BANKING LAW &

PRACTICES
MBA 2nd semester (B&F)
 Origin & growth of banking
Various views about the origin of word bank
1-bank is derived from Greece word
bancus(bench)From the fact that Jews in
Lombardy transacted the business transactions
by sitting on the benches in the market places.
2-other views told that this word is derived from
German word bauk which means joint stock fund.
Later on after the occupation of German on
major part of italy ,this changed to word banco
and then to bank.
 Growth banking
Origin & growth of banking can be traced to as
600 B.C.(Before Christ) means dates Before
Jesus's birth
Accourding to Crowther, Modern banking has
three ancestors:
1-The merchants
2-The goldsmiths
3-The money lenders
 The merchants
That is the earliest stage in the evolution of
modern banking. These merchants were
traders in different commodities. For this
trade they could not carry precious metals due
to possibilities of theft. So the traders with
good reputations issues letters of transfers
called hundi
That hundi were taken as money for exchange
purpose.
 The goldsmiths
That is the 2nd stage of evolution of modern
banking. In this the goldsmiths issues receipts
against the money deposited with the
goldsmiths.
These receipts were operative and acceptable by
the traders only because of the integrity &
solvency of the goldsmiths
We can say these receipts were the earlier bank
notes.
Later on when goldsmiths recognized that most
of the money deposited with them was lying idle.
So they decided to give deposited money as loan
to the needy persons.
 The money lenders

Third stage in the development of banking arose when

the goldsmiths became moneylenders.
At that time moneylenders keep some cash with
themselves for payment purposes & rest of money
they lent to the needy persons.
The allowed the depositors to draw over & above the
money actually standing to their credit.(overdraft
facility)
In the same way goldsmiths(moneylenders) practiced
to give loan without keeping adequate reserves for
meeting the demand for cash of customers.
 Cont..
Due to the above practice of goldsmiths,
confidence of depositors on goldsmiths tend to
be decreased.
In order to reinstate the confidence level ,A
conference was held in Nuremberg in 1548.in this
conference it was decided that a bank should be
set up by the state.
First central bank was formed in Geneva in
1578,in 1694 bank of England. After that there
was stream of commercial banks as trade
increases with passage of time
 Types of banks
Primarily all banks gather idle money for the purpose of lending to others and
investments.
However due to variety of resources of money & diversity in lending &
investment operations, banks are classified into different types. These are
Commercial banks
A financial institution that provides services, such as accepting deposits, giving
business loans and auto loans, mortgage lending, and basic investment products
like savings accounts and certificates of deposit.
Merchant banks
A bank that deals mostly in (but is not limited to) international finance, long-term
loans for companies and underwriting. Merchant banks do not provide regular
banking services to the general public.
Savings banks
A financial institution whose primary function is to hold deposit in savings
accounts. Also known as a Savings and Loan Association.
Mortgage banks
A bank that primarily or exclusively offers loans to clients to purchase real estate,
especially of private residences. The bank loans its own capital to clients and
either collects payments (with interest) or sells its loans on the secondary
market. Other revenue comes from origination fees and similar fees attached to
making loans.
Consumer banks
consumer loans, credit cards, etc., and other such
services provided to individuals. Also called consumer
banking
Investment banks
A specific division of banking related to the creation of
capital for other companies. Investment banks
underwrite new debt and equity securities for all types of
corporations. Investment banks also provide guidance to
issuers regarding the issue and placement of stock.
Development banks
Financial institutions dedicated to fund new and
upcoming businesses and economic development
projects by providing equity capital and/or loan capital.
 Conti..
Cooperative banks
A bank that holds deposits, makes loans and provides other financial
services to cooperatives and member-owned organizations.
Exchange banks
Exchange banks are those banks which deal in foreign exchange and
specialize in financing foreign trade. They are also called foreign
exchange banks.
Central banks
The central bank is the apex bank in a country which controls its
monetary and banking structure. It is owned by the government
of the country and operates in national interest.
CLASSIFICATION OF BANKS ON THE BASIS OF OWNERSHIP:
Banks are classified on the basis of ownership into three categories
i.e..
 Cont.
(i) Public sectors banks
(ii) Private sector banks
(iii) Cooperative banks
Public sector banks
The banks which are owned and controlled by
government or government owned agencies.
Private sector banks
The banks which are owned by corporations or private
individuals.
Cooperative banks
These banks are set up under the cooperative Society Act
of 1925.the federal bank for cooperative was set up
in 1976 in Pakistan.
Classification on the basis of domicile
(a) Domestic banks which are registered and incorporated
within the country
(b) Foreign banks which have their origin & head offices in
the foreign country.
Scheduled and non scheduled bank
Scheduled banks
The minimum Paid up Capital requirements for all locally
incorporated banks has been raised to Rs. 23 billion (net
of losses).they should be members of clearing
house(NIFT-National Institutional Facilitation
Technologies) which is managed and supervised by SBP.
Non scheduled bank
The bank which is not member of clearing house that is
managed and supervised by SBP.
