share holder shall be entitled to attend at any general meeting; and each
shareholder who has been registered on a register maintained under Section 7 for
a period of not less than six months ending with the date of the meeting, as
holding five or more shares shall have one vote, and on a poll, each' shareholder
so registered shall, subject to a maximum of ten votes, have one vote for each five
shares, and such votes may be exercised either personally or by proxy
Business which the Bank may transact: Sec 17
(1)Bank is authorized to carry on and transact the several kinds of business

hereinafter specified, namely:- The accepting of money on deposit from,
and the collection of money for the Federal Government, the Provincial
Governments, Local Authorities, bank and other persons: provided that no
interest shall be paid on deposits received from the Federal Government, a
Provincial Government, or a Local Authority;
(2)
(a) The purchase, sale and rediscount of bills of exchange and promissory notes
drawn on and payable in Pakistan and arising out of bonafide commercial or trade
transactions bearing two or more good signatures one of which shall be that of a
scheduled bank, and maturing within one hundred and eighty days from the date
of such purchase or rediscount, exclusive of days of grace;
(b) The purchase, sale and rediscount of bills of exchange and promissory notes,
drawn on and payable in Pakistan and bearing two or more good signatures one of
which shall be that of a scheduled bank and drawn or issued for the purpose of
financing seasonal agricultural operation or the marketing of crops, and maturing
within fifteen months from the date of such purchase or rediscount exclusive of
days of grace;
(3)The purchase and the sale of approved foreign exchange;
(b) The purchase, sale and rediscount of bills of exchange including treasury bills,
drawn in or on any place in countries whose currency has been declared as
approved foreign exchange and maturing within one hundred and eighty days from
the date of purchase, provided that no such purchase, sale or rediscount shall be
made in Pakistan except with a scheduled bank;
(4)The making to Local Authorities, scheduled banks or co-operative banks of
advances and loans repayable on demand or on expiry of fixed periods not
exceeding one hundred and eighty days against the security of: stocks, funds
and securities, other than immovable property, in which a trustee is authorized
to invest trust money by any law for the time being in force in Pakistan;
(5)The making to the Federal Government or Provincial Governments of advances
repayable in each case not later than three months from the date of the making
of the advance;
(6)The making to institutions or banks, specially established for the purpose of
promoting agricultural or industrial development, or for the financing of
construction of houses, in the country or co-operative banks of advances and
loans for such amounts and on such terms and conditions
(7)the issue and purchase of telegraphic transfers, demand drafts and other kinds
of remittances made payable at its own branches, offices or agencies;
(10) (a)The purchase and sale of securities of the Federal Government or a

Provincial Government of any maturity or of such securities of a Local Authority
as may be specified in this behalf by the Federal Government by notification in
the Official Gazette on the recommendation of the central Board;
(12) The sale and realization of all property, whether movable or immovable
which may in any way come into the possession of the Bank in satisfaction, or
part satisfaction of any of its claims;

(13) The acting as agent to Federal Government, any Provincial Government, or
any Local Authority in the transaction of any of the following kinds of business,
namely:-
(a). the purchase and sale of gold or silver or approved foreign exchange;
(b). the purchase, sale, transfer and custody of bills of exchange,
securities or shares in any company;
(c). the collection of the proceeds, whether principal or interest, profit,
dividend or other return, of any securities;
(d). the remittance of such proceeds at the risk of the principal, by bills of
exchange payable either in Pakistan or elsewhere;
(e). the management of public debt; and
(f). the transacting of special drawing rights with the International
Monetary Fund;
(17) The making and issue of bank notes subject to the pro-visions of this Act;
(18) The exercise of powers and the performance of functions and duties
entrusted to the Bank by or under this Act or any other law for the time being
in force;
(18A) The entering into clearing and payments arrangements with any
country or group of countries, on a general or regional or sub-regional basis,
participation in the formation and settlement of international payments
transactions under such arrangements, and incurring financial and other
obligations relating thereto;
(19) Establish credits and give guarantees; and
(20) Generally, the doing of all such matters and things as may be
necessary, incidental to or consequential upon the exercise of its powers or
the discharge of its duties or functions under this Act.
Issue Department: Sec 26

The issue of Bank Notes shall be conducted by the Bank in an Issue Department
which shall be separated and kept wholly distinct from the Banking Department
and the assets of the Issue Department shall not be subject to any liability other
than the liabilities of the Issue Department as hereinafter defined in Section 32.
Cash Reserve of Scheduled Banks to be kept with the Bank: Sec 36

Every scheduled bank shall maintain with the Bank a balance the amount of which
shall not at the close of business on any day be less than such percentage of
demand liabilities and that of the time liabilities of such bank in Pakistan as may
be determined by the State Bank.
Scheduled Banks: Sec 37

(1)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).
(2)The Bank shall, by notification, in the official Gazette
(a) Declare any bank to be scheduled bank which is carrying on the business of
banking in Pakistan and which-
(i) is a banking company as defined in Section 227F of the Companies Act, 1913, or
a Co-operative bank, or a corporation or a company incorporated by or established
under any law in force in any place in or outside Pakistan;
(ii) has a paid-up capital and reserves of an aggregate value of not less than five
lakhs of rupees:
Provided that in the case of a co-operative bank, an exception may be made by
the Bank;
(iii) satisfies the Bank that its affairs are not being conducted in a manner
detrimental to the interests of its depositors;
(iii) satisfies the Bank that its affairs are not being conducted in a manner
detrimental to the interests of its depositors;
Power to require returns from Corporations: Sec 38

The Bank may require any Corporation with which it has any transactions under
Section 17 to furnish returns referred to in under sub section (3) of Section 36, and
if it does so require, the provisions of sub-Section. (6), (7) and (8) of Section 36
shall apply, so far as may be, to such Corporation as if it were a scheduled bank.
Publication of consolidated statement by the Bank: Sec 39

The Bank shall compile and publish in such manner and at such times as the
Federal Government may direct, a consolidated statement from such information
as may be received under this Act.
Returns
Submission of Returns by State Bank: Section 40

(1)The Bank shall prepare and transmit to the Federal Government a weekly
account of the Issue Department and of the Banking Department in such
form as the Federal Government may, by notification in the official Gazette
direct. The Federal Government shall cause these accounts to be published
weekly in the official Gazette.
(2)The Bank shall also, within four months from the date on which the annual
accounts of the Bank are closed, release to the public and simultaneously
transmit to the Federal Government a copy of the annual accounts signed
by the Governor, the Deputy Governor, if any, and the Chief Accounting
Officer of' the Bank, and certified by the Auditors together with a report by
the Central Board on the working of the Bank throughout the year, and the
Federal Government shall cause such accounts and report to be published in
the official Gazette.
(3)The Bank shall also, within two months from the date on which the annual
accounts of the Bank are closed, transmit to the Federal Government a
statement showing the name, address and occupation of, and the number of
shares held by each shareholder of the Bank.
The Bank and its officers to be public officers: Section 46:

(1)For the purposes of Section 124 of the Evidence Act, 1872, the provisions of
Part IV of the Code of Civil Procedure, 1908 -and the provisions of rule 27 of
Order V, and rule 52 of Order XXI of the said Code, the Bank and any person
in the service of the Bank acting in his capacity as such shall be deemed to
be public officer.
(2)The provisions of Section 123 of the Evidence Act shall apply to the
unpublished records of the Bank and the Governor shall be deemed to be
the officer or head of the department concerned.
(3)Every person in the service of the Bank shall be deemed to be a public
servant within the meaning of section 21 of the Pakistan Penal Code (Act
XLV of 1860) -
Production of unpublished record of bank, etc: Sec 46-A

(1)No court tribunal or other authority shall be entitled to compel the bank or
any person in the service of the bank to produce or, as the case may be,
give any evidence derived from, any unpublished record of the bank
(2)No court, tribunal or other authority shall permit any one to produce or give
evidence derived from, any unpublished record of the bank, except with the
prior permission in writing of the Governor who may give or withhold such
permission as he thinks fit.
(3)Notwithstanding anything contained in this Act or any other law for the time
being in force', a report prepared by the Bank on a banking company under
Section 40 of the Banking Companies Ordinance, 1962 (LVII of 1962), shall
be deemed to be unpublished for the purposes of subsections (1) and (2)
even if a copy of such report has been supplied to the banking company to
which the report pertains or to the Federal Government or to the Pakistan
Banking Council constituted under Section 9 of the Banks (Nationalization)
Act, 1974.
Inconsistent orders not to be issued: Sec 46-B

No governmental or quasi-governmental body or agency shall issue any directive,
directly or indirectly, to any banking company or any other financial institution
regulated by the Bank which is inconsistent with the policies, regulations and
directivities issued by the Bank pursuant to this Act, the Banking Companies
Ordinance, 1962 (LVII of 1962) or any other law in force.
Liquidation of the Bank: Sec 50

The Bank shall not be placed in liquidation save by order of the Federal
Government and in such manner and on such terms and conditions as it may
direct.
From the above we understand that State Bank of Pakistan exercises

various powers as well as certain duties and obligations are entrusted on
the Bank by virtue of Statutory Provisions contained in this Act.

LESSON 17
SBP BANKING SERVICES CORPORATION ORDINANCE, 2001
This Ordinance extends to the whole of Pakistan. Central Banks all over the world
are required to discharge an important obligation as regulator and policy maker as
well as advisor to the Government; as such it is not advisable that Central Bank
should engage themselves into day to day affairs of the Banking. As such it was
decided that a corporation may be established for discharging various functions
which are contained in this Ordinance, so that the State Bank of Pakistan may
focus its attention towards its prime objectives.
In this Ordinance we shall especially focus on the following aspects/

statutory provisions:
• Definitions
• Establishment and incorporation of the Bank
• Bank to be a subsidiary of the State Bank
• Business and functions of the Bank
• Board of Directors
• Managing Director of the Bank
• Accounts and audit
• Liquidation of the Bank
• Transfer of undertaking to the Bank
• Provisions with respect to employees transferred to the bank
• Delegation of the powers of the State Bank to SBP Banking Services
Corporation
• Duty of officers and servants to maintain secrecy
Definitions: the definitions as contained in the Ordinance are given hereunder:

"Act" means the State Bank of Pakistan Act, 1956.
"Bank" means the SBP Banking Services Corporation established under section 3;
"Board" means the Board of Directors of the Bank;
"Chairman" means the Chairman of the Board;
"Committee of Directors" means a Committee of Directors constituted under
section 11;
"Director" means a member of the Board;
"Governor" means the Governor and includes an Acting Governor of the State
Bank appointed under the Act;
"Managing Director" means the Managing Director appointed under section 9;
"Regulations" means regulations made under this Ordinance;
"Rules" means rules made under this Ordinance;
"Seal" means the common seal of the Bank;
"State Bank" means the State Bank of Pakistan established under the Act;
"Transfer Date" means the date specified in the Transfer Order;
"Transfer Order" means Transfer Order made under sub-section (1) of section 15-
"Transferred Employees" means the employees of the State Bank who shall, as
from the Transfer Date, stand transferred to and become the employees of the
Bank, by virtue of the Transfer Order; and
"Transferred Undertaking" means a part of the undertaking of the State Bank
specified in sub-section (1) of section 15.
Establishment and incorporation of the Bank: Sec 3:

(1) As from the date of promulgation of this Ordinance, there shall be established,
a bank to be called SBP Banking Services Corporation.
(2) It is worth mentioning that wherever the word bank is used in this Ordinance
that would invariably mean SBP Banking Services Corporation.
(3) The Bank shall be a body corporate having perpetual succession and a seal and
shall, by the name assigned to it by sub-section (1), sue and be sued.
(4) The head office of the Bank shall be situated in Karachi and it may establish
branches, offices and agencies in Pakistan and anywhere outside Pakistan with
the prior approval, in writing of the State Bank.
Bank to be a subsidiary of the State Bank: Sec 4

The Bank shall be a subsidiary of the State Bank, and the State Bank shall exercise
control over the Bank in accordance with the provision of this Ordinance
Business and functions of the Bank: Sec 5:

(1) Subject to sub-section (2), the Bank, under the overall supervision and control
of the State Bank, may transact and carry on all or any of the following
functions namely:—
(a). The carrying on of the Transferred Undertaking, statutory and

administrative functions and activities of the State Bank transferred or
delegated by the State Bank to the Bank under this Ordinance;
(b). The handling of receipt, supply and exchange of Bank notes and coins
which are legal tender;
(c). The issue, supply, sale, encashment and handling of prize bonds,
holding draws thereof and other savings instruments of the Federal
Government or of a Provincial Government;
(d). The performance of any other activity or business which the State
Bank may, by order in writing, specify; and
(e). The carrying on of any business and discharging of any functions and
powers as are incidental to, or in connection with, the affairs of the
Bank, including, without limiting the generality of the foregoing and, the
power to enter into any contracts or other instruments or any financial or
other transactions, issue guarantees and indemnities, borrow and lend
moneys, accept deposits of money, make investments, purchase and
hold any property and assets, and to provide any services to the State
Bank and to others .and receive any fee, commission or other
compensation for such services.
(2) The State Bank shall not transfer or delegate any of the functions specified in
section 9A Of the Act, including formulation and monitoring of monetary and
credit policies, regulation and supervision; of the financial sector, foreign
exchange regime and exchange-rate policy, and payment and settlement
system.
Share capital and limited liability: Sec 6

The authorized share capital of the Bank shall be one billion rupees or such other
amount the State Bank may, from time to time, determine by order in writing and
shall be divided into shares of one million rupees each.
'The paid-up capital of the Bank shall be such amount as may, from time to time,
by order in writing be determined by the State Bank and held inter alia, by -it,
including the fully paid-up shares issued to it under sub-section (7) of section 15.
The share capital may be divided into different kinds and classes therein as' may
be prescribed by regulations.
The liability of shareholders of the Bank shall be limited to the amount, if any, not
fully paid-up on the shares held by them in the capital of the Bank.
Board of Directors: Sec 7:

The general superintendence, direction and management of the affairs and
business of the Bank and overall policy making in respect of its operations shall
vest in the Board of Directors which may exercise all such powers and do all such
acts, deeds and things that may be exercised or done by the Bank.
In discharging its functions, the Board shall ensure compliance with the orders and
directions that may be issued by the State Bank from time to time.
The Board shall consist of:-

a) Members of the Central Board of the State Bank; and
b) The Managing Director.
The meetings of the Board shall be held at such times and places as may be
prescribed by regulations or, until so prescribed by regulations, as and when
convened by the Chairman.
No act or proceedings of the Board shall be invalid merely on the ground of the
existence of any vacancy in, or defect in the constitution of the Board
The quorum of meetings of the Board shall be as may be prescribed by
regulations or, until so prescribed by regulation, shall be five Directors.
All decisions of the Board shall be taken by majority of the Directors present and
voting at a meeting duly convened and held, and in the event of an equality of
votes, the Chairman may exercise a casting vote.
A resolution in writing signed by all Directors shall be as effective as if such
resolution had been passed at a meeting of the-Board
Chairman: Sec 8
The Governor shall be the Chairman of the Bank.
The Chairman shall, whenever present, preside over meetings of the Board, but if
at any meeting the Governor is not present, a Deputy Governor of the State Bank,
designated for this purpose by the Governor, shall attend the meeting on behalf of
the Governor and preside over such meeting provided that if the Deputy Governor
being present, is not willing to act, or is also absent, the Directors present shall
choose one of their member to be the Chairman of such meeting.
Managing Director: Sec 9

The Managing Director shall be appointed by the State Bank
The Managing Director shall hold office during the pleasure of the State Bank.
The Managing Director shall be the chief executive officer of the Bank and shall,
subject of the control and direction of the Board, administer the affairs of the Bank,
and shall have such powers for this purpose as are from time to time delegated to
him by the Board.
The salary and other terms and conditions of service of the Managing Director
shall be such as the Board may determine.
The Managing Director shall devote his whole time and attention to the affairs of
the Bank, provided that the Managing Director may, in addition to his duties as the
Managing Directors, be entrusted with such other duties for such period as the
State Bank may, by order in writing determine.
Disqualifications of the Managing Director: Sec 10

No person shall be appointed or hold office as Managing Director:—
a. Who is a member of the Senate, National Assembly, any Provincial Assembly,

or an elected member of a local council or local body constituted under any law
relating to local councils or local bodies.
b. Who is employed in any capacity in the service of the Federal Government or of
a Provincial Government or holds any office or position for which any salary or
other remuneration is payable out of public funds.
c. Who is a director, officer or employee of any other Bank or of a financial
institution or has an interest as a shareholder in any other bank or financial
institution:
d. Provided that nothing in this clause shall apply where this Managing Director is
in the employment of the State Bank or where the Managing Director is, in
addition to holding the office of Managing Director of the Bank, entrusted with
additional duties under sub-section (5) of section 9;
e. Who has been convicted of tax evasion under any law, or has been convicted or
proceedings are pending against him under section 412 of the Companies
Ordinance, "1984 (XLVII of 1984), or section 83 of the Banking Companies
Ordinance, 1962 (LVII of 1962), or has been convicted by a Court of law for an
offence involving moral turpitude;
f. Who is in default of payments due from him to any Bank, financial institution,
cooperative society, Government department? Government controlled or
managed company or corporation and for the purpose of this clause, default
in payment by the spouse, dependent children, and companies, firms and
other business concerns under the control or management of a person shall be
considered as the default of such person; or
g. Who holds an office in a political party?
Committees of Directors: Sec 11

The Board may constitute one or more Committees consisting of such number of
Directors as it may determine.
( 2) The powers, functions, duties and other terms of appointment of a Committee
of Directors shall be such as the Board may determine.
The members of a Committee of Directors shall hold office for such period as the
Board may determine.
The minutes of every meeting of a Committee of Directors shall be laid before the
Board as its next meeting following the meeting of the Committee.
Subject to the general and any special directions of the Board, a Committee of
Directors shall deal with any matter entrusted to it by the Board
Delegation of powers and appointment of attorneys: Sec 12

The Board may, for the purpose of ensuring smooth and efficient functioning of the
Bank and facilitating transactions of its daily business, by resolution, delegate to
the Managing Director or any other executive of the Bank, subject to such
conditions and limitations, if any, as may be specified therein, such of its powers
and duties under this Ordinance as it may deem necessary
The Board may, from time to time, by resolution appoint any company, firm or
person to be the attorney of the Bank for such purposes and with such powers,
authorities and discretions, not exceeding those vested in or exercisable by the
Board under this Ordinance and for such period and subject to such conditions as
the Board may think fit, and any such resolution may contain such provisions for
the protection and convenience of persons dealing with any such attorney as the
Board may think fit.
Accounts and audit: Sec 13

The accounting year of the Bank shall commence on the first day of July and end
on the thirtieth day of June
The Bank shall maintain proper accounts and other records to reflect true and fair
view of its state of affairs and prepare annual statement of accounts, including the
profit and loss account and balance sheet.
The accounts of the Bank shall be audited by one or more auditors who shall be
chartered accountants within the meaning of the Chartered Accountants Ordinance
, 1961 (X of 1961) to be appointed by the State Bank.
Every auditor shall be supplied with a copy of the annual statement of accounts
and it shall be the duty of the auditor to examine the same together with the
accounts and vouchers relating thereto, and every auditor shall have a list
delivered to him of all books kept by the Bank and shall, at all reasonable times,
have access to books, accounts and other documents of the Bank and may
employ accountants or other persons to assist him in auditing such accounts and
may, in relation to such accounts, examine the Managing Director, any Director
and executive of the Bank.
The auditors shall submit a report to the Board and to the State Bank
regarding the annual statement of accounts, and in any such report they shall
state whether in their opinion the statement of accounts is a full and fair
statement of accounts containing all necessary particulars and is properly drawn
up so as to exhibit a true and correct view of the state of affairs of the Bank and,
in case they have called for any explanation or information from the Managing
Director or the Board, whether it has been given and whether it is satisfactory.
The Board may, in addition to the audit under sub-sections (3) and (4), cause to be
carried out internal audit of the Bank's accounts and the internal auditors' reports
shall be submitted to the Board.
The Board may, in addition to the audit under sub-sections (3) and (4), cause to be
carried out internal audit of the Bank's accounts and the internal auditors' reports
shall be submitted to the Board.
Liquidation of the Bank: Sec 14

The Bank shall not be placed in liquidation save by order of the State Bank and in
such manner and on such terms and conditions as the State Bank may direct.
Transfer of undertaking to the Bank: Sec 15

(l) Subject to the powers under section 5, the State Bank may direct, by Transfer
Order and as particularly described in such Order, that
i. The operational functions and activities of SBP
ii. All related offices and departments;
iii. All related assets and liabilities; and
iv. Certain employees of the State Bank shall transfer to and vest in the Bank
as of the Transfer Date.
On the making of the Transfer Order by the State Bank under subsection(1), the
Transferred Undertaking and the Transferred Employees shall stand transferred to
and vest in the bank as on the Transfer Date and shall be operated, managed and
regulated by the Bank as the undertaking and employees of the Bank, provided
that the rules and regulations of the State Bank applicable to the operation of the
Transferred Undertaking and to the employment of the Transferred Employees as
of immediately before the Transfer Date shall continue to be applied by the Bank
unless altered by the Board with the approval of the State Bank
For the purposes of sub-section (1),-
(a) “assets" include properties whether tangible or intangible, rights, benefits and
Entitlements of every description and nature (other than immovable property) of
the State Bank and relating to, as of the Transfer Date, the operational functions
and activities of the State Bank and to the related offices and departments;
(b) “Employees” means the employees of the State Bank as are specified in the
Transfer Order;
( c) "liabilities" include debts, obligations, commitments, loans, encumbrances,
claims and charges of every description and nature, actual or contingent of the
State Bank and related to, as on the Transfer Date, the operational functions and
activities of the State Bank and to the related offices and departments;
(3) For the purposes of sub-section (1),-

"related offices and departments" include all field offices of the State Bank
and certain other offices and departments, in full or in part, as are specified in the
Transfer Order; "Operational functions and activities"
shall consist of the following, namely:—
i. revenue collecting and payments for and on behalf of the Federal

Government, a Provincial Government, Local Governments, local bodies or
any other governmental body, authority, institution, company or
corporation;
ii. maintenance of the accounts of the Federal Government, a Provincial

Government, local governments, local bodies, other governmental bodies,
authorities, institutions, companies, corporations and of other banks and
financial institutions;
iii. Operational work relating to management of debt;
iv. Operational work relating to foreign exchange;

v. Prize bonds and Government savings schemes;
vi. cash and other business as provided for in agreements between the State
Bank and the Federal Government and between the State Bank and the
Provincial Governments or in the Act, the Foreign Exchange Regulation Act,
1947 (VII of 1947), the Banking Companies Ordinance, 1962 (LVII of 1962),
the Public Debt y Act, 1944 (XVIII of 1944), the Securities Act, 1920 (X of
1920), or in any other applicable laws, rules, regulations, orders and
notifications made or issued there under; and
vii. Any other business, offices or departments, and functions, in full or to part,
as may be set out in or authorized or delegated by the Transfer Order.
(4)As and after the Transfer Date, the Bank shall undertake, pay, satisfy, discharge,
perform and fulfill all debts, liabilities, contracts, engagements, commitments and
obligations
whatsoever, of the State Bank existing immediately before the Transfer Date and
comprised in or exclusively relating to the Transferred Undertaking, and as on the

Transfer Date, the State Bank shall stand released and discharged from all such
debts, liabilities, contracts, commitments and obligations.
(5) All agreements, contracts, deeds, bonds, securities, powers-of-attorneys, grant

of instruments and other legal representations, guarantees, letters of credit,
negotiable instruments of whatever kind subsisting or having effect as at
immediately before the Transfer Date to which the| State Bank may be a party or
which shall be in favor of the State Bank and which are compromised in the
Transferred Undertaking or exclusively relate thereto shall be of full force and
effect, on the Transfer Date, against or in favor of the Bank and be enforced or
acted upon by or against the Bank, as if instead of the State Bank, the Bank had
been a party thereto or as if the same had been issued by or in favor of the Bank.
All suits, appeals or other legal proceedings, including arbitration proceedings, of
whatsoever nature by, or against, the State Bank which exclusively relate to the
Transferred Undertaking and which shall be pending immediately before the
Transfer Date in any Court, Tribunal, other competent authority or before any
arbitrator shall be continued exclusive by, or against, the Bank and the State Bank
shall cease to be a party to such suits, appeals or other legal proceedings.
In consideration of the transfer to the Bank of the Transferred Undertaking under
sub-section (1), the Bank shall issue such number of fully paid-up shares in its
share capital to the State Bank as shall be specified in the Transfer Order.
Notwithstanding anything in the Stamp Act, 1899 (II of 1899) or any other law for
the time being in force no stamp duty, registration or any other similar tax or levy
shall be payable under any law for the time being in force on or in relation to the
vesting and transfer made by the Transfer Order
The State Bank may take all such further, supplemental, incidental and
consequential actions, and steps as may be necessary to give full effect to the
provisions of this section.
Employees transferred to the Bank: Sec 16

l) The Transfer Order shall specify by category or by name the employees of the
State Bank who shall, as from the Transfer Date, stand transferred to, and become
the employees of, the Bank by virtue of the Transfer Order.
(2) The Transferred Employee shall not be entitled to any compensation or any
other payments whatsoever as a consequence of transfer to the Bank.
(3) The existing terms and conditions of service and the benefits to which the
Transferred Employees are entitled to in the State Bank, including pension,
gratuity, provident and benevolent funds benefits and benefits of the existing staff
regulations shall be assured to the Transferred Employees upon their transfer to
the Bank except where altered with the consent of the Transferred Employees
As from the Transfer Date, the benefits accrued to the Transferred Employees
under the State Bank's pension, gratuity, provident fund, benevolent fund any
other employees benefit Of the State Bank shall be transferred to similar funds and
schemes established by the Bank and the Transferred Employees shall be deemed
to have become members of, and become entitled to the benefits of, such funds
and schemes of the Bank.
For the purpose of payment .of benefits to the Transferred Employees under the
pension, gratuity, provident and benevolent funds and other employees benefits
schemes of the Bank, the period of employment of the Transferred Employees
under the State Bank shall count towards then-under -the Bank notwithstanding
the date of transfer of the Transferred Employees to the Bank.
Power of the State Bank to give direction: Sec 17

Where the State Bank is satisfied
a. In the public interest; or . .
b. To prevent the affairs of the Bank being conducted in a manner detrimental to
the interests of its customers or in a manner prejudicial to the interests of the
Bank or of the State Bank; or
to secure the proper management of the Bank generally, It is necessary to issue
directions to the Bank, the State Bank may, from time to time, issue such
directions as it may deem fit and the Bank shall be bound to comply with such
directions.
The State Bank may, on representation made to it, or on its own motion, modify or
cancel any direction issued under sub-section (1) and in so modifying or cancelling
any such direction may impose such conditions as it thinks fit, subject to which
the modifications or shall have effect.
Delegation of the powers of the State Bank: Sec18

The State Bank may, by order in writing, direct that all or any of the State Bank's
powers and functions under this Ordinance, the Act, the Banking Companies
Ordinance, 1962 , the Foreign Exchange Regulation. Act, 1947 or under any other
law, rules, regulations, orders, notifications or bye-laws for the time being in force
shall, subject to the provision of section 5 of this Ordinance, be exercised by the
Bank, as the SBP may, from time to time, specify by order in writing. ,
Where the Governor or any other executive of the State Bank authorized by the
.Governor in this behalf has, under sub-section (1), directed that any of the State
Bank's powers or functions under any law, rules, regulations, orders, notifications
or bye-laws for the time being in force shall be exercised or performed, by the
Bank the Board may, by resolution, direct that any of such powers and functions
shall be exercised, or performed, subject to such limitations, restrictions or
conditions, if any, as the Board may, from time to time, impose by the Managing
Director or any other Director, executive or other employee of the Bank specified
by the Board
Appointments under section 23B of the Foreign Exchange Regulation Act,

1947: Sec 19
Notwithstanding the provisions of section 23B of the Foreign Exchange Regulation
Act, 1947 the State Bank may, by order in writing, authorize in relation to any area
specified in such order any executive of the Bank to act as the Director of
Adjudication, an Additional Director of Adjudication, a Joint Director of Adjudication,
a Deputy Director of Adjudication Director of Adjudication for the purposes of
section 23B thereof.
The executives of the State Bank currently acting as the Director of Adjudication,
the additional Director of Adjudication, the Joint Director of Adjudication, the
Deputy Director of Adjudication, And the Assistant Director of Adjudication in
respect of any area and transferred to the Bank pursuant to the Transfer Order
shall continue to hold such appointments until removed by the State Bank and
shall be deemed to have been appointed by the Federal Government for the
purposes of Section 23-B of the Foreign Exchange Regulation Act, 1947 (VII of
1947).
Duty of officers and servants to maintain secrecy: Sec 20

Except in the performance of his duties under this Ordinance, every executive or
other employee of the Bank shall preserve and aid in preserving secrecy with
regard to all matters relating to the affairs of the Bank and of the State Bank
coming to his knowledge and not published by the Bank or by the State Bank and
with regard to all matters relating to the financial or monetary affairs of any Bank,
institution, person, body of persons, any Government or authority whether in
Pakistan or outside Pakistan that may come to his knowledge in the performance
of his duties.
Every such executive or other employee who communicates any such matter,
except when required by law so to do, or in the discharge of his duties as such,
shall be guilty of an offence punishable with imprisonment of either description for
a term which may extend to three years or with fine which may extend to one
hundred thousand rupees; or with both.
No Court shall take cognizance of any offence punishable under this section except
upon a complaint in writing by a person authorized in this behalf by the Board.
Bank and its officers to be public officers: Sec 21

For the purposes of Article 7 of the Qanun-e-Shahadat Order, 1984 (P.O. No. 10 of
1984), the provisions of Part IV -of the Code of Civil Procedure, 1908 (Act V of
1908), and the provisions of rule 27 of Order V, and rule 52 of order XXI of the said
Code, the Bank and any person in the service of the Bank acting ate, capacity as
such shall be deemed to be a public officer.
The provisions of Article 6 of the Qanun-e-Shahadat Order, 1984 (P.O. No.. 10 of
1984), shall apply to the unpublished records of the Bank and the Managing
Director shall be deemed to be the officer or head of the department concerned.
Persons in the service of the Bank to be public servants: Sec 22

Every person in the service of the Bank shall be deemed to be a public servant
within the meaning of section 21 of the Pakistan Penal Code (Act XLV of 1860).
Production of unpublished records of the Bank, etc: Sec 23

No Court, Tribunal or other authority shall be entitled to compel the Bank or any
person in the service of the Bank to produce or , as the case may be, give any
evidence derived from, any unpublished records of the Bank
No Court, Tribunal or other authority shall permit any one to produce or give
evidence derived from, any unpublished records of the Bank, except with the prior
permission in writing of the Managing Director who may give or withhold such
permission as he thinks fit.
Notwithstanding anything contained in this Ordinance or any other law for the time
being in force, a report prepared by the Bank on a banking company under any
law for the time being shall be deemed to be unpublished for the purposes of sub-
sections (1) and (2) even if la copy of such report has been supplied to the
banking company to which the report pertains, the State Bank or the Federal
Government.
Pension of Bank employees to be exempt from attachments, etc Sec 24

Notwithstanding anything contained in any law for the time being in force,
pensions granted by the Bank to its executives and other employees shall not be
liable to seizure, attachment or sequestration by process of any court at the
instance of a creditor, for any demand against the pensioner or in satisfaction of a
decree or order of any such Court
Exemption from taxes: Sec 25

Notwithstanding anything contained in the Wealth Tax Act, 1963 (XV of 1963), and
the Income Tax Ordinance, 1979 (XXXI of 1979) or any other law for the time being
in force relating to wealth tax, income tax or super tax, the Bank shall not be liable
to pay any wealth tax, income tax or super tax on its income or wealth.
Power to make rules: Sec 26

The State Bank may, by notification in the official Gazette, make rules, consistent
with the provision of this Ordinance, for carrying out the purposes of this
Ordinance
Power to make regulations: Sec 27

The Bank may, subject to the prior approval of the State Bank, make regulations,
not inconsistent with the provisions of this Ordinance and the rules made there
under, to provide for all matters for which provision is necessary or convenient for
the purpose of giving effect to the provisions of this Ordinance.
Where any provision of the regulations is inconsistent with any provision of the-
rules, the provision of the rules shall prevail.
Where the State Bank considers it expedient so to do, it may by order in writing,
direct the Bank to make any regulations or to amend or rescind any regulations
already made, within such period as it may specify in this behalf.
If the Bank fails or neglects to comply with any direction of the State Bank under
subsection (3) within the specified period, the State Bank may make, amend or
rescind any regulation directed by the State Bank to be made, amended or
rescinded, and a regulation so made, amended or rescinded by the State Bank
shall be deemed to have been made, amended or rescinded by the Bank in
accordance with the provisions of this section and shall have effect accordingly.
Protection of action taken in good faith: Sec 28

No suit or other legal proceedings shall lie against the State Bank or any director
or officer of the State Bank for anything which is in good faith done or intended to
be done in pursuance of this Ordinance or of any rules, regulations or orders made
there under
Ordinance to override, etc: Sec 29

Except the application of any provision of the Act to the Bank as a subsidiary of the
State Bank, this Ordinance shall have effect notwithstanding any thing contained
in any law for the time being in force or in any agreement, contract, or other
applicable document or instrument.
The Banking Companies Ordinance, 1962 (L VII of 1962), shall not apply to the
Bank.
Removal of difficulties: Sec 30

If any difficulty arises in giving effect to & provisions of this Ordinance, the State
Bank may make such order not inconsistent with the provisions of this Ordinance,
as may appear to it to be necessary for the purposes, of removing the difficulty:
Provided that no such power shall be exercised after the expiry of two years from
the commencement of this Ordinance
It is worth mentioning that with the establishment of SBP Banking

Services Corporation, the Central Bank is discharging its time functions
in a more efficient and effective manner.

LESSON 18
PAKISTAN BANKING AND FINANCE SERVICES COMMISSION ACT, 1992
THE CO-OPERATIVE SOCIETIES AND CO-OPERATIVE BANKS (REPAYMENT

OF LOANS) ORDINANCE, 1966
Establishment of Federal Bank for Co-Operative and regulation of Co-
Operative Banking Act, 1977
Federal Bank for Co-Operative and Regulation of Co-Operative Banking
(Account) Rules
PAKISTAN BANKING AND FINANCE SERVICES COMMISSION ACT, 1992

Object:
The object and purpose of establishment of the commission was to promote merit
and transparency in recruitment of bank officers through competitive examination
and interview as well as conducting test for promotion, advice Federal Government
on matters relating to requisite qualifications, methods of recruitment in officer
grade-2 (OG-2) and higher grades in financial institutions. The commission was
required to submit annual report to the President of Pakistan.
In this Act we shall cover the following aspects/ statutory provisions:

• Definitions
• Establishment of the Commission
• Salary, allowances and privileges
• Term of office
• Resignation and filling of vacancies
• Functions of the Commission
• Recruitment to posts in Financial Institutions
• Funds of the Commission:
• Appointment of officers, employees, etc
• Report of the Commission
• Power to amend Schedule
• Act to override other laws
• Power to make rules
“Commission” means the Pakistan Banking and Finance Services Commission
established under section 3;
"Financial institution" means an institution referred to in the Schedule;
"Member" means a member of the Commission;
"Recruitment" means initial appointment otherwise than by promotion or transfer;
"Rules" means rules made under section 14; and
(f)"schedule" means the schedule to this Act.
Establishment of the Commission: Sec 3

There shall be established for the purposes of this Act a commission to be called
the Pakistan Banking and Finance Services Commission and consisting of a
Chairman and not more than four members appointed by the Federal Government.
Salary, allowances and privileges: Sec 4

The Chairman and the Members shall be entitled to such salary, allowances and
privileges as the Federal Government may determine from time to time

Term of office: Sec 5
The Chairman and Members shall hold office for such term as may be determined
by the Federal Government
Resignation and filling of vacancies: Sec 6

The Chairman or a Member may, by statement under his hand addressed to the
Federal Government, resign his office.
Any vacancy occurring in the membership of the Commission due to death,
resignation or removal shall be filled by the appointment of another person by the
Federal Government.
Functions of the Commission: Sec 7

The functions of the Commission shall be— to conduct open competitive
examinations for recruitment to Grade III or higher posts in the financial
institutions; to conduct interviews and tests for recruitment to posts in grades
higher than Grade III, except where such recruitment is excluded from the purview
of the Commission by the Federal Government; to conduct tests for promotion
of existing employees from lower cadres to Grade III and above, if so required by a
financial institution; and to advise the Federal Government on matters relating to
qualifications for, and methods of recruitment to, posts in Grade II or higher
grades in the financial institutions, if so required by the Federal Government
Recruitment to posts in Financial Institutions: Sec 8:

Recruitment to all posts in Grade iii or higher grades in a financial institution shall
be made on the advice of the Commission:
Provided that the Commission may, on the direction of the Federal Government
advise any financial institution for recruitment in any post or grade
The Commission may exempt any professional or class of professionals, like
engineers, lawyers and chartered accountants, from appearing in any written test
or examination conducted by the Commission.
A financial institution shall not disregard, or act contrary to, the advice of the
Commission without the prior approval of the Federal Government, and where the
Federal Government grants such approval it shall record its reasons for doing so.
Funds of the Commission: Sec 9

There shall be constituted for the Commission a fund to which shall be credited all
sums received under sub-section (2) and out of which shall be defrayed all
expenditure incurred by the Commission, including expenditure on the
emoluments of the Chairman and members and the officers, employees, experts.
And consultants of the Commission
Every financial institution shall make to the Commission such payments to defray
its expenses as the Commission may, with the approval of the Federal
Government, demand
Appointment of officers, employees, etc: Sec 10

For the efficient performance of its functions, the Commission may appoint its
officers, employees, experts and consultants on such terms and conditions as may
be prescribed.
Report of the Commission: Sec 11

The Commission will submit to the President annually a report on the work done by
the Commission.
Power to amend Schedule: Sec 12

The Federal Government may, keeping in view the purposes of this Act, by
notification in the official Gazette, amend the Schedule so as to add any entry
thereto or omit or modify any entry therein.
Act to override other laws: Sec 13
The provisions of this Act shall have effect notwithstanding anything contained in
any other law, or in any instrument, deed or other documents relating to a
financial institution.

The Commission may, with the approval of the Federal Government, by notification
in the official Gazette, make rules, for carrying out the purposes of this Act.
Since the scenario in the banking sector has undergone, transformation
and shifted from governmental control and nationalization to a privatized
sector. Hence designing and implementing the recruitment policies of the
respected banks is now the sole prerogative of the Board of Directors of
the respective Banks. Hence the importance of this Ordinance is
overshadowed by the new realities.
The co-operative societies and co-operative banks (repayment of loans)

ordinance, 1966
This Ordinance extends to the whole of the province of the Punjab, except the
Tribal Areas. It shall come into force at once.
The concept of co-operative and formation of Co-operative societies and Co-
operative bank appears to be a priority area for the governments to support and
provide institutional framework to those persons and segments of the society
which do not hold sufficient assets and collaterals to offer to the banks and
financial institutions for securing loans/ advances.
• Definitions
• Repayment of loans
• Supply of information to the Registrar
• Service of notice to the borrowers
• Determination of liability when loan is not admitted
• Securing and repayment of loans
• Recovery of loans
• Restrictions on registration of documents:
• Restrictions on alienations
• Power of Registrar when making inquiry
• Penalty
• Procedure
• Power to make rules
• Bar of Jurisdiction
“Act” means the Co-operative Societies Act, 1925 (Sind VII of 1925);
“Assistant Registrar” means an Assistant Registrar of Co-operative Societies
appointed or deemed to have been appointed under the Act to assist the Registrar;
“Benami loan” means a loan the real beneficiary or recipient whereof a person
other than the person is in whose name the loan is advanced or granted;
“Borrower” includes in case of a benami loan, the real beneficiary or recipient of
the loan;

“co-operative bank” means a co-operative society established for carrying on
banking business and having as its principal object the financing of other co-
operative societies registered or deemed to be registered under the Act;
“co-operative society” means a society which having as its object the promotion
of economic interest of its members in accordance with co-operative principles, is
registered or deemed to be registered under the Act;
“Government” means the Provincial Government of the Punjab
i. “loan” means a loan (including [a benami loan or] any transaction which in
the opinion of the Registrar is in substance a loan), whether of money or in
kind, which is not secured or is in-sufficiently secured, and taken from a co-
operative society by any person, whether a member of such society or not,
or from a co-operative bank by any person but not an Agricultural Co-
operative Society, Dairy Farming Co-operative Society or Poultry Farming
Cooperative Society having in each case a working capital not exceeding
five hundred thousand rupees], and includes,—
ii. Finance as defined in the Banking Tribunals Ordinance, 1984.
iii. Any amount which is due from any such person to a co-operative society or
a co-operative bank, whether taken as a loan or not;
iv. any amount due from any such person to a co-operative society or a co-
operative bank under a decree passed by a Civil Court or an award given by
an arbitrator or a decision of the Registrar, whether in exercise of his
original or appellate jurisdiction; and
v. any loan due from any such person to a co-operative society or a co-
operative bank which is the subject matter of any pending suit, arbitration
proceedings, appeal or revision, whether under the Act or before any Court.
Explanation— A loan is “insufficiently secured” if it is not secured by mortgage,

pledge, hypothecation or assignment of such property of the borrower or of his
surety or of both, as in the case of a loan not exceeding five hundred thousand]
rupees, the Assistant Registrar, and in the case a loan exceeding five hundred
thousand] rupees, the Registrar may think adequate;
“Registrar” means a Registrar of Co-operative Societies appointed or deemed to
have been appointed under the Act, and includes a person upon whom all the
powers of a Registrar have been conferred under the Act.
Repayment of loans: Sec 3:

Notwithstanding anything contained in any other law for the time being in force or
in any agreement or other instrument, award or decree of any Court, every loan
outstanding, whether barred by limitation or not, in whole or in part and every
loan, any installment whereof is outstanding shall, unless repaid earlier, be repaid
and secured in the manner provided in section 7].
Supply of information to the Registrar: Sec 4

Every co-operative society and co-operative bank, through its Manager or
Secretary, shall—when a loan obtained from it is not repaid by the date on which it
is due for repayment, bring such fact, together with full details of the case and the
particulars of the borrower (including in the case of a benami loan, the real
beneficiary or recipient of the loan)and surety to the notice of Assistant Registrar,
when the amount of the loan does not exceed five hundred thousand] rupees; and

to the notice of the registrar, when the amount of the loan exceeds five hundred
thousands rupees; and
when so directed by the Registrar or the Assistant Registrar, as the case may be,
within thirty days of receipt of such direction, furnish to the Registrar, or the
Assistant Registrar, as the case may be, furnish full information in respect of all
cases of loans falling under section 3 required to be repaid or secured under
section 7.
Service of notice to the borrowers: Sec 5

On receipt of information under section 4 [or on his own information] in respect of
any loan, the Registrar or the Assistant Registrar, as the case may be, shall issue
or cause to be issued a notice to the borrower and his surety requiring them to
repay and secure the loan in accordance with the provisions of section 7.
A notice under sub-section (1) may be served
(a). By giving or tendering it to the person named in the notice; or
(b). By enclosing it in a cover and sending such cover by registered post,

acknowledgment due, to the last known address of the person named in
the notice; or
(c). By affixing such notice on a conspicuous part of the last known

residence of the person named in the notice; or
(d). By publication of the notice in a newspaper.
Determination of liability when loan is not admitted: Sec 6:

Where any borrower or his surety, to whom notice under section 5 is issued, does
not admit the loan or any liability arising there from, such borrower or surety, as
the case may be, shall, within thirty days of the receipt of the notice, submit,
either personally or by registered post (acknowledgment due), a written statement
to that effect to the Registrar or the Assistant Registrar, by whom such notice was
issued or caused to be issued, and such Registrar or Assistant Registrar, as the
case may be, thereupon shall cause notice to be issued to the co-operative
society, or the co-operative bank, as the case may be, and in the case of a benami
loan, to the alleged beneficiary, and shall, after making such inquiry as he may
consider necessary and giving the parties a reasonable opportunity of being heard,
decide the matter.
Securing and repayment of loans: Sec 7

Within thirty days of the service of the notice under section 5, in a case where the
borrower does not deny the loan or the liability arising there from, and in other
cases, within thirty days of the decision of the Registrar or the Assistant Registrar,
as the case may be, under section 6, the borrower and his surety shall—
secure the loan or the liability arising there from by mortgage, pledge,
hypothecation or assignment of such property of the borrower or his surety or of
both as in the case of a loan not exceeding five hundred thousand rupees, the
Assistant Registrar, and in the case of a loan exceeding five hundred thousand
rupees, the Registrar, may think adequate; and
repay the loan after thirty days of the service of notice under section 5 when he
does not deny the loan or the liability arising there from, and in any other case,
after thirty days of the decision of the Registrar or the Assistant Registrar, as the
case may be, in eight months in four equal installments, the first installment being
due on the day immediately succeeding the one month period of notice or, as the
case may be, the decision of the Registrar or the Assistant Registrar specified
above.
Recovery of loans: Sec 8:

If the amount of any loan or any part thereof to be repaid in accordance with the
provisions of section 7 is not paid within the period or the periods specified in the
said section, the same may, without prejudice to the provisions of section 10, be
recovered according to the law and under the rules for the time being in force for
the recovery of arrears of land revenue.]
Where the borrower is a firm, partnership, company or other association of persons
(not being a company registered under the Companies Act, 1913, the liability of
the members whereof is limited), the loan or any part thereof due from such
borrower may be recovered from the assets of such firm, partnership, company or
other association of persons, as the case may be, or from the members or partners
thereof.
Restrictions on registration of documents: Sec 8-A

Notwithstanding anything contained in any other law for the time being in force no
registering officer shall register any document relating to property, which is
required to be registered under the provisions of clause (a), (b), (c) or (e) of section
17 of the Registration Act, 1908 ,or which is produced before him for voluntary
registration, nor shall any Revenue Officer on the basis of any such document
effect any mutation in the record of rights under the provisions of any law for the
time being in force, unless—
(1) (a) the person whose right, title or interest in the property is or will be
transferred, assigned, limited or extinguished under the terms of the document or
on the basis of the mutation in the record of rights, as the case may be, furnishes
an affidavit to the registering officer or the revenue officer, as the case may be, to
the effect that he does not owe any loan, whether due immediately or on a future
date, to a co-operative society or a cooperative bank; or
(b) where such person owes a loan to a co-operative society or a co-operative
bank, whether due immediately or on a future date, it is certified by the Registrar
where the loan owed by such person exceeds rupees five hundred thousand, and
by the Assistant Registrar where the loan owed by such person does not exceed
rupees five hundred thousand, that either satisfactory arrangements have been
made for the repayment of the loan or that the loan has been secured in
accordance with the provisions of section 7.
Where an application is made to the Registrar or an Assistant Registrar, as the
case may be, for issuing a certificate under the provisions of sub-section (1), he
shall not refuse to issue the certificate unless he has first given the applicant an
opportunity of being heard and adducing evidence to show that either satisfactory
arrangements have been made for the repayment of the loan owed by the
applicant or that the loan has been secured in accordance with the provisions of
section 7.
An order made by the Registrar or an Assistant Registrar under sub-section (2)
refusing to issue a certificate, shall be final and not open to question in any
manner.
Restrictions on alienations: Sec 8-B

Where any person owing a loan, whether due immediately or on a future date, to a
co-operative society or a co-operative bank has, on or after the twenty-seventh
day of April, 1966, alienated any immovable property, by sale, exchange, gift,
mortgage or will, otherwise than by or under an order or decree of a Civil, Revenue
or Criminal Court, which alienation is fraudulent with intent to defeat the claim of
a co-operative society or a co-operative bank, such alienation shall not operate to
transfer any right, title or interest in the property of the debtor, unless—
a. The loan due from the debtor has been repaid; or
b. It is certified by the Registrar, where the loan exceeds rupees [five hundred
thousand], and by the Assistant Registrar, where the loan does not exceed
rupees [five hundred thousand], that either satisfactory arrangements have
been made for the repayment of the loan or that the loan has been secured in
accordance with the provisions of section 7.
An alienation of immovable property shall be deemed to be fraudulent with intent
to defeat the claim of a co-operative society or a co-operative bank for the
purposes of sub-section (1), if the Registrar, after giving the person by whom the
alienation has been made, and the person or persons in whose favor the alienation
has been made an opportunity of being heard, issues a declaration to the effect
that the alienation is fraudulent with intent to defeat the claim of a co-operative
society or a co-operative bank.
Any party aggrieved by a decision made by the Registrar under sub-section (2)
may prefer an appeal to Government against such decision, and the order made
by Government, on such appeal passed after giving an opportunity of being heard
to the appellant shall be final and shall not be open to question in any manner.
Power of Registrar when making inquiry: Sec 9

The Registrar or the Assistant Registrar, as the case may be, shall, for the purpose
of making any inquiry under this Ordinance, have the same powers as are vested
in a Civil Court under the Code of Civil Procedure, 1908 (Act V of 1908), when
trying a suit, in respect of the following matters, namely:-
(a)Summoning and enforcing the attendance of any person and examining him on
oath;
(b) Requiring the discovery or production of any document;
(c) Requisitioning any public record from any Court or office;
(d) Issuing commissions for the examination of witnesses;
(e)Appointing guardians or next friends of persons who are minors or of unsound
mind;
(g) Adding legal representatives of deceased borrowers or sureties;
(h) Substituting the names of rightful parties, including the beneficiaries of benami
loans;
Consolidation of cases;
(i) Any other matter which may be prescribed by rules made under section 12; and
(j)Enforcing any order made by him under the provisions of this Ordinance or the
rules framed there under.
Penalty: Sec 10
Whoever contravenes any of the provisions of this Ordinance or the rules made
there under shall be punishable with imprisonment for a term which may extend to
seven years, or with fine, which, in the case of default in the repayment of a loan,
shall not be less than one-fourth of the amount of the loan outstanding against
him, or with both.
Procedure: Sec 11
(1) No Court shall take cognizance of any offence under this Ordinance except on a
complaint in writing made by the Registrar or an Assistant Registrar, or by a
person duly authorized by the Registrar or Assistant Registrar.
(2)Notwithstanding anything to the contrary contained in the Code of Criminal
Procedure, 1898, the provisions of Chapter XX of the said Code shall apply to the
trial of cases under this Ordinance.]

