Pakistan’s central bank has taken a stern stance against six commercial and Shariah-compliant banks, imposing a monetary penalty of Rs31 million on them for violating regulatory instructions related to anti-money laundering (AML), combating the financing of terrorism (CFT), and foreign exchange (FX) regulations in the quarter ending June 30, 2023.
The six banks facing penalties include some of the top conventional and Islamic banks in the country. The violation of these crucial banking regulations could potentially lead to Pakistan being put back on the Financial Action Task Force’s (FATF) grey list, as the international watchdog closely monitors suspicious financial transactions worldwide.
Pakistan had managed to reclassify into FATF’s white list in October 2022, signalling significant progress in implementing AML and CFT regulations after being placed on the grey list earlier.
However, a couple of major Pakistani banks have faced the consequences of non-compliance in the past, with branches abroad being closed and hefty penalties being imposed, especially in jurisdictions like the US.
Finance Minister Ishaq Dar has been vocal about local banks violating foreign exchange regulations, such as manipulating the rupee-dollar exchange rate in the interbank market. The central bank conducted a study on eight suspected banks involved in foreign exchange manipulation, as they were found to have earned substantial revenue through speculation on the rupee-dollar trade.
Initially, the State Bank of Pakistan had announced plans to take regulatory or monetary actions against banks engaged in rupee manipulation by December 2022, but later halted the process.
Recent reports on the strengthening of black currency markets have caught FATF’s attention, said a currency dealer, leading to renewed concerns about Pakistan’s financial system.
The central bank’s report titled ‘Details of Significant Enforcement Actions by SBP during the Quarter ended June 30, 2023’ reveals that besides penal actions, banks have also been advised to improve their internal processes.
The violations span various areas, including customer due diligence (CDD), know-your-clients (KYC), asset quality, and general banking operations.
Out of the six banks facing enforcement actions by the SBP, four were charged with violating foreign exchange regulations, one for non-compliance with AML/CFT regulations, one for quality assets, while all six banks were found to be flouting CDC/KYC regulations and general banking operations.
It is noteworthy that the central bank has been consistently imposing monetary penalties on different banks for regulatory violations for several years. However, despite these actions, conventional and Shariah-compliant banks have continued to overlook regulatory instructions.
The latest significant enforcement actions taken by the central bank and FATF’s renewed concerns point to the involvement of influential individuals and organisations in suspicious international financial transactions.
Interestingly, the banks facing penalties are among those that have reported record-high profits in recent years. These profits were earned even when various other industries were facing challenges due to factors such as soaring borrowing costs (reaching an all-time high of over 23%), substantial rupee devaluation against the US dollar, limited foreign exchange for raw material imports, and political instability in the country.
In the quarter ending June 30, 2023, the banks’ profits, primarily derived from the spread between their lending interest rates and the return offered to depositors, reached a two-decade high weighted average spread of 7.73%. According to a local research house, the spread on fresh lending and borrowing spiked to over 9% during the same period.
As the central bank continues to crack down on regulatory violations in the banking sector, the spotlight remains on the need for compliance and transparency in the financial industry to ensure a stable and secure economic environment for Pakistan.
Published in The Express Tribune, July 28th, 2023.
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