 GROWTH OF BANKING IN PAKISTAN
At the time of partition, the total number of
commercial banks was 38, out of these: the
Pakistan banks were 2; Indian banks 29 while the
exchange banks were 7 & the total deposits of
Pakistan banks stood at Rs.880 million whereas
the advances were Rs.198 million.
Development of banking in Pakistan
The process of development of banking started
with the establishment of State bank of
Pakistan.SBP was established in July 1948.in
November 1949 National bank of Pakistan.
IDBP & ADBP was set up in August 1961.
Nationalization of Banks
In January 1974 all the commercial banks were nationalized.
So all the small banks were merged into 5 major banks.
INTEREST FREE BANKING
From July 1, 1985, all commercial banking in Pak Rupees was
made interest-free. From that date, no bank in Pakistan was
allowed to accept any interest-bearing deposits and all
existing deposits in a bank were treated to be on the basis
of profit and loss sharing. Deposits in current accounts
continued to be accepted but no interest or share in profit
or loss was allowed to these accounts. However, foreign
currency deposits in Pakistan and on-lending of foreign
loans continued as before.
 Denationalization of Commercial
Banks
In 1991 denationalization process started due to
many weaknesses such as overstaffing ,rising
bad debts ,loans on political basis. First of all
MCB bank was denationalized in 1991.
Opening of investment banks
The idea of opening of investment bank was also
started in 1991.e.g Atlas investment bank,
Trust investment bank limited etc.
 Current structure of
financial(banking) system of Pakistan
1-Central bank
2-Nationalized scheduled banks e.g. NBP, First
women bank
3-Specialized banks e.g. industrial development
bank , Zarai taraqiati bank
4-Private scheduled banks
5-Development financial institutions. E.g Pak
China investment company Islamabad,House
building finance corporation Karachi
6-Investment banks
7-Discount and Guarantee houses. E.g National
discounting services limited ,First credit & discount
corp limited
8-Housing finance companies. E.g.Asian housing finance
limited ,Citybank housing finance company limited
9-venture capital companies.E.g. Pakistan venture capital
limited
10-Micro finance banks.e.g Khushali bank limited,Tameer
micro finance bank
11-Islamic banks: Dawood Islamic bank,Dubai islamic
bank,Meezan bank,Albaraka islamic bank,Bank islami
Pakistan limited,Emirates Global islamic bank
 STATE BANK OF PAKISTAN Act 1956
SBP is the central bank of Pakistan. It was
established on July 1,1948 under state bank of
Pakistan order,1948.
The present structure, operations and authority of
SBP is based upon State bank of Pakistan Act
1956.
According to SBP Act 1956 ,SBP has authority to..
Regulate the monetary and credit systems of
Pakistan.
Foster its growth in the best national interest
with a view to secure monetary stability & full
utilization of resources
 Cont
State Bank of Pakistan Act 1956 has 55 sections
divided into following chapters.
1-Capital
2-Management
3-Monetary and Fiscal Policies
4-Independence of Central bank
5-Functions
 1-Capital of SBP
According to section 4 of SBP Act 1956,SBP had
mixed ownership. Such as..
51% of paid up capital was held by Federal
government & 49% by private sector.
However after nationalization in January 1974 ,
the federal govt has assumed ownership of all
Privately held shares.
 2-Management
All the affairs & business of SBP vest in the central board of
directors.
Section 9 of the Act tells the composition of BOD.
BOD comprises of
1-Governor(chief executive of bank. Tenure 3 years. Can be
reappointed provided he has not exceeded the age of 65)
2-one or more deputy governor(to assist governor. Tenure five
years)
3-Seven non executive directors nominated by federal
government including one director from each province,
ensuring representation from Agriculture, Banking and
Industrial sectors.
4-Directors hold their office for three years,
The Central Board of Directors must hold six meetings
in a year & at least one meeting in one quarter.
The Central Board of Directors took various policy
decisions in meetings held during the year. The Board
discussed and took decisions on Annual Report on
the State of Economy(country's financial position at a
specific period of time), Corporate Governance,
Annual Performance Review, Financial Stability
Report, Financial Statements of SBP and its
Subsidiaries, Monetary Policy Measures, Annual
Budget, HR Policies, Compensation Package and
Review of Banking System.
 Cont.
A member of legislature ,an employee federal &
provincial govt ,an officer or director or
employee of another bank or any financial
institution or any person who has shares in
any bank or financial institution, are ineligible
to hold the office of governor or deputy
governor of SBP.
 3-Monetary and Fiscal Policies
SBP makes monetary policy & helps govt for making
fiscal policy.
Monetary policy
It is the process by which the SBP controls the
supply of money, often targeting a rate of interest
for the purpose of promoting economic growth
and stability. The official goals usually include
relatively stable prices and low unemployment.
Monetary economics provides insight into how to
craft optimal monetary policy.
 Cont
Fiscal policy
Government's revenue (taxation) and spending policy
designed to (1) counter economic cycles in order to
achieve lower unemployment, (2)achieve low or no
inflation, and (3) achieve sustained but controllable
economic growth.