Government may, by notification in the official Gazette, make rules, to carry out
the purposes of this Ordinance.
Bar of Jurisdiction: Sec 13

No Court or other authority shall have jurisdiction—
(a). To entertain or adjudicate upon any matter which [Government, the
Registrar] or the Assistant Registrar is empowered by or under this Ordinance
or the rules framed there under to dispose of or determine; or
(b). To question the legality or validity of anything done under this Ordinance or
the rules framed there under by [Government, the Registrar] or Assistant
Registrar.
No Court or other authority shall be competent to grant an injunction or other
order in relation to any proceedings before the Registrar or the Assistant Registrar,
or anything done or to be done by or at the instance of the Registrar or the
Assistant Registrar under this Ordinance or the rules framed there under.
From the above, we understand that provision of law is a very important
aspect of the cooperative banking but at the same time recovery of the
loan disbursed is equally important. The above statutory provisions
provide a legal framework for recovery granted by cooperative banks.
Establishment of Federal Bank for Co-Operative and regulation of Co-

Operative Banking Act, 1977
This Act may be called the establishment of the Federal Bank for Co-Operative and
regulation of Co-operative Banking Act, 1977. It extends to the whole of Pakistan
and also applies to the business of the Bank transacted outside Pakistan and to
persons conducting such business. It shall come into force at once and shall be
deemed to have taken effect on the 9th day of October, 1976.
Definition:
“ Approved securities” means 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 Trusts Act, 1882, and such other securities as the Federal Government may, by
notification in the official Gazette, declare to be approved securities for purposes
of this Act;
“Bank” means the Federal Bank for Co-operatives established under section
5;
“Board” means the Board of Directors constituted under section 9;
“Chairman” means the Chairman of the Board;
“Co-operative bank” means a banking society as defined in the Explanation to
the sub-section (2) of section 7 of the Co-operative Societies Act, 1925, other than
a provincial Co-operative Bank;
“Co-operative society” means a society registered in Pakistan under any law for
the time being in force relating to registration of co-operative societies and a
“primary co-operative society” means such a society of which no other society is a
member;
“Borrower” means a person who has obtained a loan from the Bank of a
Provincial Co-operative Bank and includes a surety or an indemnifier, but does not
include the Federal Government or a Provincial Government.
“Demand Liabilities” means liabilities which are to be met on demand and
“time liabilities” means liabilities which are not demand liabilities;
“Director” means a Director for the time being of the Board;
"District Judge” in respect of areas where a District Judge does not have
unlimited pecuniary jurisdiction in original civil suits, a high Court exercising
original civil jurisdiction;
“Family members” in relation to a person means his spouse, dependent lineal
ascendants and descendants and dependent brothers and sisters;
“Loans, advances and credit” includes finance as defined in the Banking
Tribunals Ordinance, 1984, and all cognate expressions shall be construed
accordingly:
“Managing Director” means Managing Director of the Bank and includes any
person for the time being discharging the functions of the Managing Director”
“Multi-unit co-operative society” means a co-operative society to which the
multi-Unit Co-operative Societies Act, 1942 applies
“Prescribed” means prescribed by rules;
“Provincial Co-operative Bank” means a co-operative society the primary
object of which is to make loans to the co-operative societies which are its
members and which is notified, for the purposes of this Act, to the Bank by the
Provincial Government of the Province within which the co-operative society is
registered or, until a co-operative society is so notified, any one of the following
namely:
The Baluchistan Provincial Co-operative Bank Ltd
The Frontier Provincial Co-operative Bank Ltd
The Punjab Provincial Co-operative Bank Ltd
The Sindh Provincial Co-operative Bank Ltd
“Regulation” means a regulation made under this Act;
“Scheduled Bank” has the same meaning as in State Bank of Pakistan Act, 1956
“State Bank” means the State Bank of the Pakistan established under the State
Bank of Pakistan Act, 1956
Establishment of the Bank: Sec 5

As soon as may be after the coming into force of this Act, the Federal Government
shall take steps to establish, in accordance with the provisions of this Act, a Bank
to be called “ The Federal Bank for co-operatives” to carry out the purposes of this
Act,
The Bank shall be a body corporate having perpetual succession and a common
seal, with powers to acquire, own, hold and dispose of any property, and shall by
the name assigned to it by sub-section (1) sue and be sued. The Bank shall be
deemed to be a banking company for the purposes of the State Bank of Pakistan
Act, 1956, the banking Companies Ordinance, 1962 and any other law for the time
being in force relating to banking companies, excepting the Banks (Nationalization)
Act, 1974
Share Capital: Sec 6

The initial share capital of the Bank shall be twenty crors of rupees divided into
tow thousand fully paid up shares of the nominal value of one hundred thousand
rupees each shall be fully subscribed by the Federal Government, the provincial
Governments and the State Bank of Pakistan in the following manner:---
(a) Federal Government Rs 2.00 crores
(b) State Bank Rs 15.00 crores
(c) Government of the Punjab Rs 1.00 crores
(d) Government of Sindh Rs 1.00 crores.
(e) Government of N.W.F.P Rs 0.50 crores
(f) Government of Baluchistan Rs 0.50 crores

The share capital may be increased from time to time by a resolution of the Board
with the approval of the Federal Government and the capital so increased shall be
fully subscribed by the Federal Government, the provincial Governments and the
State Bank of Pakistan.
Direction and superintendence: Sec 8

The general direction and superintendence of the affairs and business of the bank
shall vest in a Board of Directors constituted in accordance with section 9, which
may exercise all such powers and do all such acts and things as may be exercised
or done by the Bank, subject to the provisions of this Act.
Board: Sec 9
The Board shall consist of:
The Chairman;
All the directors for the time being of the Central board of Directors of the State
Bank;
The Managing Director;
Two directors to be nominated by the Federal Government, of whom one shall be
officer of ministry of GOP and other a non-official; and
The Board shall consist of:
e. Two directors from each Province to be nominated by the Federal Government
on the recommendation of each Provincial Government, of whom on shall be a
non-official.
The Governor for the time being of the State Bank shall be the Chairman of the
Board.
Unless the Federal Government otherwise directs in any case, a non-official
Director referred to in clause (d) or clause (e) of sub-section 1 shall hold office for a
period of three years and shall, subject toe the provision of this Act be eligible for
re-appointment.
Managing Director (Sec 10) – shall be appointed by the federal

government. Shall be whole time chief executive.
Disqualifications of Managing Director and Directors (Sec 11)– legislators,
insolvent, minor, of unsound mind, govt. servant, not citizen.
Indemnity of Directors (Sec 14)– if acted in good faith.
Business and Functions: Sec 17

The Bank shall be the principal financing institution for meeting the credit needs of
provincial Co-operative Banks and multi-unit co-operative societies.
The bank may carry on, transact or do the several kinds of business and acts
hereinafter specified namely:--
Accept money on deposit;
Borrow funds from the Federal Government, financial institutions
Raise funds for the purpose of the Bank’s operation through issue and
sale of bonds -- -- debentures;
Obtain or raise funds on the basis of participation in profit and loss, mark-up
and mark---down in price, hire-purchase, rent sharing, licensing etc
Make secured loans and advances to provincial Co-operative Bank, multi-
unit co-operative societies and, subject to the regulations framed for the purpose,
to the officers and staff of the Bank;

Draw, accept, discount, buy or sell or rediscount bills of exchange or promissory
notes bearing two or more good signatures, one of which shall be that of
scheduled bank of a provincial Co-operative Bank;
Issue guarantees and give indemnities in relation to its business;
Subscribe to the debentures (Participation term certificates, term finance
certificates etc) repayable within a period not exceeding 10 years
Deliver, receive, collect and remit any securities
Purchase or otherwise acquire in the normal course of its banking business any
Moveable or immovable property, residential or commercial etc
Open accounts or enter into any agency arrangement with any bank or
financial institution in or outside Pakistan.
Invest its funds in Government Securities and other approved securities and if so
directed by the Board and with the approval of the Federal Government, in the
share capital of:
A Provincial Co-operative Bank (so that the amount so invested is not less than)
twenty-five percent of the fresh capital contributed by the Provincial Government
A multi-unit co-operative society up to an amount not exceeding 25% of its paid-up
capital
Sell and realize property, movable or immovable, patents, designs, trade

marks, which may in any way come into the ownership, possession or control of
the Bank in the satisfaction or part satisfaction of any of its claims.
Assist Provincial Co-operative Banks in preparing their seasonal and
developmental loaning programs and conduct appraisal and undertake feasibility
study of projects covered by such loaning programs
Encourage the development of special co-operative projects.
Establish independent subsidiaries.
Organize training in co-operative banking for the employees of the Provincial
Co-operative banks and other co-operative societies
Ensure proper utilization of loans obtained from the bank
Carry out research on problems of rural credit
Lend money in the inter-bank call money market
Issue letters of credit
Appoint attorney and agents;
Maintain and operate the provident fund and other funds created for the
benefit if its employees
Perform such functions and exercise such powers as may be entrusted to or
conferred upon it by or under any law; and
Generally do all such matters and things as may be necessary, incidental to or
consequential upon exercise of its powers or the discharge of its duties or
functions under this Act or any other law.
Power to borrow or obtain finance (Sec 19)—the bank made for the purpose
of its business borrow or obtain funds.
Power to call for payment before agreed period (Sec 21)—the bank may by
notice may require any borrower to which it has granted any loan to repay the
same in full forth with.
Power to inspect (Sec 25)—the bank may at any time under directions of the
State Bank of Pakistan shall inspect any provincial cooperative bank or multi-unit
cooperative society including its branches and offices and its books, accounts and
documents.
Power to prohibit acceptance of deposits (Sec 26)—the State Bank on
recommendations of the bank may prohibit or restrict the acceptance of deposits
by provincial cooperative bank or multi-unit cooperative society. However no such
order shall be passed without prior approval in writing on the federal government.
Maintenance of liquid assets (Sec 29)—every provincial cooperative bank shall
be required to maintain the prescribed liquid assets
Power to remove Directors, other managerial persons from office and to
supersede Board of Directors, of Provincial Co-operative Bank (Sc30)—the
bank shall have same powers as are conferred on the State Bank, in this regard.
Power of the Bank to call for statements and return, etc., and to publish
information (Sec 31)
Duty of the officers and servants to maintain secrecy (Sec 32)
Liquidation of the Bank ( Sec 41)—No provisions of law relating to the winding
up of the companies or banks shall apply to the bank and the bank shall not be
wound up but by the order of federal government on the recommendation of State
Bank.
Federal Bank for Co-Operative and Regulation of Co-Operative Banking
(Account) Rules
These rules may be called the Federal Bank for Co-Operatives and
Regulation of Co-operative Banking (Account) Rules, 1977
Preparation of statements of accounts:

Immediately after the close of each financial year, the bank shall prepare a
balance sheet and the statement of profit and loss, as nearly as may be, in the
form set out in the Second Schedule to the Banking Companies Ordinance, 1962,
for examination of the auditors and provided under section 37 of the
Establishment of the Federal Bank for Co-operative and Regulation of Co-operative
Banking Act, 1977
The audited balance sheet and the statement of profit and loss shall be submitted
to the Board for approval not later than the fifteenth of September each year.
The balance sheet and the statement of profit and loss as approved by the Board,
shall be signed by the at least two Directors nominated by the Board for this
purpose and the Managing Directors.
Within three months of the close of each financial year, the Board shall submit a
copy of each of the approved balance sheet, the statement of profit and loss
account and the report of the auditors to the Ministry of Finance, Government of
Pakistan, for publication in the official Gazette.

LESSON 19
MICROFINANCE INSTITUTIONS ORDINANCE, 2001
The Corporate and Industrial Restructuring Corporation Ordinance, 2000
Microfinance Institutions Ordinance, 2001
It extends to the whole of Pakistan. This Ordinance contains provisions with regard
to microfinance institution. Some of the important aspects are discussed
hereunder.
Definitions: the definitions as contained in the Ordinance are given hereunder:
“Auditor” means any person who is appointed in accordance with the provisions
of this Ordinance for the audit of the accounts of a microfinance institution;
“Banking Company's ordinance” means the Banking Companies Ordinance,
1962.
“Company” means a company incorporated under the Companies Ordinance,
1984. Or any other law for the time being in force;
“Customer” means any person or group of persons availing the services of a
microfinance institution;
“Deposit” means the deposit of money, repayable on demand or otherwise,
accepted by a microfinance institution from the public for the purpose of providing
microfinance services;
“Depositor” means a person in whose name a deposit is held by a microfinance
institution;
“License” means the license issued by the State Bank and the expression
“licensed” should be construed accordingly;
“Member” means the member or shareholder who has contributed or subscribed
to the capital of a microfinance institution;
“Microfinance institution” means a company that accepts deposits from the
public for the purpose of providing microfinance services;
“Microfinance services” means the financial and other related services
specified in section 6, the value of which does not exceed such amount as the
State Bank may, from time to time, determine;
“Poor persons” means persons who have meager means of subsistence and
whose total income or receipt during a year is less than the minimum taxable limit
set out in the law relating to income-tax;
“Prescribed” means prescribed by rules made under this Ordinance;
“Specified area” means the district, province or other specified area within
which a microfinance institution is licensed to operate; and
“State bank” means the State Bank of Pakistan established under the State
Bank Act,
The provisions of this Ordinance shall be in addition to, and, save as hereinafter
provided, not in derogation of, any other law for the time being in force.
Restrictions on establishment and operations: Sec 4

No person, other than a company, shall be established as a microfinance
institution.
No microfinance institution shall commence, or carry on, the business of taking
deposits unless and until such institution has been licensed in accordance with the
provisions of this Ordinance.
Name: Sec 5

No person other than a licensed microfinance institution shall use with its name
the words “Microfinance Bank”, “MFB’, “Microfinance Institution” or “MFI” or
derivatives or any words or letters which suggest that it is a microfinance
institution.
Whoever, without being licensed, uses the name “Microfinance Bank” , “MFB”,
“Microfinance Institution” or “MFI “ or derivatives or any word or letters which
suggest that it is a microfinance institution shall be punishable with imprisonment
for a term which may extend to six months and with fine which may extend to one
hundred thousand rupees.
Functions and powers: Sec 6

A microfinance institution shall, in accordance with prudential regulations and
subject to the terms and conditions of the license issued by the State bank, render
assistance to micro-enterprises and provide microfinance services in a sustainable
manner to poor persons, preferably poor women, with a view to alleviating poverty
Without prejudice to the generality of the foregoing provisions, the powers and
functions of microfinance institutions shall be:-
a. To provide financing facilities, with or without collateral security, in cash or in
kind, for such terms and subject to such conditions as may be prescribed, to
poor persons for all types of economic activities including housing, but
excluding business in foreign exchange transactions;
b. To accept deposits;
c. To accept pledges, mortgages, hypothecations or assignments to it of any
kind of movable or immovable property for the purpose of securing loans and
advances made by it;
d. To undertake the management, control and supervision of any organization,
enterprise, scheme, trust fund or endowment fund for the benefit and
advancement of poor persons;
e. To buy, sell and supply on credit to poor persons industrial and agricultural
inputs, livestock, machinery and industrial raw materials, and to act as agent
for any Organization for the sale of such goods or livestock;
f. To invest in shares of any body corporate, the objective of which is to provide
microfinance services to poor persons;
g. To provide storage and safe custody facilities;
h. To carry out survey and research, and to issue publication and maintain
statistics relating to the improvement of economic condition of poor persons;
i. To provide professional advice to poor persons regarding investments in small
business and such cottage industries as may be prescribed;
j. To encourage investments in such cottage industries and income generating
projects for poor persons as may be prescribed
k. To provide services and facilities to customers to hedge various risks relating
to microfinance activities;
l. To render managerial, marketing, technical and administrative advice to
customers and assisting them in obtaining services in such fields;
m. To borrow and raise money and open bank accounts;
n. To purchase, take on lease, or otherwise acquire, sell, exchange, surrender,
lease, mortgage, dispose of and deal in any movable and immovable property
and rights of all kinds for and on behalf of its customers for the purpose of
promoting development opportunities, building of assets, resource allocation,
promotion of markets, and adoption of better technology for economic growth
and development;
o. To establish subsidiaries, whether wholly or partly owned, and to appoint
agents in various locations for various activities which it may consider
necessary for the proper discharge of its functions;
p. To pay, receive, collect and remit money and securities within the country;
q. To acquire, maintain and transfer all movable and immovable property
including residential premises, for carrying on its business;
r. To open account or make any agency arrangement with, and to act as
agent or correspondent of, any bank or financial institution;
s. To invest its surplus funds in Government securities;
t. To impose and receive fees, charges, profits or return for its services;
u. To mobilize and provide financial and technical assistance and training to
micro enterprises;
v. To undertake mobile banking to expedite transactions and reduce costs;
w. To establish trust and endowment funds;
x. To receive grants from the government and any other sources permitted by
the State Bank; and
y. To generally do and perform all such acts, deeds and things as may be
necessary, incidental or conducive to the fulfillment of their functions and the
attainment of their objectives;
Prohibition and restrictions: Sec 7

A microfinance institution shall not undertake or transact any kind of business
other than that authorized by, or under, this Ordinance.
In performance of its functions under this Ordinance, a microfinance institution
shall have proper regard to the economic and commercial merits of any or the
transactions or activities it plans to undertake or assist
Where a microfinance institution is required by any authority to undertake or assist
a micro enterprise or other such activities which it considers economically or
otherwise unsound, the microfinance institution shall not undertake or assist such
activity until and unless the said authority has provided adequate guarantee to the
microfinance institution or indemnify any losses that it may incur in the
undertaking of such activity.
No microfinance institution shall create a floating charge on the undertaking or any
of its assets or part thereof, unless the creation of such floating charge is certified
in writing by the State Bank as not being detrimental to the interest of the
depositors of such institution
Any such charge created without obtaining the certificate of the State Bank shall
be invalid.
Any microfinance institution aggrieved by the refusal of a certificate under sub-
section (4) may, within thirty days from the date on which such refusal is
communicated to it, prefer an appeal to the Central Board of the State Bank whose
decision thereon shall be final.
Area of operation: Sec 9

A microfinance institution shall be licensed to operate in an area which may
consist of,-
A district;
A province; or
The whole of Pakistan
Capitalization: Sec 10
No microfinance institution shall operate unless it has a paid up capital of not less
than,-
(a) One hundred million rupees or such higher amounts, as may be prescribed
from time to time, for microfinance institutions to whom a license to operate in a
specified district is issued.

(b) two hundred and fifty million rupees or such higher amount as may be
prescribed from time to time, for microfinance institutions to whom a license to
operate in a specified province is issued; and
(c) five hundred million rupees or such higher amount as may be prescribed from
time to time, microfinance institutions to whom a license to operate nationally is
issued.
Not less than fifty-one per cent of the paid up capital of a microfinance institution
shall be subscribed by the promoters or sponsor members and the shares
subscribed to by the promoters or sponsor members shall remain in the custody of
State Bank and shall neither be transferable nor encumbrance of any kind shall be
created thereon without prior permission, in writing, of the State Bank.
Winding Up: Sec 11

The provisions’ of Banking Companies Ordinance for winding up of banking
companies shall, mutates mutandis, apply to microfinance institutions for the
purpose of their winding up.
Existing microfinance institutions: Sec 12

Any person performing the functions of a microfinance institution on the
commencement of this Ordinance shall on such form accompanying such
information and fee as may be prescribed, make an application to the State Bank
for issuance of a license to take deposits.
The State Bank may, on receipt of the application, make such enquiries as it
considers necessary and either grant a license as specified in sub-sections (2) and
(3) of section 13 or, for reason to be recorded in writing, reject the application for
the license.
Any person performing the functions of a microfinance institution on the
commencement of this Ordinance shall on such form accompanying such
information and fee as may be prescribed, make an application to the State Bank
for issuance of a license to take deposits.
The State Bank may, on receipt of the application, make such enquiries as it
considers necessary and either grant a license as specified in sub-sections (2) and
(3) of section 13 or, for reason to be recorded in writing, reject the application for
the license
Where an application for a license has been made in respect of a microfinance
institution in existence on the commencement of this Ordinance, and such
application is rejected, the operations of the microfinance institution may be
continued for a period of thirty days from the date on which its application is
rejected, or if an appeal is referred under subsection (4), until such appeal is
disposed of.
If the State Bank rejects an application for a license in respect of a microfinance in
existence on the commencement of this Ordinance, the applicant may, within
thirty days from the date of the order of the State Bank, prefer an appeal to the
Central Board of the State Bank, and the order passed by the Central Board shall
be final.
Licensing: Sec 13
Before taking deposits, a microfinance institution shall apply to the State Bank, on
such form accompanying such information and fee as may be prescribed, for
issuance of a license to take deposits.
The State Bank may issue license to operate in a specific district, province or other
area, subject to such conditions as the State Bank may think fit to impose.

Before granting any license under this section, the State Bank shall satisfy itself
by an inspection of the books of the microfinance institution or otherwise that all
or any of the following conditions are fulfilled, namely:-
(a) That the microfinance institution is, or will be, in a position to meet its liabilities
to the present or future customers in full as and when such liabilities accrue; and
(b) that the affairs of the microfinance institution are not being, or are not likely to
be, conducted in a manner detrimental to the interests of its members and present
or future customers.
The State Bank may suspend or cancel a license granted to a microfinance
institution if such institution:
(a) At any time fails to comply with any of the conditions imposed upon it under
sub-section (2); or
(b) Fails to fulfill, at any time, any of the conditions referred to in sub-section (3);
(c) Has furnished false or misleading information in its application for a license; or
No license shall be suspended or cancelled under subsection (4) unless and until
the microfinance institution is called upon by a notice in writing by the State Bank
to show cause within fifteen days as to why its license should not be suspended or
cancelled.
In the event of suspension or cancellation of a license the microfinance institution
concerned shall be notified forthwith and, from the date of such notification, shall
cease to transact any business other than that required to wind up its affairs with
the approval of the State Bank. The State Bank shall publish notice of such
suspension or cancellation in one leading Urdu language newspaper and one
English language newspaper in addition to its publication in the official Gazette.
The provisions of sub-section (4) shall not prejudice the rights or claims of any
person against the microfinance institution or of the microfinance institution
against any person.
A microfinance institution aggrieved by the decision of the State Bank for
suspension or cancellation of its license may, within thirty days from the date on
which such decision is communicated to it, apply for review to the Central Board of
the State Bank.
The decision of the State Bank, subject to the result of review by the Central Board
of the State Bank under sub-section (8), shall be final.
Management and administration: Sec 14

The general superintendence and management of the affairs of a microfinance
institution shall vest in its Board of Directors which shall manage its business and
affairs in accordance with the principles of good governance.
There shall be a chief executive officer who shall work full time and be responsible
for the day-to-day administration of microfinance institution.
The State Bank shall ensure that the persons serving on the Board of Directors
and the chief executive officer of a microfinance institution are persons of integrity
and have good financial reputation.
Accounts: Sec 15
A microfinance institution shall maintain proper books of accounts and, at the
expiration of each calendar year, prepare annual statement of accounts including
the profit and loss account and balance sheet as may be prescribed.
A microfinance institution shall, in respect of such accounts, comply with such
general directions as the State Bank may, from time to time, issue.
Audit: Sec 16

The accounts of a microfinance institution for each accounting year ending 31st
December shall be audited by one or more auditors who are chartered accountants
within the meaning of the Chartered Accountants Ordinance, 1961 ( X of 1961),
and whose names are included in the panel of approved auditors maintained by
the State Bank.
The auditor or auditors shall be appointed for such terms and on such
remuneration, to be paid by the microfinance institution, as the Board of Directors
of such institution may fix:
Provided that the auditors once appointed shall not be removed before three years
without the prior approval of the State Bank and no auditor shall serve as external
auditor of a microfinance institution consecutively for more than three years.
Every auditor, appointed under sub-section (2), shall be given a copy of the annual
balance sheet and other accounts of the microfinance institution who shall
examine it, together with the accounts and vouchers relating thereto, and shall
have a list delivered to him of all books kept by the microfinance institution
The auditors shall report to the Board of Directors of the microfinance institution
upon the annual accounts and balance sheet and in their report they shall state
whether, in their opinion, the balance sheet contains all necessary particulars and
is properly drawn up so as to exhibit a true and correct view of the state of affairs
of the microfinance institution and, in case they have called for any explanation or
information from the microfinance institution, whether it has been given and
whether it is satisfactory.
The audited financial statements shall be published within three months of close of
its financial year and microfinance institution shall cause its accounts to be
published in a daily newspaper having wide circulation in the specified area.
A microfinance institution shall submit audited financial statements along with
auditors’ report to the State Bank within three months of the close of its financial
year
Nothing in this Ordinance shall apply to the preparation of accounts by a
microfinance institution and its audit in respect of any accounting year which has
expired prior to the commencement of this Ordinance, and notwithstanding the
other provision of this Ordinance such accounts shall be prepared, audited and
submitted in accordance with the law in force immediately before such
commencement.
Returns: Sec 17
A microfinance institution shall furnish to the State Bank such returns, reports and
information as may be prescribed.
Without limitation to the foregoing, a microfinance institution shall,-
(a) Maintain a register of its members, Board of Directors and the chief executive
officer and provide information thereof to the State Bank at such time and in such
manner as may be prescribed;
(b) Maintain accounts and have the same audited at such time and in such
manner as may be prescribed; submit its annual report and audited accounts to
the State Bank and publish the same for general information at such time and in
such manner as may be prescribed; and
(d) Furnish to the State Bank such particulars with regard to accounts and other
records as the State Bank may from time to time require.
The State Bank, or any officer duly authorized by it in this behalf, may at all
reasonable times inspect the books of account and other records of a microfinance
institution, the securities, cash and other properties held by such institution, and
all documents relating thereto.
Depositors’ protection fund: Sec 19

(1) A microfinance institution shall, as required by the State Bank, establish and
maintain depositors’ protection fund or scheme for the purpose of providing
security or guarantee to persons depositing money in such institution.
Five per cent of the annual after tax profits of a microfinance institution and profits
earned on the investments of the fund shall be credited to the depositors’
protection Fund and such fund shall either be invested in Government securities or
deposited with State Bank in a remunerative account.
The depositors’ protection fund shall be used to make payment to the individual
depositors with aggregate deposits of up to ten thousand rupees in case of
liquidation of the microfinance institution.
The depositors’ protection fund shall be operative with effect from the expiry of
five years from the date of first Annual Balance Sheet of the microfinance
institution and shall remain unencumbered at all times.
Power to call for information: Sec 20

Where it appears to the State Bank that a person is carrying on the business of a
microfinance institution in contravention of section 4, the State Bank may:
(a). Direct such person or any other person who is, or has at any time,
been dealing, doing business or associating in any manner with such
person, to give or furnish to the State Bank within a specified period such
books, accounts, information, documents or records as may be within the
custody, possession or control of such person;
(b). Authorize any person to enter and search any premises and seize
books, accounts or other documents or records relating to such business;
(c). Inspect and examine any of the books, accounts, documents or
records referred to in clause (a); and
(d). Exercise as far as may be applicable the powers conferred on the
State Bank under section 22.
Inspection and investigation: Sec 21

(1)The State Bank may, at any time, inspect books of accounts and records of
any microfinance institution to evaluate its financial viability and may, of its
own or on receipt of complaint investigate the affairs of such institution.
(2)The inspection or investigation shall be carried out by such officer of the
State Bank or by such other person as the State Bank may authorize.
(3)It shall be the duty of every officer and employee of a microfinance

institution or any other person dealing with or connected with the
operations of the microfinance institution to produce to any officer, making
an inspection or investigation under this section
(4)The inspecting officer may examine on oath any officer or employee of the
microfinance institution in relation to its business and may administer an
oath accordingly.
(5)The State Bank shall supply to the microfinance institution a copy of its
report on the inspection made under this section.
(6)The State Bank shall systematically monitor and evaluate the performance
of a microfinance institution to ensure that it is complying with the
applicable criteria and prudential rules and regulations:
Powers to give directions: Sec 22

Where the State Bank is satisfied that,
(a). In the public interest; or

(b). To prevent the affairs of a microfinance institution being conducted in
a manner detrimental to the interest of the depositors or in a manner
prejudicial to the interest of a microfinance institution; or
(c). In furtherance of monetary or financial sector policy;
(d). To secure the proper management of a microfinance institution, it is

necessary to issue directions to microfinance institutions generally or to any
microfinance institution in particular, it may, from time to time, issue such
directions as it may deem fit and the microfinance institutions or the
microfinance institution, as the case may be, shall comply with such
directions.
The State Bank may, on representation made to it or of its own motion, modify or
cancel any direction issued under subsection (1), and in so modifying or canceling
any direction may impose such condition, as it thinks fit, subject to which the
modification or cancellation shall have effect.
Penalties: Sec 23
Whoever carries on the business of a microfinance institution without having been
licensed to do so or who carries on such business after the license therefore has
been suspended or cancelled shall be punished with imprisonment for a term
which shall not be less than five years.
Any person who willfully withholds or fails to deliver any document or information
or makes a statement in any return, balance sheet or other document or in any
information required or furnished under, or for the purpose of any provision of, this
Ordinance which to the knowledge of such person is false in any material respect,
shall be punishable with imprisonment for a term which may extend to one year,
or with fine which may extend to one hundred thousand rupees, or with both.
Any person who contravenes any other provision of this Ordinance or does not
comply with any requirement of this Ordinance or any rule, regulation, order,
instruction, condition made, given or imposed hereunder shall be liable to such
fine as the State Bank may, from time to time determine.
If any officer of a microfinance institution, mismanages the affairs of the

microfinance institution or misuses his position for gaining direct or indirect benefit
for himself or any of his family members, he shall be punishable with
imprisonment for a term which may extend to three years and shall also be liable
to fine which may extend to one hundred thousand rupees, and shall be ordered,
by the court trying the case, to deliver or Contd.. or refund within a time to be
fixed by the court any property acquired or gained by him in his own name or in
the name of his family members by using his position or, in default, to suffer
further imprisonment for a term which may extend to six years.
A microfinance institution, which fails to maintain liquid assets and reserves in
accordance with the provisions of this Ordinance, shall be punished with a fine
equivalent to one per cent of the shortfall for every day in which the failure occurs.
Continuance of charge and priority: Sec 24

Where a charge over any property has been, or is, created by any person in favour
of a microfinance institution to secure any of the services extended by the
microfinance institution to such person, such charge shall continue to remain valid
and shall maintain its priority in favour of the microfinance institution against all

charges created by such person in favour of any other person subsequent to the
original date of registration of such charge.
Restrictions on removal of records and documents: Sec 25

No microfinance institution shall remove from the specified area, to a place outside
the specified area, any of its records and documents relating to its business
without the prior permission in writing of the State Bank.
Non-disclosure of information: Sec 26

(1) Except as otherwise required under this Ordinance, no information or data
provided by a person, applying to the microfinance institution for financial
assistance or any other service, shall be disclosed or used by any officer or
employee of the microfinance institution for any purpose other than the
purpose for which it was intended.
(2) Whoever contravenes any of the provisions of sub-section (1) shall be guilty
of an offence punishable with imprisonment for a term which may extend to
six months or with fine which may extend to one hundred thousand rupees,
or with both.
False information: Sec 27

Whoever in any application for obtaining assistance or in any balance sheet,
statement of profit and loss, declaration or any other document submitted to the
microfinance institution for the purpose of obtaining any financial aid sought or
granted under this Ordinance, willfully makes false statement or knowingly permits
any false statement to be made or to remain, or uses or permits to be used any
financial facility for any purpose other than that for which it is granted by the
microfinance institution shall be punishable with imprisonment for a term which
may extend to six months, or with fine which may extend to one hundred thousand
rupees, or with both.
Cognizance of offences: Sec 28

No court shall take cognizance of an offence under this Ordinance except on
complaint in writing made by an officer of the State Bank authorized in this behalf.
Notwithstanding anything in the Code of Criminal Procedure, 1898 (Act V of 1898),-
(1)No court other than that of a Judicial Magistrate of the first class shall try an
offence under this Ordinance; and
(2)It shall be lawful for the Judicial Magistrate to pass any sentence authorized
by this Ordinance.
Indemnity: Sec 29
No suit or other legal proceeding shall lie against the Federal Government, the
State Bank or any officer of the Federal Government or the State Bank for anything
which is in good faith done, or intended to be done, under this Ordinance or of any
rules, regulations or orders made hereunder.

The State Bank may, with the approval of the Federal Government, by notification
in; the official Gazette, make rules for carrying out the purposes and provisions of
this Ordinance.
In particular, and without prejudice to the generality of the foregoing power, such
rules may provide for all or any of the following matters, namely:-

Specifying the portion of profits, if any and other income of a microfinance
institution required to be utilized to promote the objective of the microfinance
institution;
Regarding the term and conditions for providing microfinance services to be
extended by microfinance institutions;
(a). Regarding investments in small business and such cottage industries;
(b). Regarding investments in cottage industries and income-generating
projects for poor persons;
(c). Specifying criteria for operation in the specified area;
(d). Regarding capitalization;
(e). Regarding the forms, fees and procedures for licensing;
(f). Specifying principles of good governance;
(g). Regarding audit, accounts, and returns to be filed by microfinance
institutions; and
(h). Regarding liquidity and reserve requirements.
Power to make regulations: Sec 31

The State Bank may make regulations, not inconsistent with the provisions of this
Ordinance and the rules, to provide for all matters for which provision is necessary
or expedient for the purpose of giving effect to the provisions of this Ordinance
and efficient conduct of the affairs of a microfinance institution.
Removal of difficulties
Subject to sub-section (2), if any difficulty arises in giving effect to any of the
provisions of this Ordinance, the Federal Government may make such order, not
inconsistent with the provisions of this Ordinance, as may appear to it to be
necessary for the purpose of removing the difficulty.
No order under sub-section (1) shall be made after expiry of two years from the
commencement of this Ordinance.
The Corporate and Industrial Restructuring Corporation Ordinance, 2000.

This Ordinance may be called the Corporate and Industrial Restructuring
Corporation Ordinance, 2000. It extends to the whole of Pakistan. It shall come into
force at once.
Definitions
(a). "Administration Committee" means the administration committee
established under section 12 ;
(b). "Board" means the Board of directors constituted under section 6 ;
(c). "bonds" means bonds, debentures, participation term certificates,
term finance certificates, redeemable capital certificates of similar
instruments providing for scheduled or contingent payment of debt
obligations ;
(d). "book value" means the rupee amount, inclusive of principal and
accrued profit, owed by any obligor in connection with any financial asset as
reflected on the books and records of the financial institution, as of the
transfer date ;
(e). "Chairman" means the chairman of the Board ;
(f). "Chief Executive" means the Chief Executive Officer of the
Corporation
(g). "collateral" means any asset, property, right, claim, entitlement,
share undertaking, guarantee, agreement, document or instrument, security
interest, charge, mortgage, lien, hypothecation, pledge or assignment in
respect of or as security for any financial asset ;
(h). "Commission" means the Securities and Exchange Commission of
Pakistan established under section 3 of the Securities and Exchange
Commission of Pakistan Act, 1997 (XLII of 1997) ;
(i). "Corporation" means the Corporate and Industrial Restructuring
Corporation established under section 4 ;
(j). "director" means a director of the Board ;
(k). "financial asset" means any short, medium or long term interest
and non-interest bearing loan, finance, advance, lease-installment, term
finance certificate, participation term certificate, musharaka, modaraba,
profit and loss sharing agreement, redeemable capital, guarantee or
contractual right to receive payment of money in respect of sums advanced
or committed to an obligor by a financial institution including collateral
pertaining thereto ;
(l). "financial institution" means any bank or other financial institution
operating in Pakistan wherein the Federal Government holds overwhelming
equity in excess of eight-five per cent as specified in the Schedule ;
(m). "Government entity" means any Ministry, Division, Department or
office of the Federal Government or any corporation, company, trust,
statutory body or other entity of which more than fifty per cent of the equity
or beneficial interest is directly or indirectly owned or controlled by the
Federal Government ;
(n). "non-performing asset" means any financial asset :
Which is held as an asset on the books of a financial institution.
With respect to which the obligor has been in arrears on any payment obligation
for a period more than three hundred and sixty-five days, including-
collateral with respect to any financial asset, and a whole or partial right or
interest of a financial institution in any financial asset, that otherwise constitutes a
non-performing asset including a financial asset with respect to which the financial
institution has an ongoing funding obligation; and
With respect to which the obligor's outstanding payment obligation to any financial
institution exceeds ten million rupees or more;
(o). "obligor" means any individual, proprietorship concern, company or
other body corporate, trust, partnership or other entity that has, with
respect to a non-performing asset, a contractual or legal obligation or duty
to make payment, effect performance, provide security, or collateral with
respect to any financial asset whether as principal, surety, guarantor or
otherwise and whether such obligation is primary, secondary, matured or
contingent ;
(p). "outstanding amount" means the book value of a non-performing
asset of the financial institution less:
(a) Any amount on the books of the financial institution appearing as a specific
reserve applicable to that non-performing asset;
(b) any amount on the books of the financial institution appearing in a general loan
loss and/or other reserve applicable to that non-performing asset ; and if, in the
opinion of the Board, the book value of the non-performing asset, as adjusted in
sub-clauses (a) and (b), is higher than the estimated market price of the non-
performing asset, the Board shall commission an independent evaluator to
determine such market price and in the event that the market price as determined
by the independent evaluator is lower than the book value as adjusted in sub-
clauses (a) and (b), such market price shall be deemed to be the outstanding
amount
(q). "regulations" means regulations made under this Ordinance ;
(r). "rules" means rules made under this Ordinance ;
(s). "Schedule" means the Schedule to this Ordinance ; and
(t). "State Bank" means the State Bank of Pakistan.
Establishment of the Corporation: Sec 4

A corporation called the Corporate and Industrial Restructuring Corporation is
hereby established for carrying out the purposes of the Ordinance.
The Corporation shall be a body corporate having a common seal with powers,
subject to the provisions of the Ordinance, to hold and dispose of property and
shall by its name sue and be sued.
The headquarters of the Corporation shall be Islamabad or such other place as
may be determined by the Board.
Board and its powers: Sec 5

The overall direction, management, control and superintendence of the affairs of
the Corporation shall vest in the Board which may exercise all such powers and do
all such acts and things as may be exercised and done by the Corporation as set
out in section 18.
In discharging its functions, the Board shall act with prudence and sound business
and financial considerations for and on behalf of all persons who have beneficial
interest as creditors or otherwise are beneficiaries, including the financial
institutions and Government entity.
Composition of the Board: Sec 6

The Board shall consist of the following directors, namely:-
(a) The Minister for Finance, Government of Pakistan;
(b) The Minister of Commerce and Industry, Government of Pakistan;
(c) The Governor, State Bank of Pakistan;
(d) The Chairman, Privatization Commission of Pakistan
(e) The Secretary General, Ministry of Finance;
(f) The Chief Executive as defined in clause (1) of section 2 ; and
(g) A minimum of four and a maximum of eight persons of repute from the private
sector and as far as possible from each Province - one of whom shall be from the
banking sector.
The directors referred to in clauses (a) to (f) of sub-section (1) shall be ex-officio
directors.
The directors under clause (g) of sub-section (1) shall be appointed by the Federal
Government, who shall hold office for a term of two years and shall be eligible for
re-appointment for additional terms of two years each.
No act or proceedings of the Board shall invalid merely on the ground of the
existence of any vacancy in or defect in the constitution of the Board.
No director shall have any direct or indirect financial interest in or have business
connection with any obligor or financial institution whose non-performing assets
are the subject of this Ordinance.
The director shall not, for two years after the expiry of their term of office, enter
into the employment of or accept any advisory or consultancy relationship with
any obligor or financial institution whose non-performing assets are the subject of
this Ordinance.
Chief Executive of the Corporation: Sec 8

The Chief Executive shall be appointed by the Federal Government who shall be
the whole time Chief Executive Officer of the Corporation.
The Chief Executive shall hold office for a term of two years and shall be eligible
for re-appointment for additional terms of two years each.

Subject to its superintendence, direction and control the Board may authorize in
writing the Chief Executive to exercise and perform any or all of the following
powers and functions as the Board deems fit, namely :-
3.
(a). To deal with, negotiate, enter into and sign agreements and contracts with
any obligor or financial institution in respect of the non-performing assets or
related collateral and to take any and all actions, in any manner to advance the
business of the Corporation as specified in section 18;
(b). To institute, finance, manage, oversee and terminate rehabilitation plans

and schemes for the non-performing assets or the obligor, as the case may be;
(c). To pay the cost, charges and expenses for the day to day business of the
Corporation;
(d). To receive money or goods on behalf of the Corporation;
(e). To sell, deal in and dispose of all articles and goods of the Corporation;
(f). to engage, employ, fix and pay the remuneration and dismiss or discharge
all managers, agents, secretaries, clerks, servants, workmen and other persons
employed in or in connection with the Corporations business ;
(g). To appoint any person or persons to be attorney or attorneys of the

Corporation for such purposes and with such powers authorities and discretion's
and for such period and subject in such conditions as he may from time to time
think fit;
(h). To make and give receipt, release and discharge all moneys payable to the
Corporation or for the claims and demands of the Corporation;
(i). To draw, accept, endorse and negotiate all such cheques, bills of exchange,
promissory notes and Government and other securities as shall be necessary in
or for carrying on the affairs of the Corporation whether the account may be
overdrawn or not ;
(j). To institute, compromise, withdraw or abandon any legal proceedings by or

against the Corporation or its officers or otherwise concerning the affairs of the
Corporation;
(k). To provide for the welfare of employees or ex-employees of the Corporation

and the wives, widows or families or the dependants of such persons in such
manner as he may thing fit ;
(l). To open, maintain and operate accounts or letters of credit for any amount
with any bank or banks and to give instructions for operation of such accounts;
(m). To appear before any court law, civil, criminal, revenue, excise, income-tax
including banking courts and tribunals established for recovery of bank dues and
loans, whether original or appellate, High Courts and Supreme Court of Pakistan
and other authorities for and on behalf of the Corporation and to institute, apply
for transfer of suits and other proceedings, conduct, prosecute and defend
(n). to enter into all such negotiations and contracts and rescind or vary all such
contracts and do all acts, deeds and things in the name and on behalf of the

Corporation as he may consider necessary, expedient or proper, or in relation to
any of the matters aforesaid or otherwise, for the purposes of the Corporation ;
(o). To give effectual discharge for moneys payable to the Corporation and for its
claims and demands
(p). to purchase or take on lease or otherwise acquire for the Corporation, land,
buildings, rights and privileges for its purpose of offices or premises of the
Corporation at such prices and generally on such terms as he may think
necessary and expedient, to build, alter and furnish offices, houses or premises
and let or sub-let any such houses or premises in portion or otherwise
(q). to demand and enforce payment, delivery, transfer of any dues for recovery
and receive from all and every persons, body corporate or corporations, firm or
companies whatsoever, all money, securities for money, debts and claims of all
kinds and demand, enforce, deliver and receive and take possession of money,
securities, shares, and goods produced and property of all kinds whether
belonging to the Corporation as security or in trust or held by any person or
company in trust or by way of security for the Corporation
(r). to deal with, make arrangements, sign contracts with Government, semi
Government, autonomous bodies, corporations, local Government and other
institutions ; and
(s). To appoint attorneys, agents, managers and authorize them to exercise any
or all such powers and functions as are mentioned in clauses (a) to (r) above.
4. The Federal Government may, by notification in the official Gazette remove the
Chief Executive if, --
(a). He refuses or fails to discharge or becomes in the opinion of the Federal
Government, incapable of discharging his responsibilities under this Ordinance;
or
(b). He has been declared insolvent; or
(c). He has been declared to be disqualified for employment in or has been
dismissed from the service of Pakistan, or has been convicted of an offence
involving moral turpitude ; or
(d). He has knowingly acquired or continued to hold without the permission in
writing of the Federal Government, directly or indirectly or through a partner
any share or interest in any obligator or financial institution.
Committees: Sec 9
The Board may, for the purpose of obtaining advice and assistance in carrying out
the purposes of this Ordinance, constitute one or more committees consisting of
members of the Board and any other suitable persons as it may deem fit. Any
committee so formed shall, in exercise of the powers delegated to it or conferred
on it. Conform to any restrictions that may be imposed on it by the Board.
Verification Committees: Sec 10

For the purposes of this Ordinance and before taking any action there under, the
Corporation shall, having regard to the facts and circumstances of the case, refer a
question of bona fide dispute relating to liability of the obligor in respect of the
non-performing assets or cases relating thereto, including the cases of fraud,
misrepresentation, and breach of any provision of law, rule, regulation and
circulars of the State Bank, Contd….
Regarding the calculation, existence and repayment of a financial obligation or
outstanding loan, mark-up or interest claimed against an obligor, to the Governor
State Bank for verification and correct determination and calculation by the
Verification Committee as hereafter provided:

The verification, determination and calculation of matters referred to in sub-
section (1) shall be made in accordance with the existing law, rules, regulations
and circulars of the State Bank in the manner provided herein in regard to the
principal amount of loan, mark-up, as claimed by or against the financial institution
or the Corporation, as the case may be, in respect of the non-performing assets
and the liability of the obligor.
Save as provided in this Ordinance, the provisions of sub-sections (1) and (2) shall
not affect the validity, continuance and enforcement of an order of winding-up of a
company under the Companies Ordinance, 1984, which has been made before the
commencement of this Ordinance except for the purpose of calculating the
payment of any financial obligation or verified claim to the creditor or contributory
or liability of the guarantor or any other person.
Where a matter is referred to the Governor State Bank under sub-section (1) and
(2), he may constitute one or more Verification Committees for the purposes of this
Ordinance. The Verification Committee shall consist of a nominee of the Governor
State Bank being a senior officer of the State Bank who shall be the Chairman of
the Committee, two Chartered Accountants, to be nominated by the Governor
State Bank and one Chartered Accountant to be nominated by the Council of the
Institute of Chartered Accountants of Pakistan, Karachi, such nomination to be
obtained by the Governor State Bank and such other person as the Corporation
may require.
The Chairman of the Verification Committee shall convene the meetings, conduct
proceedings of the Committee, and maintain record including the evidence
submitted before him by the parties and their statements and on their request
supply authenticated copies of the record to them.
The Verification Committee after examination of the record of the concerned
lending financial institution and the obligor and after due notice by courier service,
fax, U.M.S. or any other effective mode to both parties and affording them
reasonable opportunity to explain their position and hearing them in person and
through liability and matters referred to in sub-sections (1), (2) and (3) in
accordance with the law, rules, regulations and circulars of the State Bank.
(8)Where a party after due notice under sub-section (7) does not appear in
person or through chartered accountant before the Verification Committee,
it may proceed ex-parte.
(9)Provided that nothing contained herein shall prevent such party from
appearance before the Verification Committee before the conclusion of the
proceedings.
(10) The Verification Committee shall submit its finding and report with
recommendations to the Governor State Bank within thirty days of the
commencement of the proceedings or such extended period as the
Governor State Bank may allow for reasons to be recorded in writing.
(11) The Governor State Bank shall consider the findings and report and
recommendations submitted to him by the Verification Committee under
sub-section (9) and may accept or modify the same or may, for reasons to
be recorded, make such other appropriate recommendations and findings in
respect thereof as he may deem fit.
(12) The Governor State Bank shall forward his recommendations and
findings made under sub-section (10) along with the finding, report,
recommendations and record of the Verification Committee to the
Corporation and the parties will be entitled to obtain copies thereof from the
Corporation.

(13) The recommendations and finding of the Governor State Bank made
on the basis of finding, report and recommendations of the Verification
Committee in regard to calculation of liability of obligor shall be final and
have presumption of truth unless found to contain manifest error or contrary
to law, but the same shall be subject to orders of the High Court.
(14) The Corporation after considering the recommendations and findings
of the Governor State Bank forwarded to it under sub-section (11) will take
appropriate action under this Ordinance having regard to the facts of each
case.
(15) In the event of failure either of the Verification Committee to conclude
the reference within thirty days of the commencement of the proceeding, or
such extended period referred to in sub-section (9) or the failure of the
obligor or the financial institution to accept the recommendations and
findings of the Governor State Bank, the Corporation may proceed in respect
of the non-performing asset under this Ordinance
(16) Notwithstanding anything contained in any other law for the time
being in force, the final recommendations and findings by the Governor
State Bank and the finding, report and the recommendations of the
Verification Committee under sub-section (11) shall constitute admissible
evidence for any legal proceedings.
(17) Explanation. - For the purpose of this Ordinance any instructions
given by the State Bank to any bank or financial institution for writing off
any debt for the purpose of accounting of any such bank or financial
institution shall not be construed as satisfaction of any debt payable by the
obligor.
Guidelines for Corporation and the Governor State Bank: Sec 11

The Corporation and where a matter is referred by it to Governor State Bank under
sub-section (1) of section 10, the Governor State Bank, shall take into
consideration inter-alia the following factors as the Corporation, or as the case may
be, the Governor State Bank, may deem fit having regard to the facts of each case,
namely :-
(a). The practical possibilities of the non-performing asset;
(b). The possibility of re-scheduling of financial assistance;
(c). The adequacy of the subsisting securities and the willingness of the obligor
to provide sufficient additional security;
(d). Such other preventive, ameliorative and remedial measures including
amalgamation or merger, change in management whether partial or whole or
such incidental, consequential or supplemental measures as may be necessary;
(e). examine the possibility of keeping alive a running project by providing
reasonable financial assistance through financial institutions keeping in view
the interest of both borrower and lender and avoiding unemployment ;
(f). where the obligor can make financial arrangement on a joint venture basis
with a third person on mutually agreed terms so as to provide sufficient
security to the satisfaction of the Governor State Bank or the Board for
repayment of the outstanding amount or liability of the non-performing asset to
be determined in accordance with the State Bank's circulars, instructions, rules,
regulations and the law ; and
(g). Any other facts and circumstances having regard to public interest and the
objectives of the Ordinance.
Qualifications and disqualifications of directors: Sec 15

No person shall be or shall continue to be a director who
Is or at any time has been adjudicated as insolvent;
Is found to be a lunatic or becomes of unsound mind;
Is or has at any time been convicted of any offence which, in the opinion of the
Federal Government, is an offence involving moral turpitude;
(d) absents himself from all the meetings of the Board, without leave of absence
from the Board, for a continuous period of six months or, if less than three
meetings are held within such period, from three consecutive meetings of the
Board ; and
(e) Is a salaried official of the Corporation either than the Chief Executive?
Employees of the Corporation to be public servants: Sec 16

Every person in the service of the Corporation shall, when acting or purporting to
act in pursuance of any of the provisions of this Ordinance is deemed to be a
public servant within the meaning of section 21 of the Pakistan Penal Code 1860.
Business which the Corporation can transact: Sec 18

Without prejudice to the provisions of any other law for the time being in force and
subject to the provisions of this Ordinance, the Corporation may exercise powers
and functions as under :-
(a). To acquire, purchase, hold, manage, restructure, rehabilitate, sell and
dispose of non-performing assets ;
(b). To acquire, purchase, manage, restructure, rehabilitate, sell and
dispose of any obligor being a corporation or a company;
(c). to purchase, take over, own, hold, sell, lease, arrange finance for,
manage, dispose of, re-organize, restructure, rehabilitate and otherwise,
enter into any settlement or contract, realize mortgage, hypothecate,
control, manage any loan, finance, advance, commitment, lease installment,
sale contract or other activity relating to a non-performing asset ;
(d). to purchase, take over, own, hold, sell, lease, and otherwise dispose
of, re-organize, restructure, rehabilitate and otherwise enter into any
settlement or contract, realize, pledge, mortgage, hypothecate, control,
manage, and arrange finance for any asset, property, undertaking, collateral
or security underlying or relating to or securing any financial asset or
instrument, including any intellectual property, trade mark, equity, financial
interest, legal and contractual right, asset, guarantee and other undertaking
;
(e). to initiate, take, continue, resist, implement and perform any and all
activities for the recovery of non-performing assets including filing suits and
appeals and to enter into settlements, through the courts or outside, in
respect thereof ;
(f). to engage and enter into agreements with financial and other
institutions, and financial, legal, accounting, valuation and other specialists,
for the purposes of the business of the Corporation ;
(g). to purchase, amalgamate, enter into partnerships, form joint
ventures, make profit sharing arrangements or co-operate or participate
with any company or other entity for the business purposes of the
Corporation ;
(h). to sell, improve, manage, develop, exchange, mortgage, let or rent
(for profit or royalty or otherwise), grant licenses, casements, options,
servitude's and other rights over and in any other manner deal with or
dispose the real and personal property, assets, rights and effects of the
Corporation ;
(i). to open and maintain the Corporation's accounts with banks and
financial institutions and to draw, make, endorse, accept, discount, execute
and issue promissory notes, bills of exchange, bills of lading, warrants,
participation term certificates and other negotiable or transferable
instruments ;
(j). to establish or promote, or concur or participate in establishing any
corporation or other entity whose objects shall include the acquisition of all
or any of the property or liabilities of the Corporation or the promotion of
which may seem, directly or indirectly, calculated or benefit the
Corporation ;
(k). to enter into any agreement with any authorities, Federal, Provincial,
autonomous, semi-autonomous, municipal, local or otherwise that may
seem conducive to the Corporations' objects or any of them, and to obtain
from any such authority, rights, privileges and concessions which the
Corporation may deem desirable to obtain and to carry out, exercise and
comply with any such arrangements, rights, privileges and concessions ;
and
(l). All powers enumerated in sub-section (3) of section 8 entrusted to the
Chief Executive.
Financial Institutions to which the provisions of this Ordinance shall

apply: Sec 20
The provisions of this Ordinance shall apply to financial institutions specified in the
Schedule to this Ordinance in relation to the non-performing assets as mentioned
in their audited balance sheet subject to rights of third parties.
Accounts and audit: Sec 26

(1) The financial year of account of the Corporation shall be the year commencing
the first day of July and ending the last day of June.
(2) Subject to sub-section (10, the Corporation shall maintain its accounts in such
manner as the Federal Government may, in consultation with the Auditor General
of Pakistan prescribe.
(3) The accounts of the Corporation shall be audited by one or more auditors who
are chartered accountants within the meaning of the Chartered Accountants
Ordinance, 1961 (X of 1961), appointed by the Corporation.
Reserve fund: Sec 27

The Corporation shall establish a reserve fund to which shall be credited its annual
recoveries.
Annual report to the Federal Government: Sec 29

Within one hundred and eighty days of the end of each financial year of the
Corporation, the Board shall prepare a presentation to the Federal Government
with respect to the financial performance and results of operations of the
Corporation for the preceding financial year and the overall policies and goals of
the Corporation.
Exemption from taxes: Sec 34

Notwithstanding anything contained in any other law for the time being in force,
the Federal Government may exempt Corporation from the payment of all or any
other taxes, duties, levies, charges and fees payable under or pursuant to any
Federal law, on its investment, income, assets or wealth.
Right of recovery as arrears of land revenue: Sec 37

The Corporation shall be entitled to recover all outstanding amounts, subject to
law, on the basis of and under any non-performing assets held by the Corporation

as if they are arrears of land revenue under the Land Revenue Act, 1967 (West
Pakistan Act XVII of 1967).
Power to obtain information and documents etc Sec 38

(1) The Corporation may call upon any person, authority, agency, bank or financial
institution to furnish any information, documents, papers and accounts it may
require for the purposes of this Ordinance.
(2) Any person who does not or fails to furnish the information, documents, papers
and accounts required by the Corporation under sub-section 910 shall be
punishable with imprisonment of either description for a term which may extend to
one year, or with fine or, with both.

