MECHIR BANDA TEAM (MBT): Banking Laws & Practies BNK601

Banking Laws & Practices BNK601 book HANDOUTS in pdf 
 
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Banking laws and practices-BNK 601 VU 
© Copyright Virtual University of Pakistan 1 
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 
· 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 
Banking Laws and Practices-BNK 601 VU 
© Copyright Virtual University 2 of Pakistan 
· 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 
· 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 
Banking Laws and Practices-BNK 601 VU 
© Copyright Virtual University of Pakistan 3 
· 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 
Banking Laws and Practices-BNK 601 VU 
© Copyright Virtual University 4 of Pakistan 
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: 
Banking Laws and Practices-BNK 601 VU 
© Copyright Virtual University of Pakistan 5 
· 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. 
Banking Laws and Practices-BNK 601 VU 
© Copyright Virtual University 6 of Pakistan 
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 
Banking Laws and Practices-BNK 601 VU 
© Copyright Virtual University of Pakistan 7 
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”. 
Banking Laws and Practices-BNK 601 VU 
© Copyright Virtual University 8 of Pakistan 
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 
Banking Laws and Practices-BNK 601 VU 
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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. 
Banking Laws and Practices-BNK 601 VU 
© Copyright Virtual University 10 of Pakistan 
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. 
Sources of Law 
Formal 
Sources 
Material Sources 
Historical 
Sources 
Legal 
Sources 
Legislation Precedent Customs Agreement 
Banking Laws and Practices-BNK 601 VU 
© Copyright Virtual University of Pakistan 11 
When National Assembly 
is in Session 
When National Assembly is not 
in Session 
Money Bill All Other Bills 
National 
Assembly 
Senate 
President 
Assent 
Reject 
Act/Law 
Sent for reconsideration to 
Parliament (Joint sitting of 
National Assembly and Senate) 
President 
Ordinance 
Process of 
Legislation 
Banking Laws and Practices-BNK 601 VU 
© Copyright Virtual University 12 of Pakistan 
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: 
Banking Laws and Practices-BNK 601 VU 
© Copyright Virtual University of Pakistan 13 
Indirect Finance 
Funds 
Funds 
Funds 
Direct Finance 
Financial 
Intermediaries 
Lender-Savers: 
 Households. 
 Business Firms. 
 Government. 
 Foreigners. 
Financial 
Market 
Borrower Spenders: 
i. Business Firms. 
ii. Government. 
iii. Households 
iv. Foreigners. 
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) 
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. 
Types of Financial Markets 
Financial markets are divided as under: 
1. Foreign exchange market. 
2. Stock market. 
3. Bond market. 
Financial markets are one arena in which savers’ surpluses are transferred to borrowers. Savers can buy 
stocks and Bonds and Business borrowers can obtain funds by issuing stocks and Bonds 
Financial Institutions: (Global Perspective) 
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. 
Banking Laws and Practices-BNK 601 VU 
© Copyright Virtual University 14 of Pakistan 
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 financial 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 
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© Copyright Virtual University of Pakistan 15 
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) 
Banking Laws and Practices-BNK 601 VU 
© Copyright Virtual University 16 of Pakistan 
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. 
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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' acceptances 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. 
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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 house- holds, 
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. 
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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. 
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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. 
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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 
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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. 
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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 
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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 
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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 
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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 denationalized 
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. 
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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 cooperative 
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; 
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(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: 
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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 ofa) 
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 Boarda) 
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: 
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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 ifa. 
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. 
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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. 
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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 subsection 
(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 subsection 
(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” 
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“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. 
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· 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. 
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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 
following topics are covered under this part 
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 
following topics are covered under this part 
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 
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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. 
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LESSON 8 
BANKING COMPANIES ORDINANCE, 1962 
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 
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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: 
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"Scheduled bank" means a bank for the time being included in the list of banks maintained under subsection 
(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: 
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· 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 statei. 
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 
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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 
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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. 
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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. 
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LESSON 9 
BANKING COMPANIES ORDINANCE, 1962 
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 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”. 
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 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 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. 
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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— 
(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 
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. 
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 
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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. 
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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. 
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LESSON 10 
BANKING COMPANIES ORDINANCE, 1962 
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. 
Banking Laws and Practices-BNK 601 VU 
© Copyright Virtual University of Pakistan 49 
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 mortgagemoney 
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 
Banking Laws and Practices-BNK 601 VU 
© Copyright Virtual University 50 of Pakistan 
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 subsection 
(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 tosubsidiary 
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 
Banking Laws and Practices-BNK 601 VU 
© Copyright Virtual University of Pakistan 51 
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 
 
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