According to newly added section 9B (6) through SBP
amendment ordinance 2002 SBP has reassigned the
responsibility of coordinating fiscal, monetary and
exchange rate policies and ensuring consistency in
achievement of macro economics target of growth ,
inflation ,fiscal and monetary expansion and external
accounts.
Objectives of Fiscal Policy
(i) The achievement of desirable prices,
(ii)The achievement of desirable consumption
level,
(iii) The achievement of desirable employment
level,
(iv) The achievement of desirable income
distribution.
Collection of revenue
Direct tax
Indirect tax
Fees
Aids
Fines
Loans
Tools of Fiscal policy
Government revenue
Expenditure
Budget
 4-Independence of Central bank
SBP (amendment) Act 1997 has reassured the
independence of SBP.
No govt or quasi govt(supported by the
government but managed privately) body or
agency shall issue any directive to any
banking or other financial institutions which is
inconsistent to the policies, regulations and
directives issued by SBP or discussed in any
banking Act or ordinance.
 5-Functions
Functions of SBP have been in Chapter 5th of SBP
Act 1956.These functions are
Bank of issue
Section 24 of the SBP Act,1956,had declared that
SBP has sole authority to issue notes except
subsidiary coins which are issued by the
Government. These metallic subsidiary coins are
one , two, and five rupees coins.
The Bank adopted the Proportional Reserve
System for the issue of notes up to December
1965.
These notes are backed by gold bullion, Silver
bullion, approved foreign securities and SDRs
is now fixed Rs 1200 million through an
ordinance in December 1965. This system of
note issue is known as minimum Reserve
System.
At present SBP has Four offices of note issues.
 Bankers to the government
SBP acts as banker to federal as well as provincials
governments, as mentioned in section 21 of SBP
Act 1956.
It supplies govt with cash required for salaries &
wages.
It transfers government funds from one account to
another account.
No interest or return is paid on the cash balance
maintained for government by SBP.
SBP can give loan to government without security
but repayable not later than three months.
Advisor and agent to government
The State Bank of Pakistan acts as advisor to
government in all financial matters, as
mentioned in section 9 of SBP Act 1956. Since
State Bank of Pakistan is directly involved in
the money and foreign exchange markets, it,
therefore, tenders advice on all economic
matters. It also provides advice to commercial
banks and other financial institutions and to
commerce and industry in general.
Under section 23 of SBP Act 1956 ,it acts as
governments agent for buying and selling of
approved foreign exchange from authorized
dealers in Pakistan and issuance of T-bill and
different bonds and other securities.
It receives and make payment to foreign as well
as local institutions on behalf of government
 Bankers bank
SBP acts as bankers bank because.
It rediscounts the government securities to
commercial banks.
It provides loan to the other banks.
The State Bank of Pakistan is the lender of last
resort for the commercial banks. If at any time
the banks are short of cash reserves, the State
Bank of Pakistan comes to their rescue. It
provides cash to commercial banks by
rediscounting bills of exchange and treasury bills.
The State Bank of Pakistan thus helps and
maintain liquidity ad solvency of the commercial
banks.
 Controller of credit and bank rate
SBP Act 1956 has empowered SBP to formulate and
execute policies to promote the expansion of
banking and credit facilities in Pakistan through
qualitative and quantitative methods.
Quantitative Methods (control the quantity of credit)
Bank rate policy(SBP Act.1956 define bank rate is the
standard rate at which SBP is prepared to buy or
rediscount bill of exchange or other commercial
papers,90 days trade bills and agriculture bills
Open market operations(buying and selling of eligible
securities by the Central Bank in the money market and
capital market.)
Variation of cash reserve ratio(Statutory
Liquidity Reserve (SLR) is governed under
Section 29 of the BCO, 1962. Presently it is
being monitored at 20% of the Total Demand
& Time Liabilities of a Scheduled Bank. This
20% is comprised of 5% on account of Cash
Reserve Requirement and 15% on account of
Statutory Liquidity Requirement.)
 Qualitative Methods (The qualitative credit control is also called as
selective credit control)
Fixation of margin requirements
Rationing of credit(The Central Bank fixes a maximum limit for
loans that a commercial bank can provide to a particular sector)
Regulation of consumer credit (fixes the down payments and
the period over which the installments are spread)
Controls through directives (The directives may be in the
form of written orders, warnings or appeals,)
Moral suasion (Central Bank merely uses its moral influence
on the commercial banks.)
Publicity (the Central Bank gives wide publicity to its credit
policy through its bulletins)
Direct action (The Central Bank can take action against the
banks which contravene its instructions)
 Exchange Control
Foreign exchange control in Pakistan is
exercised under foreign regulation Act,1947 and
authority to control has been vested with the
SBP under the SBP Act 1956.
SBP controls all the visible and invisible foreign
currency payments to and from the country.
SBP issues licenses to the other banks to
functions as authorized dealers in foreign
exchange business
It also maintains export price check on certain
export commodities, like cotton and rice. So
that prices of these commodities should not be
under invoice
 Banking Companies Ordinance 1962
This is the law under which a banking company is
established and managed in Pakistan. This law is
applied in conjunction with Companies ordinance
,1984.BCO 1962 has five parts containing 95
sections. These are..