LESSON 20
BANKER-CUSTOMER RELATIONSHIP
Types:
There are amongst others the following important type of relationships between a
banker and his customer:
• Debtor and Creditor
• Creditor and Debtor
• Principal and Agent
• Bailer and Baillie
• Mortgagor and Mortgagee
• Pledger and Pledgee
Before we move on to discuss the above relationships we need to

understand certain terms/concepts including banker, customer, banking
and banking company. The same are explained in the following
paragraphs.
Banker:
Words Banker/Bank/Banking are interchangeably used. Banker not specifically
defined. Meanings inferences and definitions are derived from in- depth study of
various statutes relating to banking and writings of renowned economists and
jurists. However, in different statutes including banking company's ordinance,
1962, concepts such as business of banking/functions of banks and business
transacted by banks are contained.
Some of the Definitions of Banker:

According to J.W. Gilbert
“A banker is a dealer in capital, or, more properly, a dealer in money. He is an
intermediate party between the borrower and the lender. He borrows from one
party and lends to another”
According to Dr. Herbert L. Hart

“A person carrying on a business of receiving money, and collecting drafts for
customers subject to the obligation of honoring cheques drawn upon him from
time to time by the customers to the extent of the amounts available on their
current accounts
According to Sir John Paged: (considered as an authority on banking law)
“that no person or body corporate or otherwise, can be a banker, who does not (i)
take deposit accounts, (ii) take current accounts, (iii) issue and pay cheques and
(iv) collects cheques crossed and uncrossed for his customers”
Sir John Paget further adds that one claiming to be a banker must profess himself
to be one, and the public must accept him as such, hi main business must be that
of banking, from which generally he should be able to earn his living. This
definition is fairly exhaustive, although it makes no mention of many other
important functions of the present day banker, which may be put under two heads
(a) agency services, comprising of the collection of bills, promissory notes,
coupons, dividends, payment of subscription and insurance premiums, and (b)
general utility services, e.g., issue of credit instruments, the transaction of foreign
exchange business, the safeguarding of valuables and documents against fire,
theft, etc. there seems to be no doubt that according to English Law; a person
claiming to be treated as a banker, should perform the functions as given by Sir
John Paget.
American Version:
“by “banking” we mean the business of dealing in credits, and by a “bank” we
include every person, firm or company having a place of business where credits
are opened by deposits or collection of money or currency, subject to be paid or
remitted on cheque or order, or money is advanced or loaned on stocks, bonds,
bullion, bills of exchange or promissory notes or where these are received for
discount or sale”
United Kingdom’s Version: (According to bills of exchange Act, 1882)

“A banker is any person who carries on the business of banking”
According to Finance Act, 1915:

“Any person carrying on a bonafide banking business in the United Kingdom is a
banker”
According to Negotiable Instruments Act, 1881 (according to Sec 3 (b) of

Negotiable Instrument Act) and BCO, 1962
“ Banker means a person transacting the business of accepting for the purpose of
lending or investment, of deposit of money form the public, repayable on demand,
or otherwise or withdraw able by cheque or otherwise, and includes any post office
savings bank. ”
In Halsbury’s Laws of England:

Banker is defined as an individual, partnership or corporation, whose sole or
predominating business is banking, that is, the receipt of money on current or
deposit account, and the payment of cheques drawn by and the collection of
cheques paid in by the customer.
Conclusion:
We can say that banker is what banker does. It takes us to the business of banking
or functions performed by banks
Definition of Banking, Banking Company & Forms of Business-- BCO, 1962

Re-visited
“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, payable to order or otherwise;
“Banking Company” means any company which transacts the business of

banking in Pakistan;
Forms of business carried out by the banking company under section 7
BCO, 1962:
In addition to the business of banking, a banking company may engage in any one
or more of the following forms of business, namely:-
a) Borrowing, raising, or taking up of money; the lending or advancing of money

either upon or without security; 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, scripts 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 granting and issuing of letters of credit, issuing of traveler's cheques and
circular notes;
(aa) the providing of finance as defined in the Banking Tribunals.
b) 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;
(bb) acting as “modaraba company” under the provision of the Modaraba
Companies and Modaraba (Floatation and Control) Ordinance, 1980 (XXXI of
1980);
c) Contracting for public and private loans and negotiation and issuing the same;
d) 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
e) Carrying on and transacting every kind of guarantee and indemnity business;
(ee) 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 leaning or
licensing or for rush-sharing or for any other mode of financing;
f) 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;
g) 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 security;
for any loans or advances or which may be connected with any such security;
h) Undertaking and executing trusts;
i) Undertaking the administration of estates as executor, trustee or otherwise;
j) Establishing and supporting or aiding in the establishment and support of
associations, institutions, funds, trusts and conveniences calculated to benefit
employees or ex-employees of the company or the dependents or connections
of such persons; granting pensions and allowances and making payments
towards insurance; subscribing to or guaranteeing moneys for charitable or
benevolent objects or for any exhibition or for any public, general or useful
object;
k) The acquisition, construction, maintenance and alteration of any building or
works necessary or convenient for the purpose of the company;
l) Selling, improving, managing, developing, exchanging, leasing, mortgaging,
disposing of or turning into account or otherwise dealing with all or any part of
the property and rights of the company;
m) Acquiring and undertaking the whole or any part of the business of any person
or company, when such business is of a nature enumerated or described in this
sub-section;
n) Doing all such other things as are incidental or conducive to the promotion or
advancement of the business of the company;
o) Any other form of business which the Federal Government may, by notification
in the official Gazette, specify as a form of business in which it is lawful for a

banking company to engage. (2) No banking company shall engage in any form
of business other than those referred to in sub-section (1)
Customer Defined:
The entire law relating to banking rotates on the interplay of forces governing the
relationship between a banker and a customer. The question arises as to who may
be called a customer and it is most surprising that the word “ Customer” has not
been defined and at the same time one must know as to who is a customer. In
some of the judgments pronounced by different courts an attept has been made to
give definitions of a customer but it is not an exhaustive attempt and they havenot
been able to give such definition which may be termed as a satisfactory definition
of this word.
According to Heber L. Hart:

A customer is a person who has an account with a banker. Coming to the meaning
of the word, Hart says that a person is a “customer” of a bank within the meaning
of section 82 of the Bills of Exchange Act, 1882, if he keeps either a current or a
deposit account with the bank, or , it would seem if the bank systematically
transacts with him, or for him, any kind of banking business.
According to Sec 131 of Negotiable Instruments Act, 1881

In the above cited section a reference has been made with regard to the
Customer-- that protection shall be available to a banker collecting cheques on
behalf of his customer
According to Sir John Paget:

“To constitute a customer, there must be some recognizable course of habit of
dealing in the nature of regular banking business”
According to the judgment in the case cited as “Lad Broke V Todd

(1914) given by Justice Bail Hache, customer’s domain is maintained as
under
“in my opinion a person becomes a customer of a bank when he goes to the bank
with money or a cheque and asks to have an account opened in his name, and the
bank accepts the money or cheque and is prepared to open an account in the
name of that person; after that he is entitled to be called the customer of bank. It
is further added, “I think such a person becomes a customer the moment the bank
receives the money or cheque or agrees to open an account.”
Legal Requirements to be qualified as Customer:

Customer should be of age of majority should be of sound mind
Not debarred under any law there must be an offer/ proposal and acceptance of
that offer/ proposal.
Rights and Duties of Customer

The customer has the following universally accepted rights:
(a)To draw cheques against his credit balance, or in the absence of credit balance,
when there are arrangements for accommodation made with the banker
earlier;
(b)To receive a statement of his account from a banker.
(c) To sue the bank for any loss and damages.
(d)To sue the banker for not maintaining the secrecy of his account.
The customer has the following duties towards his banker:

- (i) Section 72 of the Negotiable Instruments Act, 1881, lays down that the
customer must present the cheques for payment and collection within the
business hours of his banker.
- (ii) Section 84 of the Negotiable Instruments Act, 1881, lays down that the
customer should see that the cheques and other instruments are presented for
payment within a reasonable time from the date of their issue.
- (iii) He should take reasonable care for safe custody of the cheque books. If a
customer fails in this duty, he is to be held responsible for his negligence in
leaving his cheques unprotected.
(iv) He should draw the cheques very carefully and in such a way that there is no
room left for any fraudulent alternations and additions. In Yany V Grote, the Lord
Chancellor said:
"A cheque drawn by a customer is in point of law, a mandate to the banker to pay
the amount according to the tenor of the cheque. It is beyond dispute that the
customer is bound to exercise reasonable care in drawing the cheque to prevent
from being misled. If he draws the cheques in a manner which facilitates fraud, he
is guilty of a breach of duty to himself and the banker, and he will be responsible
to the banker for any loss suffered by the banker as a natural and direct
consequence of this breach of duty".

LESSON 21
Nature of Legal Relationship:

Basic legal relationship between banker and customer is contractual
relationship. This relationship is established from the time of opening an account
in a bank. This relationship is at the root of all other legal relationships that exist
between the banker and customer. As such, scope, essentials and type of
contracts have been discussed in the following paragraphs.
Contract-- Defined
Contract is an agreement enforceable at law.
Essentials of a Valid Contract:

To understand a contract, we need to know what an agreement is. The agreement
has been defined in section 2 (e) of the Contract Act which is given below.
Agreement
Every promise or every set of promises, forming the consideration for each other is
an agreement.
--To understand an agreement, we must know what a promise is. The promise has
been defined in section 2 (b) of the Act which is reproduced below:
Promise
When the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted. A proposal when accepted becomes a promise.
Proposal and Promise:

The word "proposal" is synonymous in English use with "offer". But the language
of these definitions appears to confine "proposal" to an offer to be bound by a
promise. Thus a man who offers to sell and deliver, then and there, existing
portable goods in his immediate control, such as a book or a jewel, does not offer a
promise but an act, and if the other party takes the goods on the spot and
becomes liable to pay for them, he (the buyer) is the Promisor. In such a case the
seller would seem not to make a proposal within the terms of the Contract Act. A
quotation of prices is not an offer, but an invitation for offer; the same is true of
many common forms of advertisement. A statement of the lowest price at which a
landowner is prepared to sell is not an offer. A term in a partition deed that any of
the parties wishing to sell his share will sell to the others at the market value is not
an offer but an undertaking to make an offer.
The Act does not say, but it seems to imply, that every promise is an accepted
proposal. In the Common Law this is not so, for a binding promise may be made by
deed, that is, by writing under seal without any communication between the
parties at all. This is because the deed, as an ancient formal method of proof, was
conclusive against its maker.
Promisor and Promisee has been defined in section 2(c)

The person making the proposal is called “the Promisor” and
The person accepting the proposal is called “the Promisee”
To transform a promise into an agreement consideration is also an important
ingredient. Consideration has been defined in section 2 (d) of the Act which is
reproduced below:
Consideration
When at the desire of the Promisor, the Promisee or any other person who has
done or abstained from doing, or does or abstains from doing, or promises to do or
to abstain from doing, something, such act or abstinence or promise is called a
consideration for the promise.
All agreements are not contracts, meaning thereby that all agreements are not
enforceable at law. Such agreements are called void agreements. The same has
been defined in section 2 (g) of the Act which is reproduced below:
Legal relationship
Intention to create legal relationship must exist, in commercial transactions it is
presumed that such intention always exists. Social agreements do not give rise to
any legal relationship, hence no rights or obligations arise/accrue from social
agreements, i.e. (Social agreements are not enforceable at law)
Free consent
This is an important essential of a valid contract. It requires that contract should
be entered into with free consent of parties.
Consent is said to be free if not caused by:

• Coercion
• Undue influence
• Fraud
• Misrepresentation or
• Mistake
Competent Parties
Another important essential of a valid contract is the legal capacity of the parties
to enter into a contract; this has been provided in section 11 of the Act which is
reproduced below:
“Every person is competent to contract who is of the age of majority according to
law to which he is subject, and who is of sound mind, and is not disqualified from
contracting by any law to which he is subject”.
Who are competent to contract?

Every person is competent to contract who is of the age of majority according to
the law to which he is subject, and who is of sound mind, and is not disqualified
from contracting by any law to which he is subject. This section deals with
personal capacity in three distinct branches: (a) disqualification by infancy; (b)
disqualification by insanity; (c) other special disqualifications by personal law.
"To Contract."---means, to bind himself by promise. A minor who gives value,
without promising any further performance, to a person competent to contract is
entitled to sue him for the promised equivalent. This may be properly not in
contract but on a quasi-contract under section 70.
Minor's agreement:
If the first branch of the rule laid down in the section be converted into a negative
proposition, it reads thus: No person is competent to contract who is of the age of
majority according to the law to which he is subject: in other words, a minor is not
competent to contract. This proposition is capable of two constructions · either
that a minor is absolutely incompetent to contract, in which case his agreement is
void, or that he is incompetent to contract only in the sense that he is not liable on
the contract though the other party is, in which case there is a void able contract.
If the agreement is void, the minor can neither sue nor be sued upon it, and the
contract is not capable of ratification in any manner; if it is void able, he can sue
upon it, though he cannot be sued by the other party, and the contract be ratified
by the minor on his attaining majority. Where, an infant retains property obtained
under the contract from the other party, the equitable remedy of restitution has
been applied, even though the infant made no false representation as to his age.
Payment of debt incurred during minority:

Where a person on attaining majority pays of debt incurred by him during
minority, no question of ratification of a contract arises, since an agreement with a
minor is merely void and not unlawful, the sum paid cannot be sued for
subsequently, and in law it must be regarded on the same footing as a gift. It is
within the competence of a certificated guardian appointed by statute, such as the
Guardian and Wards Act, 1890, or the various Courts of Wards Acts to enter into a
contract for the purchase or sale of immovable property on behalf of the minor
with the sanction of the Court. Persons otherwise "disqualified from
contracting."---The capacity of a woman to contract is not affected by her
marriage under the law.
According to above definition the following parameters would determine the legal
capacities of parties to a contract:
Parties to contract are required to be of the age of majority.
Of sound mind
Not barred from entering into contracts by the operation of law.
Lawful object
Not expressly declared void--- Some instances of void agreement are

given below:
Agreements in restraint of marriage (sec 26)

Every agreement in restraint of the marriage of any person, other than minor, is
void
Agreements in restraint of trade (sec 27)

Every agreement by which any one is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent void.
Agreements in restraint of legal proceedings (sec 28)

Every agreement, by which any party thereto is restricted absolutely
from enforcing his right under or in respect of any contract, by the usual
proceedings in the ordinary tribunals, or which limits the time within
which he may thus enforce his rights, is void to that extent.

Legal formalities
The agreements must fulfill all the requirements all the legal formalities such as:
(i) Writing
(ii) Witness
(iii) Attestation
(iv) Registration
Classification of contracts:
Valid contract
Valid contract is an agreement enforceable by law. In such contract all
essentials of a contract as mentioned in section 10 are required to be
fulfilled. In case breach of contract by one party, the other party has a
right to file a suit for this breach.
Illustration:
A contract for the sale of a car between Mr. Yasir and Mr. Waqas has been
concluded and all necessary formalities have been completed. The said contract
meets all essentials of a valid contract. If either of the two that is Mr. Yasir or Mr.
Waqas fails to perform his part of contract, the counter party can sue the other
party for the breach of contract.
Voidable contract
A voidable contract is the one which is enforceable by law at the option of one or
more of the parties to the contract, but not at the option of the other or others. As
long as the contract is not avoided or cancelled by the party who is entitled to do
so, the contract shall remain a valid contract. Such contracts are voidable at the
option of aggrieved party.
Voidable contract has been defined in section 2 (i) of the Contract Act which is
reproduced below:
“An agreement which is enforceable by law at the option of one or more of the
parties thereto, but not at the option of the other or others, is a voidable contract”
--A contract becomes voidable in the following situations:
Where consent of a contracting party is not free
Where Promisor prevented from performance of the contract.
--An agreement on account of misrepresentation shall be voidable at the
option of the person who is misled by such misrepresentation.
--In case a voidable contract is acted upon by a party as valid, that party
cannot subsequently deny the validity thereof.
Void contract
A void contract is the one which is not enforceable by law. It has been provided in
section (j) of the Contract Act.
“A contract which ceases to be enforceable by law becomes void when it
ceases to be enforceable. “

A voidable contract is a good contract as long as it is not avoided by the
person who has the option to avoid whereas a void contract is not a
contract at all from the very beginning in the eye of law.
Example:
Mr. Aslam resident of Lahore entered into an agreement with Mr. Kamal, a rice
dealer at Gujranwala for the purchase of 100 tons of rice. District Coordination
Officer ( DCO) Lahore had imposed restriction on entry of rice in the territorial
jurisdiction of District Lahore well before the date of the above agreement. The
said agreement is not enforceable at law, hence void.
Situations of void contract

Impossibility of performance. It has been discussed in section 56
Legal contract may became void due to some illegality afterwards.
Revocation of a voidable contract by the party at whose option, the
contract is avoidable becomes void contract
Unenforceable Contract
Such contracts are unenforceable before a court of law due to some technical
defects such as non-deposit of court fee, submission of unsigned documents,
absence of writing, wherever writing required, absence of registration, wherever
required under law. On removal of these discrepancies, the contract becomes
enforceable.
Express contract
An express promise shall lead to an express contract. Such a contract may be
expressed by words spoken or written. Express contracts are contained in the
provisions of section 9 of the Act.
Implied contract:
Such contracts are inferred from the acts and conduct of the contracting parties.
Example:
Mr. Aslam was engaged by a business man as a helper at his shop. He has been
performing the job assigned to him, however no appointment letter was issued by
the shopkeeper. Although there is no express agreement as to the employment of
Mr. Aslam but the acts and the conducts of the respective parties shall lead to a
conclusion regarding the nature of contract between them. Since the conclusions
shall be inferred from the acts and conduct of the respective parties, such contract
would be called an implied contract.
--The provisions regarding express and implied contract as contained in section 9
are given below:
“In so far as the proposal or acceptance of any promise is made in words,
the promises is said to be express. In so far as such proposal or
acceptance is made otherwise than in words, the promise is said to be
implied. “
We shall continue with further discussion on this topic


LESSON 22
We already know that besides other following are important legal relationships
between banker and customer.
• Debtor and Creditor
• Creditor and Debtor
• Principal and Agent
• Bailor and Bailee
• Mortgagor and Mortgagee
• Pledger and Pledgee
The above relationships are explained in the following paragraphs.
Debtor and Creditor Relationship

When customer deposits money in a bank the relationship of debtor and creditor
is established, in this case; Banker is Debtor & Customer is Creditor
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. It has now been well settled that the first
and foremost relationship between the customer and the bank is the relationship
of a Creditor and debtor.
H.P. Sheldon in his Practice and Law of Banking sets out this relationship as
follows:
"The banker when he receives money from a customer does not hold the money in
a fiduciary capacity. To say that money is Deposited'' with a banker is likely to
cause misapprehension. What really happens is that the money is not deposited
with, but lent to the banker, and all that the banker engages to do is to discharge
the debt by paying over an equal amount when called upon.
Halsbury's Lazus of England, (Simonds Edn.) Vol. 2, p. 166, states that receipt of
money by a banker from or on account of his customer constitutes him the debtor
of the customer.
American Jurisprudence discussing the relation between bank and general
depositor has the following to say:
Sec. 444. "It is a fundamental rule of banking law that in the case of a general
deposit of money in a bank, the moment the money is deposited it becomes the
property of a bank, and the bank and the depositor assume the legal relation of
debtor and creditor. The legal effect of the transaction is that of a loan to the bank
upon the promise and obligation, usually implied by law, to pay or repay the
amount deposited usually upon demand; there is nothing of a trust or fiduciary
nature of a bailment in the transaction or relationship or in the nature of any right
to specific money deposited….”
Corpus Juris gives the following information:
Sec. 326. "The contract between a bank and a depositor is not materially different
from any other contract by which one person becomes bound to take charge of
and repay another's, funds, and there is no trust relation between a bank and a
general depositor. The relation between a bank and a depositor may be dual in
character, the bank being the depositor's debtor with respect to one thing and his
agent with respect to another, or his debtor at one time and his agent at another;
and while the relation between the bank and a depositor in respect to a general
deposit is generally regarded as that of a debtor and creditor, yet in another sense
the depositor is the owner of the deposit, in that he can demand repayment at any
time. It is competent for a bank of deposit to enter into a collateral agreement with
the depositor with reference to the disposition of the proceeds of deposits...."
According to H P Sheldon in his publication ‘practice and law of banking’, this

relationship has been expressed as under:
“The banker when he receives money from a customer does not hold the money in
the fiduciary capacity. To say that the money is deposited with a banker is likely to
cause misapprehension. What really happens is that the money is not deposited
with, but lent to the banker, and all that the banker engages to do is to discharge
the debt by paying over an equal amount when called upon”
Creditor and Debtor Relationship:

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.
Principal & Agent Relation

In certain situations, the banker serves as agent of the customer (principal) some
of these situations are enumerated below:
- Collection of cheques on behalf of the customer
- Collection of dividends and bills of exchange
- Acting as attorney, executor or representative of a customer
- Buying and selling securities on his behalf.
According to Skeleton another service being rendered by a banker to his customer

is to collect his customer's cheque and other credit instruments. In these
transactions, the relationship between the two parties is that of principal and
agent—the banker acting as his customer's agent. This is because in the course of
business incidental to banking, a banker undertakes to perform many services for
the customer such as:
Buying and selling securities on his behalf; collection of cheques, dividends, bills or
promissory notes on his behalf; acting as a trustee, attorney, executor,
correspondent or a representative of a customer.
In the performance of all these functions, the banker acts as an agent of the
customer.

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: Sec 182

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
The legal relation between a merchant in one country and a commission agent in
other is that of principal and agent, and not seller and buyer, though this is
consistent with the agent and principal, when the agent consigns the goods to the
principal, being in a relation like that of seller and buyer for some purposes. A
merchant, therefore, in this country who orders goods through a firm of
commission agents in Europe cannot hold the firm liable as if they were vendors
for failure to deliver the goods. And the result is the same if the goods are ordered
through a branch in this country of a firm of commission agents in another
country. For the same reason, where a commission agent buys goods for a
merchant at a price smaller than the limit specified in the indent, he cannot charge
any price higher than that actually paid by him, except in the case of a custom to
the contrary.
An agent may have, and often has, in fact, a large discretion, but he is bound in
law to follow the principal's instructions provided they do not involve anything
lawful. To this extent an agent may be considered it's a superior kind of servant;
and a servant who is entrusted with any dealing with third persons on his master's
behalf is to that extent an agent. But a servant may be wholly without authority to
do anything as an agent, and agency, in the case of partners, even an extensive
agency, may exist without any contract of hiring and service.
Agency may be created in the following ways:

• By consent
• By operation of law
• By estoppel
• By ratification
Agency by Consent:
Consent may be express or implied.
Express Agency:
Such agency is created by words either spoken or written. In business
transactions, this relationship is usually established through writing an agreement
Implied Agency:
An authority is referred to as implied when it is inferred from the conduct of the
parties or circumstances of the case.

Definitions of express and implied authority as contained in section 187
of the Act is given below:
An authority is said to be express when it is given by words spoken or written. An
authority is said to be implied when it is to be inferred from the circumstances of
the case; and things spoken or written, or the ordinary course of dealing, may be
accounted for circumstances of the case.
Types of Agent:
The agents may be classified as under:
Public Agents- these are representatives of a State
Private Agents—these agents represent individuals or companies
General Agents- these agents pertaining to a business, vocation or profession
Special Agents—such agents are appointed for a specific transaction.
Co-Agents-- Such Agents act along with Principal.
Duties of the Agent:
Duties of agent are contained in sec 211 to 218 of the Contract Act. Some of the
important duties are given below:
• To follow principal’s instructions
• To show required skill and diligence
• Agent to render proper accounts
• Agent to pass on any benefits derived by him
Agent’s duty in conducting principal’s business. (sec 211)
An agent is bound to conduct the business of his principal according to the

directions given by the principal, or, in the absence of any such directions,
according to the custom which prevails in doing business of the same kind at the
place where the agent conducts such business. When the agent acts otherwise, if
any loss be sustained, he must make it good to his principal, and, if any profit
accrues, he must account for it.
Illustrations
(a) A, an agent engaged in carrying on for B, a business, in which it is the custom
to invest from time to time, at interest, the moneys which may be in hand, omits
to make such investments. A must make good to B the interest usually obtained
by such investments. (b) B, a broker, in whose business it is not the custom to sell
on credit, sells goods of A, on credit to C, whose credit at the time was very high. C
before payment becomes insolvent. B must make good the loss to A.
(c) An agent, instructed to warehouse goods at a particular place, warehouse a
portion of them at another place, where they are destroyed, without negligence.
He is liable to the principal for the value of the goods destroyed. (d) An agent,
instructed to insure goods, neglects to do so. He is liable to the principal for their
value in the event of their being lost. (e) A broker, entrusted with goods for sale,
sells them by auction at an inadequate price, not having made an estimate of the
value in accordance with the custom of the particular trade. He must make good
the loss. (f) An auctioneer, contrary to the usual custom, takes a bill of exchange
in payment of the price of goods sold. He is liable to the principal for the amount of
the bill in the event of its being dishonored. (g) An agent, bound by his contract to
keep proper books of account, omits to scrutinize, examine or check the accounts
of his subordinates whom he implicity trusts. Taking advantage of this, the
subordinates commit gross frauds on him and his employers. The frauds and
defalcations being due to the agent’s failure to perform his duty he is liable to
make good the loss thereby caused.
Skill and diligence required from agent (sec 212)

An agent is bound to conduct the business of the agency with as much skill as is
generally possessed by persons engaged in similar business, unless the principal
has notice of his want of skill. The agent is always bound to act with reasonable
diligence, and to use such skill as he possesses; and to make compensation to his
principal in respect of the direct consequence of his own neglect, want of skill or
misconduct, but not in respect of loss or damage which are indirectly or remotely
caused by such neglect, want of skill or misconduct.
Illustrations
(a) A, a merchant in Islamabad, has an agent, B, in London to whom a sum of
money is paid on A's account, with orders to remit. B retains the money for a
considerable time. A, in consequence of not receiving the money, becomes
insolvent. B is liable for the money and interest from the day on which it ought to
have been paid, according to the usual rate, and for any further direct loss---as
e.g., by variation of rate of exchange--but not further. (b) A, an agent for the sale
of goods, having authority to sell on credit, sells to B on credit, without making the
proper and usual inquiries as to the solvency of B. B, at the time of such sale, is
insolvent. A must make compensation to his principal in respect of any loss
thereby sustained. (c) A, an insurance broker, employed by B to effect an
insurance on a ship, omits to see that the usual clauses are inserted in the policy.
The ship is afterwards lost. In consequence of the omission of the clauses nothing
can be recovered from the underwriters. A is bound to make good the loss to B.) A,
a merchant in England, directs B, his agent at Karachi who accepts the agency, to
send him 100 bales of cotton by a certain ship. B, having it in his power to send
the cotton, omits to do so. The ship arrives safely in England. Soon after her
arrival, the price of cotton rises. B is bound to make good to A, the profit which he
might have made by the 100 bales of cotton at the time the ship arrived, but not
any profit he might have made by the subsequent rise.
Agent's accounts (section 213)

An agent is bound to render proper accounts to his principal on demand.
Agent's duty to communicate with principal (section 214)

It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in
communicating with his principal, and in seeking to obtain his instructions. Agent
is under a duty to consult principal in a "difficult" situation so as to save
repudiation of his action by principal.
Right of principal when agent deals, on his own account, in business of

agency without principal's consent.( sec 215)
If an agent deals on his own account in the business of the agency, without first
obtaining the consent of his principal and acquainting him with all material
circumstances which have come to his own knowledge on the subject, the
principal may repudiate the transaction, if the case shows either that any material
fact has been dishonestly concealed from him by the agent, or that the dealings of
the agent have been disadvantageous to him.
Principal's right to benefit gained by agent dealing on his own account in

business of agency (sec 216)
If an agent, without the knowledge of his principal, deals in the business of the
agency on his own account instead of on account of his principal, the principal is
entitled to claim from the agent any benefit which may have resulted to him from
the transaction.
Agent's right of retaining out of sums received on principal's account.

( sec 217)
An agent may retain, out of any sums received on account of the principal in the
business of the agency, all moneys due to himself in respect of advances made or
expenses properly incurred by him in conducting such business, and also such
remuneration as may be payable to him for acting as agent.
Agent's duty to pay sums received for principal (sec 218)

Subject to such deductions, the agent is bound to pay to his principal all sums
received on his account.
Rights of the Agent:

These are discussed in the following paragraphs:
When agent’s remuneration becomes due-Sec 219:

In the absence of any special contract, payment for the performance of any act is
not due to the agent until the completion of such act; but an agent may detain
moneys received by him on account of goods sold, although the whole of the
goods consigned to him for sale may not have been sold, or although the sale may
not be actually complete.
Agent to be indemnified against consequences of lawful acts (sec 222)

The employer of an agent is bound to indemnify him against the consequences of
all lawful acts done by such agent in exercise of the authority conferred upon him.
Agent to be indemnified against consequences of acts done in good faith

(sec 223)
Where one person employees another to do an act and the agent does the act in
good faith, the employer is liable to indemnify the agent against the consequences
of that act, though it cause an injury to the rights of third persons.
Compensation to agent for injury caused by principal's neglect (sec 225)

The principal must make compensation to his agent in respect of injury caused to
such agent by the principal's neglect or want of skill.
Enforcement and consequences of agent's contracts (sec 226)

Contracts entered into through an agent, and obligations arising from acts done by
an agent, may be enforced in the same manner, and will have the same legal
consequences as if the contracts had been entered into and the acts done by the
principal in person.
Principal’s liability with regard to agreements caused by

misrepresentation or fraud by agent: Sec 238
Misrepresentation made, or frauds committed, by agents acting in the course of
their business for their principals, have the same effect on agreements made by
such agents as if such misrepresentations or frauds had been made or committed

by the principals; but misrepresentations made, or frauds committed, by agents, in
matters which do not fall within their authority, do not affect their principals.
Scope of duties of Principal:

Duties of the principal are enumerated below:
• Payment of remuneration to the agent
• Not to prevent his agent from performing the duties/ acts assigned to him
under the contract and for which remuneration is payable.
• Any legitimate expenses which have been incurred by the agent in the
course of performance of his duties are to be indemnified by the principal.

LESSON 23
We have already discussed the under noted legal relationships between banker
and customer.
o Debtor and Creditor,
o Creditor and Debtor
o Principal and Agent
Now we shall cover the following relationships:
o Bailor and Bailee
o Mortgagor and Mortgagee
o Pledger and Pledgee
Bailor and Bailee Relationship:

In banker customer relationship, bailment is also important types of relations. It
may arise in the following situations:
Availing safe custody services (lockers)
Pledge of stocks as security for availing credit from bank. In these cases---
Customer--- Bailor & Bank---- Bailee
Bailment
The definition of bailment as contained in section 148 is given here under:
A “bailment” is the delivery of goods by one person to another for some purpose,
upon a contract that they shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of the person delivering them.
The person delivering the goods is called the “bailor”. The person to whom they
are delivered is called the “bailee”
Explanation.---If a person already in possession of the goods of another contracts
to hold them as a bailee, he thereby becomes the bailee, and the owner becomes
the bailor, of such goods although they may not have been delivered by way of
bailment.
Essentials of Bailment:
Contract--there is an underlying contract between the bailor and bailee, there
may be an explicit contract or it may be an implied contract.
Specific purpose--the bailment of goods is always for some specific purpose.
Delivery of goods--there must be delivery of movable goods in a contract of

bailment.
No change of ownership--in a contract of bailment, only the possession of goods

is transferred from bailor to the bailee, whereas the bailor has all ownership rights
over the goods delivered.

Return of the goods delivered on accomplishment of purpose--when the
purpose for which the goods are delivered is completed, the goods
must be returned in the original form or modified form as per
instructions of the bailor.
For the benefit of the bailor-- Mr. Yasir, while going out of city handed over
some precious household articles to Mr. Usman for safe custody, without any
obligation to pay any fee/ charges. It is a bailment for the benefit of the bailor.
For the benefit of the bailee—Mr. Umer handed over his car to Mr. Ahsan, as he
was in need of conveyance for few days. Mr. Umer handed over this car without
any obligation on the part of Mr. Ahsan to pay any rent/ charges for the use of this
car. This bailment is exclusively for the benefit of the Mr. Ahsan, the bailee.
For the benefit of bailor and bailee—Mr. Ahmad availed locker facilities from
M/S XYZ bank ltd. Under the terms and conditions of the contract
Mr. Ahmad was required to pay Rs.1000/ annual fee on
account of availing this facility. This contract is for the benefit of
both parties, the bailor and the bailee.
Explanation:
Scope of bailment and its essentials are explained in detail in the following
paragraphs.
Nature of the transaction.---"Bailment" is a technical term of the Common Law.
It involves change of possession. One who has custody without possession, like a
servant, or a guest using his host's goods, is not a bailee. The constructive delivery
will create the relation of bailor and bailee as well as actual delivery. The bailee's
duty to deal with the goods according to the bailor's orders is incidental to the
contract of bailment, and arises on the delivery of the goods, although those
orders may have already been given and accepted in such a manner as to
constitute a prior special contract. As a matter of pleading this is no longer
material in this country, but it might still be material with regard to the period of
limitation. Ailment is necessarily dealt with by the Contract Act only so far as it is
a kind of contract. It is not to be assumed that without an enforceable contract
there cannot in any case be a bailment. The words. "Otherwise disposed of" in the
present section express the common law as now understood. "It seems clear that
a bailee is not the less a bailee because he is clothed with authority to sell the
thing which is bailed to him," e.g., a factor for sale. On the whole a bailment may
be described as a delivery on condition, to which the law usually attaches an
obligation to redeliver the goods, or otherwise deal with them as directed, when
the condition is satisfied; but there may be, in particular cases, a bailment without
an enforceable obligation
Rights and duties of bailee

To take care of goods delivered by bailor—this aspects are contained in the
following sections:
--Sec 151: in all cases of bailment the bailee is bound to take as much care of the
goods bailed to him as a man of ordinary prudence would, under similar
circumstances, take of his own goods of the same bulk, quality and value as the
goods bailed.

-- Sec 152: the bailee, in the absence of any special contract, is not responsible
for the loss, destruction or deterioration of the thing bailed, if he has taken the
amount of care of it described in section 151.
Effects of mixture, without bailor’s consent when the goods can be

separated
-Sec 156: if the bailee, without the consent of the bailor, mixes the goods of the
bailor with his own goods, and the goods can be separated or divided, the property
in the goods remains in the parties respectively; but the bailee is bound to bear
the expense of separation or division, and any damage arising from the mixture.
Effect of mixture, without bailor’s consent, when the goods cannot be

separated
--Sec 157: if the bailee, without the consent of the bailor, mixes the goods of the
bailor with his own goods, in such a manner that it is impossible to separate the
goods bailed from the other goods and deliver them back, the bailor is entitled to
be compensated by the bailee for the loss of the goods.
• According to section 154, bailee shall not make un-authorized use of the
goods delivered to him.
• According to section 160, bailee is required to return the goods delivered to
him for som purpose.
• According to section 163, bailee is required to return an increase or profit in
lieu of goods delivered.
Explanation:
The duties of the bailee are explained in greater detail in the following
paragraphs:
The bailee has no right to dispose of or sell the property unless specifically
authorised to do so. He has only a right to retain the goods bailed with him until he
receives due remuneration for the service rendered in respect of the goods. He is
responsible for the safe delivery of the goods bailed with him and in default is
responsible to the bailor for any loss of goods
Goods given to a person by bank on trust receipt---Person becomes a

bailee---Liable for criminal breach of trust in case of non-accounting of
goods. The execution of a trust receipt is a recognised mode of making a person
bailee of the goods and in such circumstances the Bank must be deemed to be in
possession or control of the goods. The validity and efficacy of such instruments of
trust are now generally acknowledged. If a person who has signed such a trust
receipt, fails to hand over to the Bank the sale-proceeds of the goods sold, the
former would be liable for criminal
http://www.paksearch.com/Government/CORPORATE/Contract/P43.htm breach of
trust
Intentional wrong delivery by carrier---Carrier liable for damages ---Where

the carrier has made intentional wrongful delivery of goods, he cannot escape
liability to indemnify the plaintiff for the loss caused to him by wrongful deliveries
of the http://www.paksearch.com/Government/CORPORATE/Contract/P44.htm
consignments

Care to be taken by bailee (sec 151)
In all cases of bailment the bailee is bound to take as much care of the goods
bailed to him as a man of ordinary prudence would, under similar circumstances,
take of his own goods of the same bulk, quality and value as the goods bailed
Contract by bailee exempting himself from liability for negligence.---The

learned authors considered that a contract by a bailee purporting to exempt
himself wholly from liability for negligence was not valid. This opinion is based on
the express provisions for contracting out in S. 152, and in fact throughout the
Chapter on Bailments wherever a rule of law is to operate only in the absence of a
contract to the contrary, it is expressly so stated in sections 163, 165, 170, 171,
and 174.
Theft of goods pledged with Bank---Document of pledge containing condition
that during the continuance of pledge agreement the borrowers shall be
responsible for all loss, damage, or deterioration of security caused by theft, fire,
rain or any other cause whatsoever---There being. no discrepancy between
provisions of S. 151, Contract Act, 1872 and condition of document of pledge, if
loss had been caused by theft, fire, rain or any other cause, it would be the duty of
the bailee to explain that he had taken care of the goods as a man of ordinary
prudence would under similar circumstances take of his own goods and if in spite
of that the goods pledged were lost in manner as recorded in the condition of
document of pledge, liability of borrower could not be
http://www.paksearch.com/Government/CORPORATE/Contract/P58.htm legally
denied.
Loss to goods by negligence of ship-owner---Claim for damages against

ship-owner sustainable:
The ship-owner committed a breach of the obligation contained in the bill of lading
and as such the consignee was entitled
tohttp://www.paksearch.com/Government/CORPORATE/Contract/P61.htm recover
damages.
Damage to contents of parcel---Burden of proof is on consignor--Mere

damage to containers does not prove damage to contents.
The burden of proof was on the plaintiff to show that the damage to the contents
was caused by the negligence of the servants of the Carrier while the Crates were
in its custody. No such evidence has been produced by the plaintiff and merely,
because some of the wooden crates were externally broken and some card-board
cases torn, as stated in the Survey Report, it cannot be inferred, nor is there any
evidence to show, that the external damage must have resulted in Damage to the
contents
Loss of goods in possession of bailee---Onus of proof as to negligence of

bailee:
Where goods are lost or destroyed while in .possession of bailee the onus of
placing all the materials in his possession or knowledge is on the bailee, while the
onus of establishing negligence is on the plaintiff
Carriage of goods by sea from foreign port to Pakistan---Damage to

goods---Contract Act applies.---The provisions of the rules to the Carriage of
Goods by Sea Act, 1925 do not apply in relation to carriage of goods by sea in a
ship carrying goods from a foreign port to a port in Pakistan, as is the present
case. Therefore, the rights and liabilities of the parties have to be ascertained by
reference to the proper law of the contract which in this case, is the Pakistan law
Buyer rejecting goods---If can sell them to recover ware-house charges

for storing them.---The buyer rejected the goods and then disposed them of in
order to recover the ware-house charges for having stored them. He contended
that he as a bailee had the right to do so
Held: The buyer of the goods having rejected them and thereafter selling them as
the goods belonging to him, stands on a different footing than the bailee
contemplated under sections 151 and 170 of the Contract Act. The principle on
which a bailee is entitled to dispose of the goods or has lien on the goods bailed
with him are entirely different and are not applicable to the case of the sale of
goods. As discussed above, the buyer of the goods after rejecting them, has no
lien on the goods in dispute and must place them at the disposal of the seller for
dealing with them in any manner which he likes
Loss of goods during transit---Railway liable---Absence of brake---

Negligence of railway.---Where goods were lost during transit and it was found
that there was no vacuum or brake in the van of the guard so that the train could
not be stopped in case of theft in the running train.
Held: There ought to be a vacuum in a train in order that in case of theft while it is
running it may be stopped. That a vacuum should be there in the brake of the
guard is not denied and the failure to keep a vacuum against the rules would be
negligence. Therefore the failure to provide brake should be considered a
negligent act on the part of the Railway.
Held further: That there is no satisfactory evidence from which it could be

inferred that they had taken proper care of the consignment as bailer of the goods
consigned. Therefore, the railway was liable for the loss of goods.
Mortgagor and Mortgagee Relationship

When credit facility is provided by the bank to a customer against the security
(collateral) of immovable property, the relationship of Mortgagor and Mortgagee is
established.
In this situation:
Mortgagor— Customer
Mortgagee— Bank
Mortgage Defined: sec 58:

(a) A mortgage is the transfer of an interest in specific immoveable property for
the purpose of securing the payment of money advanced or to be advanced by
way of loan, an existing or future debt, or the performance of an engagement
which may give rise to a pecuniary liability.
Mortgagor: The transferor is called a mortgagor

Mortgagee: The transferee a mortgagee
Mortgage Money: The principal money and interest of which payment is secured
for the time being are called the mortgage-money
Mortgage Deed: the instrument (if any) by which the transfer is effected is
called a mortgage deed.
Nature of Transaction:
In Mortgage, the rights and interests which are vested in Mortgagor are transferred
by him in favor of the other person, the Mortgagee.
Mortgage in fact is a transfer of an interest in specific immovable property as
security for the repayment of a debt and such an interest is itself immovable
property. The nature of the right that is transferred would depend upon the form of
Mortgage.
Types of Mortgages:
Registered Mortgage
Equitable Mortgage
Registered or Legal Mortgage

It is comparatively expensive as it involves stamp duty and registration fee.
Equitable Mortgage:
Memorandum regarding deposit of title deed is also signed by respective parties.
Clear title of the mortgagor must be ascertained by the mortgagee.
Rights of Mortgagee
To sell the mortgaged property in case of default by mortgagor
Right to fore-closure
Right to file suit
Pledger and Pledgee Relationship

When credit facility is provided by a bank to its customers against security
(Collateral of movable property) the Relationship of Pledger and Pledgee is
established.
In this case:
Pledger—Customer
Pledgee—Bank
Pledge
It has been defined in section 172 of the Contract Act which is given below:
"Pledge," "pawnor," and "pawnee" defined.
The bailment of goods as security for payment of a debt or performance of a
promise is called "pledge". The bailor is in this case called the "pawnor." The
bailee is called the "pawnee."
• The pledge has actual control of pledge stocks/goods.
• Pledge can sell pledged stocks by giving reasonable notice to the borrower.
• Before disposal pledge should publish the notice through news papers etc.
Comments
The bailee tendering a contract of pledge does not become owner, but, as having
possession and right to possess, he is said to have a special property. Any kind of
goods, documents, or valuable things of a personal nature may be pledged.
Delivery is necessary to complete a pledge; it may be actual or constructive. It is
sufficient if the thing pledged is delivered under the contract within a reasonable
time of the lender's advance being made. Pledge---Monthly statements of stocks
lying in godown showing goods as pledged with defendant-Bank---All such
documents signed by authorized person on behalf of plaintiff---Debit advice
vouchers produced by defendants showing conveyance charges paid to Godown
Keeper visiting godown, and debited to account of plaintiff---Goods, held, in
possession of defendant under pledge and not merely

http://www.paksearch.com/Government/CORPORATE/Contract/Q26.htmhypothecat
ed.
According to J. Milnes Holden:

“Pledge arises when goods or (documents of title of goods thereto) or bearer
securities are delivered by one person (called the Pledger) to another person
(called the Pledgee) to be held as a security for the payment of a debt or for the
discharge of some other obligation, upon the express or implied understanding
that the subject matter of the Pledge is to be restored to the Pledger as soon as
the debt or other obligation is discharged.
Where a definite time for payment has been fixed, the Pledgee has an implied
power of sale upon default, but if there is no stipulated time for payment, the
Pledgee may demand payment and in default thereof may exercise his power of
sale after giving notice to the Pledger of his intention to do so. The Pledgee has
actual control of pledged stocks/Goods.
Pledgee can sell pledged stocks by giving reasonable notice to the borrower.
Before disposal Pledgee should publish the notice through news papers etc.
Termination of Banker- Customer Relationship:

This relationship that is established by the time an account is opened may be
terminated by either party in following manner:
o By Notice from customer or
o By notice from banker

LESSON 24
Types of Customer’s Account

General Requirements for opening an account
-- Completion of Account Opening Form ( AOF)

Introduction of the prospective customer and preliminary investigations (know
your customer KYC)
Obtaining specimen Signatures
Mandate regarding operation of Account
Allocating Account number

Preliminary investigations /Introduction of Account
Introduction of a new account refers to proper investigations about the credentials
of prospective account holder by the banker. If proper introduction not obtained it
would tantamount to negligence on the part of banker. Retention of photo copy of
CNIC of Account Holder as well as introducer of account after verifying from
originals.
Why Introduction & Preliminary Investigation:

(a). To avoid frauds
(b). Safeguard against unintended/inadvertent credits to an account by
mistake, in case banker has conducted proper preliminary investigations
and obtained introduction it would be help in follow up process
Negligence in seeking proper introduction & making necessary preliminary
investigations leads to deprivation of banker from seeking protection of law U/S
131 of Negotiable Instruments Act 1881.
Inquiries about client (credit Reports/status inquiries) furnished by banks. In case
account opened by a banker without proper inquiries—the bank furnishing status
inquiries /etc. may at times launch itself into trouble.
Specimen Signatures:
If forged signatures on a Cheque entertained & Cheque passed by bank--bank shall
be legally responsible to make good the loss to Account Holder
Opening of Account of an Illiterate Person:

Photograph on S.S Card
Thump impression in the presence of bank officer to be affixed.
L.T.I (Gents)
R.T.I (Ladies)
Type of Accounts:
Individual’s Account
Joint Account
Minor’s Account
Legal Issues with respect to individual’s Account:

A banker’s authority to pay cheques is revoked in the following situations as per
provisions contained in section 122-A of Negotiable Instruments Act, 1881:
Countermand of payment (stop payment)
Notice of customer’s death
Notice of Adjudication of the Customer as insolvent

Joint Accounts
These accounts are not to be treated as partnership accounts. These are the
accounts opened in the name of two or more persons who are not partners
Operations of Joint Account:

--The mandate must bear the signatures of all the account holders.
Can be operated jointly by all the account holders
Can be operated by any one or more persons authorized to operate the account
Either or Survivor /s mandate.
Stop Payment Instructions in a Joint Account

Any one of the joint account holders can give stop payment instructions of any
cheque to the bank; however, for reinstatement of the payment of such cheque,
such instructions must bear signatures of all the account holders.
Minor’s Account
Minor does not have legal capacity to enter into a contract. As we know that legal
relationship between banker and his customer is a contractual relationship, as
such minor is not qualified under law to open an account. However, an account in
the name of minor can be opened when guardian of the minor shall operate this
account. According to law, minor is a person who has not attained the age of 18
years. Further more under section 3 of majority Act 1875, if a guardian is
appointed by the court in respect of a person before he attains the age of 18
years, the majority extends to the age of 21 years.
Classified Accounts of the Customers

Partnership Account
Companies Account
Account of Clubs, Societies & Associations.
Agents’ Account
Trust Account
Executors & Administrators’ Account
Accounts of Local Bodies
Partnership Account:
“Partnership” is the relation between persons who have agreed to share the
profits of a business carried on by all or any of them acting for all Right to sue
vests in registered firm.
Partner is treated as an agent of firm (Section 18 of Partnership Act. 1932)
however; partner has no authority to open an account on behalf of the firm
(Section 19-2B)
Survivorship mandate
Joint and several mandates
Admission of new partner—responsibilities of incoming partner start from the date
of admission unless not otherwise agreed.
Bankruptcy of a partner-- ordinarily partnership stands dissolved.
Insolvency of firm—business of partnership vests in official receiver appointed by
court, operations in account are stopped, personal accounts of partners are also
declared inoperative.
Accounts of Companies
Documents Required:
Resolution passed by Board of Directors for opening the account
Copy of Memorandum of Association
Copy of Articles of Association
Certificate of Incorporation
Certificate of commencement of business
Balance Sheet.
Operation of the account in line with the instructions contained in the board of
directors resolution, authorized directors to operate the account.
In case of winding up of a company, bank should stop operations in the account.
Accounts of Clubs, Societies & Association

Resolution passed by managing committee/executive committee/Governing body
etc.
Certified copy of by- laws/rules
Signatures of the persons authorized to operate account.
Agent Account
Agent acts on behalf of the principal.
Agent can open an account under the authority of principal—based on power of
attorney.
On revocation of power of attorney operation in the account will stand inoperative.
In case death of the agent operations should be stopped immediately however,
Principal can sign the cheques and the same are honored by the banks.
Account of Trusts:
Trusts are governed by Trust Act-1882
Any person who is competent to contract may create a trust.
Opening of Account
Account is opened in the name of the Trust.
All trustees to sign account opening form.
Executors & Administrator's Account

Executor is a person who is entrusted responsibilities of executing WILL.
An administrator is a person appointed by a court to look after the estate of a
person who died without leaving a WILL or the person appointed as executor is not
competent to perform the contract (for example minors, insolvent, lunatics)
The banks must carefully study the contents of the WILL before opening an
account of Executor/Administrator.
Accounts of Local Bodies:

The accounts must be in conformity with local bodies law/rules.
The request for opening an account must be made by competent authority.
Difference between Joint Account & Partnership Account (Profit Motive)

Operation of Joint Account:
Instructions to be obtained by the bank to be operated by one, anyone or jointly by
all or some of designated person/persons.
Stop payment legal position:

Any of joint Account holders has the authority to issue such instructions to bank
but not revocation thereof.
Authority to Draw Cheque by Third Party/Manager

Such authority--Jointly by all Account Holders
Joint Account:
Above Authority/Mandate Revoked Automatically
By death
Bankruptcy (insolvency)
Insanity (unsound mind) of either or any account holder/s
Survivorship in case of death of one or more of the Joint A/c Holder:

(Either or Survivor)
Joint responsibility, survivors not responsible for payment of any debt due to bank
by deceased account holder, however right of set off can be exercised.
Deceased A/c Holder (in case of joint account)

However, in case of joint & several mandates the amount of debt due to bank by
deceased can be set-off / recovered from joint account balance to the extent of
amount owed by the deceased.
Bankruptcy of Joint Account Holder

Operations to be stopped & instructions should be sought from solvent customers
and official assignee to whom all credit balance will vest.
Types of Customer’s Account

Joint Account
In the event of death
Ownership vests in joint holders/ surviving account holders and not to legal heirs
of the deceased.
In the event of Lunacy

These articles on death of a holder should be delivered with the consent of official
assignee or Manager of Lunacy.

LESSON 25
NEGOTIABLE INSTRUMENTS
Concept/ Object and Purpose of Negotiable instruments
The object and purpose of the Act is to legalise the system under which claims
upon certain mercantile instruments are treated like ordinary goods passing from
hand to hand. The Act is not exhaustive of all matters relating to negotiable
instruments nor does it purport to deal with all kinds of negotiable instruments. It
merely regulates the issue and negotiations of bills notes and cheques and even
as regards them it does not deal with its transmissions of rights in them by
operation of law or by assignment by deed. In the absence of any express
provisions in this Act to the contrary, the general rules contained in the Contract
Act are applicable to such instruments as to obligations of parties to the
negotiable instruments are contractual in nature. For example the Act does not
declare what consideration is sufficient and valid for a bill or note and therefore
any consideration which will support a simple contract will support a bill or a note
also.
This clause as provided in section 3 of the Negotiable Instrument Act

1881 is reproduced here under:
In this Act, unless there is anything repugnant in the subject or context:-
"accommodation party" means a person who has signed a negotiable instrument
as a marker, drawer acceptor or endorser without receiving the value thereof and
for the purpose of lending his name to some other person;
"Banker" means a person transacting the business of accepting, for the purpose of
lending or investment, of or deposits of money from the public, repayable on
demand otherwise withdraw able by cheque, draft, order, or otherwise, and
includes any Post Office Savings Bank;
"Bearer" means a person who by negotiable comes into possession of a negotiable
instrument, which is payable to bearer,
"Delivery" means transfer of possession actual or constructive, from one person to
another;
"issue" means the first delivery of a promissory notice, bill of exchange of cheque
complete in form to a person' who takes it as holder .
"material alteration" in relation to a Promissory note, bill, of exchange or cheque
includes an alteration of the date, the sum payable, the time of payment, the of
payment, and, where any such instrument has been accepted generally, the
addition of a place of payment without the acceptor's assent, and
"Notary public" includes any person appointed by the Central Government to
perform the functions of notary public under this Act and a notary appointed under
the Notaries Ordinance, 1961.
Explanation
The words “material alteration” is not defined in the Act, but in the definition
clause with reference to negotiable instrument these words are followed by

“include”, which has an effect of enlarging the scope of the already understood
meaning of the words. The definitions extends the scope of the words to take into
its folds the change or alteration in relation to the date, sum payable, time and
place of payment with reference to negotiable instrument. It means any material
and substantial change, variation, modification, substitution, insertion, erosion,
addition or alteration in the contents or body of the negotiable instrument
including any alteration of date, the sum payable, the time and place of payment
after its due execution which affects the rights, liabilities or legal position of a
party.
Some of the important concepts as discussed in the Act are given below:
Negotiable means the quality of transferability by delivery or by endorsement
and delivery.
Instrument means a written document by which a right is created in favor of

some person.
Negotiable Instrument means a written document, which is freely transferable
and which creates a right in favor of some person to receive some money.
Negotiable Instrument as defined in section 13 of the Act is given below:
“A negotiable instrument means a promissory note, bill of exchange or cheque
payable either to order or to bearer”.
The Act besides above three negotiable instruments recognizes any other
instrument satisfying the characteristics of negotiability, as a Negotiable
Instrument.
Quasi Negotiable Instruments—the negotiable Instruments Act, 1881 besides

the three negotiable instruments as contained in section 13 also recognizes the
following instruments as negotiable instrument. These are called Quasi Negotiable
Instruments.
Dividend Warrants
Share Warrants
Bearer Debentures
Government Promissory Notes etc.
Promissory Note
It has been defined in section 4 of the Act which is given here under:
“A promissory note is an instrument in writing (not being a bank note or a currency
note) containing unconditional undertaking, signed by the maker to pay on
demand or at a 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.
Specimen of a Promissory
Rs. 100,000/- Lahore
August 20, 2007

Thirty days after date, I promise to pay Mr. Ahmad Kamal or order the sum of
rupees one hundred thousand only for value received.
Signature Revenue Stamp
Yasir Mehmood
(The Maker)
Explanation
The definition of promissory note as given in the Act is much the same as that in
section 83 (1) of the Bills of Exchange Act. This and the following sections
attempts to define different kinds of negotiable instruments dealt with by the Act.
To understand the essentials of a negotiable instrument we have to bear in mind
the purpose of such instruments, which is, that they may represent money and do
all the work of money in business transactions. It is obvious, therefore, that the
first and essential requisite is certainty. Certainty as to the person to make the
payment, the person to receive it, the time and place of payment, the conditions
of liability, and also as to the amount to be paid. These sections endeavor to
define these certainties not “ in such exact and technical way as would only
embarrass the transaction of business but substantially, in a perfect and practical
way. “ A promissory note may be in the form of a letter or in any other form of
words which fulfill the requirements of this section, and from which the intention to
make a note appears.
How promissory note differs from agreement:

It depends upon the circumstances and wording in each case as to whether a
document is a promissory note or an agreement. One of the tests to be applied to
find out is the intention of the parties. The second is whether the document as
drawn out can be said to be negotiable, that is to say, could a third person file a
suit on the strength of the document. If he could not, then it is a mere
agreements, where the document clearly stated that the amount was kept in
deposit the mere fact that the document bore twenty five paisa stamps and the
impression of the scribe would not make it a promote.
Notice to surety:
Delivery of notice to surety is not a condition precedent for making him liable on a
negotiable instrument if the maker does not pay
Proof:
A party seeking to prove a promissory note need not go behind the promissory
note, he has only to prove due execution of the note. Where the plaintiff bank
produced two witnesses who categorically stated all documents including
promissory notes, hypothecation agreement, letter of revival and balance credit
slips having been signed by the defendant, no evidence was produced by
defendant to discharge the burden placed upon him in the face of the positive
evidence produced by the plaintiff, the genuineness of the promissory note stood
proven
Under Article 73 of the Limitation Act, a suit based on a promissory note payable
on demand has to be filed with in 3 years from the date of the note. Under Article
64-A a suit under Order XXXVII of the Code of Civil Procedure, is required to be
filed within 3 years from the date when the debt becomes payable immediately
where a promissory note makes it obligatory on the holder to sue on expiry of
three days after notice to pay was given, limitation of the suit begins three days
after the notice to pay was given.
Mere fact that there was an oral understanding between the parties to return the
amount within three months, would not take away the unconditional effect of the
pronote.
Promissory Note:
Proof of promissory note, would be unquestionable when witnesses were subjected
to lengthy cross-examination but noting was extracted to demolish their credibility
and neutrality.
Promissory note is not required to be attested. Requirement as to attestation of
promissory note prescribed in Art. 17 (2) (a), Qanun-e-Shahadat, 1984, would not
override Negotiable Instruments Act, 1881 which does not require attestation of
promissory note.
We shall carry on with the negotiable instruments in the coming Lessons.

