Banking law and practices

Assignment no 2

Section: A
Presented to: ma’am Wafa farrukh

Presented by: ABEERA SAEED L1F18MCOM7024

LEGAL SYSTEM OF PAKISTAN

What is law all about? And its importance

. 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

The law is important for a society for it serves as a norm of conduct for citizens. .The law is
important because it acts as a guideline as to what is accepted in society. Without it there would
be conflicts between social groups and communities. It is pivotal that we follow them

Jurisprudence

Latin word. Juris means Law or legal or Wise and Prudential means knowledge

so Jurisprudence means knowledge of law or skill in law.

Importance of Jurisprudence:

It serves to render the complexities of law in a more manageable and rational way which can
help to improve practice in the law. Its study helps in rationalizing the thinking the students and
prepares them for an upright civil life.

Following are the kinds of jurisprudence

• Analytical Jurisprudence

• Historical Jurisprudence

• Ethical Jurisprudence

Analytical:

 It deals with the analysis of laws, which are existed at present. It is the jurisprudence of present
and has no concern with various stages of past through which law has been evolved.

Criticism: It neglects not only historical evolution of law, but also moral aspect of law.

Scope of Analytical Jurisprudence

Analytical Jurisprudence analyses the basic principle of the existing civil law. But have no
concern with the past stages of evolution and the ethical status, goodness or badness of the law.
Therefore it can be said that it ignore the historical and ethical study.

Historical
 It deals with the past of the law and its evolutionary process. Also it deals with origin of the law
and its basic principles with its development. This is the jurisprudence of the past (history of
legal principles & conceptions of legal systems).

Criticism: It neglects present and future law only deals with past law.

Ethical It deals with the philosophy of what ought or should be? It deals towards the supreme
good. It seeks towards the ideal form of law. It is jurisprudence of future i.e. from moral point of
view as to how law should be & how its purpose is achieved.

Scope of ethical jurisprudence

Ethics is concerned with good human conduct in the light of the public
opinion. Jurisprudence is related to Positive Morality in so far as the law is the instrument to
assert positive ethics. Jurisprudence believes that Legislations must be based
on ethical principles. It is not to be divorced from Human principles

Advantages of study of jurisprudence

• Jurisprudence is the “grammar of law.

• Teaches the lawyers and the legislator's proper use of legal terms.

• It ensures homogeneity and accuracy in legal phraseology.

• It ensures homogeneity and accuracy in legal phraseology. And many more

Classification of law

The law is classified into the following branches:

Imperative Law

 Physical or Scientific Law

 Natural or Moral Law

Imperative means obligatory, compulsory, essential, important etc. John Austin introduced this

theory. Starting point of Austin theory is his definition of independent and politically organized
society and sovereign

He said,” if a determinant human superior, not in a habit of obedience to a like superior,

commands, habitual obedience from a bulk of a society, such a society is politically
organized and independent.”

According to Austin the law may be divided into two parts-

[1]-Law of God-laws set by God for men. 

[2]-Human laws-laws set by men for men.

Law is command of sovereign.

No necessary connection between law and morals or “law as it is” and “law ought to be”. 
Legal system is a closed logical system

Divine law

God made laws are natural, fixed, rigid, unchangeable, and uniform (same laws at all time and at
all place) in other words all things are bound to everlasting or eternal law of God, and this eternal
law is in fact natural law.

Civil law

Civil law also known as law of the land (country law) it covers all the law which prevailing in a
society. It covers all the statues, laws, rules and regulations which exist in a society.

International law

International law is a law which is applicable for interstate affairs i.e. between the state to
determine the relation in one state and the other which is governed by international law.

According to Salmon jurisprudence is the knowledge which proves helpful in understanding

basic principles of laws of country.