Part I Preliminary
Part II Business of Banking Companies
Part III Suspension of Business and winding up of
Banking Companies
Part IV Special Provisions for Speedy Disposal of
Winding up Proceedings
Part V Miscellaneous
 Part I Preliminary
Short title, extent and commencement
(a) It is called the Banking Companies
Ordinance, 1962.
(b) It extends to the whole of Pakistan
(c) It shall come into force at once.
Application of other laws not barred
This law is in addition to other related laws and
provision of this law not barred the other laws.
 Cont.
DEFINITIONS
Approved securities
securities in which a trustee may invest money.
Such as Pak rupees obligations issued by federal or
provincial governments or entity which partially or
wholly owned by provincial or federal government.
Banking
It 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;
Banking company
means any company which transacts the business
of banking in Pakistan and includes their branches
and subsidiaries functioning outside Pakistan.
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 come under the
definition of banking company.
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.
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;
Company
It means any company which is established under the
Companies Ordinance, 1984 and includes a branch of a
foreign banking company doing banking business in
Pakistan under a license issued by the State Bank.
Debtor
It includes a person to whom, or a banking company or
financial institution to which, finance has been
provided.
Demand & time liabilities
It means liabilities which must be met on demand, and
time liabilities means liabilities which are not
demand liabilities
Foreign banking company
It 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.
Scheduled bank
It has the same meaning as in the State Bank of
Pakistan Act, 1956.
Secured loan or advance
It 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.
Ordinance to override memorandum, articles of
association.
Any provision contained in the memorandum, articles,
agreement or resolution, decisions passed by directors
shall, to the extent to which it is repugnant to the
provisions of this Ordinance, become or be void.
 Part II; BUSINESS OF BANKING
COMPANIES
A banking company may engage in any one or more of the
following forms of business,namely:
The borrowing, raising, or taking up of money
The lending or advancing of money either upon or without
security
The drawing, making, accepting, discounting, buying,
selling, collecting and dealing in bills of exchange, hundies,
promissory notes, coupons, drafts, bills of lading, railway
receipts, debentures, certificates, scrips (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, and securities whether transferable or
negotiable or not.
 The buying, selling and dealing in bullion species
The buying and selling of foreign exchange including
foreign bank notes
The acquiring, holding, issuing on commission,
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.
The granting and issuing of letters of credit, traveler's
cheques and circular notes(A circular note is a written
request by a bank to its foreign correspondents to pay
a specified sum of money to a named person).
 The purchasing and selling of bonds, scrips 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.
The providing of safe deposit vaults
The collecting and transmitting of money and
securities.
 Acting agents for any Government or local authority or
any other person or persons.
Acting as modaraba company under the provision of
the Modaraba Companies and Modaraba Ordinance,
1980
Carrying on and transacting every kind of guarantee
and indemnity business
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;
undertaking the administration of estates as executor,
trustee or otherwise;
The acquisition, construction, maintenance and
alteration of any building or works necessary or
convenient for the purpose of the company.
Use of the word Bank
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:
Prohibition of trading
No banking company shall directly or indirectly
deal in the buying or selling or bartering of
goods or engage in any trade or buy, sell or
barter goods for others s, otherwise than in
connection with bills of exchange received for
collection or negotiation.
Requirement as to minimum paid-up capital and
reserves
No banking company shall
(a) commence business unless it has a minimum
paid-up capital as may be determined by the
State Bank
(b) carry on business unless the aggregate of its
capital and unencumbered general reserves is of
such minimum value within such period as may
be determined and notified by the State Bank
from time to time.
Board of directors
(a) Notwithstanding anything contained in the
Companies Ordinance, 1984 (XLVII of 1984), or
in the memorandum or articles of association of
any banking company, the State Bank may
appoint not more than one person to be a
director of a banking company, whether or not
he holds any qualification shares.
(b) A director of a banking company, not being its
chief executive, by whatever name called, shall
not hold office for more than six consecutive
years.
Power of state bank of Pakistan
Banking Companies Ordinance 1962 has conferred the
following powers on SBP
It has authorized SBP to control advances by banks
It has authorized the SBP to collect credit information
from banking companies and furnish them to other
banking companies without disclosing the source of
information.
It has authorized SBP to prepare and submit to the
federal government every year a special report on cases
of write off of loans ,mark up and other dues or financial
relief through rescheduling and restructuring of loans,
where banking companies have deviated from the
established banking practices.
 It has authorized the SBP to prohibit banking
companies incorporated in Pakistan or incorporated
outside Pakistan but operating in Pakistan from
accepting deposits
No individual, association or a company is authorized
to carry on banking business in Pakistan without
obtaining a license from SBP.SBP may cancel the license
if after enquiries ,confirms that the banking company
was contravening the provisions of the license.
It makes obligatory for banking company to prepare
and display balance sheet and profit & loss account on
the last working day each year.
Restrictions on loans and advances.