LESSON 26
Promissory Note:
We have already gone through the definition of promissory note and also had a
view of a specimen of a promissory note; we shall continue to explore the other
aspects of promissory note.
The notes which do not qualify to be called Promissory note:

We are discussing below some of the notes which do not qualify to be called
promissory note in the light of definition contained in section 4:
Thirty days after date, I promise to pay Mr. Ahmad Kamal or order the sum of
rupees one hundred thousand only and the amounts which may be due to Ahmed
Kamal by due date.
--This is not the promissory note since the amount promised is not certain and
ascertainable on the date of making the promise/ undertaking.
The notes given below do not qualify to be called promissory note in the light of
definition contained in section 4
I owe Rs 100,000 to MR. Ahmad Kamal
--This is not a promissory note since it is just an acknowledgement not an
undertaking
I promise to pay Rs 100,000 to Mr. Ahmad Kamal thirty days after getting
admission in a University.
--This is not a promissory note since the time of payment is not certain/
ascertainable at the time of making the promise.
The section 4 of the Act recognizes three kinds of promissory notes:-
A promise to pay a certain sum of money to a person.

A promise to pay a certain sum of money to the order of a certain person. This is
nevertheless payable to the person named or his order.
A promise to pay the bearer.
The main question in deciding whether a document is a promissory note is to

consider not whether it is negotiable or not but to consider whether in substance
and primary intention it was a note and whether it contains the necessary recitals
and is not intended to record a different kind of transaction altogether. The
question whether the words in documents amount to mere acknowledgement or to
a promise has to be decided on the intention as mentioned above and the real
characteristics of the document. Mere reference to account in the promissory note
does not make it any the less a promissory note. When the requirements of the
section are satisfied, a promissory note is not the less a note because it contains a
recital that the maker has deposited title deeds with the payee; or because it is
attested by witnesses, or because it refers to an agreement which does not,

however, qualify the note, or because the words “security for overdraft” are found
printed upon it or because it contains a promises to pay at certain place.
Parties to the Promissory Note

As we already know that there are following parties in a promissory note
Maker &
Payee
Essentials of a Promissory Note:

A promissory note must fulfill the following requirements:
It should be in writing
There must be promise/ undertaking to pay
The promise/undertaking should be unconditional
It should be signed by maker
Maker must be a certain person
Payee must also be a certain person
The amount to be paid must be certain
Legal tender money is to be paid under a promissory note
Time of payment to be ascertainable
It should be properly stamped under stamp Act.
Promise to pay must be for lawful consideration
Promissory note must maintain the date of issue and place of issue.
Explanation:
Sum to pay must be only money and certain:
It is also necessary that the medium of payment must be money only that is
specie or other legal currency, and not bonds, bills, notes or any article other than
money. But it is not necessary that the money to be paid must be that current in
the place of payment, or where the bill is drawn, it may be in the money form of
any country whatever. The amount promised to be paid must be certain and
incapable of being varied by indefinite editions or deductions. If the amount is not
capable of being ascertained of the face of the instrument, that instrument will not
be a promissory note.
“To or to the order of certain person”

An instrument that does not own it face indicate to whom the money is payable is
not a promissory note. But where it is clear from the instrument itself who the
payee is, it in not necessary that the name of the payee must appear in that part
of the note which expresses a promise to pay. Therefore a promissory note made
in favor of a person described by his office is one made in favor of certain person
and is valid. A promissory note payable to manage of a bank is payable to a
certain person. But where the payee is described only as “you” the instrument is
not a promissory note.
Signature:
The Act contains no definition of the term “ signature” it includes the mark made
by a person who is unable to write his name such signature need not be al the foot
or at any particular part of the document. Where the intention of the parties is
clear, the position of a signature on a bill is immaterial; if the maker writes his
name to a bill or note on any part of it so as to authenticate it and to give effect to
the contract by him thereon. It will be sufficient. A signature to a bill may be in
pencil; it may be lithographed, and even printed; in which case however, it must
be shown to have been adopted and used by the party as his signature, or again,
the affixing of the facsimile of a name ( e.g. by rubber stamp) is good as signature.
Plaintiff had established his case on the basis of evidence both documentary as
well as oral and the Trial Court decreed the suit against the defendant. Contents of
the document would bring the document within the definition of promissory note.
Heading given to such document was not legally relevant. Document forming basis
of the decree against the defendant was in fact a promissory note as defined in
section 4 of negotiable instruments Act, 1881, even though the same was
described as a pronote.
Writing:
The instrument may be written on paper, parchment, or any other convenient
substitute for paper. “Writing” would be held to include printing, engraving,
lithographing, and in fact every mode by which words and figures can be
expressed on any material. The writing may be in pencil or in ink, but the
imperfection of the former mode of writing and its liability to obliteration prevent
its being generally adopted.
The fact that a promissory note is written on a page in an account book of the
creditor does not make it illegal or any the less a promissory note. There is nothing
in the Negotiable Instrument Act to make even a promissory note not negotiable
by express terms or by necessary implication.
Signature only on stamp:

Where defendant denied the execution of promissory note but did not deny
signature on revenue stamp affixed on the pronote. Contention of defendant was
that he did not sign beyond the revenue stamp, his signature was for the payment
of salary and promissory note was the result of fraud. The Court rejected the
contention.
Unconditional undertaking:
In a promissory note there must be an unconditional undertaking to pay, and the
note must be payable at all events. When a promise to pay is said o be conditional
and when not, is explained in section 5. A letter requesting a loan, and stating that
the amount lent will be repaid is not such an unconditional undertaking, because
the repayment is dependent on the advance being made. But mentioning a place
of payment is not such a condition under the section as to make it not a
promissory note. Mere acknowledgement of indebtedness is not sufficient.
Bill of exchange
It is an important form of a negotiable instrument and has been defined in section
5 of the Act; the said definition is reproduced below:
signed by maker, directing a certain person, to pay on demand or at fixed or
Specimen of bill of exchange

Rs. 100,000/- Lahore
August 20, 2007
Ninety days after date, pay to Mr. Ahmad Kamal or order rupees one hundred
thousand only for value received
Signature Accepted by
Yasir Mehmood Drawee XYZ (Drawee)
(Drawer)
Revenue Stamp
Essentials of bill of exchange
These are outlined here under:
• In writing
• Order to pay
• Unconditional order
• Signed by the drawer
• Drawee certain person
• Time of payment
• Certain sum
• Legal tender money
• Payee certain person
• Other formalities
• Date
• Place
• Lawful consideration
• Revenue stamp
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

default of payment of one or more installments or interest. Or return in any other
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.
an indication of a particular fund out of which the drawee is to reimburse himself
or a particular account to be debited to the amount, or
a statement of the transaction which gives rise to the note of bill, in unconditional
The following are the ingredients of a bill of exchange:
• It must in writing
• It must contain an order to pay and addressed to some person
• The order must be unconditional
• The order must be signed by the maker
The order must direct to pay or demand or at a fixed or determinable future time.
The sum ordered to be paid must be certain.
The payment should be ordered to be paid to a certain person, or to his order, or
to the bearer.
Order should be unconditional:

The drawer’s order to the drawee must be unconditional and should not make the
payment of the bill dependent on a contingency. Where an instrument is
expressed to be payable on a contingency, it does not cease to be invalid by the
happening of the event before the expiry of the period fixed for the performance
of the obligation, for the instrument must be valid ab initio, and carry its validity
on its face.
Drafts:
A banker’s draft is a bill drawn either on demand or otherwise by one bank on
another in favor of third party, or by one branch of a bank on another branch of
the same bank, or by the head office on a branch, or vice versa. It is a bill of
exchange and therefore a negotiable instrument. The issue of a draft is regarded
in banking practice as a matter of purchase and ordinarily the relationship
between the holder of a demand draft and the bank issuing it is that of debtor and
creditor.
Future interest, etc:

If the sum payable includes future interest, or is payable at an indicated rate of
exchange, or is according to course of exchange, the sum payable shall be
considered to be “certain” although the instrument may provide that on default of
payment of an installment the whole of unpaid balance shall become due.
Certain person:
Although a certain person is misnamed or designated by description only, yet the
person shall be “certain” if it is clear as to who is the person to whom direction is
given or payment is to be made.
Instrument must contain an order to pay money and money only: In order that an
instrument may amount to a promissory note, it is essential that the medium of
payment must be money only. It should not consist in any article of food or any
animal or in any bonds, simply or coupled with money in specie.
If after issuing a cheque the drawer keeps quiet and takes no steps to inform the
bank in time i.e. before the cheque is encased that the cheque should not be
according to section 10 of the Negotiable Instruments Act, means payment in
accordance with the apparent tenor of the instrument in good faith, the liability for
the drawn cheque shall absolutely and squarely fall on the drawer.
Difference between promissory note and bill of exchange:

In a promissory note the executants promises him to pay while in a bill of
exchange he directs another to pay.
In a bill of exchange the person liable is responsible to executants and not scribe
In a promissory note the maker is the principal debtor. In the case of bill of
exchange the drawer is surety.
A bill of exchange can be accepted conditionally while a promissory note cannot
be so made.
A pronote cannot be made payable to the maker himself. In a bill of exchange this
is possible and one person may become both drawer and payee or both drawee
and payee.
In promissory notes there are two parties—the promisor and the promisee (the
maker and the payee). In the case of bills of exchange there are three parties—the
drawer (who makes the order), the drawee, the bill is drawn).
The most important distinction is that in the case of a promissory note the maker
unconditionally undertakes to pay the amount mentioned in the pronote while in
the case of a bill of exchange the maker gives an unconditional order directing
another person to pay.
If Interest on a promissory note is subsequently increased by agreement of the
parties. The guarantors of the promissory note are not discharged if the suit is
brought on the original promissory note.

LESSON 27
NEGOTIABLE INSTRUMENT
Another important type of negotiable instrument is cheque. Cheque as defined in

section 6 of the Act is given below:
Cheque
“A cheque is a bill of exchange drawn on a specified banker and not expressed to
payable otherwise than on demand”.
Parties:
There are three parties in the cheque which are as under:
Drawer
Drawee (in case of cheque, drawee is always a banker)
Payee
Essentials of a Cheque:
A cheque must fulfill the following requirements:
• It must be in writing
• It should contained unconditional order
• It must by signed by drawer
• Cheque is always payable on demand
• The cheque is always drawn on a specified banker
• As a matter of practice, cheque leaves are in printed form
• The amount payable should be specified in the form of legal tender money
and is paid accordingly.
• The amount must be certain amount
• The cheque is payable to specified person or order of or to bearer.
• Date of issue must be mentioned on the cheque.
Explanation:
A cheque is a peculiar sort of instrument in many ways resembling a bill of
exchange, but in some entirely different. In the ordinary course, it is never
accepted, it is not intended for circulation, it is given for immediate payment, it is
not entitled to days of grace. In addition, a cheque is presented for payment,
whereas a bill in the first instance is presented for acceptance, this is not so in the
case of a cheque, because the holder of a cheque, as between himself and the
drawer, has no right to require acceptance. A cheque is not intended for
circulation; it is given for immediate payment; it is not entitled to days of grace;
and though it is, strictly speaking an order upon a debtor by a creditor to pay to a
third person the whole or part of a debt, yet, in the ordinary understanding of
persons, it is not so considered.
Types of Cheques:
The cheques can be divided in the following forms:
Bearer Cheques:
In this type cash is payable to anyone presenting the cheque for payment at the
cash counter of bank?
Order Cheques

Such cheques are payable to the specified person on proper identification of the
payee.
Crossed Cheques
Crossing may be of different types, we shall discuss all these types of crossing.
However if the cheque is crossed as payees account only such cheques cannot be
paid at the cash counter of the bank and these must be credited to the bank
account of the payee.
Crossed Cheques and their Collection

Crossing of cheques:
The cheques are of two types—open (uncrossed) cheques and crossed cheques.
Payment of a cheque by the drawee banker depends upon whether the cheque is
open or crossed. The payment of open cheque is made at the counter of the
banker on its presentation. The open cheque is liable to a great risk in the course
of circulation. Since an open cheque is payable to a bearer, it involves a risk of
payment to any person, if it is lost. In order to avoid such risk and to protect the
interest of the genuine holder, the system of crossing the cheques was introduced.
In case of a crossed cheque, payment can be obtained only through a banker. That
is, the payee or the holder, having an account in a bank, has to deposit the
crossed cheque for collection, and draw the moen ywhen the cheque is collected
and the proceeds are credited to his account. It is only with a view to avoiding any
such risk of fraud that businessmen introduced the divice of crossing. Thus,
crossing of a cheque may be defined as, “ a direction to the drawee banker to pay
the money on a crossed cheque through a banker, so that the party getting the
payment of a crossed cheque may be easily traceable.”
Types of Crossing
There are two types of crossing
1. General Crossing
2. Special Crossing.
General Crossing:
A cheque is said to contain a general crossing when two parallel lines are drawn
across the face of the cheque. According to Sec. 123. “ where a cheque bears
across its face an addition of the words “ and company” or any abbreviation
thereof, between two parallel transverse lines, or of two parallel transverse lines
simply, either with or without the words “ not negotiable”, that addition shall be
deemed a crossing, and the cheque shall be deemed to be crossed generally.” A
cheque is said to be crossed when two parallel transverse lines, with or without
any words, are drawn on the left hand top corner of the cheque. It is relevant to
state that such lines are essential for general crossing and may not be drawn in
case of special crossing.
Special Crossing:
Sec. 124 of the Act defines special crossing as “Where cheque bears across its
face an addition of the name of a banker, either with or without the word “not
negotiable” that addition shall be deemed a crossing, and cheque shall be eemed
to be crossed specially and to be crossed to that banker.” Further, Sec. 126, Para 2
states “Where a cheque is crossed specially the banker on whom it is drawn shall
not pay it otherwise than to the banker to whom it is crossed, or his agent, for
collection.
In the case of special crossing the paying banker is to honour the cheque only
when it is presented through the bank mentioned in the crossing or an agent of
such bank, further, sec. 127 states, “Where a cheque is crossed specially to more
than one banker, except when crossed to an agent for the purpose of collection,
the banker on whom it is drawn shall refuse payment thereof. “ A special crossing
makes the cheque safer than a general crossing because now a thief will have to
search an account-holder of that particular bank only whose name appears in the
crossing which may only create more difficulty.
Account Payee (Restrictive crossing)

Although the Act is silent with regard to this form of crossing, it has been
recognized by custom amongst businessmen and bankers. The words ‘account
payee’ within a general or a special crossing, are a direction to the collecting
banker to collect and credit the payee;s account with the proceeds of the cheque.
It means that a cheque marked ‘account payee only’ or A/c Payee’ or ‘Payee’s A/c’
have same significance. If the banker goes against this order, he will be guilty of
negligence. Hence “accounts payee only” crossing is not negotiable practically, as
banks will collect it on behalf of no person other than the payee.
Not Negotiable Crossing:

The words ‘Not negotiable’ may also be written in both types of crossing—general
and special and a crossing with these words is said to be ‘Not Negotiable’ crossing.
Section 130 states that “ A person taking a cheque crossed generally or specially,
bearing in either case the words “ not negotiable” shall not have, and shall not be
capable of giving, a better title to the cheque than that which the person from
whom he took it had.
The object of ‘ not negotiable’ crossing is to afford protection to the holder or
drawer of a cheque, because even if such a cheque goes to wrong hands and from
there it is transferred to holder in due course, the true owner will not lose his claim
against an indorsee. Thus an indorsee of such a crossed cheque must not accept
the cheque unless he knows the indorser very well and is convinced about his
having a good title thereto.
Who may Cross a Cheque?

Crossing of an uncrossed cheque does not amount to a material alteration so as to
affect the validity of the instrument. Apart from the drawer of a cheque crossing it
generally or specially at the time of issue, the holder of a cheque and also the
banker may cross it. Section 125 permits the crossing being made even after issue
of a cheque in the following ways:
1. (Sec 125) “Where a cheque is in crossed, the holder may cross it generally
or specially.
2. Where a cheque is crossed generally, the holder may cross it specially.
3. Where a cheque is crossed generally, or specially, the holder may add the
word “not negotiable”.
4. Where a cheque is crossed specially, the banker to whom it is crossed may
again cross it specially, to another banker, his agent, for collection.”
Crossing once made is a material part of the cheque and its alteration except in
the above cases will amount to a material alteration. Thus, if a special crossing on
a cheque Is altered by the holder into a general crossing by striking out the name
of the banker, it will be unauthorized. Crossing once made became material part of
the cheque and only the drawer of the cheque is entitled to cancel or open the
crossing by writing the words “ pay cash” and cancelling the crossing along with
his fully signature. Thus, where a cheque is crossed ‘account payee’ and the
holder alters it into a general crossing by striking out the words ‘account payee’,
the alteration is irregular and discharges the instrument.
Various provisions of negotiable instrument Act 1881 with regard to

cheque:
The Act deals with various aspects regarding the cheques which are appended
hereunder for reference.
Instruments payable on demand: Sec 19

A promissory note or bill of exchange is payable on demand, ---
(a). Where it is expressed to be so, or to be payable at sight or on presentment;
or
(b). where no time for payment is specified in it; or
(c). where the note or bill accepted or endorsed after it is overdue, as regards
the person accepting or indorsing it
Anti-dating and post-dating: sec 21C

A promissory note, bill of exchange or cheque is not invalid by reason only that i;
is anti-dated or post-dated; Provided that the anti-dating or post-dating does not
involve any illegal or fraudulent purpose or transaction.
Liability of legal representative signing: Sec 29

A legal representative of a deceased person who signs his name to a promissory
note, bill of exchange or cheque is liable personally thereon unless he expressly
limits his liability to the extent of the assets received by him as such.
Signature essential to liability: sec 29-A

No person is liable as maker, drawer, endorser or acceptor of a promissory note,
bill of exchange or cheque who has not signed it as such:
Provided that where a person signs any such instrument in a trade or assumed
name he is liable thereon as if he had signed it in his own name.
Forged or unauthorized signature: Sec 29-B

Subject to the provisions of this Act, where a signature on a promissory note, bill of
exchange or cheque is forged or placed thereon without the authority of the
person whose signature it purports to be, the forged, or unauthorized signature is
wholly inoperative, and no right to retain the instrument or to give a discharge
therefore or to enforce payment thereof against any party thereto can be acquired
through or under that signature, unless the party against whom it is sought to
retain or enforce payment of' the instrument is precluded from setting up the
forgery or want of authority:
Provided that nothing in this section shall effect the ratification of an unauthorized
signature not mounting to a forgery.
Stranger signing instrument presumed to be endorser: Sec 29-C

A person placing his signature upon a negotiable instrument otherwise than as
maker, drawer or acceptor is presumed to be an endorser unless he clearly
indicates by appropriate words his intention to be bound in some other capacity.
Liability of drawee of cheque: Sec 31

The drawer of a cheque having sufficient funds of the drawer in his hands properly
applicable to the payment of such cheque must pay the cheque when duly
required so to do, and, in default of such payment, must compensate the drawer
for any toss or damage caused by such default.
When is a banker justified in dishonoring cheques: he will be justified:-

(a). If the banker has not sufficient funds of the drawer with him.
(b). If the banker has sufficient funds but they are not properly applicable to the
payment of cheque.
(c). If the cheque is not duly presented for payment.
(d). If the cheque is not presented within reasonable time after the issuing date.
Usually a period of six months has been considered as the reasonable time.
(e). If the cheque is post-dated and is presented before actual date.
(f). When the customer draws the cheque on one branch while he has account
in another branch of the same bank.
(g). When the customer countermands payment.
When a bank is bound to dishonor the cheque: he will be bound to

dishonor:-
(a). If the cheque is irregular, ambiguous, etc
(b). If the customer is dead and the banker has notice of the same.
(c). If the funds are subject to a lien
(d). If the customer becomes insolvent of which fact the banker has received
notice.
(e). If the customer becomes lunatic and the banker has notice thereof.
Presentment of cheque to charge drawer: Sec 72

Subject to the provisions of section 84, a cheque must, in order to charge drawer,
be presented at the bank upon which it is drawn before the relation between the
drawer and his banker has been altered to the prejudice of the drawer.
When cheque not duly presented and drawer damaged thereby: Sec 84
(1)Where a cheques is not presented for payment within a reasonable time of its
issue, and he drawer or person on whose account it is drawn had the right, at
the time when presentment ought to have been made, as between himself and
the banker, to have the cheque paid and suffers actual damage through the
delay, he is discharged the extent of such damage, that is to say, to the extent
to which such drawer or person is a creditor of the banker to a larger amount
than he would have been if such cheque had been paid.
(2)In determining what a reasonable time is, regard shall be had to the nature of
the instrument, the usage of trade and of bankers, and the facts of the
particular case.
(3)The holder of the cheque as to which such drawer or person is so discharged
shall be a creditor, in lieu of such drawer or person, of such banker to the
extent of such discharge and entitled to recover the amount from him.
Illustrations
(a). A draws a cheque for Rs. 1,000 and when the cheque ought to be
presented, has funds at the bank to meet it. The bank fails before the cheque is
presented. The drawer is discharged, but the holder can prove against the bank
for the amount of the cheque.
(b). A draws a cheque at Sialkot on a Bank in Karachi. The Bank fails before the
cheque could be presented in ordinary course. A is not discharged, for he has
not suffered actual damage through any delay in presenting the cheque.
Cheque payable to order: Sec 85

(1)Where a cheque payable to order purports to be endorsed by or on behalf of
the payee, the drawee is discharged by payment in due course.
(2)Where a cheque is originally expressed to be payable to bearer, the drawee is
discharged by payment in due to the bearer thereof, notwithstanding any
endorsement whether in full or in blank appearing thereon, and
notwithstanding that any such endorsement purports to restrict or exclude
further negotiation.
Drafts drawn by one branch of a bank on another payable to order: Sec

85-A
Where any draft, that is, an order to pay money, drawn by. one office of a bank
upon another office of the same bank for a sum, of money payable to order on
demand, purports to be endorsed by or on behalf of the payee, the bank is
discharged by payment in due course.
Special provisions relating to cheques as contained in the Act:

Revocation of banker's authority: Sec 122-A
(1)The duty and authority of a banker to pay a cheque drawn on him by his
customer are determined by-
(2)Countermand of payment;
(3)Notice of the customer's death;
(4)Notice of adjudication of the customer as an insolvent.
Cheque crossed generally: Sec 123

Where a cheque bears across its face an addition of the words "and company" or
any abbreviation thereof, between two parallel transverse lines, or of two parallel
transverse lines simply, either with or without the words "not negotiable", that
addition shall be deemed a crossing and the cheque shall be deemed to be
crossed generally.
Cheque crossed "account payee: sec 123A.
(1)Where a cheque crossed generally bears across its face an addition of the word
"account payee" between the two parallel transverse line constituting the
general crossing, the cheque, besides being crossed generally, is said to be
crossed" account payee".
(2)Where a cheque is crossed "account payee"---
(a). It shall cease to be negotiable; and
(b). It shall be the duty of the banker collecting payment of the cheque to
credit the proceeds thereof only to the account of the payee named in
the cheque.
Cheque crossed specially: Sec 124.

Where a cheque bears across its face an addition of the name of a banker either,
with or without the words "not negotiable, that addition shall be deemed a
crossing, and the cheque shall be deemed to be crossed specially, and to be
crossed to that banker.
Crossing after issue: Sec 125

• Where a cheque is uncrossed, the holder may cross it generally or specially.
• Where a cheque is crossed generally, the holder may cross specially.
• Where a cheque is crossed generally or especially the holder may add the
words "not negotiable".
• Where a cheque is crossed specially, the banker to whom it is crossed may
again cross it especially to another banker, his agent, for collection.

• When an uncrossed cheque, or a cheque crossed generally, is sent to a
banker for collection he may cross it especially to himself.
Crossing a material part of a cheque: Sec 125-A

A crossing authorized by this Act is a material part of the cheque; it shall not be
lawful for any person to obliterate, or, except as authorized by this Act, to add to
or alter, the crossing.
Payment of cheque crossed generally: Sec 126

Where a cheque is-crossed generally, the banker on whom it is drawn shall to pay
it otherwise than to a banker.
Payment of cheque crossed specially

Where a cheque is crossed specially, the banker on whom it is drawn shall not pay
it otherwise than: to the banker to whom it is crossed, or his agent for collection.
Payment of cheque crossed especially more than once: Sec 127.

Where a cheque is crossed specially to more than one banker, except when
crossed to an agent for the purpose of collection, the banker on whom it is drawn
shall refuse payment thereof.
Payment in the course of crossed cheque: Sec 128

Where the banker on whom a crossed cheque is drawn in good faith and without
negligence pays it, if crossed generally, to a banker, and if crossed specially, to
the banker to whom it is crossed or his agent for collection, being a banker, the
banker paying the cheque, and (in case such cheque has come to the hands of the
payee) the drawer thereof, shall respectively be entitled to the same rights, and
be placed in the same position in all respects, as they would respectively be
entitled to and placed in if the amount of the cheque had been paid to and
received by the true owner thereof.
Payment of crossed cheque out of due course: Sec 129

Any banker paying a cheque crossed generally otherwise than to a banker, or a
cheque crossed specially otherwise than to the banker
Difference between a cheque and a bill of exchange:
i. A cheque is drawn on a specified banker, but a bill may be drawn on any
one including a banker
ii. A cheque is payable immediately on demand, a bill is entitled to days of
grace.
iii. A cheque requires no acceptance: it is intended for immediate payment
whereas a bill of exchange has to be accepted before acceptor can be made
liable.
iv. Failure of presentment for payment discharges the drawer in the case of a
bill, but the drawer of a cheque is not discharged by failure of the holder to
present it in due time unless the drawer has sustained damage by the
delay.
v. When a cheque is not met, notice of dishonor is not necessary as in the case
of bills: want to assets in the hands of the banker is sufficient notice.
vi. A cheque is revocable while a bill is not.
In case the drawer of the cheque denies its execution, he may take a plea in the
alternative that if his signature on the cheque is found to be genuine it may be
taken that a signed cheque had been stolen from him and as such he is not liable

on it. In such a case it is for the plaintiff to prove that the cheque was actually
drawn by the defendant and therefore he was liable on it.
Cheques in the nature of an order from the account—holder to the Bank directing
it to pay the specified amount out of his account. Where signature of the account-
holder on a cheque is forged then it is not his order to pay. Payment on the basis
of a foraged cheque is thus payment without authority and would not bind the
customer.
The different types of negotiable instruments have been covered in

detail; we shall discuss the other aspects regarding these instruments in
coming Lessons.

LESSON 28
Endorsement: we shall discuss endorsement and its kinds:

Definition of endorsement as contained in section 15 of the Act is reproduced
below:
“When the maker or holder of a negotiable instrument signs the same, otherwise
than as such maker, for the purpose of negotiation, on the back or face thereof or
on a slip of paper annexed thereto, or so signs for the same purpose a stamped
paper intended to be completed as a negotiable instrument, he is said to indorse
the same, and is called endorser”.
Essentials of an Endorsement: An endorsement must fulfill the following

requirements:
It should be on the instrument. If there is no space on it, it may be on a separate
slip of paper annexed to the instrument called ‘allonge’.
The endorser should sign the endorsement in the same style and with the same
spellings as written in the instrument.
Signatures should be in ink and not by pencil or rubber stamp.
It should be made by the holder or the maker. It cannot be endorsed by a stranger.
The delivery of the instrument with the intention of passing the property in it to
the endorsee is important.
A partial endorsement, i.e., an endorsement which purports to transfer to the
endorsee a part only of the amount or which purports to transfer the instrument to
two or more endorsees severally does not operate as a negotiation of instrument.
An endorsement may be made in blank or full. It may also be restrictive.
The name of a married woman should be accompanied by the name of her
husband.
Mere signature of the holder, without any words, also constitutes endorsement.
Any number of endorsements may be made on the instrument.
No particular form of words is necessary to create a contractual relationship
between endorser and the endorsee.
An endorsement becomes complete only when:
The holder signs on the face or back of the instrument;
The instrument is delivered to the endorsee; and
It is signed and delivered with the intention of vesting the endorsee with the rights
of the holder.
Kinds of Endorsement:
The endorsements are divided as under:
Blank or general
Full or special endorsement
Restrictive endorsement
Partial endorsement
The above endorsements are discussed in the following paragraphs:

Instrument endorsed in blank:
It has been discussed in section 16 which is given below:
If the endorser signs his name only, the endorsement is said to be "in blank", and
if he adds a direction to pay the amount mentioned in the instrument to, or to the
order of, a specified person, the endorsement is said to be 'in full", and the
person so specified is called the "endorsee" of the instrument.
In such type of endorsement, endorser just signs his name.
Instrument endorsed in blank: Sec 54

Subject to the provisions hereinafter contained as to crossed cheques, a
negotiable instrument endorsed in blank is payable to the bearer thereof even
although originally payable to order.
Full or special endorsement:

The said endorsement has been defined in section 16 which is given below:
If the endorser signs his name only, the endorsement is said to be "in blank", and
if he adds a direction to pay the amount mentioned in the instrument to, or to the
order of, a specified person, the endorsement is said to be 'in full", and the
person so specified is called the "endorsee" of the instrument.
Conversion of endorsement in blank into endorsement in full: Sec 55

If a negotiable instrument, after having been endorsed in blank, if endorsed in full,
the amount of it cannot be claimed from the endorser in full, except by the person
to whom it has been endorsed in full,' or by one who derives title through such
person.
Endorser mentions the name of endorsee and puts his signature.
"Endorsee"
The provisions of this Act relating to a payee shall apply with the necessary
modifications to an endorsee.
Restrictive Endorsement:
It has been defined in section 50(2) of the Act which is reproduced below:
An endorsement is restrictive which either--

Restricts or excludes the right to further negotiate the instrument, or
Constitutes the endorsee an agent of the endorser to endorse the instrument or to
receive its contents for the endorser or for some other specified person
Such endorsement restricts further negotiation of the instruments, for example
Pay Yasir only
Signature of endorser
Without Recourse Endorsement

It has been defined in section 52 of the Act which is reproduced below:
The endorser of a negotiable instrument may, by express words in the
endorsement, exclude his own liability thereon, or make such liability or the right
of the endorsee to receive the amount due thereon depend upon the happening of
a specified event, although such event may never happen.
Where an endorser so excludes his liability and afterwards becomes the holder of
the instrument, all intermediate endorsers are liable to him.
Where the right of an endorsee to receive the amount due on the negotiable
instrument is made dependent in the aforesaid manner the condition is valid only
as between the endorser and the endorsee.
Where the endorsement of a negotiable instrument purports to be conditional, the
payer may disregard the condition and payment .o the endorsee is valid whether
the condition has been fulfilled or not.
Without responsibility of the endorser. For example:
Pay Yasir without recourse to me
Signature of endorser
Partial Endorsement:
Negotiation by endorsement must be of the entire instrument.

An endorsement which purports to transfer to the endorsee only a part of the
amount payable, or which purports to transfer the instrument to two or more
endorsees severally, is not valid as a negotiable of the instrument; but where such
amount has been paid in part, a note to that effect may be endorsed on the
instrument, which may then be endorsed for the balance.
The endorser directs the transfer only a part of amount payable on a bill of
exchange or promissory note through such endorsement.
Explanation:
A partial endorsement, i.e., an endorsement which purports to transfer to the
indorse a part only of the amount payable, does not operate as a negotiation of
the instrument. Such an endorsement is not warranted by the custom of
merchants and would be attended with this inconvenience to the prior parties, that
it would subject them to a plurality of actions. In the same manner, an
endorsement, which purports to transfer the instrument to two or more indorses
severally and not jointly, is also expressly forbidden by this section. The object of
the section is to prevent an instrument being transferred for a portion only of the
sum at the time due under it, because a personal contract cannot be apportioned.
The endorsement must be the endorsement of the instrument.
Illustrations:
A is the holder of a bill for Rs. 1,000. A indorses it thus: “pay Rs 50 to transferred
to B and C as each of them is in indorse of only a part of the amount, the
endorsement is partial and invalid for the purpose of negotiation.
A is the holder of a bill for Rs. 1,000. A indorses it thus: “pay B or order Rs. 500.
This is a partial endorsement and invalid for the purpose of negotiation.
The last part of the section says that if a bill has been paid in part, the fact of the
part payment may be indorsed on the instrument, and it may then be negotiated
for the residue, e.g.., a bill may be indorsed thus: “Pay A or order Rs. 500 being
the unpaid residue of the bill”. Such an endorsement would be valid.
Effect of endorsement: Sec 50

Subject to the provisions of this Act relating to restrictive, conditional and qualified
endorsement, the endorsement of a negotiable in followed by delivery transfers to
the endorsee the property therein' with the right of further negotiation.
An endorsement is restrictive which either--
Restricts or excludes the right to further negotiate the instrument, or
Constitutes the endorsee an agent of the endorser to endorse the instrument or to
receive its contents for the endorser or for some other specified person.
Provided that the mere absence of words implying, right to negotiate does not
make the endorsement restrictive.
Illustrations
B signs the following endorsements on different negotiable instruments payable to
bearer-----
"Pay the contents to C only."
"Pay C for any use."
"Pay C or order for the account of B."
"The within just be credited to C."
These endorsements exclude the right of further negotiation by C.
"Pay C."
"Pay C value in account with the Oriental Bank."
"Pay the contents to C, being part of the consideration in a certain deed of
assignment executed by C to the endorser and others.
These endorsements do not exclude the right of further negotiation by C.
Who may negotiate: Sec 51

Every sole-maker, drawer, payee or endorsee, or all of several joint makers,
drawers, payees or endorsees, of a negotiable instrument may, if the negotiability
of such instrument has not been restricted or excluded as mentioned in Section
50, endorse and negotiate the same.
Explanation --- Nothing in this section enables a maker or drawer to endorse or

negotiable an instrument, unless he is in lawful possession or is holder thereof or
enables a payee or endorsee to endorse or negotiate an instrument, unless he is
holder thereof.
Illustration
A bill is drawn payable to A or order, A endorses it to B, the endorsement not
containing the words "or order" or any equivalent words. B may negotiate the
instrument. .
Requisites of endorsement: Sec 56

Negotiation by endorsement must be of the entire instrument.
An endorsement which purports to transfer to the endorsee only a part of the
amount payable, or which purports to transfer the instrument to two or more
endorsees severally, is not valid as a negotiable of the instrument; but where such

amount has been paid in part, a note to that effect may be endorsed on the
instrument, which may then be endorsed for the balance.
Legal representative cannot by delivery only negotiate instrument

endorsed by deceased: Sec 57
The legal representative of a deceased person cannot negotiate by delivery only a
promissory note, bill of exchange or cheque payable to order and endorsed by the
deceased but not delivered.
Maturity of the Instruments

What is Maturity:
It is the date of a promissory note or bill of exchange, at which it falls due.
(Section 22 defines the maturity)
Days of Grace:
Three days of grace are provided in section 22 for determining pay ability of
instrument but said days of grace are not available when instrument is payable on
demand or at sight or on presentment
Days of Grace are applicable in case of Promissory note and bill of exchange but
not cheque, since it is always payable on demand.

LESSON 29
PARTIES TO PROMISSORY NOTES, BILLS AND CHEQUES
We have already discussed the parties to promissory note, bill of exchange and
cheque,
Various legal aspects with respect to the parties to these instruments are
discussed in detail in the following paragraphs:
Every person capable of contracting can be a party to a negotiable instrument that
is can be a party by making/ drawing, accepting, endorsing a negotiable
instrument.
Capacity to make/draw negotiable instruments:

Every person capable of contracting, according to the law to which he is
subject, may bind himself and be bound by the making, drawing, acceptance,
endorsement, delivery and negotiation of a promissory note, bill of exchange or
cheque.
Positions of parties who are incompetent to enter into contracts:

Minor:
Where such an instrument is made, drawn or negotiated by a minor, the making,
drawing or negotiating entitles the holder to receive payment of such instrument
and to enforce it against any party thereto other than minor.
Although the minor cannot bind himself by making/ drawing a negotiable
instrument but through such an instrument bind all other parties.
A person of unsound mind is incompetent to enter into a contract

Insolvent: The property belonging to an insolvent vests in an official receiver,
hence the insolvent person cannot neither sue nor capable of negotiating/ transfer/
endorse the instrument
Lunatic- Position same as that of minor
Agent /Agency:
Every person capable of binding himself or of being bound by the making, drawing,
acceptance or negotiation of a negotiable instrument, may so bind him or be
bound by a duly authorized agent acting in his name.
A general authority to transact business and to receive and discharge debts does
not confer upon an agent the power of accepting or indorsing bills of exchange so
as to bind his principal.
An authority to draw bills of exchange does not of itself import an authority to
endorse.
Liability of the Agent:

An agent may draw, accept or negotiate an instrument on behalf of the principal
so as to bind him. However this binding is subject to following conditions:

That the agent has been authorized by the principal to that effect:
That the authority has been expressed in clear terms:
That the principal is a competent person to enter into a contract.
That the agent acts in the name of the principal: and
That the agent has not exceeded his authority.
The agent will be personally liable in any of the following cases;
If he does not disclose the name of his principal:
If he does not indicate that he is an agent.
If he executes an instrument without or in excess of his authority.
The above provisions are contained in section 28 which is reproduced:
Where a person signs a promissory note, of exchange or cheque without adding to

his signature words indicating that he signs it as an agent for and on behalf of a
principal or in a representative character, he is personally liable thereon but the
mere addition to his signature of words describing him as an agent or as filling a
representative character does not exempt him from personal liability.
Notwithstanding anything contained in sub-section (1), any person signing a
promissory note, bill of exchange or cheque for and on behalf of the principal is
not liable to a person who induces him to sign upon the belief that the principal
alone would be held liable.
Parties to Promissory Note:

These are discussed below:
Maker:
The person who makes the note and undertakes to pay the amount stated in the
promissory note.
Payee:
The person to whom the amount is payable under promissory note.
Holder:
The person who may be the payee or endorsee of the promissory note. Holder is
the person who is entitled to the possession of the instrument in his own name and
also entitled to receive the amount due under a promissory note.
Endorser
The person who by endorsement transfers the promissory note to another person.
Endorsee
The person to whom the promissory note is transferred by endorsement.
Parties to bill of exchange

Drawer
The maker of a bill of exchange is Drawer.
Drawee
The person who is directed by the drawer to pay the amount stated in bill of
exchange is called drawee.
Accepter
The drawee when accepts the bill of exchange, he becomes acceptor.
Payee
The person to whom or to whose order the amount stated in bill of exchange is to
be paid.
Holder
Explained while discussing promissory note.
Endorser
Endorsee
Parties to a Cheque:
Drawer
The person who draws/ writes a cheque is called the drawer
Drawee
The person who is directed through a cheque to pay the specified amount is called
the drawee, however in case of a cheque, drawee must always be a bank.
Payee
Holder
Endorser
Endorsee
Holder:
The scope of the holder is contained in section 8 of the negotiable instrument
1881 which is reproduced below:
The "holder" of a promissory note, bill of exchange or cheque means the payee or
endorsee that is in possession of it or the bearer thereof but does not include a
beneficial owner claiming through a benamidar. Sec 8
In order to be called a ‘Holder’, the person must satisfy the following two
conditions:
He must be entitled to the possession of the instrument in his own name
He must be entitled to receive or recover the amount due thereon from the parties
liable thereto
Holder in Due Course:

Holder in due courser has been explained in section 9 of the Act, which is
reproduced below:
"Holder in due course" means any person who for consideration becomes the
possessor of a promissory note, bill of exchange or cheque if payable to bearer, or
the payee or endorsee thereof, if payable to order, before it became overdue,
without notice that the title of the person from whom he derived his own title was
defective.
Conditions for a person to be called ‘Holder in Due Course’:

He must be holder
He obtains the instrument for valuable consideration
He must become the holder of the instrument before maturity
He must have obtained the instrument in good faith
He must take the instrument complete and regular on the face of it.
Acceptor’s liability to the Holder in Due Course when endorsement

forged: Sec 41
An acceptor of a bill of exchange already endorsed is not relieved from liability by
reason that such endorsement is forged, if he knew or had reason to believe the
endorsement to be forged when he accepted the bill.
Privileges of a holder in due course

In case of Inchoate stamped instruments:
An inchoate stamped instrument can be completed by the transferee/ holder in
due course and his right is not affected that the instrument was not bearing the
required stamps at the time he acquired the instrument.
Prior parties liable to holder in due course:

It has been defined in section 36 which is given below:
Every prior party to a negotiable instrument is liable thereon to a holder in due
course until the instrument is duly satisfied
No effect of conditional delivery:

The making, acceptance or endorsement of promissory note, bill of exchange or
cheque is completed by delivery, actual or constructive.
Holder in due Course acquires better title than that of the transferor:
-- He acquires a better title to the instrument despite of the fact that there may
be defect in the title of the transferor.
Distinguishing Features between Holder and Holder in due Course

Holder Holder in Due Course
Title of the holder shall not be good Holder in due course shall have a
if the title of any prior parties is good title even if the title of prior
defective. parties is defective. However
condition is that he should obtain
that title in good faith.
Consideration is not necessary to Consideration is necessary

be a holder of an instrument
A holder does not enjoy any special Enjoys special privileges.
privileges
A holder is a person who is entitled He is a person who has taken the

in his own name to the possession instrument in good faith and for
of the instrument and to recover or value, and also before its maturity.
receive the amount due thereon
from the parties.
Liabilities of the parties to an instrument:

We shall discuss the liabilities of the following parties in the light of relevant legal
provisions:
Liability of Drawer
Liability of Drawee of a cheque
Liability of maker of note and acceptor of bill
Liability of Endorser
Liability of Drawer:
The drawer of a bill or cheque is bound to compensate the holder in case
dishonored by the
drawee or acceptor provided due notice of dishonor has been given or received by
the drawer.
Before acceptance of a bill, drawer’s liability is primary and after acceptance his
liability becomes secondary to acceptor’s liability.
Liability of drawee of cheque:

The drawee of a cheque having sufficient funds of the drawer in his hands properly
applicable to the payment of such cheque must pay the cheque when duly
required so to do, and, in default of such payment, must compensate the drawer
for any loss or damage caused by such default
Liability of maker of note and acceptor of bill:

In the absence of a contract to the contrary, the maker of a promissory note, by

making it, the acceptor before maturity of a bill of exchange by accepting it,
engages that he will pay it according to the tenor of the note or his acceptance
respectively, and in default of such payment, such maker or acceptor is bound to
compensate any party to the note or bill for any loss or damage sustained by him
and caused by such default. .
The acceptor of a bill of exchange at or after maturity, by accepting it,

engages to pay the amount thereof to the holder on demand.
Liability of endorser:
In the absence of a contract to the contrary, the .endorser of a negotiable
instrument, by indorsing it, engages that on due presentment it shall be accepted
and paid according to its tenor and that if it be dishonored he will compensate the
holder or subsequent endorser who is compelled to pay it for any loss or damage
caused to him by such dishonor.
Extent of Liability-- Rules as to compensation:

The compensation payable in case of dishonor of a promissory, bill of exchange or
cheque, by any party liable to the holder or any endorsee, shall be determined by
the following rules:,-

The holder is entitled to the amount due upon the instrument; together with the
expenses properly incurred in presenting, noting and protesting it;
When the person charged resides at a place different from that at which the
instrument was payable, the holder is entitled to receive such sum at the current
rate of exchange between the two places;
An endorser who, being liable, has paid the amount due on the same is entitled to
the amount so paid with interest at six per centum per annum from the date of
payment until, tender or realization thereof, together with all expenses caused by
the dishonor
When the person charged and such endorser reside at different places the
endorser is entitled to receive such sum at the current rate of exchange between
the two places;
The party entitled to compensation may draw a bill upon the party liable to
compensate him, payable at sight or on demand, for the amount due to him,
together with all expenses properly incurred by him. Such bill must be
accompanied by the instrument dishonored and the protest thereof (if any). If such
bill is dishonored, the party dishonoring the same is liable to make compensation
thereof in the same manner as in the case of the original bill.
Negotiation of the instruments

Negotiation:
In general terms, negotiation is the characteristic of transferability possessed by a
negotiable instrument.
When a promissory note, bill of exchange or cheque is transferred to any person,
so as to constitute that person the holder thereof, the instrument is said to be
negotiated.
This transfer by way of negotiation can take place in the following ways:
Negotiation by delivery
Negotiation by endorsement and delivery
Negotiation of the instruments

Negotiation by delivery:
Subject to the provisions of section 58, a promissory note, bill of exchange or
cheque payable to bearer is negotiable by delivery thereof.
Exception. ---A promissory note bill of exchange or cheque delivered on condition

that it is not to take effect except in a certain event is not negotiable (except in
the hands of a holder for value without notice of the condition) unless such event
happens.
Illustration:
Mr. Aslam is the payee of a bearer cheque amounting Rs 50,000 and this cheque
fulfills all essential requirements. Mr. Aslam delivers this cheque to Mr. Yasir. This
cheque has been negotiated/ transferred to Mr. Yasir by way of delivery.
Negotiation by Endorsement and Delivery:

Subject to the provisions of section 58 a promissory note, bill of exchange or
cheque payable to order is negotiable by the holder by endorsement and delivery
thereof.
Section 58 is regarding defective title.
Who may negotiate the instruments

Maker/ Drawer
Payee
Endorsee
This is provided in Section 51 of the Act.

Every sole-maker, drawer, payee or endorsee, or all of several joint makers,
drawers, payees or endorsees, of a negotiable instrument may, if the negotiability
of such instrument has not been restricted or excluded as mentioned in Section
50, endorse and negotiate the same.
Right of the holder of the instrument acquired after dishonor or when

overdue:
The holder of negotiable instrument who has acquired it after dishonor, whether by
non-acceptance or non-payment, with notice thereof, or after maturity, has only,
as against the other parties, the rights thereon of his transferor and is subject to
the equities to which the transferor was subject at the time of acquisition by such
holder.
Effect of Defective Title:

When a promissory note, bill of exchange or cheque has been lost or has been
obtained from any maker, drawer, acceptor or holder thereof by means of an
offence or fraud, or for an unlawful consideration, neither the person who finds or
so obtains the instrument nor any possessor or endorsee who claims through such
person is entitled to receive the amount due thereon from such maker, drawer,
acceptor or holder, unless such possessor or endorsee is, or some person through
whom he claims was, a holder thereof in due course.
Instrument negotiable till payment or satisfaction Sec 60

A negotiable instrument may be negotiated (except by the maker, drawer or
acceptor after maturity) until payment or satisfaction thereof by the maker,
drawee or acceptor at or after maturity, but not after such payment or satisfaction.

Presentment of Negotiable Instrument
Presentment for Acceptance:
A bill of exchange payable after sight must, if no time or place is specified therein
for presentment, be presented to the drawee thereof for acceptance, if he can,
after reasonable search, be found, by a person entitled to demand at within a
reasonable time after it is drawn and in business hours on a business day. In
default of such presentment, no party thereto is liable thereon to the person
making such default
Essentials of Valid Acceptance

Must be in writing
Signed by drawee or his agent
Acceptance must appear on the bill
Accepted bill must be delivered to the holder
Who can accept the Bill

Drawee or his agent, in case of several drawees, all the drawees can accept
In case of death of the drawee, bill can be accepted by the legal representative of
the deceased drawee
Official receiver, in case drawee declared as insolvent
Presentment for Sight:

A promissory note payable at a certain period after sight, must be presented to
the maker thereof for sight (if he can after reasonable search be found) by a
person entitled to demand payment, within a reasonable time after it is made and
in business hours on a business day. In default of such presentment, no party
thereto is liable thereon to 'the person making such default.
Presentment for Payment:

Subject to the provisions of section 76, promissory notes, bills of exchange and
cheques must be presented for payment to the maker, acceptor or drawee thereof
respectively, by or on behalf of the holder as hereinafter provided. In default of
such presentment, the other parties thereto are not liable thereon to such holder.
Section 76 underlines situations when presentment is unnecessary e.g. Drawee

prevents presentment.
Payment and Interest

To whom payment could be made:
Subject to the, provisions of section 82, payment of the amount due on a
promissory note, bill of exchange or cheque must, in order to discharge the maker
or acceptor, be made to the holder of the instrument.
Section 82 underlines the situations when maker, drawer, acceptor of an
instrument are discharged from liability.
Interest when rate specified or not specified:

Subject to the provision of any law for the time being in force relating to the relief
of debtors, and without prejudice to the provisions of section 34 of the Code of
Civil Procedure, 1908,---
when interest at a specified rate is expressly made payable on a promissory note
or bill of exchange and no date is fixed from which interest is to be paid, interest
shall be calculated at the rate specified, on the amount of the principal money due
thereon, from the date of the note, or, in the case of a bill, from the date on which
the amount becomes payable, until tender or realization of such amount, or until
the date of the institution of a suit to recover such amount;
where a promissory note or bill of exchange is silent as, regards interest or does
not specify the rate of interest, interest on the amount of the principal money due,
thereon shall, notwithstanding any collateral agreement relating to interest
between any parties to the instrument, be allowed and calculated at the rate of six
per centum per annum from the date of the note, or, in the case of a bill, from the
date on which the amount becomes payable, amount due thereon, or until the
date of the institution of a suit to recover such amount.
Interest when no rate specified:

When no rate of interest is specified in the instrument, interest on the amount due
thereon shall, notwithstanding any agreement relating to interest between any
parties to the instrument, be calculated at the rate of six per centum per annum,
from the date at which the same ought to. have been paid by the party charged,
until tender or realization of the amount due thereon, or until such date after the
institution of a suit to recover such amount as the Court directs.
Discharge from liability

Section 82 contains the provisions with regard to discharge of a party from its
liability under a negotiable instrument. The said provisions are appended below:
The maker, acceptor or endorser respectively of a negotiable instrument is
discharged from liability thereon----
By cancellation; to a holder thereof who cancels such acceptor's or endorser's
name with intent to discharge him, and to all parties claiming under such holder;
By release; to a holder thereof who otherwise discharges such maker, acceptor or
endorser, and to all parties deriving title under such holder after notice of such
discharge; and
By payment; to all parties thereto, if the instrument is payable to bearer, or has
been endorsed in blank, and such maker, acceptor or endorser makes payment in
due course of the amount due thereon.