Sources of law
Formal sources of law are that source, which makes law authenticated. In fact, law drives its
image, impression, effect and lawfulness from this kind of source.
Material sources of law are from which substance law is derived. All other sources except
formal source of law are related & connected with material source of law.
Both formal and material sources are subdivided into legal and historical sources and we are
going to study legal source.
Legal sources include: Legislation-how law is made (statue law).Precedent- judgments of
superior judicatory i.e. High courts and supreme courts (judgment law).
Customs- practices (tradition/ customary law).
Agreement- people are free to make agreements and types of agreement on their own.
Legislation
Legislation (or "statutory law") is law which has been promulgated (or "enacted") by
a legislature or other governing body or the process of making it. ... Whether a given bill will be
proposed is generally a matter of the legislative priorities of government.
IMPORTANCE
Legislation is one of the most important instruments of government in organizing society and
protecting citizens. It determines amongst others the rights and responsibilities of individuals and
authorities to whom the legislation applies
Process of legislation
In order for a bill to become law in Pakistan, it must undergo a legislative procedure in each
house of Parliament that involves twelve or thirteen steps, including three readings in both the
National Assembly and the Senate, followed by presidential assent
FINANCIAL SYSTEM AND BANKING
The financial system:
The group of institutions that helps matches the saving of one person with the investment of
another. In other words, the group of institutions that helps matches the saving of one person
with the investment of another. IT IS AN 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.
Purpose of the financial system
The primary purpose of financial law is to allocate risk from one person to another and change
the nature of risk being run by the protection buyer into the 'credit risk' of the risk taker.
• Why the financial system is important?
• What are the players in the financial system?
• How the financial system works?
On what basis are the activities, work, transactions, institutions in the financial system are
working so what is all that in order to understand all this we will see how the financial system
works, what is its purpose, who are the player involved in itThe basic purpose & role of the
financial systems along with its contribution is the growth which you see in the world as it plays
a big part in it.
- What does financial system do?
 It channels the funds from savers to borrowers, giving saver's claim on borrower’s future
income. The financial system is taking funds from savers and giving it to borrowers and
it does it in two ways. This is done by the financial institutions and by the financial
markets which are playing their role in the market.
 Direct Finance
 Borrowers sell securities directly to lenders in the financial markets.
 Governments and corporations finance their activities this way
  The securities become assets to the lenders who buy them and liabilities to the borrower
who sells them
 Indirect Finance
 A financial institution (like a bank) borrows from the lender and then provides funds to
the borrower. If someone borrows money to buy a car, the car becomes his or her asset
and the loan is a liability.
FINANCIAL MARKETS•
Market where entities can trade financial securities, commodities, at low transaction costs
and at prices that reflect supply and demand. Securities include stocks and bonds, and
commodities include precious metals or agricultural goods

Types of Financial Markets

Financial markets are divided as under:
1. Foreign exchange market.
2. Stock market.
3. Bond market.
Foreign exchange market
This market determines foreign exchange rates for every currency. It includes all aspects of
buying, selling and exchanging currencies at current or determined prices.
The Stock Market.
A stock is a claim to partial ownership in a firm. Or we can say the stock market refers to the
collection of markets and exchanges where regular activities of buying, selling, and issuance of
shares of publicly-held companies take place.
The Bond Market.
A bond is a certificate of indebtedness i.e. the bond market (also debt market or credit market) is
a financial market where participants can issue new debt, known as the primary market, or buy
and sell debt securities, known as the secondary market. This is usually in the form of bonds, but
it may include notes, bills, and so on.
Financial institution
Common types of financial institutions include; banks, Insurance Company, Leasing
Company, Investment Company, Mutual Funds.
Key Services Provided by Financial Institutions
Risk Sharing
We know that the value of financial assets change over period based on a number of factors.
Some factors could be interest earned or expanded, inflation, growth of economy, price in the
share market, demand and supply ratio etc. Risk is the chance that the value of financial assets
will change relative to your expectation or your current value. The financial system makes it
possible for individual depositors and borrowers to share the risk. 
LIQUIDITY

 The term liquidation in finance and economics is the process of bringing a business to an end
and distributing its assets to claimants.

 A bankrupt business is no longer in existence once the liquidation process is complete.

 Liquidation can also refer to the process of selling off inventory, usually at steep discounts.

INFORMATION
Further the financial markets convey information to both savers and borrowers by determining
the prices of stocks, bonds, and other securities. The incorporation of available information into
asset prices is an important feature of well-functioning financial markets.
Structure of Financial Market
• 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 Markets 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 markets and over-the-counter market. (OTC)
• 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.
• Forward contracts and future markets
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.

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

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.

Financial instrument
A Document with monetary value and is legally enforceable. It can be a check, bill, bond, or
contract that two parties or more agree to the payment of. Refer to debt instrument,
equity instrument, and financing instrument.
TYPES OF MARKET INSTRUMENTS
Money Market Instruments
The market for financial assets with an original maturity of less than one year. It deals in
short term debt instruments.
Capital Market Instruments
The market for financial assets with an original maturity of greater than one year. It deals in
long-term debt instruments
 Money market instrument

 GOVERNMENT SECURITIES(G- Sacs)

 Issued by the Government for raising a public loan or as notified in the official Gazette.

 Maturity ranges from of 2-30 years.

 G-sacs consist of Government Promissory Notes, Bearer Bonds, Stocks or Bonds, Treasury
Bills or Dated Government Securities.

 No default risk as the securities carry sovereign guarantee.

 Ample liquidity as the investor can sell the security in the secondary market

2. MONEY MARKET AT CALL ANDSHORT NOTICE

 Money at call is a loan that is repayable on demand, and money at short notice is repayable
within 14 days of serving a notice.

 Participants are banks & all other Indian Financial Institutions as permitted by RBI.