No banking company shall
(a) make any loans or advances against the security
of its own shares; or
(b) grant unsecured loans or advances to, or make
loans and advances on the guarantee of,
(i) any of its directors;
(ii) any of the family members of any of its directors;
(iii) any firm or private company in which the
banking company or any of the persons is interested
as director, proprietor or partner; or
(iv) any public limited company in which the banking
company or any of the persons as aforesaid is
substantially interested
Unclaimed deposits and articles of value.
According to BCO 1962,SBP has authority to take
over the possession of deposits & articles of
value left over by depositors with the banking
companies in Pakistan for ten years or more.
Power to publish information
The State Bank, if it considers it in the public
interest so to do, may publish any
information obtained by it.
Fidelity and secrecy
According to this ordinance it is mandatory for
each banking company to maintain secrecy
relating to affairs of its customers except when
law required.
If any banking company gives relaxation to any of
its customer in shape of write off loans and
amount of those loans is Rs.500,000 or greater
than Rs.500,000 then all these informations
should be published
Inspection by SBP
The State Bank may, at any time, and, on being
directed so to do by the Federal Government, shall,
inspect any banking company and its books and accounts.
Procedure for amalgamation of banking companies.
No banking company shall be amalgamated with another
banking company, unless a scheme containing the terms of
such amalgamation has been placed in draft before the
shareholders of each of the banking companies concerned
separately, and approved by a resolution passed by a
majority in number representing two thirds in value of
the shareholders of each of the said companies, present
either in person or by proxy at a meeting called for the
purpose.
If the scheme of amalgamation is approved
by the requisite majority of shareholders in
accordance with the provisions of this
ordinance, it shall be submitted to the State
Bank for sanction and shall, if sanctioned by the
State Bank by an order in writing passed in this
behalf be binding on the banking companies
concerned and also on all the shareholders
thereof;
Winding up by High Court
The High Court shall order the winding up of a
banking company
if the banking company is unable to pay its
debts; or
if an application for its winding up has been made
by the State Bank.
Section 59 of this ordinance clearly lays down no
banking company which holds a license
granted under section 27 may be voluntarily
wound up unless the State Bank certifies in
writing that the company is unable to pay in full
all its debts to its creditors as they accrue.
State Bank to be official liquidator
In any proceeding for the winding up of a
banking company by the High Court the State
Bank applies for an order appointing the State
Bank or any individual as the official liquidator
of the banking company in that proceeding.
Where a winding-up order has been made in
respect of a banking company, the official liquidator
shall submit a preliminary report to the High Court
within ninety days from the date of the winding-up
order.
 PART IV
BANKING MOHTASIB
Appointment of Mohtasib
There shall be a Banking Mohtasib who shall
be appointed by the President in consultation
with the Governor of the State Bank of Pakistan.
The Banking Mohtasib shall be a person of high
integrity and unimpeachable banking or legal
credentials who is not a share-holder of a
banking company or financial institution and is
not, and has not, been a bank defaulter.
Jurisdiction of the Banking Mohtasib
(a)Enquire into complaints of banking malpractices;
(b)Perverse, arbitrary or discriminatory actions;
(c) Violations of banking laws, rules, regulations or
guidelines;
(d)Inordinate delays or inefficiency and
(e)corruption, nepotism or other forms of
maladministration.
The Banking Mohtasib shall hold office a period of
three years and shall not be eligible for any
extension of tenure or for reappointment under any
circumstances whatsoever.
Terms and conditions of the Banking Mohtasib
The Banking Mohtasib shall be entitled to the
same salary and allowances as a Judge of a High
Court.
The Banking Mohtasib may be removed from
office on the ground that he has been guilty of
misconduct or that he is incapable of properly
performing the duties of his office by reason of
physical or mental incapacity.
 PART V
MISCELLANEOUS
Penalties
If Any information provided by banking company or its
officials ,proven to be wrong or omitted then that
banking companys official will be punished for a term
which may extend to three years and shall also be liable
to fine not exceeding five hundred thousand rupees.
Change of name by a banking company
Federal Government shall not signify its approval to the
change of name of any banking company unless the
State Bank certifies in writing that it has no objection to
such change.
Alteration of memorandum of a banking company
No application for the confirmation of the alteration of the
memorandum of a banking company shall be maintainable
unless the State Bank certifies that there is no objection to
such alteration.
Removal of difficulties
If any difficulty arises in giving effect to any of the
provisions of this Ordinance, the Federal Government
may make such order as may appear to it to be necessary
for the purpose of removing the difficulty.
THE NEGOTIABLE INSTRUMENTS ACT,
1881
1. Introduction:
The law relating to negotiable instrument is embodied in
the negotiable instruments act 1881. it deals with the
promissory notice, bills of exchange and cheques. the
negotiable instruments act came into force of the first
day of March 1884. it extends to the whole of Pakistan
but it does not affect the provision of Sec 24(sole issue of
bank note) and 35(Offences and penalties relating to
unauthorized issue of bills and bank notes) of the state
bank of Pakistan act 1956 and accordingly every
negotiable instrument shall be governed by the
provisions of this act.
2. Meaning:
The word negotiable means transferable by
delivery and instrument means a written
document, so it means a document which can
be transferred from one person to another
making the receiver of that document entitled
to receive that same amount of value which is
contained.