LESSON 30
PRINCIPLES AND FORMS OF LENDING
Banking Credit Management

The basic purpose of a banking business like any other business remains
maximization of profits. This is achieved by charging higher rates of profits/
interest on their investments/ financing and paying lower rate of interest to their
depositors/ creditors. This process in banking terminology is called ‘spread’.
Since loans are the dominant asset in a commercial bank so it is important to pay
greater attention to its management.
Commercial banks extend credit to different types of borrowers for different
purposes. For most customers, bank credit is the primary source of available debt
financing. For banks good loans are the most profitable assets. As with any
investment, extending loans to the businesses and individuals involves taking risk
and to earn high returns. Returns comes in the form of profits/ interest, fee income
and investment income from due deposits. Banks also use loans to cross sell other
fee-generating services. As such the most prominent assumed risk is credit risk.
Many factors can lead to loan defaults. An entire industry, such as energy,
agriculture, or real estate, can decline because of general economic events. Firm-
specific problem may arise from changing technology, strikes, and shifts in
consumer preferences or bad management. Individual borrowers find that the
ability to repay closely follows the business cycle as personal income rises and
falls. Loans as a group thus exhibit the highest charge offs among bank assets, so
banks regularly set aside substantial results against anticipated losses.
Interest rate risk also rises from credit decisions. Loan maturities, pricing, and the
form of principal repayment affect the timing and magnitude of banks cash
inflows. Floating-rate and variable-rate loans, for example, generate cash flows
that very closely with variable borrowing cost.
Loans are the dominant assets in most banks’ portfolios, representing on average
50% to 75% of total assets. Loan compositions vary greatly among banks
depending on size, location, trade area, and lending expertise. Various
concentrations in lending activities carry different risk and return. Problem loans
and loan losses also vary with the business cycle.
Credit Defined
Credit has been defined as the permission to use another’s capital.
The power to obtain goods or services by giving a promise to pay a certain sum of
money at a specified date in the future. Credit is a present Right to future
Payment.
Stages in risk management process

• Identification of inherent risks. (risk acceptance)
• Developing solution to mitigate the identified risk
• Identifying opportunities ( returns)
• Avoiding losses.
Managing risk another approach

• Avoid risk
• Diversify / spread risk among various assets
• Control adverse events
• Share risk with an other party such as insurance
• Transfer risk such as outsourcing
• Accept the risk
Benefits of Risk Management:

• Effective strategic planning
• Better cost control ( budgeting)
• Enhancing share holder values
• Creating a best practice and quality organization
• Protecting the organization
Banking environment
Banking environment is very competitive. There is neck to neck competition
among banks and with other financial institutions. Banks are required to manage
bottom line between deposit rates and lending rates that is risk- adjusted rate of
interest for borrowers and competitive interest rate for depositors.
Managing Risk and returns:

The fundamental objective of bank management is to maximize shareholders’
wealth. This goal is interpreted to mean maximizing the market value of a firm’s
common stock. Wealth maximization, in turn, requires that managers evaluate the
present value of cash flows under uncertainty with larger, near-term cash flows
preferred when evaluated on a risk-adjusted basis. To obtain higher yields, a bank
must either take on increased risk or lower operating costs. Greater risk manifests
itself in greater volatility of net income and market value of stockholders’ equity.
Wealth maximization requires the manager to evaluate and balance the trade-offs
between the opportunity for higher returns, the probability of not realizing those
returns, and the possibility that the bank might fail.
A bank’s profitability will generally vary directly with the riskiness of its portfolio
and operations. Although some risks can be sought out or avoided, others are
inherent in the prevailing economic environment and specific markets served.
Banks in agriculture or energy-related areas, for example, lend to businesses
involved in cyclical industries. Even though management can control the credit
evaluation procedure, returns to the bank vary with returns to its customers, and
these returns are heavily dependent on local economic conditions.
Risk management is the process by which managers identify, assess, monitor,
and control risks associated with a financial institution’s activities. The complexity
and range of financial products have made risk management more difficult to
accomplish and evaluate. In larger financial institutions, risk management is used
to identify all risks associated with particular business activities and to aggregate
information such that exposures can be evaluated on a common basis. As formal
process enables these institutions to manage risks on both a transactions basis
and by portfolio in light of the institution’s exposures in a global strategic
environment.
There are four types of risks which are as follow:

1. Credit risk
2. Liquidity risk
3. Market risk
4. Operational risk
Credit Risk:
Credit risk is associated with the quality of individual assets and the likelihood of
default. It is extremely difficult to assess individual asset quality because limited
published information is available. In fact, many banks that buy banks are

surprised at the acquired bank’s poor asset quality, even though they conducted a
due diligence review of the acquired bank prior to the purchase.
Whenever a bank acquires an earning asset, it assumes the risk that the borrower
will default, that is, not repay the principal and interest on a timely basis. Credit
risk is the potential variation in net income and market value of equity resulting
from this nonpayment or delayed payment. Different types of assets and off-
balance sheet activities have different default probabilities. Loans typically exhibit
the greatest credit risk. Changes in general economic conditions and a firm’s
operating environment alter the cash flow available for debt service. These
conditions are difficult to predict. Similarly, an individual’s ability to repay debts
varies with changes in employment and personal net worth. For this reason, banks
perform a credit analysis on each loan request to assess a borrower’s capacity to
repay. Unfortunately, loans tend to deteriorate long before accounting information
reveals any problems. In addition, many banks enter into off-balance sheet
activities, such as loan commitments, guaranty offers, and derivative contract. The
prospective borrowers and counterparties must perform or the bank may take a
loss. These risks can be substantial, but are difficult to measure from published
data.
Liquidity Risk
Liquidity risk is the current and potential risk to earnings and the market value of
stockholders’ equity that results from a bank’s inability to meet payment or
clearing obligations in a timely and cost-effective manner. Liquidity risk is greatest
when a bank cannot anticipate new loan demand or deposit withdrawals, and does
not have access to new sources of cash. This risk can be the result of either
funding problems or market liquidity risk. Funding liquidity risk is the inability to
liquidate assets or obtain adequate funding from new borrowing. Market liquidity
risk is the inability of the bank to easily in wind or offset specific exposures without
significant losses from inadequate market depth or market disturbances. This risk
is greatest when risky securities are trading at high premiums to low-risk Treasury
securities because market participants are avoiding high-risk borrowers.
A firm can provide for its liquidity needs in one of two ways: (i) by holding liquid
assets, and (ii) by securing its ability to borrow (issuing new liabilities) at
reasonable costs. Thus, when banks need cash, they can either sell liquid assets or
increase borrowings. Liquidity risk measures, therefore, focus on the quantity and
quality of liquid assets near maturity or available-for-sale at reasonable prices, as
well as the bank’s ability to cheaply and easily borrow funds to meet cash
outflows.
Market Risk:
Market risk is the current and potential risk to earnings and stockholders’ equity
resulting from adverse movements in market rebates or prices. The three areas of
market risk are: interest rate or reinvestment rate risk, equity or security price
risk, and foreign exchange risk.
o Interest rate risk is the potential variability in a bank’s net interest income and
market value of equity due to changes in the level of market interest rates.
o Equity and security price risk is the potential risk of loss associated with the
bank’s trading account portfolios.
o Foreign exchange risk is the risk to a financial institution’s condition resulting
from adverse movements in foreign exchange rates.
Interest rate risk:

Interest rate risk analysis compares the sensitivity of interest income to changes in
asset yields with the sensitivity of interest expense to changes in the interest costs

of liabilities. This is done using GAP and earnings sensitivity analysis. The purpose
is to determine how much net interest income will vary with movements in market
interest rates. A more comprehensive portfolio analysis approach compares the
duration of assets with the duration of liabilities using duration gap and economic
value of equity sensitivity analysis to assess the impact of rate changes on net
interest income and the market value (or price) of stockholders’ equity. Duration is
an elasticity measure that indicates the relative price sensitivity of different
securities.
Both GAP and duration gap focus on mismatched asset and liability maturities and
durations as well as potential changes in interest rates. An asset or liability is rate
sensitive if management expects it to be reprised (change of rate) within a certain
time period.
Operational risk:
Refers to the possibility that operating expenses might vary significantly from
what is expected, producing a decline in net income and firm value. The Basel
Committee defines operational risk as:
“The risk of loss resulting from inadequate or failed internal processes, people, and
systems, or from external events.”
Salient Features Of a Bank’s Credit Policy:

Before discussing the salient features we must know the purpose of a credit policy.
Since loans/ advances are the largest and most significant asset in bank’s balance
sheet and have a bearing on the profitability and financial health of the bank as
such it is very much important that board of a director of a bank formulates a
credit policy. It provides the policy frame work as well as a document for
implementation at all tiers of the organization. The credit policy must clearly
explain the basic principles governing the disbursement of finance/ credit. it lays
down a broader framework and helps the banks to carry on its activities over a
long period of time. The bank is able to take care of the competitive environment
and is also able to safe guard against future challenges. It also provides
encouragement to field officers to discharge their duties within the frame work of
the policy without any hesitation. The field officers and other executives can
perform their functions within the delegated powers assigned to them under the
policy.
o Credit should be in line with the prudential regulations issued by the State
Bank of Pakistan
o Credit should be self liquidated that is it should be supported by future cash
flows.
o Credit policy should encompass that credit is structured to meet customers
need.
o Bankers evaluate the projected cash flows of the prospective borrower
before disbursing the loans.
o The credit policy must be diversified with respect to industries/business and
regions.
o Credit policy must ensure that request from defaulter of other banks are not
entertain.
o To safe guard against expected losses, the bank must obtain collaterals/
securities and also maintain adequate margins. There are two types of
margins, one is called the statutory margins which are fixed by the State
Bank of Pakistan and it is obligatory on banks to strictly comply with these
margins. However it is up to the discretion of the bank to obtain additional

margins. The second is the discretionary margin. The credit must be within
bank’s target market and within risk assets acceptance criteria.
Overview of credit cycle

o First of all the prospective borrower approaches the bank
o The credit officer has to process and evaluate the credit proposal
o The credit evaluation would differ on case to case basis.
o The following steps are taken in credit evaluation process:
• Applicants’ profile and track record
• Financial analysis on the basis of balance sheet and profit and loss account
and other relevant information data.
• Capacity of the borrower to repay the loan.
• Technical and economic appraisal, wherever required
• Approval of the credit request by the competent authority/ committee
• Completion of documentation formalities and execution of securities/
collaterals
• Disbursement of loan.
• However, continuous follow up till the recovery of the entire credit remains
an integrals part of the credit cycle.
The process of credit evaluation and other factors shall be discussed in
detail in the next Lesson.

LESSON 31
PRINCIPLES AND FORMS OF LENDING
The Credit Process

Credit is the life line of the banking business. The fundamental objective of a
commercial bank is to make profitable loans with minimum risk. Bank
management should target specific industries and markets in which lending
officers have expertise. However, while competing goals of loan volume and loan
quality must be balance with the banks liquidity requirements, capital constraints
and rate of return objectives. The credit process relies on each bank’s system and
controls that allow management and credit officers to evaluate risk and return
trade-offs. The credit process includes three functions:
o Business development and credit analysis
o Underwriting or credit execution and administration
o Credit review
A credit policy formalizes lending guidelines that employees follow to conduct

bank business. As already pointed out in our previous discussion that it identifies
preferred loan qualities and establishes procedures for granting, documenting and
reviewing loans.
The managements credit philosophy determines how much risk the bank will take
and in what form. Here we need to know a very important concept that is called a
bank’s credit culture. This refers to the fundamental principles that drive lending
activities and how management analysis risk. This lending philosophy would differ
from bank to bank.
However there are three loan credit cultures namely: value driven, current-profit
driven and market share driven. Salient features of these credit cultures are
outlined below:
Values Driven:
o Focus is on credit quality with strong risk management systems and
controls.
o Primary emphasis is on bank soundness and stability and a consistent
market presence.
o Underwriting is conservative and significant loan concentrations are not
allowed.
o Typical outcome is lower current profit from loans with fewer loan losses.
Current-Profit Driven:
o Focus is on short-term earnings
o Primary emphasis is bank’s annual profit plan.
o Management is often attracted to high-risk and high-return borrowers.
o Outcome is typically higher profit in good times, followed by lower profit in
bad times when loan losses increase.
Market-Share Driven:
o Focus is on having the highest market share of loans among competitors.
o Primary emphasis is on loan volume and growth with the intent of having
the largest market share.
o Underwriting is very aggressive and management accepts loan
concentrations and above-average credit risk.
o Outcome is that loan quality suffers over time, while profit is modest
because loan growth comes from below-market pricing and greater risk
taking.

Credit Evaluation/ Credit Analysis
As a customer approaches a bank with a loan request, the credit officers analyze
all available information to determine weather the loan meets the bank’s risk-
return objectives. Credit analysis is essentially default risk analysis in which a loan
officer attempts to evaluate a borrower’s ability and willingness to repay. In this
analysis following important questions arise which are looked into by the credit
officer:
1. What risks are inherent in the operations of the business?

2. What have managers done or failed to do in mitigating those risks?
3. How can a lender structure and control its own risks in supplying funds?
The first question forces the credit analyst to generate a risk of factors that
indicate what could harm the borrower’s ability to repay. The second recognizes
that repayment is largely a function of decisions made by a borrower and weather
management is aware of the important risk and necessary skills and required
systems in place. The last question forces the analyst to specify how risk can be
control so the bank can structure an acceptable loan agreement.
The significant factors in credit evaluation/ credit analysis are

enumerated below:
o Credit request not contrary to prudential regulation of State Bank of
Pakistan.
o Borrower’s Credentials
o Amount of Credit
o Borrower’s Own Equity
o Repayment Plan
The key risk factors have been classified as three Cs’, five Cs’ and seven
C’s. However these factors have explained by the experts are discussed
below:
Character refers to the borrower’s honesty and trustworthiness. An analyst must

assess the borrower’s integrity and subsequent intent to repay. If there are any
serious doubts, the loan should be rejected.
Capital refers to the borrower’s wealth position measured by financial soundness
and market standing. Can the firm or individual withstand any deterioration in its
financial position? Capital helps cushion losses and reduces the likelihood of
bankruptcy.
Capacity involves both the borrower’s legal standing and management’s
expertise in maintaining operations so the firm or individual can repay its debt
obligations. A business must have identifiable cash flow or alternative sources of
cash to repay debt. An individual must be able to generate income.
Conditions refer to the economic environment or industry-specific supply,
production, and distribution factors influencing a firm’s operations. Repayment
sources of cash often vary with the business cycle or consumer demand.
Collaterals is the lender’s secondary source of repayment or security in the case
of default. Having an asset that the bank can seize and liquidate when a borrower
defaults reduces loss, but does not justify lending proceeds when the credit
decision is originally made.
Complacency refers to the tendency to assume that because things were good in
the past they will be good in the future. Common examples are an overreliance on

guarantors, reported net worth, or past loan repayment success becausthings
have always worked out in the past.
Carelessness involves poor underwriting typically evidenced by inadequate loan
documentation, a lack of current financial information or other pertinent
information in the credit files, and a lack of protective covenants in the loan
agreement. Each of these makes it difficult to monitor a borrower’s progress and
identify problems before they are unmanageable.
Communication ineffectiveness refers to when a bank’s credit objectives and
policies are not clearly communicated. This is when loan problems can arise.
Management must effectively communicate and enforce loan policies and loan
officers should make management aware of specific problems with existing loans
as soon as they appear.
Contingencies refer to lenders’ tendency to play down or ignore circumstances in
which a loan might default. The focus is on trying to make a deal work rather than
identifying downside risk.
Competition involves following competitors’ behavior rather than maintaining the
bank’s own credit standards. Doing something because the bank down the street
is doing it does not mean it’s a prudent business practice.
Credit Analysis:
The formal credit analysis procedure includes a subjective evaluation of the
borrower’s request and a detailed review of all financial statements. Credit
department employees may perform the initial quantitative analysis for the loan
officer. The process consists of:
1. Collecting information for the credit file; such as credit history and
performance.
2. Evaluating management, the company, and the industry in which it operates;
that is, evaluation of internal and external factors.
3. Spreading financial statements; that is, financial statement analysis
4. Projecting the borrower’s cash flow and thus its ability to service the debt
5. Evaluating collateral or the secondary source of repayment
6. Writing a summary analysis and making a recommendation.
7. Track record of client
8. Published/unpublished reports regarding business/company
9. Industry analysis.
10. Trade Journals.
11. Level of competition.
12. Private on-line information system.
Credit Execution and Administration:

The loans are approved by competent authorities/ credit committees. After
approval of the loan, the borrower is intimated and a loan agreement/ sanction
advice is prepaid. This agreement formalizes the purpose of loan, the terms,
repayment schedule, collateral required, any term and condition of the loan. The
credit officer then checks that all loan documentation has been completed and is
in order. Any combination of the following collaterals/ securities is also required to
be furnished by the borrower:
Mortgage
Pledge
Hypothecation
Lien
Guarantees
Listed stocks and government securities

On completion of the above, the borrower signs the agreement and the loan is
disbursed to the borrower.
Loan Review:
The loan review effort is directed at reducing credit risk as well as handling
problem loans and liquidating assets of failed borrowers. Effective credit
management separates loan review from credit analysis, execution, and
administration. The review process can be divided into two functions: monitoring
the performance of existing loans and handling problem loans. Many banks have a
formal loan review committee, independent of loan officers, that reports directly to
the chief executive officer and directors’ loan committee. Loan review personnel
audit current loans to verify that the borrower’s financial condition is acceptable,
loan documentation is in place, and pricing meets return objectives. If the audit
uncovers problems, the committee initiates corrective action. Removing the
problem may simply involve getting signatures on omitted forms or filing required
documents with the state. If the borrower has violated any loan covenants, the
loan is in default. The bank can then force the borrower to correct the violation or
it can call the loan; that is, request immediate payment. Calling a loan is normally
a last resort and done only when the borrower does not voluntarily correct the
problem. It allows the bank to request full payment before repayment prospects
worsen.
The problem is much more serious when the borrower’s financial condition
deteriorates. These loans are classified as problem loans and require special
treatment. In many cases, the bank has to modify the terms of the loan agreement
to increase the probability of full repayment. Modifications include deferring
interest and principal payments, lengthening maturities, and liquidating
unnecessary assets. The bank may also request additional collateral or guarantees
and ask the borrower to contribute extra capital. The purpose is to buy time until
the borrower’s condition improves. Banks often assign a separate loan work-out
specialist to problem loans, rather than traditional loan officers, because they are
liquidation oriented and frequently involved in intense negotiations.
Financial Analysis
Types of Financial Analysis:
o Trend Analysis.
o Ratio Analysis.
o Cash Analysis.
Collaterals
Collaterals are discussed in detail in the following paragraphs:
Attributes of good collateral:
Collateral is considered to be good collateral if it possesses the following
attributes.
1. Adequate
2. Readily en cashable realizable
3. Sufficient.
Adequate in Value:
Value of security must be adequate to enable the bank to secure the outstanding
amount of principal and mark-up (interest). Proper margins to be retained while
accepting a security

Readily Encashable /Realizable
Collateral held by the bank should be readily encashable/realizable, in case the
borrower defaults without legal complications either by bank itself or through
speedy legal process.
Sufficient:
The collateral offered by the borrower must be sufficient to recover the amount of
principal/markup and any other liabilities accruing to the bank.
Forms of Securities:
The forms of securities as outlined above are discussed in detail:
Mortgage
Transfer of Property Act, 1882 defines mortgage as under:
“The transfer of an interest in specific immoveable Property for the purpose of
securing the payment of money advanced or to be advanced by way of loan, an
existing or future debt or performance of an engagement which may give rise to a
pecuniary liability”.
Rights of Mortgagee (Bank):

The mortgagee is vested with the following rights
o To sell the mortgaged property in case of default by mortgagor.
o Right to fore-closure.
o Right to file suit.
Types of Mortgage Important types are explained below:

Registered or Legal Mortgage.
It is comparatively expensive, involves stamp duty and registration fee.
Equitable Mortgage:
Memorandum regarding deposit of title deed is also signed by respective parties.
Clear title of the deed must be ascertained by the bank/mortgagee
Pledge:
According to section 172 of the Contract Act, the pledge is defined as under:
“Pledge is the bailment of goods as security for payment of a debt or performance
of a promise”.
Bailment
According to Section 148 of a Contract Act 1872, bailment is defined as under:
“A bailment is the delivery of goods by one person to another for some purpose
upon a contract that they shall, when the purpose is accomplished be returned or
otherwise disposed of according to the directions of the person delivering them”.
Rights of the Pledgee:

o The pledgee (Bank) has actual control of pledged stocks/Goods.
o Pledgee can sell pledged stocks by giving reasonable notice to the borrower.
Hypothecation:
“Hypothecation is a legal transaction, whereby goods may be made available as
security for a debt without transferring possession to the lender”.

Rights of Lender (Bank) in case of hypothecation
To inspect Godowns.
To demand stock reports from the borrower.
To get the stocks insured.
Lien:
“Lien is a charge given by the customer (borrower) to a bank over some
securities”.
Letter of lien must be obtained from the borrower (customer). It can be over
stocks (shares), fixed deposits, bank accounts etc.
In case the security offered is issued by the third party the notice may be issued to
the respective party regarding the same.
Lien to be noted on the said property/security.

According to companies ordinance 1984 “every charge created by a limited
company must be registered with the Registrar of Companies.
Contract of Indemnity
A contract, by which one party promises to save the other from loss caused to him
by the conduct of the Promisor himself, or by the conduct of any other person, is
called a “contract of indemnity”.
All Contracts of Insurance are contracts of indemnity except life

insurance
In such contracts an insurance company (insurer) undertakes to indemnify the
respective party (assured), of the losses suffered by the assured in the
manner and to the extent agreed in the contract.
Rights of Indemnity Holder When Sued:
o He can recover all damages incurred /Paid by him.

o He can recover costs incurred.
o He can recover sums paid under compromise, if any.
Rights of Indemnifier
Settled principle of law : it is a settled principle of law that after compensating
the loss to indemnity holder, indemnifier is entitled to all the ways and means by
which person indemnified might have protected himself for the loss.
Time of Commencement of Indemnifier’s Liability: this commences when

indemnity holder incurs an absolute liability though not actual loss.
Guarantee:
It has been defined in section 126 of the Contract Act 1872 which is
reproduced below:
“A contract of guarantee is a contract to perform the promise or discharge the
liability of a third person in case of his default”. The person who gives the
guarantee is called the “surety”; the person in respect of whose default the
guarantee is given is called the “principal debtor”, and the person to whom the
guarantee is given is called the “creditor”. A guarantee may be either oral or
written.
Kinds of Guarantee

Specific Guarantee or (Ordinary Guarantee)
This guarantee is restricted to a specific transaction or engagement. For example
availing a loan from a bank.
Continuing Guarantee:
Such guarantee covers a series of transactions. For example guarantee furnished
to a supplier for making supplies during the next one year.
Type of Finances/Credits / Forms of Lending

The finances are classified as Fund- Based & Non-Fund Based
Fund- based credits include:

Cash Finance, Overdraft, Loans, Purchase/ Discounting of bill of exchange, Export
finance, Import finance, sectoral finance, consortium finance.
Non-Fund Based:
These include letter of credit, bank guarantee, tender guarantee, and performance
guarantee.)
Trade Finances with respect to international transactions include the

following:
Export finance: In the export finance, the following types of facilities are
included:
o Finance against foreign bills.
o Foreign bill purchased.
o Packing credits.
o SBP’s export finance scheme
Import Finances. In the import finance, the following types of facilities are
included
Import letter of credit.
o Payment against Documents. PAD & also( Forced PAD)
o Finance against Trust Receipt (FTR)
o Finance against Imported Merchandise (FIM).
Sectoral finances Include: Among others these includes the following:

o Industrial Finance.
o Agricultural Finance.
o Finance for Construction/Housing.
o Consumer Finance
In Syndicated finance/Consortium finance
o In syndicated finance, number of banks participate
o There is also a lead Bank and Lead Manager.
o The banks who participate in this type of financing are called Participating
Banks.
o In this type of financing large amount of money is involved hence Borrowers
comprise of Government/Public sector organizations or corporate entities
As we have already discussed all the steps in loan sanctioning such as credit loan
structuring, pricing, Packaging, Documentation, Disbursement, Monitoring &
follow-up process as usual are carried on but with special technical skill and
professional expertise.

LESSON 32
LETTER OF CREDIT
International Banking and International Trade complementary to each

other.
Facilitating international trade is the most important activity of international
banking.
Exporter (seller) and Importer (buyer) are two important players in international
trading activity.
What the seller (exporter) wants

Contract fulfillment (payment)
Convenience (of receiving payment in a bank in his own country)
Prompt Payment
Expert Advice.
What the buyer (Importer) wants

Contract fulfillment (Goods)
Convenience of using an intervening third party in whom both have confidence,
such as a bank.
Credit -possibility of obtaining finance.
Expert advice and assistance.
Letter of credit provides the mechanism to fulfill the above requirements of
exporters and importers.
Letter of Credit
A Letter of Credit is a payment term generally used for international sales
transactions. It is basically a mechanism, which allows importers/buyers to offer
secure terms of payment to exporters/sellers in which a bank (or more than one
bank) gets involved. The technical term for Letter of credit is 'Documentary Credit'.
At the very outset one must understand is that Letters of credit deal in documents,
not goods. The idea in an international trade transaction is to shift the risk from
the actual buyer to a bank. Thus a LC (as it is commonly referred to) is a payment
undertaking given by a bank to the seller and is issued on behalf of the applicant
i.e. the buyer. The Buyer is the Applicant and the Seller is the Beneficiary. The
Bank that issues the LC is referred to as the Issuing Bank which is generally in the
country of the Buyer. The Bank that Advises the LC to the Seller is called the
Advising Bank which is generally in the country of the Seller.
The specified bank makes the payment upon the successful presentation of the
required documents by the seller within the specified time frame. Note that the
Bank scrutinizes the 'documents' and not the 'goods' for making payment. Thus
the process works both in favor of both the buyer and the seller. The Seller gets
assured that if documents are presented on time and in the way that they have
been requested on the LC the payment will be made and Buyer on the other hand
is assured that the bank will thoroughly examine these presented documents and
ensure that they meet the terms and conditions stipulated in the LC.
How Letters of Credit Can Help You Build Your Business

Letters of credit are a time-honored instrument for trade finance. We have found
them useful for any number of import deals. The usefulness of documentary letters
of credit, for instance, derives from the fact that they provide mutual protection for

both the importer and the exporter. As everyone engaged in international trade
knows, anything that removes headaches is generally a good thing.
Documentary letters of credit are also handy for commodity-type transactions.
Letters of Credit -- a Solution to Many Trade Finance Needs

Letters of credit are tools to aid importers to leverage their capital base and their
ability to capture more trading opportunities.
A Letter of Credit allows importers/buyers to offer secure terms of payment to
exporters/sellers in which a bank (or more than one bank) gets involved. The
technical term for Letter of credit is 'Documentary Letter of Credit'. Letters of
Credit (LC's) deal in documents, not goods. The idea in an international trade
transaction is to shift the risk from the actual buyer to a bank. Thus an LC is a
payment undertaking given by a bank to the Beneficiary (the seller) and is issued
on behalf of the applicant (the buyer). The Bank that issues the LC is referred to as
the Issuing Bank, generally in the country of the Buyer. The Bank that Advises the
LC to the seller is called the Advising Bank which is generally in the country of the
seller.
The specified bank makes the payment upon the successful presentation of the
required documents by the seller within the specified time frame. Note that the
Bank scrutinizes the 'documents' and not the 'goods' for making payment. This
process gives both the buyer and the seller comfort that the transfer of ownership
to the goods will occur properly and when payment is secure. The seller gets
assured that if documents are presented on time and in the way that they have
been requested on the LC the payment will be made. The buyer is assured that the
bank will thoroughly examine these presented documents and ensure that they
meet the terms and conditions stipulated in the LC.
Documents requested in a Letter of Credit would often include: a commercial

invoice; a transport document such as a Bill of lading or Airway bill; an insurance
document; an inspection certificate; and/or a certificate of origin. Other documents
could be required, depending on the underlying transaction.
Keep in mind that the Letter of Credit process revolves around documents, not
goods. The LC could be 'irrevocable' or 'revocable'. An irrevocable LC cannot be
changed unless both the buyer and seller agree. Whereas in a revocable LC
changes to the LC can be made without the consent of the beneficiary. A 'sight' LC
means that payment is made immediately to the beneficiary/seller/exporter upon
presentation of the correct documents in the required time frame. A 'time' or 'date'
LC will specify when payment will be made at a future date and upon presentation
of the required documents
A letter of credit can make a big difference to an importer. Many international
deals just can't happen without a letter of credit. And when you cut through all the
mumbo-jumbo.......this is a tool that allows buyers and sellers to do business with
greater confidence.

Method of Financing International Trade:
Letter of credit is one of the methods of financing international trade, there are
other methods of financing international trade and those are outlined and
explained below:
o Open account method
o Documentary collection and
o Payment in advance/ Cash in advance
Open Account Method

An open account transaction means that the goods are shipped and delivered
before payment is due, usually in 30 to 90 days. Obviously, this is the most
advantageous option to the importer in cash flow and cost terms, but it is
consequently the highest risk option for an exporter. Because of the intense
competition for export markets, foreign buyers often press exporters for open
account terms. In addition, the extension of credit by the seller to the buyer is
more common abroad. Therefore, exporters who are reluctant to extend credit
may face the possibility of the loss of the sale to their competitors. However, while
this method of payment will definitely enhance export competitiveness, exporters
should thoroughly examine the political, economic, and commercial risks, as well
as cultural influences to ensure that payment will be received in full and on time. It
is possible to substantially mitigate the risk of nonpayment associated with open
account trade by using such trade finance techniques as export credit insurance
and factoring. Exporters may also wish to seek export working capital financing to
ensure that they have access to financing for both the production for export and
for any credit while waiting to be paid.
Key Points
• The goods, along with all the necessary documents, are shipped directly
to the importer who agrees to pay the exporter’s invoice at a future date,
usually in 30 to 90 days.
• Exporter should be absolutely confident that the importer will accept
shipment and pay at agreed time and that the importing country is commercially
and politically secure.
• Open account terms may help win customers in competitive markets, if
used with one or more of the appropriate trade finance techniques that mitigate
the risk of nonpayment.
How to Offer Open Account Terms in Competitive Markets

Open account terms may be offered in competitive markets with the use of one or
more of the following trade finance techniques: (1) Export Working Capital
Financing, (2) Government-Guaranteed Export Working Capital Programs, (3)
Export Credit Insurance, (4) Export Factoring, and (5) Forfeiting. More detailed
information on each trade finance technique is provided in other sections of the
Trade Finance Guide
Export Working Capital Financing

To extend open account terms in the global market, the exporter who lacks
sufficient liquidity needs export working capital financing that covers the entire
cash cycle from purchase of raw materials through the ultimate collection of the
sales proceeds. Export working capital facilities can be provided to support export
sales in the form of a loan or revolving line of credit.

Government-Guaranteed Export Working Capital Programs
The Export-Import Bank of the United States and the U.S. Small Business
Administration offer programs that guarantee export working capital facilities to
U.S. exporters. With these programs, U.S. exporters are able to obtain needed
facilities from commercial lenders when financing is otherwise not available or
when their borrowing capacity needs to be increased.
Export Credit Insurance

Export credit insurance provides protection against commercial losses—default,
insolvency, bankruptcy, and political losses—war, nationalization, currency
inconvertibility, etc. It allows exporters to increase sales by offering liberal open
account terms to new and existing customers. Insurance also provides security for
banks providing working capital and financing exports.
Export Factoring
Factoring in international trade is the discounting of a short-term receivable (up to
180 days). The exporter transfers title to its short-term foreign accounts receivable
to a factoring house for cash at a discount from the face value. It allows an
exporter to ship on open account as the factor assumes the financial ability of the
importer to pay and handles collections on the receivables. The factoring house
usually works with consumer goods.
Forfeiting
Forfeiting is a method of trade financing that allows the exporter to sell its
medium-term receivables (180 days to 7 years) to the forfeiter at a discount, in
exchange for cash. With this method, the forfeiter assumes all the risks, enabling
the exporter to extend open account terms and incorporate the discount into the
selling price. Forfeiters usually work with capital goods, commodities, and large
projects.
Documentary Collections
A documentary collection (D/C) is a transaction whereby the exporter entrusts the
collection of payment to the remitting bank (exporter’s bank), which sends docu-
ments to a collecting bank (importer’s bank), along with instructions for payment.
Funds are received from the importer and remitted to the exporter through the
banks involved in the collection in exchange for those documents. D/Cs involve the
use of a draft that requires the importer to pay the face amount either on sight
(document against payment—D/P) or on a specified date in the future (document
against acceptance—D/A). The draft lists instructions that specify the documents
required for the transfer of title to the goods. Although banks do act as facilitators
for their clients under collections, documentary collections offer no verification
process and limited recourse in the event of nonpayment. Drafts are generally less
expensive than letters of credit (LCs).
Key Points
• D/Cs are less complicated and less expensive than LCs.
• Under a D/C transaction, the importer is not obligated to pay for goods
prior to shipment.
• The exporter retains title to the goods until the importer either pays the
face amount on sight or accepts the draft to incur a legal obligation to pay at a
specified later date.
• Banks that play essential roles in transactions utilizing D/Cs are the
remitting bank (exporter’s bank) and the collecting bank (importer’s bank).

• While the banks control the flow of documents, they do not verify the
documents nor take any risks, but can influence the mutually satisfactory
settlement of a D/C transaction.
Typical Simplified D/C Transaction Flow

1. The exporter ships the goods to the importer and receives in exchange
the documents.
2. The exporter presents the documents with instructions for obtaining
payment to its bank.
3. The exporter’s remitting bank sends the documents to the importer’s
collecting bank.
4. The collecting bank releases the documents to the importer upon receipt
of payment.
5. Or the collecting bank releases the documents on acceptance of draft
from the importer.
6. The importer then presents the documents to the carrier in exchange for
the goods.
7. Having received payment, the collecting bank forwards proceeds to the
remitting bank.
8. Once payment is received, the remitting bank credits the exporter’s
account.
Documents against Acceptance (D/A) Collection

Under a D/A collection, the exporter extends credit to the importer by using a time
draft. In this case, the documents are released to the importer to receive the
goods upon acceptance of the time draft. By accepting the draft, the importer
becomes legally obligated to pay at a future date. At maturity, the collecting bank
contacts the importer for payment. Upon receipt of payment, the collecting bank
transmits the funds to the remitting bank for payment to the exporter.
Time of Payment: On maturity of draft at a specified future date
Transfer of Goods: Before payment, but upon acceptance of draft
Exporter Risk: Has no control of goods and may not get paid at due date
When to Use Documentary Collections

Under D/C transactions, the exporter has little recourse against the importer in
case of nonpayment. Thus, the D/C mechanism should only be used under the
following conditions:
• The exporter and importer have a well-established relationship.
• The exporter is confident that the importing country is stable politically
and economically.
• An open account sale is considered too risky, but an LC is also too
expensive for the importer.
Cash-in-Advance
With the cash-in-advance payment method, the exporter can avoid credit risk or
the risk of nonpayment, since payment is received prior to the transfer of owner-
ship of the goods. Wire transfers and credit cards are the most commonly used
cash-in-advance options available to exporters. However, requiring payment in
advance is the least attractive option for the buyer, as this method tends to create
cash flow problems, and unless the seller sees no other option or the buyer has
other vendors to choose from, it often is not a competitive option. In addition,
foreign buyers are often concerned that the goods may not be sent if payment is
made in advance. Exporters that insist on this method of payment as their sole

method of doing business may find themselves losing out to competitors who may
be willing to offer more attractive payment terms.
Key Points
• Full or significant partial payment is required, usually via credit card or
bank/wire transfer, prior to the transfer of ownership of the goods.
• Cash-in-advance, especially a wire transfer, is the most secure and
favorable method of international trading for exporters and, consequently, the
least secure and attractive option for importers. However, both the credit risk
and the competitive landscape must be considered.
• Insisting on these terms ultimately could cause exporters to lose
customers to competitors who are willing offer more favorable payment terms to
foreign buyers in the global market.
• Creditworthy foreign buyers, who prefer greater security and better cash
utilization, may find cash-in-advance terms unacceptable and may simply walk
away from the deal.
Wire Transfer—Most Secure and Preferred Cash-in-Advance Method

An international wire transfer is commonly used and has the advantage of being
almost immediate. Exporters should provide clear routing instructions to the
importer when using this method, including the name and address of the receiving
bank, the bank’s SWIFT, Telex, and ABA numbers, and the seller’s name and
address, bank account title, and account number. This option is more costly to the
importer than other options of cash-in-advance method, as the fee for an
international wire transfer is usually paid by the sender.
When to Use Cash-in-Advance Terms

• The importer is a new customer and/or has a less-established operating
history.
• The importer’s creditworthiness is doubtful, unsatisfactory, or
unverifiable.
• The political and commercial risks of the importer’s home country are
very high.
• The exporter’s product is unique, not available elsewhere, or in heavy
demand.
• The exporter operates an Internet-based business where the use of
convenient payment methods is a must to remain competitive.
In International trade, the buyer and the seller who are located in different
countries, may not know each other and hence many times the problem of Buyer’s
Creditworthiness hampers the trade between the buyer and the seller. The main
objectives of the buyer and the seller in any international trade and contradictory
in terms of Buyer will always try to delay the payment while the seller would like to
receive funds at the earliest.
To mitigate this problem, Seller always request Buyer to arrange for a Letter of
Credit to be issued by Buyer’s Bank. Upon issuance of Letter of Credit, the Buyer’s
bank replaces its own Creditworthiness to that of the Buyer, it undertakes to
reimburse the Seller for the value of the Letter of Credit “Irrevocably” provided
two underline conditions are fulfilled by the Seller:
1. All the documents stated in the LC are presented;

2. All the terms and conditions of the LC are complied with.
The beauty of the LC is that if above two conditions are fulfilled, Issuing Bank will
effect payment to the Beneficiary, irrespective of Applicant reimburses the Issuing
Bank or not. Thus, a Letter of Credit is an undertaking issued by a bank in favor of
a Beneficiary (Seller), which substitutes the bank’s creditworthiness for that of the
Applicant (Buyer).
Why Letter?
It is named a Letter because initially the LCs were issued manually in a Letter
format address by Issuing Bank to Beneficiary confirming its conditional
undertaking to reimburse the Beneficiary, the amount of the LC provided above 2
basic conditions are fulfilled.
Letter of Credit---General Definition:

‘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.
Definition of L.C (Article 2 of UCP 600)

Complying presentation: means a presentation that is in accordance with the
terms and conditions of the credit, the applicable provisions of these rules and
international standard banking practice.
Article 2 of the ICC, Uniform Customs and Practices, brochure 500 (UCP-
500) defines a letter of credit as:
‘Any arrangement however named or described, whereby a bank issues a letter of
credit on behalf of a customer the “Applicant “or on its own behalf,
Is to make payment to or to the order of a third party (the beneficiary) or is to

accept and pay bills of exchange (draft) drawn by the beneficiary or Authorizes
another bank to effect such payment or to accept and pay such bills of exchange
(draft) or Authorizes another bank to negotiate against stipulated documents,
provided the terms and conditions of the credit are complied with.
We shall continue with the this topic in coming Lesson

LESSON 33
LETTER OF CREDIT
We have already gone through general definition of letter of credit. Now

we shall look into various aspects of letter of credit as contained in the
light of definition contained in UCP 600
LC as defined by UCP 600


Presentation means either the delivery of documents under a credit to the issuing
bank or nominated bank or the documents so delivered.
For the sake of comparison and understanding the need for UCP 600 we
give hereunder the definition as contained in Article 2 of the ICC, Uniform
Customs and Practices, brochure 500:
‘Any arrangement however named or described, whereby a bank issues a letter of
credit on behalf of a customer the “Applicant “or on its own behalf,
Is to make payment to or to the order of a third party (the beneficiary) or is to
accept and pay bills of exchange (draft) drawn by the beneficiary or Authorizes
another bank to effect such payment or to accept and pay such bills of exchange
(draft) or Authorizes another bank to negotiate against stipulated documents,
provided the terms and conditions of the credit are complied with.
Bill of Exchange-(Draft)-Defined
signed by the maker, directing a certain person, to pay on demand or at a 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.”
A bill of exchange drawn payable to bearer can not be made payable on demand.
Essentials of bill of exchange

These are outlined here under:
• In writing
• Order to pay
• Unconditional order
• Signed by the drawer
• Drawee certain person
• Time of payment
• Certain sum
• Legal tender money
• Payee certain person
• Other formalities
• Date
• Place

• Lawful consideration
• Revenue stamp
Sight bill of exchange or Time/ Usance bill of exchange:

All letters of credit require the beneficiary to present a draft and specified
documents in order to receive payment. A draft is a written order by which the
party creating it, orders another party to pay money to a third party. A draft is also
called a bill of exchange.
There are two types of drafts: sight and time. A sight draft is payable as soon as it
is presented for payment. The bank is allowed a reasonable time to review the
documents before making payment.
A time draft is not payable until the lapse of a particular time period stated on the
draft. The bank is required to accept the draft as soon as the documents comply
with credit terms. The issuing bank has a reasonable time to examine those
documents. The issuing bank is obligated to accept drafts and pay them at
maturity.
Parties to a Documentary Credit:

Applicant (opener of L.C): means the party on whose request the credit is
issued.
Issuing Bank
The issuing bank's liability to pay and to be reimbursed from its customer becomes
absolute upon the completion of the terms and conditions of the letter of credit.
Under the provisions of the Uniform Customs and Practice for Documentary
Credits, the bank is given a reasonable amount of time after receipt of the
documents to honor the draft.
The issuing banks' role is to provide a guarantee to the seller that if compliant
documents are presented, the bank will pay the seller the amount due and to
examine the documents, and only pay if these documents comply with the terms
and conditions set out in the letter of credit.
Typically the documents requested will include a commercial invoice, a transport
document such as a bill of lading or airway bill and an insurance document; but
there are many others. Letters of credit deal in documents, not goods.
Advising Bank
An advising bank, usually a foreign correspondent bank of the issuing bank will
advise the beneficiary. Generally, the beneficiary would want to use a local bank to
insure that the letter of credit is valid. In addition, the advising bank would be
responsible for sending the documents to the issuing bank. The advising bank has
no other obligation under the letter of credit. If the issuing bank does not pay the
beneficiary, the advising bank is not obligated to pay.
Confirming Bank
The correspondent bank may confirm the letter of credit for the beneficiary. At the
request of the issuing bank, the correspondent obligates itself to insure payment
under the letter of credit. The confirming bank would not confirm the credit until it
evaluated the country and bank where the letter of credit originates. The
confirming bank is usually the advising bank.
Nominated Bank/ Paying Bank:

The Paying Bank is the bank nominated in the letter of credit that makes
payment to the beneficiary, after determining that documents conform, and upon
receipt of funds from the issuing bank or another intermediary bank nominated by
the issuing bank.
Negotiating bank:
It 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.
Modes of Payment of Letter of Credit

There are following modes of payment against letter of credit:
1. By negotiation
2. By acceptance and payment of usance bill of exchange
3. By sight payment
4. By deferred payment
Available by negotiation
Documents are presented to negotiating bank/ nominated bank after shipment of
goods, the said bank makes the payment to the beneficiary. If documents
submitted are according to the requirements of L/C and stipulation of L/C are
fulfilled, the negotiating bank shall receive the negotiating charges.
Available by acceptance
In such letter of credit, usance bill of exchange/ draft is drawn on the nominated/
issuing bank and the draft is accepted and payment is made on due date.
Available by sight payment

In such situations, the payment is available at sight that is on demand; however
required documents are required to be submitted.
Available by deferred payments

Normally the terms of a documentary credit will include an instruction to the
beneficiary to draw bills of exchange, and issuing bank will guarantee that such
bills will be honored, provided all the other terms of the credit are met. However,
in deferred payment credits, there is no need for the exporter to draw a bill of
exchange. The issuing bank simply undertakes that payment will be made on a
fixed or determinable future date, provided the other conditions have been
fulfilled. Although the exporter does not draw a bill of exchange, in all respects
these credits are identical to other documentary credits and some banks, in
practice, will negotiate the documents providing they are entirely satisfied with the
standing of the issuing bank. One benefit of deferred credits is that they avoid the
need for payment of stamp duty on bills of exchange. All credits must clearly
indicate whether they are available by sight payment, by acceptance or by
deferred payment.
Characteristics of Negotiability and Revocability Explained:

Negotiability
Letters of credit are usually negotiable. The issuing bank is obligated to pay not
only the beneficiary, but also any bank nominated by the beneficiary. Negotiable
instruments are passed freely from one party to another almost in the same way
as money. To be negotiable, the letter of credit must include an unconditional
promise to pay, on demand or at a definite time. The nominated bank becomes a
holder in due course. As a holder in due course, the holder takes the letter of
credit for value, in good faith, without notice of any claims against it. A holder in
due course is treated favorably under the UCC.
The transaction is considered a straight negotiation if the issuing bank's payment
obligation extends only to the beneficiary of the credit. If a letter of credit is a
straight negotiation it is referenced on its face by "we engage with you" or
"available with ourselves". Under these conditions the promise does not pass to a
purchaser of the draft as a holder in due course.
Revocability
Letters of credit may be either revocable or irrevocable. A revocable letter of
credit may be revoked or modified for any reason, at any time by the issuing bank
without notification. A revocable letter of credit cannot be confirmed. If a
correspondent bank is engaged in a transaction that involves a revocable letter of
credit, it serves as the advising bank.
Once the documents have been presented and meet the terms and conditions in
the letter of credit, and the draft is honored, the letter of credit cannot be revoked.
The revocable letter of credit is not a commonly used instrument. It is generally
used to provide guidelines for shipment. If a letter of credit is revocable it would
be referenced on its face.
The irrevocable letter of credit may not be revoked or amended without the
agreement of the issuing bank, the confirming bank, and the beneficiary. An
irrevocable letter of credit from the issuing bank insures the beneficiary that if the
required documents are presented and the terms and conditions are complied
with, payment will be made. If a letter of credit is irrevocable it is referenced on its
face.
Types of Documentary Credits:

• Revocable Letter of Credit
• Irrevocable Letter of Credit
• Irrevocable Confirmed Letter of Credit
• Revolving Credit
• Transferable Letter of Credit
• Red Clause or Packing Credit
• Stand by Credit
Revocable letter of credit

A revocable letter of credit may be cancelled or modified after its date of issue, by
the issuing bank. According to UCP-600, credit shall be irrevocable.
Irrevocable letter of credit

An irrevocable letter of credit can neither be amended nor cancelled without the
agreement of all parties to the credit. Under UCP500 all letters of credit are
deemed to be irrevocable unless otherwise stated. Here, the importer's bank gives
a binding undertaking to the supplier provided all the terms and conditions of the
credit are fulfilled.
Confirmed letter of credit

A confirmed letter of credit is one in which the advising bank, on the instructions of
the issuing bank, has added a confirmation that payment will be made as long as
compliant documents are presented. This commitment holds even if the issuing
bank or the buyer fails to make payment. The added security to the exporter of
confirmation needs to be considered in the context of the standing of the issuing
bank and the current political and economic state of the importer's country. A
bank will make an additional charge for confirming a letter of credit. In many
cases, the confirming bank is located in Beneficiary’s country Confirmation costs
will vary according to the country involved, but for many countries considered a
high risk will be between 2%-8%. There also may be countries issuing letters of
credit, which banks do not wish to, confirm - they may already have enough
exposure in that market or not wish to expose themselves to that particular risk at
all.
We shall continue with the remaining types of letter of credit

LESSON 34
LETTER OF CREDIT
Types of Documentary Credits:

There are following types of Letter of credit:
1. Revocable Letter of Credit

2. Irrevocable Letter of Credit
3. Irrevocable Confirmed Letter of Credit
4. Revolving Credit
5. Transferable Letter of Credit
6. Red Clause or Packing Credit
7. Stand by Credit
We have already explained first three types, rest of the types are
explained in following paragraphs:
Revolving Letter of Credit
The revolving credit is used for regular shipments of the same commodity to the
same importer. It can revolve in relation to time or value. If the credit is time
revolving once utilized it is re-instated for further regular shipments until the credit
is fully drawn. If the credit revolves in relation to value once utilized and paid the
value can be reinstated for further drawings. The credit must state that it is a
revolving letter of credit and it may revolve either automatically or subject to
certain provisions. Revolving letters of credit are useful to avoid the need for
repetitious arrangements for opening or amending letters of credit.
Transferable Letter of Credit

A transferable letter of credit is one in which the exporter has the right to request
the paying, or negotiating bank to make either part, or all, of the credit value
available to one or more third parties. This type of credit is useful for those acting
as middlemen especially where there is a need to finance purchases from third
party suppliers.
Red Clause letter of credit:

Letter of credit allowing an initial advance to the beneficiary before shipment of
the goods. In the days of Telex, this clause in the Letter of Credit was printed in red
ink.
Standby Letters of Credit

A standby letter of credit is used as support where an alternative, less secure,
method of payment has been agreed. They are also used in the United States of
America in place of bank guarantees. Should the exporter fail to receive payment
from the importer he may claim under the standby letter of credit? Certain
documents are likely to be required to obtain payment including: the standby
letter of credit itself; a sight draft for the amount due; a copy of the unpaid
invoice; proof of dispatch and a signed declaration from the beneficiary stating
that payment has not been received by the due date and therefore reimbursement
is claimed by letter of credit. The International Chamber of Commerce publishes
rules for operating standby letters of credit - ISP98 International Standby Practices.
Back-to-Back Letter of Credit

A back-to-back letter of credit can be used as an alternative to the transferable
letter of credit. Rather than transferring the original letter of credit to the supplier,
once the letter of credit is received by the exporter from the opening bank, that
letter of credit is used as security to establish a second letter of credit drawn on
the exporter in favor of his importer. Many banks are reluctant to issue back-to-
back letters of credit due to the level of risk to which they are exposed, whereas a
transferable credit will not expose them to higher risk than under the original
credit.
Procedure for Issuing a Letter of Credit
The procedure for issuing a letter of credit is outlined and explained
hereunder:
• L.C Application Form
• Indent Performa invoice/Purchase Order
• Insurance cover note /Marine insurance policy
• Fixation of margin (depending on credit worthiness of applicant & SBP
instructions regarding margin requirements)
• Credit report of exporter
• Forward exchange booking (at request of importer)
• Selection of foreign correspondent/Advising bank.
• Transmission of letter of credit.
The applicant would fill out an application detailing the following information:
• Name and address of beneficiary
• Amount for which L/C is to be opened
• Mode of availability of the credit
• Name of the drawee of bill of exchange
• Description of goods documents required to be submitted by beneficiary for
seeking payment/ negotiation.
• Mentioning port of shipment and port of discharge of goods.
• Terms of payment of freight
• Instructions regarding trans shipment or partial shipment
• Last date for shipment
• The date and place of expiry
The bank would scrutinized the application and after meeting all requisites
conditions and taking necessary measures to safe guard the risk exposure of the
bank, the bank would issue letter of credit.
Inland Letter of Credit

Procedure for inland letter of credit is same as for international letter of credit.
Inland letter of credit is opened in Pak rupees and advised through local branch of
issuing bank.
Standard Forms of Documentation

When making payment for product on behalf of its customer, the issuing bank
must verify that all documents and drafts conform precisely to the terms and
conditions of the letter of credit.
The different types of documents required under letter of credit are outlined and
explained below:
• Commercial Invoice
• Bill of lading
• Warrantee of title
• Letter of indemnity
Commercial Invoice

The billing for the goods and services. It includes a description of merchandise,
price, FOB origin, and name and address of buyer and seller. The buyer and seller
information must correspond exactly to the description in the letter of credit.
Unless the letter of credit specifically states otherwise, a generic description of the
merchandise is usually acceptable in the other accompanying documents.
Bill of Lading
A document evidencing the receipt of goods for shipment and issued by a freight
carrier engaged in the business of forwarding or transporting goods. The
documents evidence control of goods. They also serve as a receipt for the
merchandise shipped and as evidence of the carrier's obligation to transport the
goods to their proper destination.
Warranty of Title
A warranty given by a seller to a buyer of goods that states that the title being
conveyed is good and that the transfer is rightful. This is a method of certifying
clear title to product transfer. It is generally issued to the purchaser and issuing
bank expressing an agreement to indemnify and hold both parties harmless.
Letter of Indemnity
Specifically indemnifies the purchaser against a certain stated circumstance.
Indemnification is generally used to guaranty that shipping documents will be
provided in good order when available.
Common Defects in Documentation

About half of all drawings presented contain discrepancies. A discrepancy is an
irregularity in the documents that causes them to be in non-compliance to the
letter of credit. Requirements set forth in the letter of credit cannot be waived or
altered by the issuing bank without the express consent of the customer. The
beneficiary should prepare and examine all documents carefully before
presentation to the paying bank to avoid any delay in receipt of payment.
Commonly found discrepancies between the letter of credit and supporting
documents include:
• Letter of Credit has expired prior to presentation of draft.
• Bill of Lading evidences delivery prior to or after the date range stated in
the credit.
• Stale dated documents.
• Changes included in the invoice not authorized in the credit.
• Inconsistent description of goods.
• Insurance document errors.
• Invoice amount not equal to draft amount.
• Ports of loading and destination not as specified in the credit.
• Description of merchandise is not as stated in credit.
• A document required by the credit is not presented.
• Documents are inconsistent as to general information such as volume,
quality, etc.
• Names of documents not exact as described in the credit. Beneficiary
information must be exact.
• Invoice or statement is not signed as stipulated in the letter of credit.

When a discrepancy is detected by the negotiating bank, a correction to the
document may be allowed if it can be done quickly while remaining in the control
of the bank. If time is not a factor, the exporter should request that the negotiating
bank return the documents for corrections.
If there is not enough time to make corrections, the exporter should request that
the negotiating bank send the documents to the issuing bank on an approval basis
or notify the issuing bank by wire, outline the discrepancies, and request authority
to pay. Payment cannot be made until all parties have agreed to jointly waive the
discrepancy.
Commonsense Rules For Importer (buyer)

• The instructions to the issuing bank must be clear, correct and precise.
• The terms and conditions and documents called for should be in agreement
with the contract of sales.
• Any examination/inspection of goods prior to shipment or at the evidenced
by a document. The issuer of such inspection document must be stated in
the credit.
• The credit should not call for the documents which the seller can not
provide, nor set out conditions that he can not meet.
Commonsense Rules For Exporter (seller)
• Communicate with your customers in detail before they apply for letters of
credit.
• Consider whether a confirmed letter of credit is needed.
• Upon first advice of the letter of credit, check that all its terms and
conditions can be complied with within the prescribed time limits.
• He should study the credit in depth and request the changes at the earliest,
if deemed necessary.
• Many presentations of documents run into problems with time-limits. You
must be aware of at least three time constraints - the expiration date of the
credit, the latest shipping date and the maximum time allowed between
dispatch and presentation.
• After dispatch of the goods, check all the documents both against the terms
of the credit and against each other for internal consistency.
• Advantages & Problems/ Risks in letter of credit:
Advantages of Letter of Credit:

1. General global acceptability by the interacting parties
2. The beneficiary is assured of payment as long as it complies with the terms

and conditions of the letter of credit. The letter of credit identifies which
documents must be presented and the data content of those documents.
The credit risk is transferred from the applicant to the issuing bank.
3. The beneficiary can enjoy the advantage of mitigating the issuing bank’s
country risk by requiring that a bank in its own country confirm the letter of
credit. That bank then takes on the country and commercial risk of the
issuing bank and protects the beneficiary.
4. The beneficiary minimizes collection time as the letter of credit accelerates
payment of the receivables.
5. The beneficiary’s foreign exchange risk is eliminated with a letter of credit
issued in the currency of the beneficiary’s country.
Risks involved in Letter of Credit.