 Banks borrow call funds for a variety of reasons to maintain their CRR, to meet their heavy
payments, to adjust their maturity mismatch etc.

3. TREASURY BILLS

 Short term (up to one year) borrowing instruments of the Government of India.

 Enable investors to park their short term surplus funds while reducing their market risk.

 Issued at a discount to face value. The return to the investor is the difference between the
maturity value and issue price.

 RBI issues T-Bills for three different maturities: 91 days, 182 days and 364 days

4. CERTIFICATES OFDEPOSITS

 A CD is a time deposit, financial product commonly offered to consumers by banks.

 CDs are negotiable instrument.
 Financial Institutions are allowed to issue CDs for a period between 1 year and up to 3 years.
 Normally give a higher return than Bank term deposit, and are rated by approved rating agencies.

 5. COMMERCIAL BILLS

 Commercial bill is a short term, negotiable, and self-liquidating instrument with low risk.
 Written instrument containing an unconditional order.

 Once the buyer signifies his acceptance on the bill itself it becomes a legal document.

 Commercial bill is a short term, negotiable, and self-liquidating instrument with low risk.

  6. COMMERCIAL PAPER

 Commercial Paper is a money-market security issued (sold) by large banks and corporations
to get money to meet short term debt obligations.

 Commercial paper is usually sold at a discount from face value.

 Interest rates fluctuate with market conditions, but are typically lower than banks‘rates.

 7.Repurchase Agreements

 Repo or Reverse Repo are transactions or short term loans in which two parties agree to sell
and repurchase the same security.

 They are usually used for overnight borrowing

 Repo/Reverse Repo transactions can be done only between the parties approved by RBI and
in RBI approved securities

7. Eurodollars

 Dollar-denominated deposits held in banks outside the United States.

8. Negotiable Bank Certificates of Deposit

 Debt instrument sold by depository institution. It pays annual interest payments equal to
fixed % of original purchase price. It can be resold in secondary market

Capital Market Instruments

 Now we have to see which institution is of capital market, to what extent it is and to
which degree it is.

 Now we have to see which institution is of capital market, to what extent it is and to
which degree it is.

Stocks (shares)

 An owner of a share owns a piece of the firm and is entitled to part of its profits. These
are issued by the companies to the purchased that are known as shareholders. This
 important instrument which are traded through the stock exchange. Secondary market
provides stock exchange where you can purchase and sell.

Corporate Bonds

 Long-term debt instruments issued by corporations

Mortgages

 Long term funds provided against the security of immovable property, real estate, for
housing loans are provided which are known as mortgage. Against mortgage finance is
provided which creates liquidity in the system which is an instrument and an institution
such as mortgage banks which are the institution and the technique or methodology
which they use is the mortgage.

Debentures: (Corporate Bonds)

 In Global Perspective debentures are issued whereas, in Pakistan participation term

certificates are issued (PTCs) which are the instruments of capital market due to long
term maturity.

 Therefore, Banks are the institutions of money market by virtue of deposit base they
have, by virtue of sources of funds they have so we will call the banks as the institutions
of money market

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.
Safe-Custody Services (Lockers Facility)
This relationship is governed by the law of bailment. (Legal relationship of Bailer and
Bailed is established between the customer and the banker while availing lockers
facility).Courts while adjudicating cases also pay due consideration to normal banking
practices
 EVOLUTION OF BANKING
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 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 banquet and the Italian word, banc, both meaning bench
• Types of Banks
Banks provide to the commercial and industrial needs of all countries which include
highly developed and industrialized countries, the less developed countries and the
countries which are at the initial stage. Therefore, there are:
 -THE INDUSTRIAL BANKS
 -THE COMMERCIAL BANKS
 -THE JOINT STOCK BANKS
 THE CO-OPERATIVE BANKS
They not only meet the requirements on a national basis, but also on an international
basis. The Banks todays are performing so many functions that it would not be an
inaccuracy to suggest that they have become the guardian of the monetary economies of
the world.
• Banking is a Dynamic Concept
In conclusion, we can say that banking is a dynamic concept as it is the invention of
decades and the development which has taken place is the creation 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.

IMPORTANCE OF COMMERCIAL BANK

The general role of commercial banks is to provide financial services to general public
and business, ensuring economic and social stability and sustainable growth of the
economy. In this respect, credit creation is the most significant function of commercial
banks.