3. Definition:
According to Sec 13 (1) of the negotiable instrument act "A
negotiable instrument means a promissory note, bill of exchange
or cheque payable either to order or bearer.
4. Types of negotiable instrument:
According to Sec (13) of negotiable instrument act 1881, a
negotiable instrument includes.
(a) A bill of exchange.
(b) A promissory note or.
(c) A cheque.
Above three types of negotiable instrument are mentioned in the
said section. however of instrument sat relies to be treated as
negotiable instrument.
(i) If it is in such a form which entitles the holder to sue in his own
name.
(ii) If it is transferable.
5. Examples:
(i) Bill of exchange.
(ii) Promissory notice.
(iii) Cheques.
(iv) Divident warrants.
(v) Share warrants.
(vi) Bearer debentures.
(vii) Bank drafts.
(viii) Railway receipts.
6. Documents which are not considered negotiable
instruments:
Following documents are not considered negotiable
instruments:
(i) Money orders.
(ii) Postal orders.
(iii) Deposit receipts.
(iv) Share certificate.
(v) Bill of lading.
(vi) Fixed deposit.
(vii) Dock warrant.
7. Conditions:
(i) The instrument should be freely transferable.
(ii) The person who obtains it in good faith and
for gets it free from all defects and is entitled to
sue upon.
Characteristics of Negotiable Instrument
Following are the characteristics of Negotiable
Instrument.
Freely Transferable
The ownership of negotiable instrument is
transferable by delivery if it is payable to bearer. If it
is payable on demand, ownership passes from
endorsement and delivery.
Title Free of all Defects
The holder in due course of such instrument is free
of all kinds of defects in the act of the transferors.
This means that if you take a pro-note even from
the thief , you (in good faith) can lawfully operate
that note.
Entitled to Receive Money
The holder of the negotiable instrument is
entitled to receive money mentioned on it.
Recovery
The holder in due course of negotiable
instruments can recover such defaulting parties,
in his own name without giving any intimation
to the drawers of his becoming holder.
Conclusion
So negotiable instrument are bills of exchange
promissory note, cheque and these documents are
called negotiable instruments just because the
negotiable instruments act defines them so and further
they are.
1.Freely transferable.
2.Ownership passes on with delivery.
3.Holder in due course is entitled to receive payment.
4.And holder in due course can sue in his own name to
all concerned parties.
 THE FOREIGN EXCHANGE REGULATIN
ACT, 1947
An Act to regulate certain payments, dealings in foreign
exchange and securities and the import and export of
currency and bullion.
1-Short title, extent and commencement
(1) This Act may be called the foreign Exchange
Regulation Act, 1947.
(2) It extends to the whole of Pakistan and applies to all
citizens of Pakistan and persons in the service of
Government wherever they may be.
(3) it shall come into force on such date as the Central
Government may, by notification in the official Gazette,
appoint in this behalf.
2-Interpretation of terms used in this
act
(a) authorized dealer
It means a person for the time being authorized
under section 3 to deal in foreign exchange.
(b) currency
It includes all coins, currency notes, bank notes,
postal notes, money orders, cheques, drafts,
travelers cheques, letters of credit, bills of
exchange and promissory notes.
(c) foreign currency
It means any currency other than Pakistan currency;
(d) foreign exchange
Exchange of domestic currency with foreign
currency.
(e) foreign security
It means any security issued elsewhere than in
Pakistan and any security the principal of or interest
on which or payable in any foreign currency or
elsewhere than in Pakistan;
(f) gold includes gold in the form of coin, whether
legal tender or not, or in the form of bullion,
whether refined or not;
g)Pakistan currency means currency which is
expressed or drawn in Pakistan rupees;
(i) prescribed means prescribed by rules made
under this Act;
(j)State Bank means the state Bank of Pakistan;
(k)security means shares, stocks, bonds,
debentures stock and Government securities
(l) Silver means silver bullion, silver sheets
and plates which have undergone no process of
manufacture, but does not include bills of
exchange or promissory notes other than
Government promissory notes;
 3. Authorized dealers in foreign
exchange.
(1) The State Bank may, on application made to it in this
behalf, authorize any person to deal in foreign exchange.
(i) may authorize dealings in all foreign currencies or may be
restricted to authorizing dealings in specified foreign
currencies only.
(ii) may authorize transactions of all descriptions in foreign
currencies or may be restricted to authorizing specified
transactions only;
(iii) may be granted to be effective for a specified period, or
within specified amounts, and may in all cases be revoked
for reasons appearing to it sufficient by the State Bank
 4. Restrictions on dealing foreign
exchange
(1) Except with the previous or special
permission of the State Bank, no person other
than an authorized dealer shall in Pakistan and
no person resident in Pakistan, other than an
authorized dealer all outside Pakistan, buy or
borrow from, or sell or lend to, or exchange
with, any person not being an authorized dealer,
any foreign exchange.