1. Since all the parties involved in Letter of Credit deal with the documents and
not with the goods, the risk of Beneficiary not shipping goods as mentioned
in the LC is still persists.
2. The Letter of Credit as a payment method is costlier than other methods of
payment such as Open Account or Collection
3. The Beneficiary’s documents must comply with the terms and conditions of
the Letter of Credit for Issuing Bank to make the payment.
4. The Beneficiary is exposed to the Commercial risk on Issuing Bank, Political
risk on the Issuing Bank’s country and Foreign Exchange Risk in case of
Usance Letter of Credits.
How the exporter can minimize the problems/ risk

o The exporter can minimize the risk of low rating of the issuing bank or country
risk by insisting for issuance of a confirmed letter of credit
Course of action when an exporter has presented documents which do

not conform to the credit:
o Exporter may ask the advising bank to send documents to issuing bank on
collection basis.
o Exporter can ask the negotiating bank to negotiate the discrepant documents
against indemnity or guarantee of the exporter.
o The advising bank can approach the issuing bank for waiver of discrepancies.
Flow Chart of Letter of Credit

We shall continue with explanation of flow chart

Lesson 35
FLOW CHART OF LETTER OF CREDIT—REVISITED
Explanation of Flow chart:

1. First of all importer and exporter enter into a contract.
2. Applicant (Importer) approaches the bank
3. Importer’s bank issues L/C and advises it to the advising bank.
4. Advising bank advises L/C to the exporter
5. After shipment of the consignment, exporter submits document
to issuing bank for payment through advising bank. (The exporter
may also adopt other measures for of payment such as negotiation of
documents through negotiating bank.
6. Advising bank sends documents to issuing bank
7. Issuing bank shall debit account of importer under advice to
him and transmit proceeds to advising bank.
8. Advising bank shall credit account of exporter.
9. The advising bank shall intimate the exporter/ customer and
send credit advice to him.
Settlements under a Letter of Credit

All commercial letters of credit must clearly indicate whether they are
payable by sight payment, by deferred payment, by acceptance, or by
negotiation. These are noted as formal demands under the terms of the
commercial letter of credit. In a sight payment, the commercial letter of
credit is payable when the beneficiary presents the complying documents
and if the presentation takes place on or before the expiration of the
commercial letter of credit.
In a deferred payment, the commercial letter of credit is payable on a
specified future date. The beneficiary may present the complying
documents at an earlier date, but the commercial letter of credit is payable
only on the specified future date.
An acceptance is a time draft drawn on, and accepted by, a banking
institution, which promises to honor the draft at a specified future date. The
act of acceptance is without recourse as it is a commitment to pay the face
amount of the accepted draft.
Under negotiation, the negotiating bank, a third party negotiator,
expedites payment to the beneficiary upon the beneficiary’s presentation of
the complying documents to the negotiating bank. The bank pays the
beneficiary, normally at a discount of the face amount of the value of the
documents, and then presents the complying documents, including a sight
or time draft, to the issuing bank to receive full payment at sight or at a
specified future date.
Reimbursement under a Letter of Credit:

Uniform Rules for Bank-to-Bank Reimbursements under
Documentary Credits, ICC Publication No. 525
Banking Laws andPROVISION
GENERAL Practices-BNK AND
601 DEFINITION VU
There are complete set of rules under URR 525 (uniform rules for bank to
Article 1 - Application of URR
The Uniform Rules for Bank-to-Bank Reimbursements under
Documentary Credits ("Rules"), ICC Publication No. 525, shall apply to
all Bank-to-Bank Reimbursements where they are incorporated into
the text of the Reimbursement Authorization. They are binding on all
parties thereto, unless otherwise expressly stipulated in the
Reimbursement Authorization. The Issuing Bank is responsible for
indicating in the Documentary Credit ("Credit") that Reimbursement
Claims are subject to these Rules.
In a Bank-to-Bank Reimbursement subject to these Rules, the
Reimbursing Bank acts on the instructions and/or under the authority
of the Issuing Bank.
These Rules are not intended to override or change the provisions of
the ICC Uniform Customs and Practice for Documentary Credits.
Article 2 - Definitions
As used in these Rules, the following terms shall have the meanings
specified in this Article and may be used in the singular or plural as
appropriate :
a. "Issuing Bank" shall mean the bank that has issued a Credit
and the Reimbursement Authorization under that Credit.
b. "Reimbursing Bank" shall mean the bank instructed and/or
authorized to provide reimbursement pursuant to a
Reimbursement Authorization issued by the Issuing Bank.
c. "Reimbursement Authorizations" shall mean an instruction
and/or authorization independent of the Credit, issued by an
Issuing Bank to a Reimbursing Bank to reimburse a Claiming
Bank, or, if so requested by the Issuing Bank, to accept and
pay a time draft(s) drawn on the Reimbursing Bank.
d. "Reimbursement Amendment" shall mean an advice from
the Issuing Bank to a Reimbursing Bank stating changes to a
Reimbursement Authorization.
e. "Claiming Bank" shall mean a bank that pays, incurs a
deferred payment undertaking, accepts draft(s), or
negotiates under a Credit and presents a Reimbursement
Claim to the Reimbursing Bank. "Claiming Bank" shall
include a bank authorized to present a Reimbursement
Claim to the Reimbursing Bank on behalf of the bank that
pays, incurs a deferred payment undertaking, accepts
draft(s), or negotiates
f. "Reimbursement Claim" shall mean a request for
reimbursement from the Claiming Bank to the Reimbursing
Bank.
g. "Reimbursement Undertaking" shall mean a separate
irrevocable undertaking of the Reimbursing Bank, issued
upon the authorization or request of the Issuing Bank, to the
Claiming Bank named in the Reimbursement Authorization,
to honor that bank's Reimbursement Claim provided the
terms and conditions of the Reimbursement Undertaking
have been complied with.
h. "Reimbursement Undertaking Amendment" shall mean an
advice from the Reimbursing Bank to the Claiming Bank
242 named in©the Reimbursement
Copyright Authorization,
Virtual University stating changes
of Pakistan
to a Reimbursement Undertaking.
i. For the purposes of these Rules branches of a bank in
different countries are considered separate banks.
Uniform Customs and Practice for Documentary Credits (UCP 600)
• International Chamber of Commerce (ICC), is a World Business
Organization, its headquarters are based at Paris, it has developed
and designed standards, rules and reference guides for international
trade. UCP 600 is also designed by ICC and the rules contained in
therein govern letter of credit transactions worldwide.
• UCP 600 became effective from 1st July 2007
• UCP 600 is comprised of 39 Articles. These are a
comprehensive and practical working aid to bankers, lawyers,
importers, and exporters, transport executives, educators, and all
others who are engaged and interested in letter of credit transactions.
We shall discuss some of the important provisions of UCP 600 in
the next Lesson.

LESSON 36
UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS
(UCP 600)
• International Chamber of Commerce (ICC), is a World Business Organization,

its headquarters are based at Paris, it has developed and designed
standards, rules and reference guides for international trade. UCP 600 is
also designed by ICC and the rules contained therein govern letter of credit
transactions worldwide.
• UCP 600 became effective from 1st July 2007
• UCP 600 is comprised of 39 Articles. These are a comprehensive and
practical working aid to bankers, lawyers, importers, and exporters,
transport executives, educators, and all others who are engaged and
interested in letter of credit transactions.
Some of the important Articles of UCP 600

Article 1
The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC
Publication no. 600 ("UCP“) are rules that apply to any documentary credit
("credit") (including, to the extent to which they may be applicable, any standby
letter of credit) when the text of the credit expressly indicates that it is subject to
these rules. They are binding on all parties thereto unless expressly modified or
excluded by the credit.
Article 2
It comprises definitions of certain expressions which are given below:
Advising bank: means the bank that advises the credit at the request of the
issuing bank.
Applicant: means the party on whose request the credit is issued.
Banking day: means a day on which a bank is regularly open at the place at
which an act subject to these rules is to be performed
Beneficiary: means the party in whose favor a credit is issued.

Confirmation: means a definite undertaking of the confirming bank, in addition to

that of the issuing bank, to honor or negotiate a complying presentation.
Confirming bank: means the bank that adds its confirmation to a credit upon the
issuing bank‘s authorization or request.
Credit: means any arrangement, however named or described, that is irrevocable

Honour means:
• To pay at sight if the credit is available by sight payment

• To incur a deferred payment undertaking and pay at maturity if the credit is
available by deferred payment
• To accept a bill of exchange ("draft") drawn by the beneficiary and pay at
maturity if the credit is available by acceptance
Issuing bank: means the bank that issues a credit at the request of an applicant
or on its own behalf.
Negotiation: means the purchase by the nominated bank of drafts (drawn on a

bank other than the nominated bank) 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.
Nominated Bank: means the bank with which the credit is available or any bank
in the case of a credit available with any bank.
Presentation: means either the delivery of documents under a credit to the

issuing bank or nominated bank or the documents so delivered.
Presenter: means a beneficiary, bank or other party that makes a presentation.
Article 3
A credit is irrevocable even if there is no indication to that effect.
A document may be signed by handwriting, facsimile signature, perforated
signature, stamp, symbol or any other mechanical or electronic method of
authentication.
Article 4
Credits v. Contracts
A credit by its nature is a separate transaction from the sale or other contract on
which it may be based. Banks are in no way concerned with or bound by such
contract, even if any reference whatsoever to it is included in the credit.
Consequently, the undertaking of a bank to honor, to negotiate or to fulfill any
other obligation under the credit is not subject to claims or defenses by the
applicant resulting from its relationships with the issuing bank or the beneficiary.
A beneficiary can in no case avail itself of the contractual relationships existing
between banks or between the applicant and the issuing bank.
An issuing bank should discourage any attempt by the applicant to include, as an
integral part of the credit, copies of the underlying contract, Performa invoice and
the like.
Article 5
Documents v. Goods, Services or Performance
Banks deal with documents and not with goods, services or performance to which
the documents may relate.
Article 7
Issuing Bank Undertaking
Provided that the stipulated documents are presented to the nominated bank or to
the issuing bank and that they constitute a complying presentation, the issuing
bank must honor if the credit is available by:
i. Sight payment, deferred payment or acceptance with the issuing bank;
ii. Sight payment with a nominated bank and that nominated bank does not pay;

iii. Deferred payment with a nominated bank and that nominated bank does not
incur its deferred payment undertaking or, having incurred its deferred
payment undertaking, does not pay at maturity;
iv. Acceptance with a nominated bank and that nominated bank does not accept
a draft drawn on it or, having accepted a draft drawn on it, does not pay at
maturity;
v. Negotiation with a nominated bank and that nominated bank does not
negotiate.
vi. An issuing bank is irrevocably bound to honor as of the time it issues the
credit.
An issuing bank undertakes to reimburse a nominated bank that has honored or
negotiated a complying presentation and forwarded the documents to the issuing
bank. Reimbursement for the amount of a complying presentation under a credit
available by acceptance or deferred payment is due at maturity, whether or not
the nominated bank prepaid or purchased before maturity.
An issuing bank's undertaking to reimburse a nominated bank is independent of
the issuing bank's undertaking to the beneficiary.
Article 8
Confirming Bank Undertaking
Provided that the stipulated documents are presented to the confirming bank or to
any other nominated bank and that they constitute a complying presentation, the
confirming bank must:
i. Honor, if the credit is available by
a. Sight payment, deferred payment or acceptance with the confirming bank;
b. Sight payment with another nominated bank and that nominated bank does
not pay;
c. Deferred payment with another nominated bank and that nominated bank
does not incur its deferred payment undertaking or, having incurred its
deferred payment undertaking, does not pay at maturity;
d. Acceptance with another nominated bank and that nominated bank does
not accept a draft drawn on it or, having accepted a draft drawn on it, does
not pay at maturity;
e. Negotiation with another nominated bank and that nominated bank does
not negotiate.
ii. Negotiate, without recourse, if the credit is available by negotiation with the
confirming bank.
iii. A confirming bank is irrevocably bound to honor or negotiate as of the time it
adds its confirmation to the credit.
A confirming bank undertakes to reimburse another nominated bank that has
honored or negotiated a complying presentation and forwarded the documents to
the confirming bank. Reimbursement for the amount of a complying presentation
under a credit available by acceptance or deferred payment is due at maturity,
whether or not another nominated bank prepaid or purchased before maturity.
A confirming bank's undertaking to reimburse another nominated bank is
independent of the confirming bank‘s undertaking to the beneficiary.
Confirming Bank Undertaking

If a bank is authorized or requested by the issuing bank to confirm a credit but is
not prepared to do so, it must inform the issuing bank without delay and may
advise the credit without confirmation.
UCP 600 - Article 11

Tele-transmitted and Pre-Advised Credits and Amendments
An authenticated tele-transmission of a credit or amendment will be deemed to be
the operative credit or amendment, and any subsequent mail confirmation shall be
disregarded.
If a tele-transmission states "full details to follow" (or words of similar effect), or

states that the mail confirmation is to be the operative credit or amendment, and
then the tele-transmission will not be deemed to be the operative credit or
amendment. The issuing bank must then issue the operative credit or amendment
without delay in terms not inconsistent with the tele-transmission.
A preliminary advice of the issuance of a credit or amendment ("pre-advice") shall

only be sent if the issuing bank is prepared to issue the operative credit or
amendment. An issuing bank that sends a pre advice is irrevocably committed to
issue the operative credit or amendment, without delay, in terms not inconsistent
with the pre-advice.
Article 14
Standard for Examination of Documents
Nominated bank acting on its nomination, a confirming bank, if any, and the
issuing bank must examine a presentation to determine, on the basis of the
documents alone, whether or not the documents appear on their face to constitute
a complying presentation.
Nominated bank acting on its nomination, a confirming bank, if any, and the
issuing bank shall each have a maximum of five banking days following the day of
presentation to determine if a presentation is complying. This period is not
curtailed or otherwise affected by the occurrence on or after the date of
presentation of any expiry date or last day for presentation.
A presentation including one or more original transport documents subject to
articles 19, 20, 21, 22, 23, 24 or 25 must be made by or on behalf of the
beneficiary not later than 21 calendar days after the date of shipment as described
in these rules, but in any event not later than the expiry date of the credit.
Data in a document, when read in context with the credit, the document itself and
international standard banking practice, need not be identical to, but must not
conflict with, data in that document, any other stipulated document or the credit.
In documents other than the commercial invoice, the description of the goods,
services or performance, if stated, may be in general terms not conflicting with
their description in the credit.
f. If a credit requires presentation of a document other than a transport document,
insurance document or commercial invoice, without stipulating by whom the
document is to be issued or its data content, banks will accept the document as
presented if its content appears to fulfill the function of the required document and
otherwise complies with sub-article 14 (d).
A document presented but not required by the credit will be disregarded and may
be returned to the presenter.
If a credit contains a condition without stipulating the document to indicate
compliance with the condition, banks will deem such condition as not stated and
will disregard it.
A document may be dated prior to the issuance date of the credit, but must not be
dated later than its date of presentation.
When the addresses of the beneficiary and the applicant appear in any stipulated
document, they need not be the same as those stated in the credit or in any other
stipulated document, but must be within the same country as the respective
addresses mentioned in the credit.

The shipper or consignor of the goods indicated on any document need not be the
beneficiary of the credit.
A transport document may be issued by any party other than a carrier, owner,
master or charterer provided that the transport document meets the requirements
of articles 19, 20, 21, 22, 23 or 24 of these rules.
Article 15
Complying Presentation
When an issuing bank determines that a presentation is complying, it must honor.
When a confirming bank determines that a presentation is complying, it must
honor or negotiate and forward the documents to the issuing bank.
When a nominated bank determines that a presentation is complying and honors
or negotiates, it must forward the documents to the confirming bank or issuing
bank.
Article 18
Commercial Invoice
A commercial invoice:
i. Must appear to have been issued by the beneficiary (except as provided in
article 38);
ii. Must be made out in the name of the applicant (except as provided in sub-
article 38 (g));
iii. Must be made out in the same currency as the credit; and
iv. Need not be signed.
A nominated bank acting on its nomination, a confirming bank, if any, or the
issuing bank may accept a commercial invoice issued for an amount in excess of
the amount permitted by the credit, and its decision will be binding upon all
parties, provided the bank in question has not honored or negotiated for an
amount in excess of that permitted by the credit.
The description of the goods, services or performance in a commercial invoice
must correspond with that appearing in the credit.
Article 20
Bill of Lading
A bill of lading, however named, must appear to:
i. Indicate the name of the carrier and be signed by:
The carrier or a named agent for or on behalf of the carrier, or
The master or a named agent for or on behalf of the master
Any signature by the carrier, master or agent must be identified as that of the
carrier, master or agent.
Any signature by an agent must indicate whether the agent has signed for or on
behalf of the carrier or for or on behalf of the master.
A bill of lading, however named, must appear to:
ii. Indicate that the goods have been shipped on board a named vessel at the port
of loading stated in the credit by:
Pre-printed wording, or
ii. An on board notation indicating the date on which the goods have been
shipped on board.
The date of issuance of the bill of lading will be deemed to be the date of
shipment unless the bill of lading contains an on board notation indicating the date
of shipment, in which case the date stated in the on board notation will be deemed
to be the date of shipment.
If the bill of lading contains the indication "intended vessel" or similar qualification
in relation to the name of the vessel, an on board notation indicating the date of
shipment and the name of the actual vessel is required.
Indicate shipment from the port of loading to the port of discharge stated in the
credit.
iii. Be the sole original bill of lading or, if issued in more than one original, be the
full set as indicated on the bill of lading.
V. contain terms and conditions of carriage or make reference to another source
containing the terms and conditions of carriage (short form or blank back bill of
lading). Contents of terms and conditions of carriage will not be examined.
vi. Contain no indication that it is subject to a charter party.
For the purpose of this article, transshipment means unloading from one vessel
and reloading to another vessel during the carriage from the port of loading to the
port of discharge stated in the credit.
i. A bill of lading may indicate that the goods will or may be transshipped
provided that the entire carriage is covered by one and the same bill of
lading.
ii. A bill of lading indicating that transshipment will or may take place is
acceptable, even if the credit prohibits transshipment, if the goods have been
shipped in a container, trailer or LASH barge as evidenced by the bill of
lading.
Clauses in a bill of lading stating that the carrier reserves the right to transship will
be disregarded.
Article 23
Air Transport Document
An air transport document, however named, must appear to:
i. Indicate the name of the carrier and be signed by:
The carrier, or
a. A named agent for or on behalf of the carrier
b. Any signature by the carrier or agent must be identified as that of the
carrier or agent.
c. Any signature by an agent must indicate that the agent has signed for or
on behalf of the carrier.
ii. Indicate that the goods have been accepted for carriage.
iii. Indicate the date of issuance. This date will be deemed to be the date of
shipment unless the air transport document contains a specific notation of the
actual date of shipment, in which case the date stated in the notation will be
deemed to be the date of shipment.
Any other information appearing on the air transport document relative to
the flight number and date will not be considered in determining the date of
shipment.
iv. Indicate the airport of departure and the airport of destination stated in the
credit.
Be the original for consignor or shipper, even if the credit stipulates a full
set of originals.
v. Contain terms and conditions of carriage or make reference to another source
containing the terms and conditions of carriage. Contents of terms and
conditions of carriage will not be examined.

For the purpose of this article, transshipment means unloading from one
aircraft and reloading to another aircraft during the carriage from the airport
of departure to the airport of destination stated in the credit.
c.
i. An air transport document may indicate that the goods will or may be
transshipped, provided that the entire carriage is covered by one and the
same air transport document.
ii. An air transport document indicating that transshipment will or may take
place is acceptable, even if the credit prohibits transshipment.
Article 27
Clean Transport Document
A bank will only accept a clean transport document. A clean transport document is
one bearing no clause or notation expressly declaring a defective condition of the
goods or their packaging. The word "clean" need not appear on a transport
document, even if a credit has a requirement for that transport document to be
"clean on board".
Article 31
Partial Drawings or Shipments
Partial drawings or shipments are allowed.
A presentation consisting of more than one set of transport documents evidencing
shipment commencing on the same means of conveyance and for the same
journey, provided they indicate the same destination, will not be regarded as
covering a partial shipment, even if they indicate different dates of shipment or
different ports of loading, places of taking in charge or dispatch.
If the presentation consists of more than one set of transport documents, the
latest date of shipment as evidenced on any of the sets of transport documents
will be regarded as the date of shipment.
A presentation consisting of one or more sets of transport documents evidencing
shipment on more than one means of conveyance within the same mode of
transport will be regarded as covering a partial shipment, even if the means of
conveyance leave on the same day for the same destination.
A presentation consisting of more than one courier receipt, post receipt or
certificate of posting will not be regarded as a partial shipment if the courier
receipts, post receipts or certificates of posting appear to have been stamped or
signed by the same courier or postal service at the same place and date and for
the same destination.
Article 33
Hours of Presentation
A bank has no obligation to accept a presentation outside of its banking hours.
Article 36
Force Majeure
A bank assumes no liability or responsibility for the consequences arising out of
the interruption of its business by Acts of God, riots, civil commotions,
insurrections, wars, acts of terrorism, or by any strikes or lockouts or any other
causes beyond its control.
A bank will not, upon resumption of its business, honor or negotiates under a
credit that expired during such interruption of its business.
Article 38
Transferable Credits
A bank is under no obligation to transfer a credit except to the extent and in the
manner expressly consented to by that bank.
For the purpose of this article:

Transferable credit means a credit that specifically states it is "transferable". A
transferable credit may be made available in whole or in part to another
beneficiary ("second beneficiary") at the request of the beneficiary ("first
beneficiary").
Transferring bank means a nominated bank that transfers the credit or, in a credit
available with any bank, a bank that is specifically authorized by the issuing bank
to transfer and that transfers the credit. An issuing bank may be a transferring
bank.
Transferred credit means a credit that has been made available by the transferring
bank to a second beneficiary.
Unless otherwise agreed at the time of transfer, all charges (such as commissions,
fees, costs or expenses) incurred in respect of a transfer must be paid by the first
beneficiary.
A credit may be transferred in part to more than one second beneficiary provided
partial drawing or shipments are allowed.
A transferred credit cannot be transferred at the request of a second beneficiary to
any subsequent beneficiary. The first beneficiary is not considered to be a
subsequent beneficiary.
Any request for transfer must indicate if and under what conditions amendments
may be advised to the second beneficiary. The transferred credit must clearly
indicate those conditions.
If a credit is transferred to more than one second beneficiary, rejection of an
amendment by one or more second beneficiary does not invalidate the acceptance
by any other second beneficiary, with respect to which the transferred credit will
be amended accordingly. For any second beneficiary that rejected the amendment,
the transferred credit will remain un-amended.
The transferred credit must accurately reflect the terms and conditions of the
credit, including confirmation, if any, with the exception of:
• The amount of the credit,
• Any unit price stated therein,
• The expiry date,
• The period for presentation, or
• The latest shipment date or given period for shipment,
The first beneficiary has the right to substitute its own invoice and draft, if any, for
those of a second beneficiary for an amount not in excess of that stipulated in the
credit, and upon such substitution the first beneficiary can draw under the credit
for the difference, if any, between its invoice and the invoice of a second
beneficiary.
If the first beneficiary is to present its own invoice and draft, if any, but fails to do
so on first demand, or if the invoices presented by the first beneficiary create
discrepancies that did not exist in the presentation made by the second
beneficiary and the first beneficiary fails to correct them on first demand, the
transferring bank has the right to present the documents as received from the
second beneficiary to the issuing bank, without further responsibility to the first
beneficiary.
The first beneficiary may, in its request for transfer, indicate that honor or
negotiation is to be effected to a second beneficiary at the place to which the
credit has been transferred, up to and including the expiry date of the credit. This
is without prejudice to the right of the first beneficiary in accordance with sub-
article 38 (h).Presentation of documents by or on behalf of a second beneficiary
must be made to the transferring bank.
Article 39
Assignment of Proceeds
The fact that a credit is not stated to be transferable shall not affect the right of
the beneficiary to assign any proceeds to which it may be or may become entitled
under the credit, in accordance with the provisions of applicable law. This article
relates only to the assignment of proceeds and not to the assignment of the right
to perform under the credit.
Uniform Rules for Contract Guarantee ICC publication # 325

These rules apply to any guarantee, bond, indemnity, surety or similar undertaking
( guarantee) which states that it is subject to uniform rules for contract guarantee
of the international chamber of commerce (publication # 325)
The important rules are given hereunder:

Tender Guarantee– In this type of guarantee, the guarantor undertakes that in
the event of default by the tendered (Principal) in fulfillment of his obligations
resulting from submission of tender, to make payment to the beneficiary within the
limits of a stated sum of money.
Uniform Rules for Contract Guarantee
Tender guarantees ensure that the party submitting the tender will not withdraw
his tender before adjudication and that he will accept and sign the contract if and
when awarded to him.
The beneficiary that is the party awarding the contract may claim under the
guarantee up to the stated sum in the event of default by the contractor.
The tender guarantees is issued by the contractor’s bank at his request in favor of
contract awarding party (the beneficiary)
It is usually one percent to five percent of tender value
Tender guarantee has a fixed expiry date
Performance Guarantee:
It is an undertaking given by a bank etc., (Guarantor) whereby the guarantor
undertakes to make payment to the beneficiary within the limits of stated sum of
money on non performance of certain contractual obligations of the contract. It is
usually for a fixed percentage of 5 % to 10% of contract value.

Parties in performance Guarantee
Guarantor
Principal (Tenderer)
Beneficiary (the Party inviting tender)
Uniform Rules for Demand Guarantees—(URDG 458)

These rules are contained in ICC brochure # 458. Important rules are given
hereunder:
A demand is required to be made by the beneficiary to the issuing bank in
accordance with terms of guarantee and before its expiry.
Duty of Guarantor
To pay to beneficiary the amount stated on demand
Rules as contained in various articles:

Counter guarantee to be furnished by the principal in favor of guarantor
All instructions should be clear and precise
All guarantees should stipulate the following parties:

Principal (contractor)
Beneficiary (the party to whom payment is to be made by bank etc on demand in
case of default by the principal)
Guarantor (Bank/ Insurance Company etc.)
Specify the underline transaction for which the guarantee issued:

Maximum amount along with the currency in which the amount is payable
• Expiry date / event
• Terms for demanding payment
• All guarantees and counter guarantees shall be irrevocable
• Guarantee shall be effective from the date of issue
• Documents inconsistent with terms shall be refused by the guarantor.
• Examination of documents by guarantor in reasonable time.
• In case of deciding refusal by the guarantor, beneficiary should be notified
immediately
• Guarantor to act in good faith and with reasonable care
• Liability of guarantor to the extent of terms specified in guarantee
• In case of demand received by the guarantor, principal to be informed by
guarantor.
• Termination of guarantee on payment of entire amount/ demand
• Demand shall be made before expiry date, in accordance with the terms
• Demand to be made/ documents to be presented at the place of issue of
guarantee
• Demand for payment should be made in writing and required documents to
be attached there with.
• Guarantees shall be governed by the law applicable at the place of issue of
guarantee

LESSON 37
DESIGNING LEGAL DOCUMENTS
Hire-Purchase Agreement
Hire-Purchase agreement is the basis of facility/ finance provided by the bank to
the hirer. In these cases, the party availing the facility or the borrower is the hirer
and the party providing the facility/ credit is the purchase. In this arrangement, the
bank in the capacity of purchaser purchases the articles from the supplier and the
borrower/ hirer agrees to hire the said articles from the bank and bank agrees to
let out said articles to the hirer. The hirer is required to pay monthly/ or periodic
rent under hire- purchase agreement. The specimen of hire-purchase agreement is
appended below:
Specimen of Hire-Purchase agreement

This agreement made at-------- this the 2nd day of March, 2008 between ABC bank
hereinafter called “The Bank” and M/S XYZ--------- called “The Hirer”
Whereas the hirer has agreed to acquire the Articles as per agreement and also
agreed to hire from the Bank the said articles and the bank at the request and for
the use of the Hirer has agreed to purchase the said Articles from its supplier after
paying the cost, charges etc. and has entered into Hire- Purchase agreement.
Hirer has agreed to pay monthly rent of Rs.----
It is agreed between the parties as mentioned in forthcoming Articles.
The Bank at the request of and after having received an initial deposit of Rs...........
from the hirer(s) shall purchase the said articles from its supplier by making
payment of the price of Rs………and/or entering into an agreement with the
supplier in this regard .and .shall acquire all the ownership, proprietary rights, title
and interest in the 'said articles and every part thereof in its own favor.
The Bank shall procure the documents evidencing its title to ‘the said articles' and
shall get all the formalities completed in this regard.
That the hirer(s), against a delivery order of the Bank, shall obtain/procure the
physical delivery and possession of 'the said articles directly from the supplier
after holding thorough inspection/examination (hereof and having been fully
satisfied that (the said articles are in accordance with the specification approved
by (he hirers)
The Bank shall not be liable for any shortfall, defect or lacuna whatsoever which
may be subsequently discovered by me hirer in (the said articles and the hirer
shall solely be responsible for (the same and shall indemnify the Bank against any
losses or damage that the Bank may incur as a consequence of any shortfall,
defect or lacuna that may be found in the said articles.
The hirer(s) confirm that the said articles shall continue to be the sole and
exclusive property of me Bank and the hirer(s) shall have no right, interest and
claim therein by reason of the original contract arrangement having been entered
into by them with the supplier or due to any reason whatsoever and until 'the said
articles' are specifically conveyed by the Bank unto the hirer(s) and the same
during the subsistence of this agreement shall be held by the hirer merely as
bailee with no authority whatsoever to mortgage, pledge, sub let or otherwise use
the same for any purpose other than for which it was hired by and delivered to the
hirer(s).
ARTICLE - II Security for Intermediate Period

That until the acquisition of "the said articles' in favor of the Bank is completed in
all respect, the Bank's commitment shall amount to an accommodation or a facility
or an investment for the purposes and use of the hirer(s) and the hirers undertake
to indemnify the Bank from all risks and losses due to any default or by reason of
any omissions and commissions leading to any such risks and losses to the Bank
directly or indirectly.
That the hirers in order to assure the better performance of the hirer's obligations
hereunder shall execute and furnish such securities and guarantees in favor of the
Bank as may deem fit within the sole discretion of the Bank from time to time.
ARTICLE-III Hire-Purchase Covenant

1. The hirer has agreed to take and the Bank has agreed to let on hire 'the said
articles' on payment of monthly rent/hire installment of Rs.15,
000/ .......................for a period of...48...;......................months each payable
by (the hirer(s) to (he Bank on and before 10th day of each month without
default or delay commencing from the month of...............................2008.
That the hirer.(s) shall obtain the delivery of 'the said articles' directly from
the supplier or their agent against a delivery order issued by (the Bank and
shall manage for installation, fixation, storage and transportation thereof and
shall hold and enjoy the peaceful and quite possession thereof as a bailee and
shall be entitled to use '(the said articles) or the purpose it was hired without
any let and hindrance whatsoever until (the Bank terminates (the arrange-
ment with prior notice or otherwise re-lakes (the possession/custody thereof.
In the event of regular payment of the hire money in monthly installments for
the full and entire hire period as stipulated herein and compliance of the term
and conditions hereto during (the agreed period by (the hirer the said articles
shall at (the hirer's option become the absolute property of the hirer on
payment of a token amount of Rs. 100/ to the Bank and the Bank shall
transfer the ownership unto the hirer.
3. Notwithstanding the above the hirer shall have the option of purchasing ‘the
said article’ at any time during the subsistence of the agreement by paying
tile; hire installments for the remaining hire period in lump sum together
with other expenses as may have been incurred by the Bank.
That during the subsistence hereof the aforementioned monthly rent/hire

installments shall not be subject to suspension or delay due to any reason
including any force major circumstances nor shall be withheld or delayed due to
'the said articles' being out of operation and/or becoming non-productive and/or
breakage and/or mechanical fault and/or non-receipt of "Insurance claim(s) for
non-installation and/or due to any other cause whatsoever.
The hirer shall, during the subsistence of the arrangement evidenced by these
presents keep the said articles in its sole custody and control in good working
condition at the specific address of die hirer and at no other place unless otherwise
permitted by the Bank if writing and shall not allow the said articles to be used by
any body else nor shall without written consent of the Bank employ the same for
the purposes other than the purpose for which the said articles were originally
acquired by the hirer
The hirer shall be obliged to allow the Bank's Officers aid nominees to inspect,
survey and examine the said articles at any time without prior notice to the hirer
and shall also furnish periodical reports to the Bank in such form as may be
required by the Bank.
The hirer(s) shall not during (he subsistence of these presents and until final
conveyance of the said articles by the Bank to me hirer, mortgage, transfer,
hypothecate, pledge, gift, lease or sublet the said articles or part thereof to any
one nor shall the hirer create any charge, encumbrances or burdens in any manner
against the said articles or part thereof.
.The hirer shall keep the said articles in good repairable condition and working
order and shall take all appropriate measures to save the same from any sort of
defect, loss, injury and damage and depreciation" to the said article and
accessories thereto. And such defect, loss, damage and injury and whenever so
occurred and caused thereto during the currency of the arrangement shall be
forthwith removed by the hirer at his own cost and risk
The hirer shall always keep (he said articles duly insured in the name of the Bank
with such Insurance Company (ies) as may be approved by the Bank against loss
due to fire/storm, theft, accident, natural calamities and other risks and shall pay
the premium there against prior to the expiry of the existing insurance and/or
before the taking of the delivery of the said articles.
9. In case the hirer fails to purchase such Insurance Policy the Bank shall be
entitled but shall not be bound, to get the said articles duly insured at the
cost of the hirer.
The hirer shall pay all the rates, taxes, tolls, license fee, charges, fine, cuss and
other imposition which may be payable to any Government and Semi-Government
Agency, authority, body and/or private person whosoever.
ARTICLE-IV—IN THE EVENT OF DEFAULT

Any of the following shall be considered to be an event of default. If the hirer:-
• Commits default in payment of the monthly rent/hire installment within the
stipulated time or
• Fails to observe all or any of the covenants hereof and the terms hereafter
prescribed by the bank or
• Neglects to maintain and/or fails to keep the said articles during the
subsistence of the arrangements to the satisfaction of the bank or admits
and commits such act which may jeopardize the interest of the bank in any
manner whatsoever or
• Fails to furnish me securities/guarantees to the satisfaction of the bank or
• Commits any act of insolvency and/or happens to be adjudicated insolvent
or enters into an arrangement with its/his creditors or
• Makes or has made nay statement or declaration, information and
representation which is or appears to be false and incorrect or
• Allows any of his moveable and immoveable properties to be attached in
execution of a decree.
• Allows any of his moveable and immoveable properties to be attached in
execution of a decree.
2. In any of the above events the Bank shall be entitled to terminate miss
agreement and may at its absolute discretion proceed to re-take the
possession of the 'said articles' and also to recover the defaulted hire
installments/rents from (the hirer together with such expenses, costs and
damages as may have accrued, incurred and sustained by the Bank and shall
also impose and recover such additional penalties as may deem fit and proper
to the Bank.
3. In the event of the termination of (he hire agreement before the expiry of the
hire period the hirer shall immediately handover the physical possession of
the said articles with all its accessories to the Bank's nominees in good
working condition and shall not claim any compensation or refund of any sum
or sums paid by him, nor shall demand any expenses made by the hirer in
maintaining of the said articles.
And (he hirer until actual delivery of the said articles to the Bank shall also be
responsible to pay me compensation for holding over to (the Bank as may be
determined by the Bank within its absolute discretion which demand shall deem to
be conclusive and binding on the hirer(s) without reference to any one and/or
scrutiny and objection whatsoever.
ARTICLE-V Termination of the Agreement:

The Bank, on occurrence of any event of default may terminate the agreement and
proceed forthwith for taking the delivery of the said article and recovery of arrears
of the hire money, compensation, penalties, expenses, losses and damages etc.
without prejudice to other recourses available to the Bank against the hirer and
their guarantors.
ARTICLE-VI INDEMNITY CLAUSE

The hirer shall always keep the Rank duly indemnified from all risks to which (the
Bank may be exposed due to (the reason of purchasing tile said articles at the
instance of the hirer and by reason of entering into hire purchase arrangements
with the hirer or because of any matters incidental thereto.
The hirer(s) further undertake to pay all hire money as per stipulation and together
with all sums which the Bank may demand on account of losses, charges, ex-
penses, compensation, damages, penalties, accrued, incurred and/or sustained or
apprehend to be accrued or sustained by the Bank due to the said arrangements
and the things allied thereto within seven days from (the receipt of a demand from
the Bank which demand snail be conclusive and binding on the hirers without
reference and recourse to anyone and/or objection and scrutiny whatsoever.
In witnesses whereof, the parties hereto have respectively set and subscribed their
hands and seal this day, month and year first above written.
SIGNATURES WITNESSES;
-- On behalf of the Bank -- For and on behalf of the
BANK
-- Of the hirer. -- For and on behalf of
HIRER
IRREVOCABLE GUARANTEE/SURETY UNDER HIRE-PURCHASE AGREEMENT:

In consideration of your having entered into the hire-purchase
agreement/arrangement with Mr./M/s...............................................
( hereinafter referred to hirers) at our request, I/we
(1) son of resident of
(2) son of resident of
Do hereby undertake as follows:—

1. I/we jointly and severally undertake to stand surety/sureties for and on behalf
of the hirer and guarantee the true and specific performance of all the
covenants envisaged in the said hire-purchase agreement
dated.................................with your Bank within such lime and manner as may
be stipulated in the agreement and as may be prescribed by your
2. In the event of default and delay in the discharge of the obligations of (the
hirers, we shall pay all the sums to you within the period of three days from the
demand made by you from us without reference to any one.
3. Each demand made by the Bank here under shall be deemed to be conclusive
and binding on me/us and my/our legal heirs.

4. The total liabilities here under shall be limited to the extent of
Rs..................................Notwithstanding any indulgence arrangement entered
into between the Bank and the hirers
5. The obligations arising herein against me/us shall be continuing and subsisting
until the same is/s-fe specifically discharged by the Bank and it shall always be
deemed (o be in addition of the other securities, if any. provided by the hirer.
2. IN WITNESSES hereof the sureties named above have signed and subscribed
their respective hand on this...................day
3. of................2008...at
SIGNATURE
1. Surety____________
2. Surety____________ WITNESSES:
1----------------------------
2-----------------------------
Specimen of Deed of Mortgage

This deed of Mortgage is made this 22nd day of April, 2008 between Mr. Y
Resident of Gulberg, Lahore hereinafter referred to as the Mortgagor of the ONE
PART and M/S XYZ BANK LAHORE, a limited banking company having its registered
office at I.I Ghundrigarh Road, Karachi ( hereinafter referred to as Mortgagee) of
the OTHER PART.
The ‘Mortgagor’ and Mortgagee shall where the context so requires or permits, be
deemed to include their respective heirs, legal representatives, assignees and
successors-in-interest or persons deriving title from or under them.
Whereas mortgagor is the lawful owner of the property described at schedule-11
and whereas mortgagor has availed finance as mentioned in Schedule-1 from the
mortgagee/ bank.
Now therefore, this deed witnesses as follows:
That the mortgagor declares and confirms that he is seized and possessed of and
otherwise well sufficiently entitled to the Mortgaged Property and same is free
from any charges or encumbrances.
In consideration of the bank having sanctioned finance amounting to Rs.
1,500,000 the mortgagor hereby mortgages the property described at schedule-11
to hold the same until the payment/ repayment of entire amount due under the
agreement up to maximum of Rs. 1,500,000/- with cost, charges, marks-up,
expenses and liquidated damages payable to the bank or incurred by the bank.
Schedule –I
Amount of finance Rs 1,500,000/-
Amount of Mark up Rs 150,000/-
Schedule –II
All the piece and parcel of plot of land Measuring 20 Marlas bearing # 241-Z Johar
Town, Lahore, together with building, Walls, structures, Fixtures, Attachments,
Walls and bounded as under:
On or towards north by: Street-named Kashmir Road
On or towards south by : House No 140
On or towards east by: House No 240
On or towards west by: House No 242
Deed of Mortgage
In witness whereof the Mortgagor has set and subscribed his hands on the day,
month and year, first herein above written.
Signed and delivered Signature
By the Mortgagor in the Mortgagor
presence of following
Witnesses:
Witness 1_____________
Witness 2_____________
Letter of Hypothecation
Specimen of Letter of Hypothecation:
In consideration of The XYZ Bank Ltd. ---- . (hereinafter called the “Bank” which
expression shall include its Successors and Assigns) granting/agreeing to
grant/continue granting loans/advances/credit banking facilities (hereinafter called
the “Facilities”) amounting to Rs.--- to me/ us to such extent and for so long as the
Bank may think fit, I/We the undersigned
__-------_____________P.O.Box No --------
(hereinafter called the “Borrower” which expression shall include me/us and
my/our legal heirs, Successors and Assigns ) hereby hypothecate, in favour of the
Bank by way of first charge , as security, for full repayment of the facilities to the
Bank together with all charges, all things and stocks as described in general terms
in the schedule hereto, (hereinafter called the “Goods”), which expression shall
include all products and stocks and moveable property, of any kind and whether
raw or in process of manufacture and all things or articles manufactured there
from which now or thereafter from time to time during the process shall be brought
into store(s) or be in or about the Borrower’s godown(s) or premises at different
places including in course of transit or delivery .
The Borrower hereby undertakes and covenants the following with the Bank:
a. The Borrower shall not at any time so long as there shall be any amount due
by the Borrower to the Bank remove or cause or permit to the removed from
the premises and /or godowns where the goods are stored nor divert or
otherwise dispose of or encumber, charge or pledge or mortgage the Goods
or any part thereof to any other party nor do any act whereby the Bank’s
security shall in any way be prejudiced or affected.
b. The Borrower shall deposit with the Bank all sale proceeds of the Goods and
insurance proceeds and recoveries thereof, which shall always constitute an
integral part of the security.
c. In the event of committing any default of any of the provisions of this
Hypothecation Deed, the Borrower shall pledge the Goods to the Bank by way
of a floating charge and all goods and moveable property of any kind and
nature belonging to the Borrower which now or thereafter or from time to
time during the continuance of this security be brought in, stored in the
premises or go downs as mentioned in the schedule hereto and/or elsewhere
on in the course of transit as a security for the Borrower’s indebtedness to the
Bank.
The expression Borrower’s “indebtedness” to the Bank shall include the principal
amounts from time to time due on Borrower’s facilities together with all interest
and all other charges which the Bank may pay or incur in connection with the
Goods, or the sale or disposal thereof and all other moneys whether hereof or by

law payable by the Borrower to the Bank in connection with or relation to the
Goods.
3. The Borrower shall make and provide to the Bank statement periodical reports
and returns in respect of the cost and market value of the goods and a detailed
description thereof and produce such evidence in support thereof as the Bank
may from time to time require. That the amount of Borrower’s total
indebtedness to the Bank for the time being together with mark up /interest
and other charges shall all time during the period of this hypothecation have a
margin not less than __________ % of the market value of the hypothecated
goods.
Such market value shall be decided from time to time by the bank which decision
shall be final and binding on the Borrower. The difference between the Borrower’s
indebtedness to the Bank and the market value of the goods shall be maintained
either by providing further security as may be approved by the Bank or by cash
payment. The Bank at its sole discretion may employ the services of any
independent Survey the value of hypothecated goods and the cost of such
evaluation shall be borne by the Borrower.
The Borrower shall insure and keep insured the hypothecated goods for their full
market value against fire, pilferage, theft, damage, loss and all other risks with an
Insurance Company approved by the Bank with the Banks as First Beneficiary, in
the name and the sole benefit of the Bank, and the Borrower will assign and
deliver to the Bank, all the insurance policies and deliver the premium receipts
paid for such insurance.
The Bank may at any time at its sole discretion, affect such insurance at the sole
expense of the Borrower, if the Borrower fails to insure the Goods as
aforementioned within 12 (twelve) hours after notice of demand served on the
Borrower. All sums received under insurance (s) as aforesaid, shall be applied
towards the liquidation of the Borrower’s indebtedness to the Bank.
The goods hypothecated to the Bank shall be kept at the sole risk and
responsibility of the Borrower wherever and in whatever godowns, premises, sheds
or places they maybe stored. The Borrower shall pay all rents, rates, taxes and
other outgoings, of the godowns and premises wherein the goods are stored and
shall keep the goods and marketable condition.
The Bank or their representatives or nominees shall be entitled at any time without
notice to enter any place where the goods are located or stored for inspection and
examination.
Event of Default
Without prejudice to the generality of the foregoing, the Bank shall have the
absolute right at anytime without notice to take charge and possession of the
Goods upon occurrence of any of the following events: -
a. If the borrower fails to maintain the margin (s) as aforementioned.
b. If the borrower fails to pay the balance (s) due to the bank on demand.
c. If the borrower commits breach of any of the terms and conditions herein
contained.
d. If the borrower suffers distress or execution to be levied or enforced upon or
against all or any of the borrower’s property.
e. If the borrower fails to effect any payment of the indebtedness on its/their
due dates.
The Bank upon taking charge and possession of the goods in terms of clause 7
shall have exclusive right and discretion to sell the goods and to appropriate the
sale proceeds towards satisfaction of the Borrower’s indebtedness to the Bank.
The Bank shall have the right to claim from the Borrower any shortfall if the sale
proceeds do not fully satisfy the Borrower’s indebtedness to the Bank.
The Bank records and statements made by the Bank showing the indebtedness of
the Borrower shall be and continue to be final and conclusive evidence as to the
correctness of such indebtedness.
The Borrower hereby declares that all the goods are free from any prior lien,
charge or encumbrance, whether legal or equitable and that the Borrower holds
lawful authority to hypothecate the Goods.
The Borrower agrees and undertakes to repay to the Bank the entire indebtedness
on receipt of first demand shall be a conclusive and final evidence that the
repayment of the indebtedness of the Borrower to the bank is due. The Borrower
hereby agrees and undertakes to carry out and his/their obligations hereof. This
hypothecation shall operate as a continuing security for all the indebtedness or
liabilities owing by the Borrower to the Bank notwithstanding any partial or
intermediate repayment(s) or adjustment(s) made at any time, without prejudice
to the other rights and remedies open to the Bank under the Law. Any violation of
the terms and conditions hereof shall render the credit facilities liable to be
cancelled.
Every demand or notice served or communicated by the Bank to the Borrower
shall be considered to have been duly served and communicated to the Borrowers
if sent to the recorded address of the Borrower either by hand delivery, ordinary or
registered mail, telex and/or any other usual and practiced means of transmission /
delivery. Every demand or notice sent in this manner by the Bank to the Borrower
or any of the persons constituting the Borrower shall be deemed to have been sent
to each and all of such persons.
Should this Deed be signed by more than one person, all signatories hereto shall
be jointly and severally liable to Bank for all the liabilities herewith.
Should the Borrower be a company or a firm, the liability of such company or firm
towards the Bank shall remain effective despite any change in the constitution,
memorandum and/or articles of association of the said company or firm.
Without prejudice to the Bank’s absolute right to submit to any other law or
jurisdiction, this document shall be governed construed and interpreted in
accordance with the law of the country.
Signatures of Witnesses Signature of
the borrower.
Witness—1
Witness---2

LESSON 38
PRUDENTIAL REGULATIONS OF SBP
SBP Prudential Regulations

In order to promote good governance in the banking system , the State Bank of
Pakistan announced a set of prudential regulations on August 29,1991.These
regulations were made effective from 1st of July, 1992 Non-Bank Financial
Institution (NBFIs) have also been placed under regulatory regime of SBP.
Considerations & Factors for introducing Prudential Regulations:

The said regulations were introduced keeping in view the following factors;
• Creation of healthy lending as well as borrowing culture.
• Protection of depositors as well as share holders interests.
• Improvement in banking management & governance standards, ensuring a
strong, viable and disciplined growth of banking sector.
• Designing minimum criteria for credit risk management.
• Prevention of misuse of banking facilities and channels. (e.g. Anti money
laundering regulations).
Regulations for Corporate/Commercial Banking

Main contents are outlined hereunder:
Part A—Definitions'
Part B—Regulations.
• Risk Management. Rl To R13
Corporate Governance Regulations
Gl to G4
KYC & Anti Money Laundering Regulations.
Ml &M2
Operations 0-1 To 0-5
Annexure.
B) Regulations For Small & Medium Enterprises Financing

Regulations R l To R 11
Annexure
Prudential Regulation for Consumer Financing Regulations for consumer
financing.R1 to 6
Regulations for Credit cards. O1 to O7
& R.7& R8
Regulations for Auto Loan. R-9 to R14
Regulation for Housing Finance.

R15 to R23
Regulations for Personal Loan Including Loans for Purchase of Consumer durables.
R24 to R28
Annexure-1- Margin Requirements under Regulation #6
Prudential Regulations for Consumer Financing

Consumer financing means any financing allowed to individuals for their personal,
family or house hold needs including the following:
• Credit cards
• Auto loans
• Housing finance
• Personal loans
Definitions as contained in these regulations are given hereunder:

Bank means a banking company as defined in the Banking Companies Ordinance,
1962.
Borrower means an individual to whom a bank / DFI has allowed any consumer
financing during the course of business.
Consumer Financing means any financing allowed to individuals for meeting
their personal, family or household needs.
Credit Cards mean cards which allow a customer to make payments on credit.
Supplementary credit cards shall be considered part of the principal borrower for
the purposes of these regulations.
Corporate Cards will not fall under this category and shall be regulated by
Prudential Regulations for Corporate / Commercial Banking or Prudential
Regulations for SMEs Financing as the case may be. The regulations for credit
cards shall also be applicable on charge cards, debit cards, stored value cards and
BTF (Balance Transfer Facility).
Auto Loans mean the loans to purchase the vehicle for personal use.
Housing Finance means loan provided to individuals for the purchase of
residential house / apartment / land. The loans availed for the purpose of making
improvements in house / apartment / land shall also fall under this category.
Personal Loans mean the loans to individuals for the payment of goods, services
and expenses and include Running Finance / Revolving Credit to individuals.
DFI means Development Financial Institution and includes the Pakistan Industrial
Credit and Investment Corporation (PICIC), the Saudi Pak Industrial and
Agricultural Investment Company Limited, the Pak Kuwait Investment Company
Limited, the Pak Libya Holding Company Limited, and any other financial
institution notified under Section 3-A of the Banking Companies Ordinance, 1962.
Documents include vouchers, cheques, bills, pay-orders, and promissory notes,
securities for leases / advances and claims by or against the bank / DFI or other
papers supporting entries in the books of a bank / DFI.
Equity of the Bank / DFI means Tier-I Capital or Core Capital and includes paid-
up capital, general reserves, balance in share premium account, and reserve for
issue of bonus shares and retained earnings / accumulated losses as disclosed in
latest annual audited financial statements. In case of branches of foreign banks
operating in Pakistan, equity will mean capital maintained, free of losses and
provisions, under Section 13 of the Banking Companies Ordinance, 1962.
Financial Institutions mean banks, Development Financial Institutions (DFIs) and

Non-Banking Finance Companies (NBFCs).
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.

Liquid Assets are the assets which are readily convertible into cash without
recourse to a court of law and mean encashment / realizable value of government
securities, bank deposits, certificates of deposit, shares of listed companies which
are actively traded on the stock exchange, NIT Units, certificates of mutual funds,
Certificates of Investment (COIs)
issued by DFIs / NBFCs rated at least ‘A’ by a credit rating agency on the approved
panel of State Bank of Pakistan, listed TFCs rated at least ‘A’ by a credit rating
agency on the approved panel of State Bank of Pakistan and certificates of asset
management companies for which there is a book maker quoting daily offer and
bid rates and there is active secondary market trading.
These assets with appropriate margins should be in possession of the banks / DFIs
with perfected lien.
Guarantees issued by domestic banks / DFIs when received as collateral by banks /
DFIs will be treated at par with liquid assets whereas, for guarantees issued by
foreign banks, the issuing banks’ rating, assigned either by Standard & Poors,
Moody’s should be ‘A’ and above or equivalent.
The inter-branch indemnity / guarantee issued by the bank’s overseas branch in
favor of its sister branch in Pakistan, would also be treated at par with liquid
assets, provided the bank is rated and above or equivalent either by Standard &
Poors, Moody’s .
NBFC means Non-Banking Finance Company and includes a Modaraba, Leasing

Company, Housing Finance Company, Investment Bank, Discount House, Asset
Management Company and a Venture Capital Company.
Secured means exposure backed by tangible security with appropriate margins

(in cases where margin has been prescribed by State Bank of Pakistan, appropriate
margin shall at least be equal to the prescribed margin). Exposure without any
tangible security is defined as clean.
Tangible Security means liquid assets (as defined in these Prudential

Regulations), mortgage of land and building, hypothecation or charge on vehicle,
but does not include hypothecation of household goods, etc.
Minimum requirements for consumer financing:

Before embarking upon or undertaking consumer financing, the banks / DFIs shall
implement / follow the guidelines given below. The banks / DFIs already involved in
the consumer financing will ensure compliance with these guidelines within six
months of the date of issuance of Prudential Regulations for Consumer Financing
.
1. Banks / DFIs shall establish separate Risk Management capacity for the purpose
of consumer financing, which will be suitably staffed by personnel having
sufficient expertise and experience in the field of consumer finance / business.
2. The banks / DFIs shall prepare comprehensive consumer credit policy duly
approved by their Board of Directors (in case of foreign banks, by Country Head
and Executive / Management Committee), which shall interalia cover loan
administration, including documentation, disbursement and appropriate
monitoring mechanism. The policy shall explicitly specify the functions,
responsibilities and various staff positions’ powers / authority relating to
approval / sanction of consumer financing facility.
3. For every type of consumer finance activity, the bank / DFI shall develop a
specific program. The program shall include the objective / quantitative
parameters for the eligibility of the borrower and determining the maximum
permissible limit per borrower.
4. Banks / DFIs shall put in place an efficient computer based MIS for the purpose
of consumer finance, which should be able to effectively cater to the needs of
consumer financing portfolio and should be flexible enough to generate
necessary information reports used by the management for effective
monitoring of the bank’s / DFI’s exposure in the area.
5. The banks / DFIs shall develop comprehensive recovery procedures for the
delinquent consumer loans. The recovery procedures may vary from product to
product. However, distinct and objective triggers should be prescribed for
taking pre-planned enforcement / recovery measures.
6. The banks / DFIs desirous of undertaking consumer finance will become a
member of at least one Consumer Credit Information Bureau. Moreover, the
banks / DFIs may share information / data among themselves or subscribe to
other databases as they deem fit and appropriate.
7. The financial institutions starting consumer financing are encouraged to impart
sufficient training on an ongoing basis to their staff to raise their capability
regarding various aspects of consumer finance
8. The banks / DFIs shall prepare standardized set of borrowing and recourse
documents (duly cleared by their legal counsels) for each type of consumer
financing.
Operations:
1. Consumer financing, like other credit facilities, must be subject to the bank’s /
DFI’s risk management process setup for this particular business. The process
may include, identifying source of repayment and assessing customers’ ability
to repay, his / her past dealings with the bank / DFI, the net worth and
information obtained from a Consumer Credit Information Bureau
2. At the time of granting facility under various modes of consumer financing,
banks / DFIs shall obtain a written declaration from the borrower divulging
details of various facilities already obtained from other financial institutions.
The banks / DFIs should carefully study the details given in the statement and
allow fresh finance / limit only after ensuring that the total exposure in relation
to the repayment capacity of the customer does not exceed the reasonable
limits as laid down in the approved policies of the banks / DFIs.
3. The declaration will also help banks / DFIs to avoid exposure against a person
having multiple facilities from different financial institutions on the strength of
an individual source of repayment.
4. Before allowing any facility, the banks / DFIs shall preferably obtain credit
report from the Consumer Credit Information Bureau of which they are a
member. The report will be given due weight age while making credit decision.
5. Internal audit and control function of the bank / DFI, apart from other things,
should be designed and strengthened so that it can efficiently undertake an
objective review of the consumer finance portfolio from time to time to assess
various risks and possible weaknesses.
6. The internal audit should also assess the adequacy of the internal controls and
ensure that the required policies and standards are developed and practiced.
Internal audit should also comment on the steps taken by the management to
rectify the weaknesses pointed out by them in their previous reports for
reducing the level of risk.
7. The banks / DFIs shall ensure that their accounting and computer systems are
well equipped to avoid charging of mark-up on mark-up. For this purpose, it
should be ensured that the mark-up charged on the outstanding amount is kept
separate from the principal.
8. The banks / DFIs shall ensure that any repayment made by the borrower is
accounted for before applying mark-up on the outstanding amount.
Prudential Regulations for Consumer Financing

REGULATION R-1
Facilities to Related Persons and Utilization of Clean Loans for Initial
Public Offerings (IPOs)
Facilities to Related Persons:
The consumer finance facilities extended by banks / DFIs to their directors, major
shareholders, employees and family members of these persons shall be at arms
length basis and on normal terms and conditions applicable for other customers of
the banks / DFIs. The banks / DFIs shall ensure that the appraisal standards are not
compromised in such cases and market rates are used for these persons. The
facilities extended to the employees of the banks / DFIs as a part of their
compensation package under Employees Service Rules shall not fall in this
category.
Utilization of Clean Loans for Initial Public Offerings IPOs:

While the State Bank’s intent is not to create any undue hindrance in the smooth
flow of consumer financing to the borrowers, the banks /DFIs are, however,
advised to institute necessary checks, so that clean loans are not used for
subscription in Initial Public Offerings (IPOs). In this connection, State Bank of
Pakistan suggests the following two minimum requirements:
At the time of sanction of a clean consumer loan / credit line, the banks / DFIs
should obtain an undertaking from the client, that the drawings from the loan
account will not be used for subscription in an IPO.
The banks / DFIs should introduce an internal system, whereby, no cheques, drafts
and / or payment instructions will be made for an IPO subscription account from a
clean personal loan / credit line account.
REGULATION R-2
LIMIT ON EXPOSURE AGAINST
TOTAL CONSUMER FINANCING
Banks / DFIs shall ensure that the aggregate exposure under all consumer
financing facilities at the end of first year and second year of the start of their
consumer financing does not exceed 2 times and 4 times of their equity
respectively. For subsequent years, following limits are placed on the total
consumer financing facilities:
REGULATION R-3
TOTAL FINANCING FACILITIES TO BE COMMENSURATE WITH THE INCOME
While extending financing facilities to their customers, the banks / DFIs should
ensure that the total installment of the loans extended by the financial institutions
is commensurate with monthly income and repayment capacity of the borrower.
This measure would be in addition to banks’ / DFIs’ usual evaluations of each
proposal concerning credit worthiness of the borrowers, to ensure that the banks’ /
DFIs’ portfolio under consumer finance fulfills the prudential norms and
instructions issued by the State Bank of Pakistan and does not impair the
soundness and safety of the bank / DFI itself.
REGULATION R-4
GENERAL RESERVE AGAINST CONSUMER FINANCE
The banks / DFIs shall maintain a general reserve at least equivalent to 1.5% of the
consumer portfolio which is fully secured and 5% of the consumer portfolio which
is unsecured, to protect them from the risks associated with the economic cyclical
nature of this business.
The above reserve requirement will, however, be maintained for the performing
portion only of consumer portfolio.
We shall continue with the rest of the regulations for consumer financing in the
coming Lesson.

