KARACHI:Pakistan’s central bank has once again found at least seven commercial banks, including leading ones, to have violated instructions on transactions in foreign currencies, imposing financial penalties totalling Rs775.54 million on as many as nine banks in the quarter ending March 31, 2024.
The central bank has tightened its oversight of foreign exchange dealings by commercial banks and exchange companies amid the country’s foreign exchange reserves (held by SBP) remaining low at $8 billion for the past couple of months until April 5, 2024, providing import cover for less than two months. These reserves are estimated to have further dropped to around $7 billion temporarily after repaying a foreign debt worth $1 billion last week. They are expected to rise back to around $8 billion again after the IMF releases the last tranche of $1.1 billion later this month (April 2024).
In a brief report titled ‘Details of significant enforcement actions by SBP during the quarter ended March 31, 2024,’ the State Bank of Pakistan (SBP) reported on Wednesday that it has imposed monetary penalties ranging from Rs38.54 million to Rs187.65 million on each of the seven banks found involved in violating instructions related to dealing in foreign exchange. The report did not provide details on the exact nature of the violations committed by the commercial banks regarding their foreign exchange dealings. However, the central bank advised financial entities to improve their internal processes and strengthen their systems to ensure meticulous compliance with regulatory instructions and to avoid recurrence of similar violations.
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Earlier, the central bank conducted a study and found 18 banks allegedly involved in overpricing foreign currency in rupee value in 2022 but decided not to penalise them due to strong opposition from the financial lobby. As many as 19 commercial banks had earned windfall income amounting to Rs110 billion in 2021 and 2022 by unnecessarily devaluing the rupee against the US dollar and other major currencies. The government considered imposing a 40% tax on their windfall income in November 2023, which would have generated an additional Rs44 billion in revenues.
The central bank has repeatedly claimed to be in contact with the Ministry of Finance to take action based on their findings in 2022. In the recent past, the central bank has suspended licenses of many currency exchange companies for being involved in smuggling foreign currency across borders and manipulating the rupee-dollar parity. It has also encouraged small currency exchange companies to merge with each other or become part of larger exchange companies to curb speculation and manipulation in foreign exchange.
The State Bank of Pakistan has penalised as many as nine financial entities in the quarter under review, including an exchange company. A Shariah-compliant bank was penalised for violating Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) instructions. Other offenses committed by many commercial banks included customer due diligence (CDD), Know Your Client (KCY), asset quality, and general banking operations, according to the report.
The central bank has been penalising commercial banks on a regulatory and quarterly basis, with the names of some banks highlighted repeatedly for violating instructions on various fronts. Despite economic slowdown and underperforming industrial activities in the country, Pakistan’s banks listed on the stock market reported an outstanding growth of 86% in net profit in the year ending December 2023, boosting total earnings to a record high of Rs572 billion amid a higher interest rate environment in the country. They managed to achieve this record high profit despite an economic downturn and underperforming industrial activities in the country.
In the calendar year of 2023, the banking sector in the listed space witnessed significant profits (86% year-on-year) driven mainly by policy rate hikes of 600 basis points coupled with volumetric growth in deposits (over 24% in 2023 compared to 2022).
Published in The Express Tribune, April 18th, 2024.
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