 5. Restrictions on payments
Except to the authorized dealers, no person in, or resident in,
Pakistan shall---
(a) make any payment to or for the credit of any person
resident outside Pakistan;
(b) draw, issue or negotiate any bill of exchange or promissory
note or acknowledge any debt, so that a right (whether actual
or contingent) to receive a payment is created or transferred in
favor of any person resident outside Pakistan;
(c) make any payment to or for the credit of any person by
order or on behalf of any person resident outside Pakistan;
(d) place any sum to the credit of any person resident outside
Pakistan;
 Banker customer relationship
Who is a Banker
J.W Gilbert defines banker in his book.
A banker is a dealer in capital or more properly ,a dealer
in money. He is an intermediate party between the
borrower and the lender. He borrows of one party and
lends to other
Dr.Herbert L.Hart in law of banking said..
A person or Company carrying on the business of
receiving moneys, and collecting drafts, for customers
subject to the obligation of honoring cheques drawn
upon them from time to time by the customer to the
extent of amount available on their current accounts
 FUNCTIONS OF BANKER
Accourding to BCO 1962,a banker performs
following function..
We have studied them in BCO 1962 as business
of banking companies.
Who is customer?
Anyone conduct banking transactions with a
bank is called customer. According to current
practices, the person who maintains a regular
bank account with a bank is called customer.
State bank of Pakistan in the prudential
regulations for banks, has defined
accountholder as.
A person who has opened an account with a
bank or is holder of deposits /deposit certificate
or any instrument, representing deposit /placing
money with a bank or has borrowed from the
bank
Qualification of a customer
A banker customer relationship is purely
contractual. So he must have some
qualifications before entering into contract.
He should not be a minor
Person of sound mind
Should not be debarred from entering into
contract under any law
 Rights and duties of Customer toward
banker
Rights of Customer
To draw cheque
To get facility of overdraft
To receive a pass book/statement containing a
copy of his account with the banker
To sue the bank for the loss/damages occurred
due to wrongfully dishonoring the cheque and
not maintaining the secrecy of the account.
To claim for the profit/return on his deposits as
promised by bank.
Duties of customer
Must present cheque within business hour &
reasonable time
Should keep his cheque book uder lock.
Should not involve in fraudulent activities
General relationship of Debtor & Creditor
When customer deposits money in the bank,
customer becomes creditor for banks and bank
becomes debtor for customer.
When customer deposits money in his account he
has the right to withdraw it, but he cant enquire
about the utilization of it.
Creditor and Debtor Relationship:
When a bank grants loan or other credit facilities to the customer,
relationship is reversed, that is now Customer is Debtor &Banker is
Creditor.
Principal & Agent Relation
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. In certain situations, the banker serves as agent of the
customer (principal) some of these situations Are enumerated
below:
-Collection of cheques on behalf of the customer
-Collection of dividends and bills of exchange
-Acting as attorney, executor or representative of a
customer
-Buying and selling securities on his behalf.
In these transactions, the relationship between the
two parties is that of principal and agentthe
banker acting as his customer's agent.
Buying and selling securities on his behalf;
collection of cheques, dividends, bills or promissory
notes on his behalf; acting as a trustee, attorney,
executor, correspondent or a representative of a
customer. In the performance of all these functions,
the banker acts as an agent of the customer.
Bailor and Bailee Relationship:
A bailment is the delivery of goods by one person to
another for some purpose, upon a contract that they shall,
when the purpose is accomplished, be returned or otherwise
disposed of according to the directions of the person
delivering them. The person delivering the goods is called the
bailor. The person to whom they are delivered is called the
bailee.
In banker customer relationship, bailment is also important
types of relations. It may arise in the following situations:
Availing safe custody services (lockers)
Pledge of stocks as security for availing credit from bank. In
these cases---Customer---Bailor & Bank----Bailee
Mortgagor and Mortgagee Relationship
When credit facility is provided by the bank to a
customer against the security (collateral) of
immovable property, the relationship of
Mortgagor and Mortgagee is established.
In this situation: MortgagorCustomer
MortgageeBank
Pledger and Pledgee Relationship/pawnor,"
and "pawnee
When credit facility is provided by a bank to its
customers against security (Collateral of
movable property) the Relationship of Pledger
and Pledgee is established.
In this case:
PledgerCustomer
PledgeeBank
Trustee
A trustee holds or manages cash, assets or a property
title for a beneficiary. The trustee has a fiduciary duty to
act in the best interest of the beneficiary
Example
Let's assume Company XYZ issues $100 million of bonds.
Company XYZ will appoint a trustee, usually a bank, to act
on behalf of the bondholders. The trustee maintains lists
of the bondholders in addition to receiving and
distributing interest payments. The trustee also monitors
Company XYZ's compliance with the agreements and
communicates with the bondholders when the issuer is
not in compliance.
Executor
An executor administers the distribution of an estate to
beneficiaries.
A will is a legal document that indicates how a person
wants his or her estate (money and property) to be
distributed after death. A will also may describe any
wishes for funeral and burial arrangements and may
designate guardians for minor children.
When the testator (the person who created the will) dies,
the executor, who is named in the will, administers the
distribution of the estate to the beneficiaries (a
beneficiary is any person or organization that receives the
assets after the testator's death). The executor's job also
includes paying any bills and taxes owed by the estate as
well as locating and protecting the assets until they are
distributed. An executor often receives payment for his or
her services, and the payment varies from state to state.