LESSON 39
PRUDENTIAL REGULATIONS FOR CONSUMER FINANCING

Contents to be covered in this Lesson:
o REGULATION R-5 :
• BAR ON TRANSFER OF FACILITIES FROM ONE CATEGORY TO ANOTHER TO
AVOID CLASSIFICATION
o REGULATION R-6:
• MARGIN REQUIREMENTS
o REGULATIONS FOR CREDIT CARDS
o REGULATION O-1
o REGULATION O-2
o REGULATION O-3
o REGULATION O-4
o REGULATION O-5
o REGULATION R-7
MAXIMUM CARD LIMIT
REGULATION R-8
CLASSIFICATION AND PROVISIONING
We have discussed some aspects/regulation of consumer financing in the previous
Lesson, we shall continue with the rest of regulations/ aspects in this Lesson.
REGULATION R-5
BAR ON TRANSFER OF FACILITIES FROM ONE CATEGORY TO ANOTHER TO
AVOID CLASSIFICATION
The banks / DFIs shall not transfer any loan or facility to be classified, from one
category of consumer finance to another, to avoid classification.
REGULATION R-6
MARGIN REQUIREMENTS
Banks / DFIs are free to determine the margin requirements on consumer facilities
provided by them to their clients taking into account the risk profile of the
borrower(s) in order to secure their interests. However, this relaxation shall not
apply in case of items, import of which is banned by the Government.
Banks / DFIs will continue to observe margin restrictions on shares / TFCs as per
existing instructions under Prudential Regulations for Corporate / Commercial
Banking (R-6). Further, the restrictions prescribed under paragraph 1.A of
Regulation R-6 of the Prudential Regulations for Corporate / Commercial Banking
will also be applicable in case of Consumer Financing.
State Bank of Pakistan shall continue to exercise its powers for fixation /
reinstatement of margin requirements on consumer facilities being provided by
banks/DFIs for various purposes, as and when required.
REGULATIONS FOR CREDIT CARDS

Prudential Regulations for Consumer Financing – Credit Cards- O-1 to O-
5
REGULATION O-1
The banks / DFIs should take reasonable steps to satisfy themselves that card
holders have received the cards, whether personally or by mail. The banks / DFIs

should advise the card holders of the need to take reasonable steps to keep the
card safe and the PIN secret so that frauds are avoided.
REGULATION O-2
Banks / DFIs shall provide to the credit card holders, the statement of account at
monthly intervals, unless there has been no transaction or no outstanding balance
on the account since last statement.
REGULATION O-3
Banks / DFIs shall be liable for all transactions not authorized by the credit card
holders after they have been properly served with a notice that the card has been
lost / stolen. However, the bank’s / DFI’s liability shall be limited to those amounts
wrongly charged to the credit card holder’s account. In order to mitigate the risks
in this respect, the banks / DFIs are encouraged to take insurance cover against
wrongly charged amounts, frauds, etc.
The bank/DFI shall, however, not charge the borrowers’ account with any amount
under the head of “insurance premium” (by whatsoever name called) without
obtaining consent of each existing & prospective customer in writing. In addition to
obtaining consent in writing, the banks/DFIs may also use the following modes for
obtaining prior consent of their customers provided proper record is maintained by
banks/DFIs:-
i. Customer’s consent on recorded lines via out bound/in bound call center
(after due verification)
ii. ATM screens – screen pop up before conducting transaction and after
inputting pin code
iii. Signed consent acquired with credit card application or as separate form
iv. IVR (Integrated Voice Recording)
REGULATION O-4
In case the cardholders make partial payment, the banks / DFIs should take into
account the partial payment before charging service fee / mark-up amount on the
outstanding / billed amount so that the possibility of charging excess amount of
mark-up could be avoided.
REGULATION O-5
Due date for payment must be specifically mentioned on the accounts statement.
If fine / penalty is agreed to be charged in case the payment is not made by the
due date, it should be clearly mentioned in the agreement.
Prudential Regulations for Consumer Financing– Credit Card- R-7 & R-8
REGULATION R-7
MAXIMUM CARD LIMIT
Maximum unsecured limit under credit card to a borrower (supplementary cards
shall be considered part of the principal borrower) shall generally not exceed Rs
500,000/.
Banks / DFIs may, however, assign a clean limit beyond Rs 500,000 but not in
excess of Rs 2 million to their prime customers who have extraordinary strong
repayment capacity, moderate debt burden and a clean track record.
But the aggregate outstanding in this respect should not exceed 10% of the total
outstanding credit card portfolio at any point in time. However, while availing
benefit of this provision, banks / DFIs would place on record well defined criteria

for terms "Prime Customers" and "Moderate Debt Burden" approved by their Board
of Directors / Chief Executive.
Banks / DFIs may also allow financing under the credit card scheme in excess of Rs
500,000/- (up to Rs 2 million) to other customers as well, provided the excess
amount is appropriately secured according to the definition given in Part A of these
regulations.
The loan secured against liquid securities shall, however, be exempted from the
above limit.
The loans against the securities issued by Central Directorate of National Savings
(CDNS) shall be subject to such limits as are prescribed by CDNS / Federal
Government / State Bank of Pakistan from time to time.
For Charge Cards, pre-set spending limits generated by the standardized systems,
as is the global practice, shall be allowed.
REGULATION R-8
CLASSIFICATION AND PROVISIONING
The credit card advances shall be classified and provided for in the following
manner:
CLASSIFICATIO DETERMINANT TREATMENT OF PROVISION TO

N INCOME BE MADE*
(1) (2) (3) (4)
Loss. Where mark-up / Unrealized mark- Provision of 100%
interest or up / interest to be of the difference
Principal is Put in Suspense Account Resulting from the outstanding

overdue by 180 and not to be credited to balance of principal less the
days or more from Income Account except amount of liquid securities with
the due date. when realized in cash. the bank / DFI.
It is clarified that the lenders are allowed to follow more conservative policies.
Further, provisioning may be created and maintained by the bank / DFI on a
portfolio basis provided that the provision maintained by the bank / DFI shall not
be less than the level required under this Regulation.
We shall continue with other categories of consumer financing in the

coming Lesson.

LESSON 40
We shall continue with the remaining regulations/ aspects for consumer

financing:
Regulations for auto loans
• REGULATION R-9
• REGULATION R-10
• REGULATION R-11
• REGULATION R-12
• REGULATION R-13
• REGULATION R-14
• REGULATION O-6
• REGULATION O-7
• REGULATION O-8
• REGULATION O-9
• REGULATION R-14- Classifications
REGULATIONS FOR HOUSING FINANCE
• REGULATION R-15
REGULATIONS FOR AUTO LOANS

R-9 to R- 13, O-6 to O-9 & R-14
REGULATION R-9
The vehicles to be utilized for commercial purposes shall not be covered
under the Prudential Regulations for Consumer Financing. Any such financing shall
ensure compliance with Prudential Regulations for Corporate / Commercial Banking
or Prudential Regulations for SMEs Financing. These regulations shall only apply for
financing vehicles for personal use including light commercial vehicles also used
for personal purposes.
REGULATION R-10
The maximum tenure of the auto loan finance shall not exceed seven years.
REGULATION R-11
While allowing auto loans, the banks / DFIs shall ensure that the minimum down
payment does not fall below 10% of the value of vehicle. Further, banks / DFIs shall
extend auto loans only for the ex-factory tax paid price fixed by the car
manufacturers. In other words, banks / DFIs cannot finance the premium charged
by the dealers and / or investors over and above the ex-factory tax paid price of
cars, fixed by the manufacturers.
REGULATION R-12
In addition to any other security arrangement on the discretion of the banks/ DFIs,
the vehicles financed by the banks / DFIs shall be properly secured by way of
hypothecation. Payments against the sale orders issued by the manufacturers are
allowed till the time of delivery of the vehicle subject to the condition that
payment will directly be made to the manufacturer / authorized dealer by the
bank/ DFI and upon delivery, the vehicle will immediately be hypothecated to the
bank/ DFI.
REGULATION R-13
The banks / DFIs shall ensure that the vehicle remains properly insured at all
times during the tenure of the loan.
REGULATION O-6
The clause of repossession in case of default should be clearly stated in the
loan agreement mentioning specific default period after which the repossession
can be initiated. The repossession expenses charged to the borrower shall not be
more than actual incurred by the bank / DFI.
However, the maximum amount of repossession charges shall be listed in the
schedule of charges provided to customers. The banks / DFIs shall develop an
appropriate procedure for repossession of the vehicles and shall ensure that the
procedure is strictly in accordance with law.
REGULATION O-7
A detailed repayment schedule should be provided to the borrower at the outset.
Where alterations become imminent because of late payments or prepayments
and the installment amount or period changes significantly, the revised schedule
should be provided to the borrower at the earliest convenience of the bank / DFI
but not later than 15 days of the change.
Further, even in case of insignificant changes, upon the request of the customer,
the bank / DFI shall provide him revised repayment schedule free of cost.
REGULATION O-8
The banks / DFIs desirous of financing the purchase of used cars shall
prepare uniform guidelines for determining the value of the used vehicles.
However, in no case the bank / DFI shall finance the cars older than five years.
REGULATION O-9
The banks / DFIs should ensure that a good number of authorized auto dealers are
placed at their panel to eliminate the chances of collusion or other unethical
practices.
REGULATION R-14- Classifications

The auto loans shall be classified and provided for in the following manner:

REGULATIONS FOR HOUSING FINANCE– R-15 to R-21, & R-22

Classifications
REGULATION R-15
Banks / DFIs shall determine the housing finance limit, both in urban and rural
areas, in accordance with their internal credit policy, credit worthiness and loan
repayment capacity of the borrowers. At the same time, while determining the
credit worthiness and repayment capacity of the prospective borrower, banks /
DFIs shall ensure that the total monthly amortization payments of consumer loans,
inclusive of housing loan, should not exceed 50% of the net disposable income of
the prospective borrower.
Banks / DFIs will not allow housing finance purely for the purchase of land / plots;
rather, such financing would be extended for the purchase of land / plot and
construction on it.
Accordingly, the sanctioned loan limit, assessed on the basis of repayment
capacity of the borrower, value of land / plot and cost of construction on it etc.,
should be disbursed in tranches, i.e. up to a maximum of 50% of the loan limit can
be disbursed for the purchase of land/ plot, and the remaining amount be
disbursed for construction there-upon.
Further, the lending bank / DFI will take a realistic construction schedule from the
borrower before allowing disbursement of the initial loan limit for the purchase of
land / plot.
Banks / DFIs may allow housing finance facility for construction of houses against
the security of land / plot already owned by their customers. However, the lending
bank / DFI will ensure that the loan amount is utilized strictly for the construction
purpose and loan is disbursed in tranches as per construction schedule.
Loans against the security of existing land / plot, or for the purchase of new piece
of land / plot, for commercial and industrial purposes may be allowed. But such
loans will be treated as Commercial Loans, which will be covered either under
Regulations for SMEs Financing.
Banks / DFIs may allow Housing Loans in the rural areas provided all relevant
guidelines/regulations on the subject are complied with by them.
We shall continue with the rest of the regulations for consumer financing in the
coming Lesson.

LESSON 41
We shall continue with the remaining regulations/ aspects for consumer financing
in this Lesson:
REGULATIONS FOR HOUSING FINANCE
• REGULATION R-15
• REGULATION R-16
• REGULATION R-17
• REGULATION R-18
• REGULATION R-19
• REGULATION R-20
• REGULATION R-21
• REGULATION R-22
REGULATIONS FOR PERSONAL LOANS INCLUDING LOANS FOR THE

PURCHASE OF CONSUMER DURABLES
• REGULATIONS R-23
REGULATIONS FOR HOUSING FINANCE– R-15 to R-21, & R-22

REGULATION R-15
Banks / DFIs shall determine the housing finance limit, both in urban and rural
areas, in accordance with their internal credit policy, credit worthiness and
loan repayment capacity of the borrowers. At the same time, while determining
the credit worthiness and repayment capacity of the prospective borrower, banks /
DFIs shall ensure that the total monthly amortization payments of consumer loans,
inclusive of housing loan, should not exceed 50% of the net disposable income of
the prospective borrower.
Banks / DFIs will not allow housing finance purely for the purchase of land / plots;
rather, such financing would be extended for the purchase of land / plot and
construction on it.
Accordingly, the sanctioned loan limit, assessed on the basis of repayment
capacity of the borrower, value of land / plot and cost of construction on it etc.,
should be disbursed in tranches, i.e. up to a maximum of 50% of the loan limit can
be disbursed for the purchase of land/ plot, and the remaining amount be
disbursed for construction there-upon.
Further, the lending bank / DFI will take a realistic construction schedule from the
borrower before allowing disbursement of the initial loan limit for the purchase of
land / plot.
Banks / DFIs may allow housing finance facility for construction of houses against
the security of land / plot already owned by their customers. However, the lending
bank / DFI will ensure that the loan amount is utilized strictly for the construction
purpose and loan is disbursed in tranches as per construction schedule.
Loans against the security of existing land / plot, or for the purchase of new
piece of land / plot, for commercial and industrial purposes may be allowed. But
such loans will be treated as Commercial Loans, which will be covered either under

Regulations for SMEs Financing.
Banks / DFIs may allow Housing Loans in the rural areas provided all relevant
guidelines/regulations on the subject are complied with by them.
REGULATION R-16
The housing finance facility shall be provided at a maximum debt-equity ratio of
85:15
REGULATION R-17
Banks / DFIs are free to extend mortgage loans for housing, for a period not
exceeding twenty years. Banks / DFIs should be mindful of adequate asset -
liability matching.
REGULATION R-18
The house financed by the bank / DFI shall be mortgaged in bank’s / DFI’s favour
by way of equitable or registered mortgage.
REGULATION R-19
Banks / DFIs shall either engage professional expertise or arrange sufficient
training for their concerned officials to evaluate the property, assess the
genuineness and integrity of the title documents, etc.
It may, however, be noted that the requirement of full-scope and desk-top
evaluation, as required under R-8 and R-11 of Prudential Regulations for
Corporate / Commercial Banking and SMEs Financing respectively, will not be
applicable on housing finance.
REGULATION R-20
The bank’s / DFI’s management should put in place a mechanism to
monitor conditions in the real estate market (or other product market) at least
on quarterly basis to ensure that its policies are aligned to current market
conditions.
REGULATION R-21
Banks / DFIs are encouraged to develop floating rate products for extending
housing finance, thereby managing interest rate risk to avoid its adverse effects.
Banks / DFIs are also encouraged to develop in-house system to stress test their
housing portfolio against adverse movements in interest rates as also maturity
mismatches.
REGULATION R-22
The mortgage loans shall be classified and provided for in the following manner:

REGULATIONS FOR PERSONAL LOANS INCLUDING

LOANS FOR THE PURCHASE OF CONSUMER DURABLES- R-23 to R-27

REGULATION R-23
The clean limit per person for personal loans will generally not exceed Rs
500,000/-.
Banks / DFIs may assign a clean limit beyond Rs 500,000 but not in excess of Rs
2 million to their prime customers who have extraordinary strong repayment
capacity, moderate debt burden and a clean track record. But aggregate
outstanding in this respect should not exceed 10% of the total outstanding
personal loans at any point in time
However, while availing benefit of this provision, banks / DFIs would place on
record well defined criteria for terms "Prime Customers" and "Moderate Debt
Burden" approved by their Board of Directors / Chief Executive.
Banks / DFIs may also allow financing under Personal Loans in excess of Rs
500,000 (up to Rs. 1,000,000) to other customers as well, provided the loan is
appropriately secured according to the definition given in Part A of these
regulations.
The loan secured against liquid securities shall, however, be exempted from this
limit.
The loans against the securities issued by Central Directorate of National Savings
(CDNS) shall be subject to such limits as are prescribed by CDNS / Federal
Government / State Bank of Pakistan from time to time.
REGULATION R-24
In cases, where the loan has been extended to purchase some durable goods /
items, including personal computers and accessories thereof, the same will be
hypothecated with the bank / DFI besides other securities, which the bank / DFI
may require on its own.
REGULATION R-25
The maximum tenure of the loan shall not exceed 5 years. However, this period
may be extended to 7 years for loans / advances given for educational
purposes, provided that disbursement of such loans shall directly be made by the
bank / DFI to the educational institution and the borrower shall not be allowed
to utilize / withdraw cash directly from the bank / DFI under this head for any other
purpose.
The maximum tenure of the loan shall not exceed 5 years. However, this period
may be extended to 7 years for loans / advances given for educational purposes,
provided that disbursement of such loans shall directly be made by the bank / DFI
to the educational institution and the borrower shall not be allowed to utilize /
withdraw cash directly from the bank / DFI under this head for any other purpose.
REGULATION R-26
In case of Running Finance / Revolving Finance, it shall be ensured that at least
15% of the maximum utilization of the loan during the year is cleaned up by the
borrower for a minimum period of one week. In case the clean up is not made by
the borrower, the loan will be appropriately classified.
However, banks / DFIs who require their customers to repay a minimum amount
each month, will be considered compliant with this regulation subject to the
condition that the aggregate cumulative monthly installments exceed the 15%
clean up requirement and accordingly the loans where the specified minimum
repayments are being made by the borrowers regularly, will not require
classification under this regulation.
REGULATION R-27
The personal loans shall be classified and provided for in the following manner:
PRUDENTIAL REGULATIONS
FOR SMALL AND MEDIUM ENTERPRISES FINANCING
Introduction:
Keeping in view the important role of Small and Medium Enterprises (SMEs) in the
economic development of Pakistan and to facilitate and encourage the flow of
bank credit to this sector, a separate set of Prudential Regulations specifically for
SME sector has been issued by State Bank of Pakistan. This separate set of
regulations, specifically tailored for SMEs, is aimed at encouraging banks / DFIs to
develop new financing techniques and innovative products which can meet the
financial requirements of SMEs and provide a viable and growing lending outlet for
banks / DFIs.
Banks / DFIs should recognize that success in SME lending requires much more
extensive involvement with the SMEs than the traditional lender-borrower
relationship envisages. The banks / DFIs are, thus, encouraged to work in close
association with SMEs. The banks / DFIs should assist and guide the SMEs to
develop appropriate systems and effectively manage their resources and risks.
The banks / DFIs are encouraged to prepare a lending program (including detailed
eligibility criteria) for each specific sub-sector of SME in which they want to take
exposure in a significant manner. For this purpose, the banks / DFIs may conduct /
arrange surveys and research to determine the status and potential of specific
SME sub-sectors. It is expected that banks / DFIs would prepare comprehensive
guidelines / manuals and put in place suitable mechanism / structure, aided by
proper MIS, to carry out the activities related to SME financing in an effective way.
This should, however, not stop banks / DFIs from lending to SMEs before
undertaking the steps mentioned above as the banks / DFIs may start soft lending
operations or test marketing campaigns, as they feel appropriate, to gain
experience and necessary know how. The factors mentioned above gain more
importance and become critical for the success of a bank / DFI in SME lending, as
the exposure of the bank / DFI on SMEs becomes a significant portion of its loan
portfolio.
State Bank of Pakistan encourages banks / DFIs to lend to SMEs on the basis of
assets conversion cycle and future cash flows. A problem, which the banks / DFIs
may encounter in this respect, is the lack of adequate information. In order to
overcome this problem, banks / DFIs may also like to prepare general industry
cash flows and then adjust those cash flows for the specific borrowers keeping in
view their conditions and other factors involved.
As mentioned above, presently most of the SMEs in Pakistan lack sophistication to
have reliable and sufficient data and financial information. In order to capture this
data and information, banks / DFIs will need to assist and guide their SME
customers. The banks / DFIs may come up with the minimum information
requirements and standardized formats for this purpose as per their own
discretion. For better understanding and to facilitate their SME customers, banks/
DFIs are encouraged to translate their loan application formats and brochures in
Urdu and other regional languages.
Banks / DFIs should realize that delay in processing the cases might frustrate the
SMEs. Banks / DFIs are therefore encouraged to process the loan cases
expeditiously and convey the decision to the SME borrowers as early as possible
In order to encourage close coordination of the officials of the banks / DFIs and
SMEs, the banks / DFIs may require the concerned dealing officer to regularly visit
the borrower. For this purpose, at a minimum, the dealing officer may be required
to pay at least one quarterly visit and document the state of affairs of the SME. In
addition, an officer senior to the ones conducting these regular visits may also visit
the SME at least once in a year. The banks may, at their own discretion, correlate
the frequency of visits with their total exposure to the SME borrower.
State Bank of Pakistan will closely monitor the situation on an ongoing basis and
work proactively with banks / DFIs to make SME financing a success. During this
process, we will keep on reviewing regulatory framework to ensure that any
impediment is immediately removed while ensuring that banks / DFIs observe due
prudence and necessary oversight.
Definitions:
Bank means a banking company as defined in Banking Companies Ordinance,
1962.
Borrower means a SME on which a bank / DFI has taken any exposure during the
course of business.
Corporate Card means credit card issued to the employees of a SME where the
repayment is to be made by the said SME.
Contingent liability means:
(a). A possible obligation that arises from past events and whose existence will
be confirmed only by the occurrence or non- occurrence of one or more
uncertain future events not wholly within the control of the enterprise; or
(b). A present obligation that arises from past events but is not recognized
because:
i. It is not probable that an outflow of resources embodying economic

benefits will be required to settle the obligation; or
ii. The amount of the obligation cannot be measured with sufficient
reliability; and includes letters of credit, letters of guarantee, bid bonds /
performance bonds, advance payment guarantees and underwriting
commitments.
Small and Medium Enterprise (SME) means an entity, ideally not a public
limited company, which does not employ more than 250 persons (if it is
manufacturing/service concern) and 50 persons (if it is trading concern) and also
fulfills the following criteria of either ‘a’ and ‘c’ or ‘b’ and ‘c’ as relevant:
(a). A trading/service concern with total assets at cost excluding land and
building up to Rs 50 million.
(b). A manufacturing concern with total assets at cost excluding land and
building upto Rs 100 million.
(c). Any concern (trading, service or manufacturing) with net sales not
exceeding Rs 300 million as per latest financial statements.
(d). An Individual, if he or she meets the above criteria, can also be categorized
as an SME.
We shall continue with regulations for SMEs in the next Lesson.

LESSON 42
PRUDENTIAL REGULATIONS
FOR SMALL AND MEDIUM ENTERPRISES FINANCING
In this Lesson, we shall cover the following:
• Prudential Regulations for small and medium enterprises finance.
• Prudential Regulations for Corporate/ Commercial Banking
First of all we give hereunder an overview of prudential regulations for small &
medium enterprises financing.
REGULATIONS FOR SMALL & MEDIUM ENTERPRISES FINANCING:
REGULATION R-1
SOURCE AND CAPACITY OF REPAYMENT
AND CASH FLOW BACKED LENDING
REGULATION R-2
Personal guarantees
REGULATION R-3
Limit on clean facilities
REGULATION R-4
Securities
REGULATION R-5
Margin requirements
REGULATION R-6
Per party exposure limit
REGULATION R-7
Aggregate exposure of a bank / dfi on sme sector
The aggregate exposure of a bank / DFI on SME sector shall not exceed the
limits as specified below:
REGULATION R-8
Minimum conditions for taking exposure
REGULATION R-9
Proper utilization of loan
REGULATION R-10
Restriction on facilities to related parties
Regulation R-11

CLASSIFICATION AND PROVISIONING FOR ASSETS, As Prescribed in
Annexure-111
LOANS / ADVANCES
Banks / DFIs shall observe the prudential guidelines given at Annexure-III in the
matter of classification of their SME asset portfolio and provisioning there-against.
All financing facilities (including short, medium and long term)

Note:
The benefit of FSV is allowed against NPLs of over Rs 5 million only and
from December 31, 2006 against NPLs of over Rs 10 million only.
Classified loans / advances that have been guaranteed by the
Government would not require provisioning, however, mark up / interest
on such accounts to be taken to Memorandum Account instead of Income
Account.
Prudential Regulations for Corporate/ Commercial Banking
Definitions:
“Key Executive” means key executives of banks/DFIs and includes the following
functional responsibilities for the present:-
(a). Any executive, acting as second to CEO including Chief Operating Officer,
Deputy Managing Director or by whatever name called
(b). Chief Financial Officer / Head of Finance / Head of Accounts
(c). Head of Internal Audit
(d). Country Treasurer
“Key Executive”
(e). Head of Credit/ Risk Management
(f). Head of Operations
(g). Head of Compliance
(h). Head of Human Resource
(i). Head of Information Technology
(j). Head of Islamic Banking
Regulations
Regulation r-1
Limit on exposure to a single person
Regulation r-2
Limit on exposure against contingent liabilities
Regulation r-3
Minimum conditions for taking exposure
Regulation r-4
Limit on exposure against
Unsecured financing facilities
Regulation r-5
Linkage between financial indicators of the borrower and total exposure from
financial institutions
Regulation r-6
Exposure against shares / tfcs
And acquisition of shares
Regulation r-7
Guarantees
Regulation r-8
Classification and provisioning for assets
Regulation r-9
Assuming obligations on behalf of nbfcs
Banks / DFIs shall not issue any guarantee or letter of comfort nor assume any
obligation whatsoever in respect of deposits, sale of investment certificates, issue
of commercial papers, or borrowings of any non-banking finance company.
Regulation r-10
Facilities to private limited company
Regulation r-11
Payment of dividend
Regulation r-12
Monitoring
Regulation r-13
Margin requirements
Regulation g-1
Corporate governance / board
Of directors and management
The following guidelines are required to be followed by banks / DFIs incorporated

in Pakistan. They will also follow ‘Code of Corporate Governance’ issued by the
Securities & Exchange Commission of Pakistan (SECP) so long as any provision
thereof does not conflict with any provision of the Banking Companies Ordinance,
1962, Prudential Regulations and the instructions / guidelines issued by the State
Bank of Pakistan.
Foreign banks are required to adhere to these guidelines wherever feasible and
applicable. However, they need not necessarily seek approval of their Board of
Directors, as stipulated below in the case of local banks / DFIs:
FIT AND PROPER TEST

-- The “Fit and Proper Test” (FPT) is applicable on the sponsors (both individual &
companies) who apply for a commercial banking license, the investors acquiring
strategic/controlling stake in the banks/DFIs, major shareholders of the banking
companies and for the appointment of Directors, CEO, and Key Executives of the
banks/DFIs. The fitness & propriety will be assessed on the following broad
elements (Annexure VII-B): Contd...
a. Integrity, Honesty & Reputation
b. Track Record
c. Solvency & Integrity
d. Qualification & Experience
e. Conflict of Interest
f. Others
2. First three elements are applicable to all categories of individuals, whereas the
last three elements will be considered while assessing the FPT of Directors, CEO &
Key Executives of banks/DFIs.
2. In addition to above requirements, sponsors and strategic investors are
evaluated respectively in terms of “Guidelines & Criteria for setting up of a
Commercial Bank” & “Criteria for Establishment of Islamic Commercial Banks”
issued by SBP and Code of Corporate Governance issued by SECP.
3. The sponsors, the strategic investors, and appointment of the Directors and CEO
require prior clearance in writing from SBP. The CEO and Key Executives shall be
full time employees of the bank/DFI. The Directors and CEO will not assume the
charge of their respective offices until their appointments are approved in writing
by SBP.
3. All the requests for seeking approval of SBP for appointment of Directors & CEO
of the banks/DFIs should be routed through respective banks/DFIs along with
information on Annexures-VI-A & VI-B.
4. The appointment of Key Executives will not require prior clearance of SBP.
However, the banks/DFIs must themselves ensure while appointing Key Executives
that they qualify FPT in letter and spirit.
5. The sponsors are required to seek prior approval of SBP along with the
information at Annexure- VI-B and other information as required in the “Guidelines
& Criteria for Setting up a Commercial Bank” and” Criteria for Establishment of
Islamic Commercial Banks”.
The strategic investors contemplating to acquire strategic/controlling stake are
required to seek prior approval from SBP either directly or through the concerned
department/Ministry of Government executing strategic sale transaction of the
bank as required and provided in the transaction structure.
The bank should also ensure to give prior intimation to SBP before dealing with any
investors/bank/institutions/person for sale/purchase of sponsors/ strategic shares
and seek approval of SBP for conducting due diligence of bank/DFI in terms of BPD
Circular No. 8 of 2003.
6. The major shareholders are required to seek prior approval in writing from SBP
for acquiring 5% or more shares along-with information on Annexure- VI-B, with
proper justification for holding more than 5% shares of the paid up capital. All the
banks/DFIs are required to ensure that major shareholders have sought such an
approval from SBP and place it on record.
7. Fit & Proper Test prescribed in the guideline is continuous in nature. All
persons subject to FPT should immediately submit any change in the information
already submitted (at the time of clearance) either through Company Secretary or
Human Resources Department to Banking Policy and Regulations Department.
7. Violation of the instructions, circumvention, concealment,
misreporting and delay in submission of information to SBP may result in
withdrawal of SBP approval, besides penal action under the provisions of
BCO, 1962.
Regulation g-2
Dealing with directors, major share-holders
And employees of the banks / dfis
Regulation g-3
Contributions and donations for charitable, social, educational and public welfare
purposes
Regulation g-4
Credit rating





With the introduction of prudential regulations, a healthy lending and borrowing

culture has been developed in our banking sector.

LESSON 43
GUIDELINES FOR BANKS BY SBP
The State Bank of Pakistan has issued guidelines for banks with a view to take
necessary remedial measures and installs required systems so as to safeguard
against undue risk exposures by developing necessary risk management
mechanism. The guidelines of SBP are given in the following paragraphs:
Risk:
For the purpose of these guidelines financial risk in banking organization is
possibility that the outcome of an action or event could bring up adverse impacts.
Such outcomes could either result in a direct loss of earnings / capital or may
result in imposition of constraints on bank’s ability to meet its business objectives.
Such constraints pose a risk as these could hinder a bank's ability to conduct its
ongoing business or to take benefit of opportunities to enhance its business.
Risk Management:
Risk Management is a discipline at the core of every financial institution and
encompasses all the activities that affect its risk profile. It involves identification,
measurement, monitoring and controlling risks to ensure that:
a. The individuals who take or manage risks clearly understand it.
b. The organization’s Risk exposure is within the limits established by Board of
Directors.
c. Risk taking Decisions are in line with the business strategy and objectives set
by BOD.
d. The expected payoffs compensate for the risks taken
e. Risk taking decisions are explicit and clear.
f. Sufficient capital as a buffer is available to take risk
The acceptance and management of financial risk is inherent to the business of

banking and banks’ roles as financial intermediaries. Risk management as
commonly perceived does not mean minimizing risk; rather the goal of risk
management is to optimize risk-reward trade -off.
-- Notwithstanding the fact that banks are in the business of taking risk, it should
be recognized that an institution need not engage in business in a manner that
unnecessarily imposes risk upon it: nor it should absorb risk that can be
transferred to other participants. Rather it should accept those risks that are
uniquely part of the array of bank’s services.
In every financial institution, risk management activities broadly take place
simultaneously at following different hierarchy levels.
a. Strategic level:
b. Macro Level:
c. Micro Level:
a. Strategic level: It encompasses risk management functions performed by senior
management and BOD. For instance definition of risks, ascertaining institutions
risk appetite, formulating strategy and policies for managing risks and establish
adequate systems and controls to ensure that overall risk remain within
acceptable level and the reward compensate for the risk taken.
b. Macro Level: It encompasses risk management within a business area or across
business lines. Generally the risk management activities performed by middle
management or units devoted to risk reviews fall into this category.
c. Micro Level: It involves ‘On-the-line’ risk management where risks are actually
created. This is the risk management activities performed by individuals who
take risk on organization’s behalf such as front office and loan origination
functions. The risk management in those areas is confined to following
operational procedures and guidelines set by management.
Risk Management framework

A risk management framework encompasses the scope of risks to be managed,
the process/systems and procedures to manage risk and the roles and
responsibilities of individuals involved in risk management. The framework should
be comprehensive enough to capture all risks a bank is exposed to and have
flexibility to accommodate any change in business activities.
An effective risk management framework includes:
a. Clearly defined risk management policies and procedures covering risk
identification, acceptance, measurement, monitoring, reporting and control.
b. A well constituted organizational structure defining clearly roles and
responsibilities of individuals involved in risk taking as well as managing it.
Banks, in addition to risk management functions for various risk categories
may institute a setup that supervises overall risk management at the bank.
Such a setup could be in the form of a separate department or bank’s Risk
Management Committee (RMC) could perform such function.
The structure should be such that ensures effective monitoring and control over
risks being taken. The individuals responsible for review function (Risk review,
internal audit, compliance etc) should be independent from risk taking units and
report directly to board or senior management who are also not involved in risk
taking.
c. There should be an effective management information system that ensures
flow of information from operational level to top management and a system
to address any exceptions observed. There should be an explicit procedure
regarding measures to be taken to address such deviations.
d. The framework should have a mechanism to ensure an ongoing review of

systems, policies and procedures for risk management and procedure to
adopt changes.
Managing Credit Risk

Credit risk arises from the potential that an obligor is either unwilling to perform on
an obligation or its ability to perform such obligation is impaired resulting in
economic loss to the bank.
In a bank’s portfolio, losses stem from outright default due to inability or
unwillingness of a customer or counter party to meet commitments in relation to
lending, trading, settlement and other financial transactions. Alternatively losses
may result from reduction in portfolio value due to actual or perceived
deterioration in credit quality. Credit risk emanates from a bank’s dealing with
individuals, corporate, financial institutions or a sovereign.
For most banks, loans are the largest and most obvious source of credit risk;
however, credit risk could stem from activities both on and off balance sheet.
In addition to direct accounting loss, credit risk should be viewed in the context of
economic exposures. This encompasses opportunity costs, transaction costs and
expenses associated with a non-performing asset over and above the accounting
loss.
Credit risk can be further sub-categorized on the basis of reasons of default. For
instance the default could be due to country in which there is exposure or
problems in settlement of a transaction.

Credit risk not necessarily occurs in isolation. The same source that endangers
credit risk for the institution may also expose it to other risk. For instance a bad
portfolio may attract liquidity problem.
Components of credit risk management

A typical Credit risk management framework in a financial institution may be
broadly categorized into following main components.
a. Board and senior Management’s Oversight
b. Organizational structure
c. Systems and procedures for identification, acceptance,
measurement, monitoring and control risks.
Credit Risk Monitoring & Control

Credit risk monitoring refers to incessant monitoring of individual credits inclusive
of Off-Balance sheet exposures to obligors as well as overall credit portfolio of the
bank. Banks need to enunciate a system that enables them to monitor quality of
the credit portfolio on day-to-day basis and take remedial measures as and when
any deterioration occurs.
Such a system would enable a bank to ascertain whether loans are being serviced
as per facility terms, the adequacy of provisions, the overall risk profile is within
limits established by management and compliance of regulatory limits.
Establishing an efficient and effective credit monitoring system would help senior
management to monitor the overall quality of the total credit portfolio and its
trends.
Consequently the management could fine tune or reassess its credit strategy
/policy accordingly before encountering any major setback. The banks credit policy
should explicitly provide procedural guideline relating to credit risk monitoring.
At minimum it should lay down procedure relating to
a. The roles and responsibilities of individuals responsible for credit risk
monitoring
b. The assessment procedures and analysis techniques (for individual loans &
overall portfolio)
c. The frequency of monitoring
At minimum it should lay down procedure relating to:
d. The periodic examination of collaterals and loan covenants
e. The frequency of site visits
f. The identification of any deterioration in any loan
Some key indicators that depict the credit quality of a loan:

a. Financial Position and Business Conditions.
The most important aspect about an obligor is its financial health, as it would
determine its repayment capacity. Consequently institutions need carefully watch
financial standing of obligor.
While making such analysis due consideration should be given to
business/industry risk, borrowers position within the industry and external factors
such as economic condition, government policies, regulations.
For companies whose financial position is dependent on key management
personnel and/or shareholders, for example, in small and medium enterprises,
institutions would need to pay particular attention to the assessment of the
capability and capacity of the management/shareholder(s).
b. Conduct of Accounts.
In case of existing obligor the operation in the account would give a fair idea
about the quality of credit facility. Institutions should monitor the obligor’s account
activity, repayment history and instances of excesses over credit limits. For trade
financing, institutions should monitor cases of repeat extensions of due dates for
trust receipts and bills.
c. Loan Covenants.
The obligor’s ability to adhere to negative pledges and financial covenants stated
in the loan agreement should be assessed, and any breach detected should be
addressed promptly.
d. Collateral valuation.
Since the value of collateral could deteriorate resulting in unsecured lending,
banks need to reassess value of collaterals on periodic basis. The frequency of
such valuation is very subjective and depends upon nature of collaterals. For
instance loan granted against shares need revaluation on almost daily basis
whereas if there is mortgage of a residential property the revaluation may not be
necessary as frequently.
In case of credit facilities secured against inventory or goods at the obligor’s
premises, appropriate inspection should be conducted to verify the existence and
valuation of the collateral. And if such
Goods are perishable or such that their value diminish rapidly (e.g. electronic
parts/equipments), additional precautionary measures should be taken.
Risk review
The institutions must establish a mechanism of independent, ongoing assessment
of credit risk management process. All facilities except those managed on a
portfolio basis should be subjected to individual risk review at least once in a year.
The results of such review should be properly documented and reported directly
to board, or its sub committee or senior management without lending authority.
The purpose of such reviews is to assess the credit administration process, the
accuracy of credit rating and overall quality of loan portfolio independent of
relationship with the obligor.
Institutions should conduct credit review with updated information on the obligor’s
financial and business conditions, as well as conduct of account. Exceptions noted
in the credit monitoring process should also be evaluated for impact on the
obligor’s creditworthiness. Credit review should also be conducted on a
consolidated group basis to factor in the business connections among entities in a
borrowing group
As stated earlier, credit review should be performed on an annual basis; however
more frequent review should be conducted for new accounts where institutions
may not be familiar with the obligor, and for classified or adverse rated accounts
that have higher probability of default.
For consumer loans, institutions may dispense with the need to perform credit
review for certain products. However, they should monitor and report credit
exceptions and deterioration.
Managing Market Risk

It is the risk that the value of on and off-balance sheet positions of a financial
institution will be adversely affected by movements in market rates or prices such
as interest rates, foreign exchange rates, equity prices, credit spreads and/or
commodity prices resulting in a loss to earnings and capital.
Financial institutions may be exposed to Market Risk in variety of ways. Market
risk exposure may be explicit in portfolios of securities / equities and instruments
that are actively traded. Conversely it may be implicit such as interest rate risk
due to mismatch of loans and deposits.
Besides, market risk may also arise from activities categorized as off-balance sheet
item. Therefore market risk is potential for loss resulting from adverse movement
in market risk factors such as interest rates, forex rates, and equity and
commodity prices. The risk arising from these factors have been discussed on
following pages.
Interest rate risk:

Interest rate risk arises when there is a mismatch between positions, which are
subject to interest rate adjustment within a specified period. The bank’s lending,
funding and investment activities give rise to interest rate risk. The immediate
impact of variation in interest rate is on bank’s net interest income, while a long
term impact is on bank’s net worth since the economic value of bank’s assets,
liabilities and off-balance sheet exposures are affected.
Liquidity Risk:
Liquidity risk is the potential for loss to an institution arising from either its inability
to meet its obligations or to fund increases in assets as they fall due without
incurring unacceptable cost or losses.
Liquidity risk is considered a major risk for banks. It arises when the cushion
provided by the liquid assets are not sufficient enough to meet its obligation. In
such a situation banks often meet their liquidity requirements from market.
However conditions of funding through market depend upon liquidity in the market
and borrowing institution’s liquidity.
Accordingly an institution short of liquidity may have to undertake transaction at
heavy cost resulting in a loss of earning or in worst case scenario the liquidity risk
could result in bankruptcy of the institution if it is unable to undertake transaction
even at current market prices.
Banks with large off-balance sheet exposures or the banks, which rely heavily on
large corporate deposit, have relatively high level of liquidity risk. Further the
banks experiencing a rapid growth in assets should have major concern for
liquidity.
Liquidity risk may not be seen in isolation, because financial risk are not mutually
exclusive and liquidity risk often triggered by consequence of these other financial
risks such as credit risk, market risk etc. For instance, a bank increasing its credit
risk through asset concentration etc may be increasing its liquidity risk as well.
Similarly a large loan default or changes in interest rate can adversely impact a
bank’s liquidity position. Further if management misjudges the impact on liquidity
of entering into a new business or product line, the bank’s strategic risk would
increase.
Managing Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal
processes, people and system or from external events.
Operational risk is associated with human error, system failures and inadequate
procedures and controls. It is the risk of loss arising from the potential that
inadequate information system; technology failures, breaches in internal controls,
fraud, unforeseen catastrophes, or other operational problems may result in
unexpected losses or reputation problems. Operational risk exists in all products
and business activities.
Operational risk event types that have the potential to result in substantial losses
includes Internal fraud, External fraud, employment practices and workplace
safety, clients, products and business practices, business disruption and system
failures, damage to physical assets, and finally execution, delivery and process
management.
The objective of operational risk management is the same as for credit, market
and liquidity risks that is to find out the extent of the financial institution’s
operational risk exposure; to understand what drives it, to allocate capital against
it and identify trends internally and externally that would help predicting it. The
management of specific operational risks is not a new practice; it has always been
important for banks to try to prevent fraud, maintain the integrity of internal
controls, and reduce errors in transactions processing, and so on.
However, what is relatively new is the view of operational risk management as a
comprehensive practice comparable to the management of credit and market risks
in principles. Failure to understand and manage operational risk, which is present
in virtually all banking transactions and activities, may greatly increase the
likelihood that some risks will go unrecognized and uncontrolled.
The above guidelines provide a working document to safeguard the interests of
the bank and other stake holders.

LESSON 44
THE FINANCIAL INSTITUTIONS (RECOVERY OF FINANCES) ORDINANCE,

2001
In case loan workout effort through negotiation, restructuring, rescheduling, and

other methods are not workable then option of filing a recovery suit may be
exercised by banks/ financial institutions as a last resort. The law governing
recovery of finances is governed by the financial institutions (recovery of finance)
Ordinance, 2001, important aspects of this ordinance are covered in the following
paragraphs.
Contents
Definitions: Sec 2
Duty of a customer: Sec 3
Establishment of Banking Court under Sec 5
Powers of Banking Courts outlined in sec 7
Suit for recovery of written off finances: Sec 8
Procedure of Banking Courts: Sec 9
Leave to defend unique concept: Sec 10
Sale of mortgaged property: Sec 15
Attachment before judgment, injunction and appointment of Receivers: Sec 16
Provisions relating to certain offences: Sec 20 Application of fines and costs: Sec
21
Appeal: Sec 22
Restriction on transfer of assets & properties: Sec 23
Indemnity: Sec 28
Definitions:
b) "Banking Court" means:
(i) In respect of a case in which the claim does not exceed fifty million rupees
or for the trial of offences under this Ordinance, the Court established under
section 5; and
(ii) In respect of any other case, the High Court.
(c) "customer" means a person to whom finance has been extended by a
financial institution and includes a person on whose behalf a guarantee or letter of
credit has been issued by a financial institution as well as a surety or an
indemnifier;
Duty of a customer: Sec 3

(1)It shall be the duty of a customer to fulfill his obligations to the financial
institution.
(2)Where the customer defaults in the discharge of his obligation, he shall be
liable to pay, for the period from the date of his default till realization of the
cost of funds of the financial institution as certified by the State Bank of
Pakistan from time to time, apart from such other civil and criminal liabilities
that he may incur under the contract or rules or any other law for the time
being in force.
(3)For purposes of this section a judgment against a customer under this
Ordinance shall mean that he is in default of his duty under sub-section (1), and
the ensuing decree shall provide for payment of the cost of funds as
determined under sub-section (2).
Establishment of Banking Court: Sec 5

(1)The Federal Government may, by notification in the Official Gazette, establish
as many Banking Courts as it considers necessary to exercise jurisdiction under
this Ordinance and appoint a Judge for each of such Courts and where it
establishes more Banking Courts than one, it shall specify in the notification the
territorial limits within which each of the Banking Courts shall exercise its
jurisdiction.
(2)Where more Banking Courts than one have been established to exercise
jurisdiction in the same territorial limits, the Federal Government shall define
the territorial limits of each such Court.
(3)Where more Banking Courts than one have been established in the same or
different territorial limits, the High Court may, if it considers it expedient to do
so in the interest of justice or for the convenience of the parties or of the
witnesses, transfer any case from one Banking Court to another.
(4)A Judge of a Banking Court shall be appointed by the Federal Government
after consultation with the Chief Justice of the High Court of the Province in
which the Banking Court is established and no person shall be appointed a
Judge of a Banking Court unless he has been a Judge of a High Court or is or
has been a District Judge.
(5)A Banking Court shall hold its sitting at such places within its territorial
jurisdiction as may be determined by the Federal Government.
(6)A Judge of Banking Court, not being a District Judge, shall be appointed for a
term of three years from the date on which he enters upon his office.
(7)The salary, allowances and other terms and conditions of service of a person
appointed as a Judge of Banking Court shall be such as the Federal Government
may determine.
(8)The Banking Court may, if it so requires, be assisted in technical aspects of
banking transactions involved in any case by an amicus curiae who has at
least ten years experience of banking at a senior management level in a
financial institution of repute or the State Bank of Pakistan and has the
following qualifications, namely:-
i. A degree in Commerce and Accounts or in Economics; or
ii. A degree in Business Administration; or
iii. Has completed a course in banking from the Institute of Bankers,
Pakistan.
Remuneration of the amicus curiae, and the party or parties by whom it will be
payable, will be determined by the Banking Court, keeping in view the
circumstances of each case.
Suit for recovery of written off finances: Sec 8

(1) Subject to sub-section (2), and notwithstanding anything contained in the
Limitation Act, 1908 (IX of 1908) or any other law, a financial institution may,
within three years from the date of coming into force of this Ordinance, file a suit
for the recovery of any amount written off, released or adjusted under any
agreement, contract, or consent, including a compromise or withdrawal of any suit
or legal proceedings or adjustment of a decree between a financial institution and
a customer on any day on or after the first day of January, 1990 and before the
coming into force of this Ordinance, if it can establish that the amount was
written off, released or adjusted for political reasons or considerations other
than bona fide business considerations.
(2) No suit under sub section (1) shall be filed unless its filing has been approved
by:
(a) The Board of Directors, in the case of a financial institution incorporated
within Pakistan,
(b) Or the chief executive (by whatever name called or designated) of the
financial institution in Pakistan, in the case of a financial institution incorporated
outside Pakistan.
Leave to defend: Sec 10

a. In any case in which the summons has been served on the defendant
as provided for in sub-section (5) of section 9, the defendant shall not
be entitled to defend the suit unless he obtains leave from the
Banking Court as hereinafter provided to defend the same and, in
default of his doing so, the allegations of fact in the plaint shall be
deemed to be admitted and the Banking Court may pass a decree in
favour of the plaintiff on the basis thereof or such other material as
the Banking Court may require in the interests of justice.
b. The defendant shall file the application for leave to defend within
thirty days of the date of first service by any one of the modes laid
down in sub-section (5) of section 9:-
(2)Provided that where service has been validly affected only through publication
in the newspapers, the Banking Court may extend the time for filing an
application for leave to defend if satisfied that the defendant did not have
knowledge thereof.
(3)The application for leave to defend shall be in the form of a written
statement, and shall contain a summary of the substantial questions of law as
well as fact in respect of which, in the opinion of the defendant, evidence needs
to be recorded. .
(4)In the case of a suit for recovery instituted by a financial institution the
application for leave to defend shall also specifically state the following :
(a). The amount of finance availed by the defendant from the
financial institution; the amounts paid by the defendant to the
financial institution and the dates of payments;
(b). The amount of finance and other amounts relating to the
finance payable by the defendant to the financial institution up to
the date of institution of the suit;
(c). The amount if any which the defendant disputes as payable to
the financial institution and facts in support thereof:
The application for leave to defend shall be accompanied by all the relevant
documents.
(5)An application for leave to defend which does not comply with the
requirements of sub-sections (3), (4) where applicable and (5) shall be rejected,
unless the defendant discloses therein sufficient cause for his inability to
comply with any such requirement. Questions of law or fact raised by him.
(6)The plaintiff shall be given an opportunity of filing a reply to the application for
leave to defend, in the form of a replication.
(7)Subject to section 11, the Banking Court shall grant the defendant leave to
defend the suit if on consideration of the contents of the plaint, the application
for leave to defend and the reply thereto it is of the view that substantial
questions of law or fact have been raised in respect of which evidence needs to
be recorded.
(8)In granting leave under sub-section (8), the Banking Court may impose such
conditions as it may deem appropriate in the circumstances of the case,
including conditions as to deposit of cash or furnishing of security.
(9)Where the application for leave to defend is accepted, the Banking Court shall
treat the application as a written statement, and in its order granting leave
shall frame issues relating to the substantial questions of law or fact, and,
subject to fulfillment of any conditions attached to grant of leave, fix a date for
recording of evidence thereon and disposal of the suit.
(10) Where the application for leave to defend is rejected or where a defendant
fails to fulfill the conditions attached to the grant of leave to defend, the
Banking Court shall forthwith proceed to pass judgment and decree in favor of
the plaintiff against the defendant.
(11) Where an application for leave to defend has been filed before the coming
into force of this Ordinance, the defendant shall be allowed a period of twenty-
one days from the date of coming into force of this Ordinance, or from the date
of first hearing thereafter, whichever is later, for filing an amended application
for leave to defend in accordance with the provisions of this Ordinance.
Disposal of suit: Sec 13

(1)A suit in which leave to defend has been granted to the defendant shall be
disposed of within ninety days from the day on which leave was granted, and in
case proceedings continue beyond the said period the defendant may be
required to furnish security in such amount as the Banking Court deems fit, and
on the failure of the defendant to furnish such security, the Banking Court shall
pass an interim or final decree in such amount as it may deem appropriate.
(2)The requirement of furnishing security under sub-section (1) shall be dispensed
with if, in the opinion of the Banking Court, the delay is not attributable to the
conduct of the defendant.
(3)Suits before a Banking Court shall come up for regular hearing as expeditiously
as possible and except in extraordinary circumstances and for reasons to be
recorded, a Banking Court shall not allow adjournments for more than seven
days.
(4)Where leave to defend is granted and evidence is to be recorded, the parties
may file affidavits in respect of the examination-in-chief of any witness who is
not to be summoned through the Banking Court, and where such affidavits are
filed, the Banking Court shall give notice thereof to the other contesting parties
and on the date fixed for recording evidence, shall, subject to such modification
as may be required for purposes of production and exhibiting of documents, or
otherwise in accordance with law, treat the affidavit as examination-in-chief
and allow the contesting parties an opportunity for cross-examination on the
basis thereof.
Final Decree: Sec 17

(1)The final decree passed by a Banking Court shall provide for payment from the
date of default of the amounts found to be payable on account of the default in
fulfillment of the obligation, and for costs including, in the case of a suit filed by
a financial institution cost of funds determined under section 3.
(2)The Banking Court may, at the time of passing a final decree, also pass an
order of the nature contemplated by sub-section (1) of section 16 to the extent
of the decrial amount.
Provisions relating to certain offences: Sec 20

(1)Whoever:
(a). dishonestly commits a breach of the terms of a letter of
hypothecation, trust receipt or any other instrument or document
executed by him whereby possession of the assets or properties offered
as security for the re-payment of finance or fulfillment of any obligation
are not with the financial institution but are retained by or entrusted to
him for the purposes of dealing with the same in the ordinary course of
business subject to the terms of the letter of hypothecation or trust
receipt or other instrument or document or for the purpose of effecting
their sale and depositing the sale proceeds with the financial institution;
or
(b). makes fraudulent mis-representation or commits a breach of an
obligation or representation made to a financial institution on the basis of
which the financial institution has granted a finance; or
(c). subsequent to the creation of a mortgage in favor of a financial
institution, dishonestly alienates or parts with the possession of the
mortgaged property whether by creation of a lease or otherwise contrary
to the terms thereof, without the written permission of the financial
institution; or
(d). subsequent to the passing of a decree under section 10 or 11, sells,
transfers or otherwise alienates, or parts with possession of his assets or
properties acquired after the grant of finance by the financial institution,
including assets or properties acquired benami in the name of an
ostensible owner shall, without prejudice to any other action which may
be taken against him under this Ordinance or any other law for the time
being in force, be punishable with imprisonment of either description for
a term which may extend to three years and shall also be liable to a fine
which may extend to the value of the property or security as decreed or
the market value whichever is higher and shall be ordered by the
Banking Court trying the offence to deliver up or refund to the financial
institution, within a time to be fixed by the Banking Court, the property
or the value of the property or security.
Explanation:
(1)Dishonesty may be presumed where a customer has not deposited the sale
proceeds of the property with the financial institution in violation of the terms
of the agreement between the financial institution and the customer.
(2)Whoever knowingly makes a statement which is false in material respects in an

application for finance and obtains a finance on the basis thereof, or applies the
amount of the finance towards a purpose other than that for which the finance
was obtained by him, or furnishes a false statement of stocks in violation of the
terms of the agreement with the financial institution or falsely denies his
signatures on any banking document before the Banking Court, shall be guilty
of an offence punishable with imprisonment of either description for a term
which may extend to three years, or with fine, or with both.
(3)Whoever resists or obstructs, either by himself or on behalf of the judgment
debtor, through the use of force, the execution of a decree, shall be punishable
with imprisonment, which may extend to one year, or with fine, or with both.
(4)Whoever dishonestly issues a cheque towards re-payment of a finance or
fulfillment of an obligation which is dishonored on presentation, shall be
punishable with imprisonment which may extend to one year, or with fine or
with both, unless he can establish, for which the burden of proof shall rest on
him, that he had made arrangements with his bank to ensure that the cheque
would be honored and that the bank was at fault in not honoring the cheque.
(5)Where the person guilty of an offence under this Ordinance is a company or
other body corporate, the chief executive by whatever name called, and any
director or officer involved shall be deemed to be guilty of the offence and shall
be liable to be prosecuted against and punished accordingly.
(6)All offences under this Ordinance shall be bailable, non-cognizable and
compoundable.