• Foundation of Banking
At the time of independence 1947, there were 487 branches of scheduled banks situated
in geographical boundaries of Pakistan. Since with the independence the interest of those
who were running those banks changed as they shifted back to India and elsewhere. So
by 30th June 1948, this number of these branches reduced by 1950.There was 19 foreign
 banks having small branches and controlled through the head officesSetup of National
Bank of Pakistan
• National Bank of Pakistan was established on November 8, 1949 through passing of a
special ordinance in the National Assembly. The need for the establishment came due to
the reason that at the time newly born country was facing economic crises.
• Establishment of SBP
• The technical and administrative difficulties of establishing a central bank just after
independence compelled Pakistan to enter into an agreement with the Reserve Bank of
India by which the bank was to perform the function of a central bank in this area also up
to 30th September, 1948.The Reserve Bank of India started following wrong policies
against the interest of Pakistan. The situation became so grave that after the consultation
of two governments the Reserve Bank of India was asked to finish the agreement from
30th June instead of from 30th September,1948.To get rid of the intervention form the
reserve bank of India, a self-owned and operated Central Bank by the name of State Bank
of Pakistan was formed in July 1948 to carry on the responsibilities of issuing the
currency and most importantly controlling the flow of money inside the country So the
Government of Pakistan decided to establish the State Bank of Pakistan as its central
bank from 1st July, In the same year first Pakistani notes in the denomination of Rs.5, 10,
and 100 were issued and Indian currency was withdrawn from circulation.
• Increased number of banks by 1973
• As discussed that at the time of independence, there were only two banks, which were
incorporated whose owners were Muslims, they chose 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 Act, 1974

Till 1973, banking was in the private sector but in 1974, the banks in Pakistan were
nationalized through an Act called Nationalization Act, 1974. The basic purpose of
nationalization was that the funds, the resources those are distributed among the people,
amongst the different classes, segments of societies, different regions and provinces.
Through nationalization the government wanted to accomplish its policies of
development of different sectors, different segments of societies, different regions where
there was no development and provinces where money was required but was not
available in that quantity.

STATE BANK OF PAKISTAN ACT, 1956

Establishment and incorporation of the Bank

(1) 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 Adulate-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. (2) The bank shall be a body corporate by the name of State Bank of Pakistan
or Bank Adulate-e- Pakistan, having perpetual succession and a common seal, and shall by the
said name sue and be sued.

Share Capital
(1) The original share capital of the bank shall be three crores 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 percent shall be held by the Federal Government and the balance by
the public.
(2) 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 percent of the additional share
capital shall be issued to the Federal Government.
(3) The nominal value of Issue price, the manner in which new shares may be issued and allotted
and their assignment to the registrar of share holders maintained under sub section (1) of section
7, shall, subject to approval of Federal Government, be determined by the Central Board.
Central Board of Directors
The Central Board shall consist of
• The Governor;
By governor means the governor state bank of Pakistan
• Secretary, Finance Division, Government of Pakistan;
The government of Pakistan secretary, finance will also be the member whosoever the secretary
is.
• Seven Directors, including one Director from each Province, to be nominated by the
Federal Government ensuring representation to agriculture, banking and industrial
sectors
Then seven directors of central board of directors are talked about here. These seven directors
must include one Director from each Province, to be nominated by the Federal Government who
will appoint different three more directors who will ensure representation to agriculture, banking
and industrial sectors.
Functions and responsibilities of the Central Board
9A.1. Functions and responsibilities of the Central Board. The Central Board shall, in order
to secure monetary stability and soundness of the financial systems;
(a) Formulate and monitor monetary and credit policy and, in determining the expansion of
liquidity, take into account the Federal Government's targets for growth and inflation and ensure
that the Bank conducts monetary and credit policy in a manner consistent with these targets and
the recommendations of the Monetary and Fiscal Policies Co-ordination Board with respect to
macro-economic policy objectives:
(b) determine and enforce, in addition to the overall expansion of liquidity, the limit of credit to
be extended by the Bank to the Federal Government, Provincial Governments and other agencies
of the Federal and Provincial Governments for all purposes (c) Approve the credit requirements
of the private sector and intimate the same to the Monetary and fiscal Policies Co-ordination
Board;
(d) Tender advice to the Federal Government on the interaction of monetary policy with fiscal
and exchange rate policy;
(e) Analyze and advise the Federal Government on the impact of various policies on the state of
the economy;
(f) submit a quarterly report to the Mails-e-Shore (Parliament) on the state of the economy with
special reference to economic growth, money supply, credit, balance of payments and price
developments; and
(g) Discharge such other functions as May necessary for formulating monetary policy and
regulating the monetary system or as may be assigned by the Federal Government.
Monetary and Fiscal Policies Coordination Board
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
Executive Committee
The executive committee or board of an organization is a committee within that organization
which has the authority to make decisions and ensures that these decisions are carried out
Qualifications and disqualification of Directors and Members:
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; a person of unsound mind;
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?
Term of office of Directors-and Members
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 renomination, as the case may be.
Removal from and vacation of office of the Governor, Deputy Governors, Directors and
Members
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
- General and annual general meeting
- Business which the Bank may transact:
Production of unpublished record of bank
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.
Inconsistent orders not to be issued
 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
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.