Application of fines and costs: Sec 21
(1)A Banking Court may direct that the whole or part of any fine or costs imposed
under this Ordinance shall be applied in or towards:
a) Payment of costs of all or any proceedings under this Ordinance; and
b) Payment of compensation to an aggrieved party.
(2)An order under sub-section (1) shall be deemed to be a decree passed under
this Ordinance for purposes of execution.
Appeal: Sec 22
(1)Subject to sub-section (2), any person aggrieved by any judgment, decree,
sentence, or final order passed by a Banking Court may, within thirty days of
such judgment, decree, sentence or final order prefer an appeal to the High
Court.
(2)The appellant shall give notice of the filing of the appeal in accordance with the
provisions of Order XLIII Rule 3 of the Code of Civil Procedure (Act V of 1908) to
the respondent who may appear before the Banking Court to contest admission
of the appeal on the date fixed for hearing.
(3)The High Court shall at the stage of admission of the appeal, or at any time
thereafter either suo moto or on the application of the decree holder, decide by
means of a reasoned order whether the appeal is to be admitted in part or in
whole depending on the facts and circumstances of the case, and as to the
security to be furnished by the appellant:
(4)An appeal under sub-section (1) shall be heard by a bench of not less than two
Judges of the High Court and, in case the appeal is admitted, it shall be decided
within 90 days from the date of admission.
(5)An appeal may be preferred under this section from a decree passed ex-parte.
(6)No appeal, review or revision shall lie against an order accepting or rejecting an
application for leave to defend, or any interlocutory order of the Banking Court
which does not dispose of the entire case before the Banking Court other than
an order passed under sub-section (11) of section 15 or sub-section (7) of
section 19.
(7)Any order of stay of execution of a decree passed under sub-section (2) shall
automatically lapse on the expiry of six months from the date of the order
whereupon the amount deposited in Court shall be paid over to the decree-
holder or the decree-holder may enforce the security furnished by the
judgment-debtor.
Through this law, the banks and financial institutions can approach the banking
courts for recovery of the finances/ facilities from the defaulters.

LESSON 45
ANCILLARY STATUTES
There are certain statues/ law which have bearing on banking transactions and as
such have their importance to all stake holders. Keeping in view the importance of
these statutes we shall discuss the following statutes in this Lesson:
• Limitation Act, 1908
• Stamp Act, 1889
• Arbitration Act, 1940
• Contract, 1872
Limitation Act, 1908
Contents:
• Objects, concept
• Provision to be applied without equitable consideration: Sec 1
• Raising of Plea of Limitation: Sec 3
• Restriction of time (limitation Period)
• Condonation of delay—where sufficient cause existed to the satisfaction of
court.
• Legal disability: Sec 6
• Exclusion of time while computing time of limitation ( Sec 12 to 16)
• First schedule contains period of limitation in different suits.
Objects:
It governs the process of litigation and limits the time after which a suit or other
proceeding cannot be maintained (enforced) in a court of law.
It requires promptness in the prosecution of remedy because law assists those who
are vigilant and not those who sleep over their rights (Rights to seek remedy—
Prosecution to seek remedy within period prescribed by limitation Act.
Statute of limitation has been termed as statute of repose, peace and justice.
Doctrine of limitation is formed on public policy and expediency.
Removes constant uncertainty, doubt and suspense.
Condonation of delay by court. Where just and sufficient cause has been
shown to court, to condone the delay
Act has two parts:

First part consist of –Sections
Second part cover schedules
(First Division) Schedules Article 1 to 149---suits of various descriptions mentioned.
(Second Division) Article 150 to 157---deals with Appeals.
(Third Division) Article 158 to 183---deals with certain applications of various
types.
In all these articles is mentioned the requisite period of limitation within which
relevant appeal or application can be made.
However, provisions of special law to prevail over general law (banking Cos’
Ordinance, Income Tax Ordinance, Family Law etc are examples of Special Laws).
The inherent power of the court cannot override the statute of limitation.
It is also not open to parties to alter the prescribed period of limitation or to
contract themselves out of statute of limitation, can never have the effect of
preventing the period of limitation from running out (PLD 1989 Lahore 390).
When a plea of limitation is raised and is rejected, it cannot be re-agitated in
appeal because of the fact that previous finding has attained finality (1986 PLC
1031).

Concept:
Statute of limitation is a procedural statute. Its application does not always mean
to usurp or help usurp a right. It rather operates on the principle that if a claimant
waived his right or was not serious and rather indolent so as to have acquiesced,
he will be hit by the doctrine of limitation
The concept of law is only that the authority created or appointed for helping a
claimant (banking court e-g) in such a situation will not help if the claimant
knowing the position of law does not ask for it within the prescribed period.
We shall discuss important provisions contained in this Act in the following
paragraphs:
Section 1:
Provision to be applied without equitable consideration
However, suspension of application of provisions of statute of limitation only in
cases where court by its own Act or oversight causes any injury or injustice to a
particular party.
Limitation Act (1908)
Provisions of limitation Act (1908) are not applicable to the following:

• Land Acquisition Act of 1894
• Proceeding under Frontier Crimes Regulation (of 1901)(FCR)
Section 3:
Raising Plea of Limitation:
A suit instituted, appeal preferred an application made after period of limitation
prescribed therefore—shall be dismissed although limitation has not been set up
as defense.
Court to examine the question of limitation even if not raised—it is the duty of
court to decide question of limitation on merits; ignorance to do so is a legal error.
Section 5:
Restriction of time (limitation Period) is an outcome of public policy.
(exceptions in suitable cases).
Condonation of delay—to advance cause of substantial justice—plausible
explanation of delay
Sufficient Cause---is genuine or good cause, because that is beyond the control of
the party, unavoidable despite care and attention.
• Abnormal conditions of the country.
• Disturbed state of a country
• Judgment announced in absence of the party (Condemned unheard).
• Person entitled to notice etc.)
Legal disability: Sec 6

(1)Where a person entitled to institute a suit [or proceeding] or make an
application for the execution of a decree is, at the time from which the period of
limitation is to be reckoned a minor, or insane, or an idiot, he may institute the
suit [or proceeding] or make the application within the same period after the
disability has ceased, as would otherwise have been allowed from the time
prescribed.
(2)Limitation Act (1908)

(3)Where such person is, at the time from which the period of limitation is to be
reckoned, affected by two such disabilities, or where, before his disability has
ceased, he is affected by another
disability, he may institute the suit or make the application within the same
period, both disabilities have ceased, as would otherwise have been allowed
from the time so prescribed.
(4)Where the disability continues up to the death of such person, his legal
representative may institute the suit or make the application within the same
period after the death as would otherwise have been allowed from the time so
prescribed.
(5)Where such representative is at the date of the death affected by any such
disability, the rules contained in subsections (1) and (2) shall apply.
Suits on foreign contracts: Sec 11
Suits instituted in Pakistan on contracts entered into in a foreign country are
subject to the rules of limitation contained in this Act.
No foreign rule of limitation shall be a defence to a suit instituted in [Pakistan] on a
contract entered into in a foreign country, unless the rule has extinguished the
contract and the parties were domiciled in such country during the period
prescribed by such rule.
Exclusion of time in legal proceedings: Sec 12

Exclusion of time of defendant's absence from Pakistan etc. and certain
other territories: Sec 13
Exclusion of time of proceeding bona fide in Court without jurisdiction:
Sec 14
Exclusion of time during which proceedings are suspended: Sec 15
Exclusion of time during which proceedings to set aside execution sale
are pending: Sec 16
Effect of death before right to sue accrues: Sec 17

Where a person, who would, if he were living, have a right to institute a suit or
make an application, dies before the right accrues, the period of limitation shall be
computed from the time when there is a legal representative of the deceased
capable of instituting or making such suit or application. Where a person against
whom, if he were living, a right to institute a suit or make an application would
have accrued dies before the right accrues, the period of limitation shall be
computed from the time when there is a legal representative of the decreased
against whom the plaintiff may institute or make such suit or application.
Nothing in subsections (1) and (2) applies to suits to enforce rights of pre-emption
or to suits for the possession of immovable property or of an hereditary office.
Limitation Act (1908)
Effect of fraud: Sec 18

Where any person having a right to institute a suit or make an application has, by
means of fraud, been kept from the knowledge of such right or of the title on which
it is founded.
or where any document necessary to establish such right has been fraudulently
concealed from him.
The time limited for instituting a suit or making an application---

• Against the person guilty of the fraud or accessory thereto, or

• Against any person claiming through him otherwise than in good faith and
for a valuable consideration, shall be computed from the time when the
fraud first became known to the person injuriously affected thereby, or, in
the case of the concealed document, when he first had the means of
producing it or compelling its production
Effect of acknowledgment in writing: Sec 19

Where, before the expiration of the period prescribed for a suit or application in
respect of any property or right, an acknowledgment of liability in respect of such
property or right has been made in writing signed by the party against whom such
property or right is claimed, or by some person through whom he derives title or
liability, a fresh period of limitation shall be computed from the time when the
acknowledgment was so signed.
Where the writing containing the acknowledgment is undated; oral evidence may
be given of the time when it was signed; but, subject to the provisions of the
Evidence Act, 1872, oral evidence of its contents shall not be received
Effect of payment on account of debt or of interest on legacy: Sec 20

Where payment on account of a debt or of interest on a legacy is made before the
expiration of the prescribed period by the person liable to pay the debt or legacy,
or by his duly authorised agent, a fresh period of limitation shall be computed from
the time when the payment was made:
(2)Effect of receipt of produce of mortgaged land.---Where mortgaged land is in
the possession of the mortgagee, the receipt of the rent or produce of such
land shall be deemed to be a payment for the purpose of subsection (1).
The first schedule to limitation Act 1809 is appended below:
THE FIRST SCHEDULE (See section 3) FIRST DIVISION: SUITS
Period of limitationTime from which
Description of suit
Part I.---Thirty days period begins to run
1. To contest an award of the Board Thirty days When notice of the award
or Revenue under the Waste LandsPart II.---Ninety days is delivered to the
(Claims) Act, 1863. plaintiff.
2. For compensation or doing or for When the act or omission
Ninety days
omitting to do an act alleged to be takes place
Part III.---Six months
in pursuance of any enactment in
force for the time being in
Six months
[Pakistan].
3. Under the Specific Relief act , When the dispossession
1877, section 9 to recover occurs.
Part IV ---One Year
possession of immovable property.
5. Under the summary procedure When the debt or
referred to in section 128(2)(f) of liquidated demand
the Code of Civil Procedure, 1908 becomes payable or when
[where the provision of such[One year] the property becomes
summary procedure does not recoverable.
exclude the ordinary procedure in
such suits
6. Upon a Statute, Act When the penalty or
Regulation or Bye-law, of a penaltyOne year forfeiture is incurred.
or forfeiture.
7. For the wages of a household When the wages accrue
[One year].
servant, artisan due
or laborer
8. For the price of food When the food or drink is
or drink sold by the keeper of a[One year]. delivered.
hotel, tavern or lodging house.
When the price becomes
9. For the price of lodging. [One year]
payable.
When the purchaser
takes, under the sale
sought to be impeached,
physical possession of the
10. To enforce a right of pre-
whole of the property
emption whether the right is
[One year] sold, or, where the
founded on law, or general usage,
subject of the sale does
or on special contract.
not admit of physical
possession, when the
instrument of sale is
registered.
11. By a person against whom any The date of the order.
of the following orders has been
made to establish the right which
he claims to the property
comprised in the order:
[One year]..
(1) Order under the Code of Civil
Procedure, 1908, on a claim
preferred to, or an objection made
to the attachment of, property
attached in execution of a decree;
11-A. By a person against whom an[One year].. The date of the order.
order has been made under the
Code of Civil Procedure, 1908, upon
an application by the holder or a
decree for the possession of
immovable property or by the
purchaser of such property sold in
execution of a decree, complaining
of resistance or obstruction to the
delivery of possession thereof, or
upon an application by any person
dispossessed of such property in
the delivery of possession thereof
to the decree-holder or purchaser,
to establish the right which he
claims to the present possession of
the property comprised in the
order.
12. To set aside any of the[One year] When the sale is
following sales:-- confirmed, or would
(a) Sales in execution of a decree otherwise have
of a Civil Court; becomingly and
(b) sale in pursuance of conclusive had no such
a decree or order of a suit been brought.
Collector or other officer of revenue

(c) sale for arrears of Government

revenue, or
for any demand recoverable as
such arrears;
(d) sale of a patni taluq sold for
current arrears of rent.
Explanation. ---In this article "patni"
includes any intermediate tenure
saleable for current arrears of rent.
The date of the final
13. To alter or set aside a decision decision or order in the
or order of a Civil Court in any[One year] case by a Court
proceeding other than a suit. competent to determine if
finally
14. To set aside any act [One year]. The date of the act or
or order of an officer of order.
Government in his official capacity,
not herein otherwise expressly
provided for.
15. Against Government to set[One year] When the payment is
aside any attachment, lease or made..
transfer of immovable property by
the Revenue Authorities for arrears
of Government revenue.
16. Against Government to recover[One year] When the payment is
money paid under protest in made.
satisfaction of a claim made by the
revenue authorities on account of
arrears of revenue or on account of
demands recoverable as such
arrears.
17. Against Government for [One year] The date of determining
compensation for land acquired for the amount of the
public purposes. compensation.
18. Like suit for compensation[One year] The date of the refusal to
(when the acquisition is not complete.
completed).
19. For compensation for false[One year] When the imprisonment
imprisonment. ends.
20. By executors, administrators or[One year] The date of the death of
representatives under the Legal the person wronged.
Representatives Suits Act , 1855.
21. By executors, [One year] The date of the death of
administrators or representatives the person killed.
under the Fatal Accidents act ,
1855.
22. For compensation for any other[One year] When the injury is
injury to the person. committed.
23. For compensation for malicious[One year] When the plaintiff is a
prosecution acquitted, or the
prosecution is otherwise
terminated.
24. For compensation for [One year] When the libel is
libel. published.
25. For compensation for slander. [One year] When the words are
spoken
spoken or, if the words
are not actionable in
themselves, when the
special damage
complained of results.
26. For compensation for [One year] When the loss occurs.
loss of service occasioned
by the seduction of the plaintiff's
servant or daughter.
27. For compensation for [One year] The date of the breach
including a person to break a
contract with the plaintiff.
28. For compensation for [One year] The date of the distress.
an illegal, irregular or excessive
distress.
29. For compensation for [One year] The date of the seizure.
wrongful seizure of movable
property under legal process.
30. Against a carrier for [One year] When the loss of injury
compensation for losing occurs
or injuring goods.
31 Against a carrier for [One year] When the goods ought to
compensation for non- be delivered.
delivery of, or delay in delivering
goods.
[One year]
[One year]
[One year]
Part V.---Two
Years
32. Against one who, having a rightTwo years Officer of Raven When the
to use property for specific perversion first becomes
purposes, perverts it to other known to the person
purposes. injured thereby.
33. Under the LegalTwo years When the wrong
Representatives' Suit Act, 1855, complained of is done.
against an executor.
34. Under the same ActTwo years -Ditto-
against an administrator.
35. Under the same ActTwo years -Ditto-
against any other representative.

36. For compensation for . Two years When the malfeasance,
any malfeasance misfeasance or misfeasance or
non-feasance nonfeasance takes place.
independent of contract
and not herein specially
provided for.
PART IV.---Three
Years
37. For compensation for Three yearsThe date of the
obstructing a way for aThree years obstruction.
watercourse. The date of the diversion
38. For compensation for Three years The date of the diversion
diverting a watercourse.
39. For compensation for ...Three years The date of trespass.
trespass upon immovable property.
40. For compensation for infringingThree years The date of the
copyright or any other exclusive infringement.
privilege.
41. To restrain waste. Three years When the waste begins.
42. For compensation for Three years When the injunction
injury caused by an injunction ceases.
wrongfully obtained.
43. Under the 50[Succession Act,Three years The date of the payment
1925, section 360 or section 361,] or distribution
by a person to whom an executor
or administrator has paid a legacy
or distributed assets.
44. By a ward who has Three years When the ward attains
attained majority, to set aside a majority.
transfer of property by his
guardian.
47. By any person bound Three years The date of the final order
by an order respecting in the case
the possession of immovable
property made under the Code of
Criminal Procedure Code, 1898,
53[**] or by any one claiming
under such person, to recover the
property comprised in such order.
48. For specific movable Three years The possession of the
property lost or acquired by theft, property first learns in
or dishonest misappropriation or whose possession it is.
conversion, or for compensation for
wrongfully taking or detaining the
same.
55[48-A. To recover Three years When the same becomes
movable property conveyed or known to the plaintiff.
bequeathed in trust, deposited or
pawned, and afterwards bought
from the trustee, depository or
Pawnee for a valuable
consideration.
56[48-B. To set aside sale ofThree years When the sale becomes
movable property comprised in a known to the plaintiff]
Hindu, Muhammadan or Buddhist
religious or charitable endowment
made by a manager thereof for a
valuable consideration.
Three years When the property is
49. For other specific movable
wrongfully taken or
property, or for compensation for
injured, or when the
wrongfully taking or injuring or
detainer's possession
wrongfully detaining the same.
becomes unlawful.
50. For the hire of animals,Three years When the hire becomes
vehicles, boats or household payable.
furniture.
51. For the balance of moneyThree years When the goods ought to
advanced in payment be delivered.
of goods to be delivered.
5852. For the price of Three years The date of the delivery of
goods sold and delivered, where no the goods.
fixed period of credit is agreed
upon.
5953. For the price of goods soldThree years When the period of credit
and delivered to be paid for after expires.
the expiry
of a fixed period of credit.
54. For the price of Three years When the period of the
goods sold and delivered proposed bill elapses
to be paid for by a bill
of exchange, no such bill
being given
55. For the price of Three years The date of the sale.
trees or growing crops
sold by the plaintiff to the
defendant where no fixed period of
credit is agreed upon.
56. For the price of Three years When the work is done
work done by the plaintiff for the
defendant at his request, where no
time has been fixed for payment.
6157. For money payable forThree years When the loan is made
money lent.
58. Like suit when the Three years When the cheque is paid
lender has given a
cheque for the money.
6259. For money lent Three years When the loan is made.
under an agreement that it shall be
payable on demand.
60. For money deposited Three years When the demand is
under an agreement that made.
it shall be payable on demand
including money of a customer in
the hands of his banker so payable.
6461. For money payable Three years When the money is paid.
to the plaintiff for money paid for
the defendant.
62. For money payable Three years When the money is
by the defendant to the received.
plaintiff for money received by the
defendant for the plaintiff's use.
6563. For money payable Three years When the interest
for interest upon money due from becomes due.
the defendant to the plaintiff.
Three years When the accounts are
stated in writing signed
by the defendant or his
agent duly authorized in
6664. For money payable to the
this behalf, unless where
plaintiff for money found to be due
the debt is, by a
from the defendant to the plaintiff
simultaneous agreement
on accounts stated between them.
in writing signed as
aforesaid, made payable
at a future time, and then
when that time arrives.
6764A. Under Order XXXVII of theThree years When the debt becomes
Code of Civil Procedure. payable.
65. For compensation Three years When the time specified
for breach of a promise to do arrives or the contingency
anything at a specified time, or happens.
upon the happening of a
specified contingency.
6966. On a single bond, Three years The day so specified.
where a day is specified
for payment.
7067. On a single bond, Three years The date of executing the
where no such day is bond.
specified.
7168. On a bond subject Three years When the condition is
to a condition. broken.
7269. On a bill of exchange orThree years When the bill or note falls
promissory note payable at a fixed due.
time after date.
7370. On a bill of exchangeThree years When the bill is
payable at sight or after sight, but presented.
not at a fixed time.
7471. On a bill of Three years When the bill is presented
exchange accepted payable at a at that place.
particular place.
7672. On a bill of exchange orThree years When the fixed time
promissory note payable at a expires.]
fixedtime after sight or after
demand.
7773. On a bill of exchange orThree years The date of the bill or
promissory note payable on note.
demand and not accompanied by
any writing restraining
or postponing the right to sue.
Three years The expiration of the first
term of payment as to the
part then payable; and for
7874. On a promissory note or
the other parts the
bond payable by installments.
expiration of the
respective terms of
payment.
Three years When the default is made,
7975. On a promissory
unless where the payee
note or bond payable by
or oblige waives the
installment, which provides that if
benefit of the provision,
default be made in
and then when fresh
payment of one or more
default is made in respect
installments, the whole shall be
of which there is no such
due.
waiver
8076. On a promissory Three years The date of the delivery
note given by the maker to a third to the payee.
person to be delivered to the payee
after a certain
event should happen.
8277. On a dishonored Three years When the notice is given.
foreign bill where protest has been
made and notice given.
8378. By the payee against theThree years The date of the refusal to
drawer of a bill of exchange which accept.
has been dishonored by non-
acceptance.
8479. By the acceptor Three years When the acceptor pays
of an accommodation bill the amount of the bill.
against the drawer.
8580. Suit on a bill of exchange,Three years When the bill, note or
promissory note, or bond not bond becomes payable.
herein expressly provided for
81. By a surety against Three years When the surety pays the
the principal debtor. creditor.
Three years When the surety pays
82.By a surety against a co-surety. anything in excess of his
own share.
83. Upon any other Three years When the plaintiff is
contract to indemnify. actually dandified.
Three years The date of the
84. By an attorney or
termination of the suit or
vakil for his costs of a suit or a
business, or (where the
particular business, there being no
attorney or vakil properly
express agreement as to the time
discontinues the suit or
when such costs are to be paid.
business) the date of such
discontinuance.
Three years The close of the years in
85. For the balance
which the last item
due on a mutual, open and current
admitted or proved is
account, where there have been
entered in the account;
reciprocal demands between the
such year to be computed
parties.
as in the account.
86. 87[(a) On a policy Three years 88[(a) The date of the
of insurance when the sum insured death of the deceased.
is payable after proof of the death
has been given to or received by
the insurers.
(b) On a policy of (b) The date of the
insurance when the sum occurrence causing
insured is payable after the loss.]
proof of the loss has been given to
or received by the insurers).
87. By the assured Three years When the insurers elect to
recover premier paid under a policy avoid the policy.
voidable at the election of the
insurers.
88. Against a factor for an account. Three years When the account is,
during the continuance of
the agency, demanded
and refused or, where no
such demand is made,
when the agency
terminates.
89. By a principal Three years Ditto
against his agent for
movable property received
by the latter and not
accounted for.
90. Other suits by Three years When the neglect or
principals against agents misconduct becomes
for neglect or misconduct. known to the plaintiff.
Three years When the facts entitling
91. To cancel or set the plaintiff to have the
aside an instrument not instrument cancelled or
otherwise provided for. set aside become known
to him.
92. To declare the Three years When the issue or
forgery of an instrument registration becomes
issued or registered. known to the plaintiff.
93. The declare the Three years The date of the attempt.
forgery of an instrument
attempted to be enforced
against the plaintiff.
94. For property which Three years When the plaintiff is
the plaintiff has conveyed restored to sanity, and
while insane. has knowledge of the
conveyance.
95. To set aside a decree obtainedThree years When the fraud becomes
by fraud, or for other relief on the known to the party
ground of fraud. wronged.
Three years When the mistake
96. For relief on the
becomes known to the
ground of mistake.
plaintiff.
97. For money paid upon anThree years The date of the failure.
existing consideration which
afterwards fails.
98. To make good out of Three years The date of the trustee's
the general estate of a death, or, if the loss has
deceased trustee the loss not then resulted the date
occasioned by a breach of of the loss.
trust.
99. For contribution Three years The date of the payment
by a party who has paid in excess of the plaintiff's
the whole or more than his share of own share.
the amount due under a joint
decree, or by a sharer in a joint
estate who has paid the whole or
more than his share of the amount
of revenue due from himself
and his co-shares.
100. By a co-trustee Three years When the right to
to enforce against the estate of the contribution accrues.
deceased trustee a claim for
contribution.
101. For a seaman's wages. Three years The end of the voyage
during which the wages
are earned.
102. For wages not otherwiseThree years When the wages accrue
expressly provided for by this due
Schedule.
103. By 93[Muslim] for Three years When the dower is
eligible dower (muajjal). demanded and refused or
(Where, during the continuance of
the marriage no such demand has
been made) when the marriage is
dissolved by death or divorce.
Three years When the marriage is
104. By a 94[Muslim] for
dissolved by death or
deferred dower (muajjal).
divorce.
105. By a mortgagor Three years When the mortgagor re-
after the mortgage has been enters on the mortgaged
satisfied, to recovery surplus property.
collections received by the
mortgagee
106. For an account and Three years The date of the
a share of the profits of a dissolved dissolution.
partnership.
107. By the manager of a jointThree years The date of the payment.
estate of an undivided family for
contribution, in respect of a
payment made by him on account
of the estate.
108. By a lesser for Three years When the trees are cut
the value of trees cut down by his down.
lessee contrary to the terms of the
lease.
109. For the profits of immovableThree years When the profits are
property belonging to the plaintiff received.
which have been wrongfully
received by the defendant.
110. For arrears of Three years When the arrears become
rent. due.
Three years The time fixed for
111. By a vendor of completing the sale, or
immovable property for personal (where the title is
payment of unpaid purchase- accepted after the time
money. fixed for completion) the
date of the acceptance.
112. For a call by a Three years When the call is payable.
company registered under any
Statute or Act.
113. For specific Three years The date fixed for the
performance of a contract. performance, or if no such
date is fixed, when the
plaintiff has notice that
performance is refused.
114. For the rescission of aThree years When the facts entitling
contract. the plaintiff to have the
contract rescinded first
become known to him.
Three years When the contract is
broken, or (where there
115. For compensation
are successive breaches)
for the breach of any contract,
when the breach in
express or
respect of which the suit
implied, not in writing registered
is instituted occurs, or
and not herein
(where the breach is
specially provided for.
continuing) when it
ceases.
Part VII. ---Six
years.
Six years When the period of
116. For compensation
limitation would begin to
for the breach of a
run against a suit brought
contract in writing
on a similar contract not
registered.
registered
117. Upon a foreign judgment asSix years The date of the judgment
defined in the Code of Civil
Procedure, 1908.
118. To obtain a Six years When the alleged
declaration that an alleged adoption becomes known
adoption is invalid, or never, in to the plaintiff.
fact, took place.
119. To obtain a Six years When the rights of the
declaration that an adoption is adopted son, as such are
valid. interfered with.
120. Suit for which no Six years When the right to sue
period of limitation is provided accrues.
elsewhere in this schedule.
121. To avoid Twelve years When the sale becomes
encumbrances or conclusive. final and conclusive
Under tenures in an entire estate
sold for arrears of Government
revenue, or in a patni taluq or other
saleable
tenure sold for arrears of rent.
122. Upon a judgment Twelve years The date of the judgment
obtained in 97[Pakistan] or recognizance.
or a recognizance.
123. For a legacy or Twelve years When the legacy or share
for a share of a residue bequeathed becomes payable or
by a testator, deliverable.
or for a distributive share of the
property of an intestate.
Twelve years When the defendant
124. For possession of hereditary takes possession of the
office office adversely to the
plaintiff.
Explanation. ---An
hereditary office is
possessed when the
profits thereof are
usually received, of (if
there are no profits) when
the duties
thereof are usually
performed.
125. Suit during the Twelve years The date of the alienation.
life of a Hindu or 1[Muslim] female
by a Hindu or 1[Muslim] who, if the
female died at the date of
instituting the suit would be
entitled to the possession of land,
to have an alienation of such land
made by the
female declared to be void except
for her life or until her remarriage.
126. By a Hindu Twelve years When the aliened takes
governed by the law of the possession of the

Mitakshara to set aside his father's property
alienation of ancestral property.
127. By a person Twelve years When the exclusion
excluded from joint family property becomes known to the
to enforce a right to share therein. plaintiff.
128. By a Hindu for Twelve years When the arrears are
arrears of maintenance payable.
129. By a Hindu for a Twelve years When the right is denied.
declaration of his right to
maintenance.
130. For the resumption Twelve years When the right to resume
or assessment of rent- or assess the land first
free land. accrues.
131. To establish a Twelve years When the plaintiff is first
periodically recurring refused the enjoyment of
right. the right.
132. To enforce payment Twelve years When the money sued for
of money charged upon immovable becomes due
property.
4[Explanation,--- For the purposes
of this article---
(a) the allowance and fees
respectively called malikana and
haqqs, and
(b) the value of any agricultural or
other
produce the right to
receive which is secured by a
charge upon immovable
property, 5[and
(c) advances secured
by mortgage by deposit
of title deeds].
shall be deemed to be
money charged upon
immovable property.
6[*************]
134. To recover Twelve years 7[When the transfer
possession of immovable becomes known to the
property conveyed or -bequeathed plaintiff.]
in trust or
mortgaged and afterwards
transferred by the
trustee or mortgagee
for a valuable consideration.
8[134A. To set aside a Twelve years When the transfer
transfer of immovable property becomes known to the
comprised in a Hindu, 9[Muslim] or plaintiff.
Buddhist religious or charitable
endowment made by a manager
thereof for a valuable

consideration.
134B. BY the manager of Twelve years The death, resignation or
a Hindu, 9[Muslim] or Buddhist removal of the transferor
to recover possession of
immovable property comprised in
the endowment which has been
transferred by previous
manager for a valuable
consideration.
134C. By the manager of Twelve years The death, resignation or
a Hindu, 9[Muslim] or Buddhist removal of the seller.
to
recovery possession of movable
property comprised
in the endowment which has been
sold by a previous manager for a
valuable consideration.
135. Suit instituted in Twelve years When the mortgagor's
a Court 11[other than a right to possession
High Court] by a mortgagee for determines.
possession of immovable property
mortgaged.
136. By a purchaser at Twelve years When the vendor is first
a private sale for possession of entitled to possession.
immovable property sold when the
vendor was out of
possession at the date of the sale.
137. Like suit by a purchaser at aTwelve years When the judgment-
sale in execution of a decree when debtor is first entitled to
the judgment-debtor was out of possession.
138. Like suit by a purchaser at aTwelve years The date when the sale
sale in execution of a decree when becomes absolute.
the judgment-debtor was in
139. By a landlord to Twelve years When the tenancy is
recover possession from a tenant. determined.
140. By a remainder man, Twelve years When his estate falls into
a reversionary (other than a possession.
landlord) or a devisee, for
possession of immovable property.
141. Like suit by a Hindu orTwelve years When the female dies.
14[Muslim] entitled to the
on the death of
a Hindu or 14[Muslim] female.
142. For possession of Twelve years The date of the
immovable property when the dispossession or
plaintiff, while in possession of the discontinuance.

property, has been
dispossessed or has discontinued
the
possession.
143. Like suit, when the Twelve years When the forfeiture is
plaintiff has become come incurred or the condition
entitled by reason of any forfeiture is broken.
or breach of condition.
15[Omitted].
145. Against a depository orThirty years The date of the deposit or
Pawnee to recover movable pawn.
property deposited or pawned.
146. Before a 16[High Court] in theThirty years When any part of the
exercise of its ordinary original civil principal or interest was
jurisdiction by a last paid on account of
mortgagee to recover from the the mortgage-debt.
mortgagor the possession of
immovable property mortgaged.
146A. By or on behalf of any localThirty years The date of the
authority for possession of any dispossession or
public street or road or any part discontinuance
thereof from which it has been
dispossessed or of which it has
discontinued the possession.
Sixty years When the money secured
147. By a mortgagee for
by the mortgage becomes
foreclosure or sale.
due.
Sixty years When the right to redeem
or to recovery possession
accrues:
Provided that all claims to
redeem arising under
instruments of mortgage
148. Against a mortgagee to of immovable property
redeem or to recover possession of situate in Lower Burma
immovable property mortgaged. which had been executed
before the first day of
May, 1863, shall be
governed by the rules of
limitation in force in that
Province immediately
before the same day.
149. 19[Any suit by "or on behalf of18[Sixty years] When the period of
the Federal]20 Government or any limitation would begin to
Provincial Government] 21[except run under this Act against
a suit before the 22[Supreme a like suit by a private
Court] in the exercise of its original person.
jurisdiction].
150. Under the Code of CriminalSeven days The date of the sentence.
Procedure, 1898 from a sentence of
death passed by a Court of Session
23[or by a High Court in the
exercise of its original Criminal
Jurisdiction].
151. From a decree or order of 25[aTwenty days The date of the decree or
High Court] in the exercise of its order.
original jurisdiction.
152. Under the Code of CivilThirty days The date of the decree or
Procedure, 1908 to the Court of a order appealed from.
District Judge.
153. Under the same Code to High27[Third days] The date of the order.
Court from an order of a
Subordinate Court refusing leave to
appeal to 26[Supreme Court].
154. Under the Code of Criminal28[Thirty days] The date of the sentence
Procedure 1898, to any Court other or order appealed from.
than a High Court.
155. Under the same Code to aSixty days The date of the sentence
High Court, except in the cases or order appealed from
provided for by Article
150 and Article 157.
156. Under the Code of CivilNinety days The date of the decree or
Procedure, 1908, to a High Court, order appealed from.
except in the cases provided for by
Article 151 and Article 153.
157. Under the Code of CriminalSix months The date of the order
Procedure, 1898, from an order of appealed from.
acquittal.
29[158. Under the Arbitration Act,Thirty days The date of service of the
1940, to set aside an award or to notice of filing of the
get an award award.
remitted for reconsideration.
159. For leave to appear and32[Ten days] When the summons is
defend a suit under summary served.
procedure referred to in section
128 (2)(f) 30[or under Order XXXVII
of the 31[Code of Civil Procedure,
1908].
160. For an order under the same Fifteen days When the application for
Code, to restore to the file an review is rejected.
application for review rejected in
consequence of the failure of the
applicant
to appear when the application was
called on for hearing.
161. For a review of judgment by a32[Fifteen days] The date of the decree or
33* Court of small Causes 34**** or order.
by a Court invested with the
jurisdiction of a 35* Court of Small
Causes when exercising that
jurisdiction.
162. For a review of judgment byTwenty days The date of the decree or
36[a High Court in the exercise of order.
its original
jurisdiction.
37162-A. [Repealed].
163. By a plaintiff for an order toThirty days The date of the dismissal
set aside a dismissal for default of
appearance or for
failure to pay costs of service of
process or to furnish security for
costs.
Thirty days The date of the decree or
164. By a defendant, for an order where the summons was
to set aside a decree passed ex not duly served, when the
parte. applicant has knowledge
of the decree.
165. Under the Code of Civil39[Thirty days] The date of the
Procedure, 1908 by a person dispossession.
dispossessed of immovable
property and disputing the right of
the decree-holder or
purchaser at a sale in execution of
a decree to be put into possession.
166. Under the same Code to set39[Thirty days] The date of the sale.
aside a sale in execution of a
decree 40[including any such
application by a judgment-debtor].
167. Complaining of resistance of39[Thirty days] The date of the resistance
obstruction to delivery of or obstruction
decreed or sold in execution of a
decree.
168.For the readmission 39[Thirty days] The date of the dismissal.
of an appeal dismissed for
want of prosecution
39[Thirty days] The date of the decree in
appeal, or, where notice
169. For the re-hearing of an of the appeal was not
appeal heard ex parte. duly served, when the
applicant has knowledge
of the decree.
170. For leave to appeal as a39[Thirty days] The date of the decree
pauper. appealed from.
171. Under the Code of CivilSixty days 43[The date of the order
Procedure, 1908, 42[by the legal or judgment].
representative of a
deceased plaintiff or defendant for
setting aside an order or judgment
made or pronounced in his
absence].
172. Under the same Code by theSixty days The date of the order of
assignee or the receiver of an dismissal.
insolvent plaintiff or appellant for

an order to set
aside the dismissal of a suit or an
appeal.
173. For a review of judgmentNinety days The date of the decree or
except in the cases provided for by order.
Article 161 and
Article 162.
174. For the issue of a notice underNinety days When the payment or
the same Code, to show cause why adjustment is made.
any payment made out of Court of
any money payable under a decree
or any adjustment of the decree
should not be
recorded as certified.
175. For payment of the amount ofSix months The date of the decree.
a decree by installments.
176. Under the same Code to have45[Ninety days The date of the death of
the legal representative of a the deceased plaintiff or
deceased plaintiff or appellant.
of a deceased appellant made a
party.
177. Under the same Code to have45[Ninety days The date of the death of
the legal representative of a the deceased defendant
deceased defendant or correspondent
of a deceased respondent made a
party.
46[178. Under the Arbitration Act,Ninety days The date of service of the
1940, for the filing in Court of an notice of the making of
award. the award].
179. By a person desiring to appealNinety days The date of the decree
under the 47[Code of Civil appealed from.
Procedure, 1908] to
48[the Supreme Court] for leave to
appeal.
180. By a purchaser of immovableThree years When the sale becomes
property at a sale in execution of a absolute.
decree for delivery of possession.
181. Applications for which noThree years When the right to apply
period of limitation is provided accrues.
elsewhere in this schedule or by
section 48 of the Code of Civil
Procedure, 1908.
50[182. [* * * * * *]
183. To enforce a judgment, decree53[Six years] When a present right to
or order of any 51[High Court] in enforce the judgment,
the exercise of its ordinary original decree or order accrues
civil jurisdiction, or an order of to some person capable
52(the Supreme Court). of releasing the right:
Provided that when the
judgment, decree or order
has been revived, or

some part of the principal
money secured thereby,
or some interest on such
money has been paid, or
some acknowledgment of
the right thereto has been
given in writing signed by
the person liable to pay
such principal of interest,
or his agent to the person
entitled thereto or his
agent, the twelve years
shall be computed from
the date of such reviver
payment or
acknowledgment or the
latest of such revivers,
payment or
acknowledgments, as the
case may be.
The second schedule--- [territories referred to in section 31.] Rep. By the repealing
and amending act, 1930 (viii of 1930),
STAMP ACT, 1899
Contents
• Definitions: Sec 2
• Instruments chargeable with duty: Sec 3
• Power to reduce, remit or compound duties: Sec 9
• Duties how to be paid: Sec 10
• Use of adhesive stamps: Sec 11
• Cancellation of adhesive stamps: Sec 12
• Stamp where value of subject-matter is indeterminate: Sec 26
• Duties by whom payable: Sec 29
• Instruments not duly stamped inadmissible in evidence, etc: Sec 35
• Collector’s power to refund penalty paid under section 38, sub-section (1):
Sec 39
• Prosecution for offence against Stamp-law: Sec 43
• Prosecution for offence against Stamp-law: Sec 48
• Penalty for executing, etc., instrument not duly stamped: Sec 62
• Jurisdiction of Magistrates
(1)This Act may be called the Stamp Act, 1899.

(2)It extends to the whole of Pakistan].
(3)It shall come into force on the first day of July, 1899.
The significant provisions of Stamp Act, 1809 are given in the following
paragraphs
Definitions: Sec 2
“Collector”–

Means the Collector of a district; and includes a [District Officer (Revenue)] and
any officer whom [the Provincial Government] may, by notification in the Official
Gazette, appoint in this behalf;
“duly stamped”, as applied to an instrument, means that the instrument bears
an adhesive or impressed stamp of not less than the proper amount and that such
stamp has been affixed or used in accordance with the law for the time being in
force in [Pakistan];
“Executed” and “execution”, used with reference to instruments, mean
“signed” and “signature” “impressed stamp” includes–
Labels affixed and impressed by the proper officer, and
Stamps embossed or engraved on stamped paper;
“power-of-attorney” includes any instrument (not chargeable with a fee under
the law relating to court-fees for the time being in force) empowering a specified
person to act for and in the name of the person executing it;
“Receipt” includes any note, memorandum or writing–
Whereby any money, or any bill of exchange, cheque or promissory note is
acknowledged to have been received, or
Whereby any other movable property is acknowledged to have been received in
satisfaction of a debt, or
Whereby any debt or demand, or any part of a debt or demand, is acknowledged
to have been satisfied or discharged, or
Which signifies or imports any such acknowledgment and whether the same is or
is not signed with the name of any person
ARBITRATION ACT, 1940

Main Contents:
• History/ Evolution
• Object
• Interpretation
• Application
• Role of Arbitrator
• Definitions—Arbitration Agreement, Award, Umpire
• Provisions implied in arbitration agreement: Sec 3
• Agreement that arbitrators be appointed by third party: Sec 4
• Authority of appointed arbitrator or umpire irrevocable except by leave of
Court: Sec 5
• Provision as to appointment of three or more arbitrators: Sec 10
• Power to Court to remove arbitrators or umpire in certain circumstances:
Sec 11
• Powers of arbitrator: Sec 13
• Award to be signed and filed: Sec 14
• Power of Court to modify award: Sec 15
• Judgment in terms of award: Sec 17
• Power of Court to pass interim orders: Sec 18
• Application to file in Court arbitration agreement: Sec 20
• Parties to suit may apply for order of reference: Sec 21
• Appointment of arbitrator: Sec 22
• Power to stay legal proceedings where there is an arbitration agreement:
Sec 34
Object of the Act:

Enforcement of arbitration agreement whereby the parties have bound themselves
down, to have their disputes arising out of transaction to which such an agreement
is applicable, adjudicated upon and decided by the domestic tribunal.
Interpretation:
Arbitration Act does not restrict the contractual rights of the parties. It only gives
effect to the choice of the parties as regards the forum to which their disputes
shall be taken.
Application of the Act:
This act lays down the rules to be followed by the parties, arbitrators and courts.
The Arbitration Act (1940)
Role of Arbitrator:
Arbitrator is to settle dispute between parties amicably by avoiding all type of
technicalities of procedural law but within the four corners of substantive law and
to provide a domestic forum for speedy disposal of dispute. Arbitration is
undertaken through persons to whom both the parties repose their trust.
Comments:
Existence of a dispute is essential for a reference to be resolved through
adjudication of such dispute culminating in an award.
Definitions
Arbitration Agreement: means written agreement to submit present or future
differences to arbitration, whether an arbitrator was named therein or not.
Court: would mean a civil court having jurisdiction to decide the subject matter.
Award: means arbitration award. The decision of arbitration or arbitrator is called
Award.
“legal representative” means a person who in law represents the estate of a
deceased person, and includes any person who intermeddles with the estate of the
deceased, and, where a party acts in a representative character, the person on
whom the estate devolves on the death of the party so acting;
Reference: means reference to arbitration any disputes. Arbitrators to make
decision within four months.
Umpire: is a person, or body of persons (often appointed by the arbitrators

themselves) who is to settle any difference that may arise between the arbitrators.
Authority of appointed arbitrator or umpire irrevocable except by leave

of Court: Sec 5
The authority of an appointed arbitrator of umpire shall not be revocable except
with the leave of the Court, unless a contrary intention is expressed in the
arbitration agreement
Power to Court to remove arbitrators or umpire in certain circumstances:

Sec 11
(1)The Court may, on the application of any party to a reference, remove an

arbitrator or umpire who fails to use all reasonable dispatch in entering on and
proceeding with the reference and making an award.
(2)The Court may remove an arbitrator or umpire who has misconduct himself or
the proceedings.
(3)Where an arbitrator or the umpire is removed under this section, he shall not
be entitled to receive any remuneration in respect of his services.
(4)For the purposes of this section the expression “proceeding with the reference”
includes, in a case where reference to the umpire becomes necessary, giving
notice of that fact to the parties and to the umpire.
Powers of arbitrator: Sec 13

(a). The arbitrators or umpire shall, unless a different intention is expressed in
agreement, have power to (a) administer oath to the parties and witnesses
appearing;
(b). state a special case for the opinion of the Court on any question of law
involved, or state the award, wholly or in part, in the form of a special case of
such question for the opinion of the Court;
(c). The arbitrators or umpire shall, unless a different intention is expressed in
agreement, have power to (c) make the award conditional or in the alternative;
(d). Correct in an award any clerical mistake or error arising from any accidental
slip or omission;
(e). Administer to any party to arbitration such interrogatories as may, in the
opinion of the arbitrators or umpire, be necessary
Award to be signed and filed: Sec 14

(1)When the arbitrators or umpire have made their award, they shall sign it and
shall give notice in writing to the parties of the making and signing thereof and
of the amount of fees and charges payable in respect of the arbitration and
award.
(2)The arbitrators or umpire shall, at the request of any party to the arbitration
agreement or any person claiming under such party or if so directed by the
Court and upon payment of the fees and charges due in respect of the
arbitration and award and of the costs and charges of filing the award, cause
the award or a signed copy of it, together with any depositions and documents
which may have been taken and proved before them, to be filed in the Court,
and the Court shall thereupon give notice to the parties of the filing of the
award.
(3)Where the arbitrators or umpire state a special case under clause (b) of Section
13, the Court, after giving notice to the parties and hearing them, shall
pronounce its opinion thereon and such opinion shall be added to, and shall
form part of, the award.
Power of Court to modify award : Sec 15

The Court may by order modify or correct an award
Where it appears that a part of the award is upon a matter not referred to
arbitration and such part can be separated from the other part and does not affect
the decision on the matter referred; or
Where the award is imperfect in form, or contains any obvious error which can be
amended without affecting such decision; or
Where the award contains a clerical mistake or an error arising from an accidental
slip or omission.
Judgment in terms of award: Sec 17

Where the Court sees no cause to remit the award or any of the matters referred
to arbitration for reconsideration or to set aside the award, the Court shall, after
the time for making an application to set aside the award has expired, or such
application having been made, after refusing it, proceed to pronounce judgment
according to the award, and upon the judgment so pronounced a decree shall

follow and no appeal shall lie from such decree except on the ground that it is in
excess of, or not otherwise in accordance with, the award.
Contract act
Main Content:
• Scope and its significance
• Consideration
• Definition of contract
• Contracts—Essentials and Kinds
Contract—scope and its kinds

The law relating to contracts in Pakistan is governed by Contract Act, 1872. It
extends to the whole of Pakistan; and it came into force on 1 st September, 1872. At
the time of promulgation, this Act comprised of 266 sections.
Scope and Significance:

The law of contract is at the root of any business transaction. We have already
discussed that it affects every person in one way or the other. We enter into
different kinds of contracts in our day today affairs. The law of contracts is
applicable not only to the business community but also to others. When a person
rides a public transport or gets admission in an educational institution or avails
loan from a bank or delivers cloth to a tailor for stitching, he is in fact entering into
a contract, knowingly or unknowingly. By virtue of a contract legal rights and
obligations are created between the contracting parties. The law of contracts is
concerned with self-imposed obligations. The parties to a contract do enjoy
freedom of contract and the rights and duties created by them can be enforced
even though the terms of the contract are harsh or unfair to one party. When
people enter into a contract they make private law binding on each other. The
parties to a contract, in a sense, make the law for themselves. It consists of a
number of limiting principles, subject to which the parties may create rights and
duties for themselves which the law will uphold. Thus we can say that the parties
to a contract, in a sense, make the law for themselves. When contracts were
entered into freely and voluntarily they would be enforceable by courts of law. The
law of contract determines the circumstances under which a promise or an
agreement shall be legally binding on the persons making it. It also provides the
remedies which are available in a court of law against a person who fails to fulfill
his contract and other conditions. The object and function of law of contract is to
see that promises made by the contracting parties are fulfilled.
Contract—defined
“An agreement enforceable by law is a contract”
Agreement—defined Sec 2(e)
Every promise or every set of promises, forming the consideration for each other,
is an agreement.
Promise—defined Sec 2 (b)

When the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted. A proposal when accepted becomes a promise.
Consideration—defined Sec 2 (d)

When at the desire of the Promisor, the Promisee or any other person who has
done or abstained from doing, or does or abstains from doing, or promises to do or

to abstain from doing, something, such act or abstinence or promise is called a
consideration for the promise.
Important ingredients of Contract:

To understand the definition of contract we need to understand the following
definitions on which a contract is based.
• Proposal
• Acceptance
• Promise
• Promisor
• Promisee
• Consideration
• Agreement
According to section 10 of Contract Act 1872;

All agreements are contracts if they are made by the free consent of parties
competent to contract, for a lawful consideration and with a lawful object, and are
not hereby expressly declared to be void.
Essentials of valid Contract

• Offer and acceptance
• Legal relationship
• Legal consideration
• Competent parties
• Free consent of the parties
Concept of competent parties

Parties to contract are required to be of the age of majority.
Of sound mind & Not barred from entering into contracts by the operation of law.
Contracts—Essentials
Concept of free consent:

Consent shall be treated as free if not obtained by:
• Coercion
• Undue influence
• Fraud
• Misrepresentation

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Banking Laws and Practices-BNK 601 VU

© Copyright Virtual University of Pakistan i

Module 1 It would cover the following topics:

Following topics shall be covered at length in this module:

© Copyright Virtual University of Pakistan 1

SBP Act, 1956: it would cover in detail the following topics/contents:

We shall focus special attention on the following topics:

2 © Copyright Virtual University of Pakistan

Securities for Advances: it would cover the following topics/contents:

Designing of legal documents: it would cover in detail the following

© Copyright Virtual University of Pakistan 3

Prudential regulations of SBP: it would cover in detail the following

Guidelines for banks by SBP: it would cover in detail the following

© Copyright Virtual University of Pakistan 5

Scope of Analytical jurisprudence

6 © Copyright Virtual University of Pakistan

Scope of Historical Jurisprudence:

Scope of Ethical Jurisprudence:

Advantages of study of jurisprudence

Concepts/ Definition of Law

© Copyright Virtual University of Pakistan 7

According to John Erskine

According to Lord Radcliff

Imperative law has some authority behind it:

Imperative law is enforced by superior power:

© Copyright Virtual University of Pakistan 9

Precedent or Case Law:

Principles of binding precedent are underlined below

Legislati Precede Custom Agreeme

Parliament: Law/ statutes are made by the parliament.

© Copyright Virtual University of Pakistan 11

When National When National Assembly is

Money All Other Bills

12 © Copyright Virtual University of Pakistan

The financial system does have its impacts on individuals, businesses,

Purpose of the financial system

The financial system brings together savers and borrowers in following

Financial markets provide play field to the financial instruments. Financial

Functions of Financial Markets and Financial Intermediaries

© Copyright Virtual University of Pakistan 13

Financial Institutions: (Global Perspective)

Key Services Provided by Financial Institutions

Structure of Financial Market

Debt and Equity Markets

Primary Market and Secondary Markets

Exchange and Over-the-Counter Markets

16 © Copyright Virtual University of Pakistan

Money Market and Capital Market

Forward Contracts and Futures Market

© Copyright Virtual University of Pakistan 17

FINANCIAL INSTRUMENTS & BANKING LAWS & PRACTICES

Money Market Instruments

Government Treasury Bills

Bill of exchange and other Commercial Papers

Bill of exchange Defined and Explained

Explanation of different features of a bill of exchange

© Copyright Virtual University of Pakistan 19

Federal (Fed) Funds (in U.S Perspective)

Negotiable Bank Certificates of Deposit

Capital Market Instruments