A testator can change a will at any time for any
reason and should keep the original copy of the
will in a safe place. A copy should be given to
the executor.
Attorney
A person legally appointed or empowered to
act for another.
Guarantor
Relationship of Licensor and Licensee
The relationship between banker and customer
can be that of a Licensor and Licensee. This
happens when the banker gives a safe deposit
locker to the customer. So, the banker will
become the Licensor, and the customer will
become the Licensee.
 Termination of Banker- Customer
Relationship:
This relationship that is established by the time
an account is opened may be terminated by
either party in following manner:
o By Notice from customer or
o By notice from banker
By Notice from customer
The customer can give the notice of termination
of relationship due to following reasons:
 Due to change of residence
Customer is not satisfied with the services
provided by the bank
Account may also closed due to death of
customer
By notice from banker
The banker may close the account of customer due
to following reasons. Before closing account bank
gives notice to customer. This is given on following
grounds
Presentation of cheque by customer for payment
without having sufficient funds in the account.
When a customer is unable to keep a remunerative
credit balance.
A regular presentation of cheques after business
hours
If customer does not respond to the notice then
bank can close his account on following reasons
Obstinacy of customer
Death of customer
Customers insanity
 Customer insolvency
Order of court
Assignment of account
Unsatisfactory operations
 Prudential regulations for banks
SBP Prudential Regulations
In order to promote good governance(way in which
a company or institution is controlled) in the
banking system , the State Bank of Pakistan
announced a set of prudential(Involving or showing
care) regulations on August 29,1991.These
regulations were made effective from 1st of July,
1992. Non-Bank Financial Institution (NBFIs) have
also been placed under regulatory regime of SBP.
 Categories of prudential regulations
There are four categories of prudential regulations:
1-Prudential regulation for risk management
a) Corporate/Commercial banking:
To diversify and management of risk faced by banks, the SBP
provide these regulations. According to these regulations the
bank/DFI can finance to maximum extent of 25% fund & non
fund based of its equity to single person or group as disclosed
in the latest audited balance sheet.
Exposure of contingent liabilities should not exceed 10 times of
banks equity.
In this adjustment of cash margin ,effective lien, liquid
securities and unconditional financial guarantee are
admissible.
 To encourage import export business, L/C issued on
behalf of government or agencies of government then
that type of L/C is excluded in list of contingent liabilities.
When bank takes exposure on customer then bank
demands CIB report and mandatory submission of
audited financial accounts.
The clean exposure is also restricted to Rs.500,000 to any
one person including finance availed by family members.
Any borrower can not avail finance from financial
institutions more than 10 times of its equity as disclosed
in latest financial statements.
In case of negative equity not exceeding 4 times of fresh
injected equity provided that organization will keep
plough back 80% of profit each year.
 Bank can not purchase shares of one company in
excess of 5% of its own equity and total
investments in shares can not exceed 30% of
banks equity.
Banks can not hold shares as pledgee ,mortgagee
or absolute owner in excess of 30% of paid up
capital of company or its own capital whichever is
less.
Banks should do their assets classification on
basis of its time based evaluation.
Substandard Where mark-up/ interest or Principal is Provision of 25% of the
overdue by 90 days or more from the due Difference resulting from the
date. outstanding balance of
principal less the amount
Of liquid assets realizable
without recourse to a Court
of Law and 40% of the
Forced Sale Value (FSV) of
pledged stocks and
mortgaged residential,
Commercial and industrial
properties
Doubtful Where mark-up/ interest or principal Is Provision of 50% of the
overdue by 180 days or more from the due differenceas
date. above

Loss (a) Where mark-up/ interest or principal Is Provision of 100% of the

overdue by one year or more from the difference resulting
due date fromas above
(b) Where Trade Bills (Import/Export or
Inland Bills) are not paid/adjusted within
180 days of the due date.
 Apart from above objective evaluation of
assets the banks can do subjective evaluations
for their non performing loans. That
evaluation should be based upon credit
worthiness of borrower, its business cash flow,
its operations and adequacy of securities.
Monitoring of fund based finances especially
hypothecation of stock on pari -passu basis.
b) Small and Medium Enterprise
In case of SMEs ,the banks required personal
guarantee of owners/directors other than
nominee directors, for taking exposure on
SMEs.
Clean financing limit raised to Rs,3 million (fund
2 & 1 non fund).
On single SME exposure of bank/DFI does not
exceed Rs.75 million.
Aggregate exposure of a bank/DFI on SME
sector depends upon the size of classified
portfolio of SMEs advances.
 Classification below 5% no limit.if
classification 10% ,15% and above 15% then
maximum limit restricted to 3 times, 2 times
and equity respectively.
Bank should develop an appropriate system
for monitoring the utilization of loans
c) Consumer Financing
The directors ,shareholders , employees and
family members of a bank must be treated as
other customers while they avail consumer
finance facility from their banks.so first directive
was to give it commercial touch.
The aggregate exposure of banks under
consumer financing is linked with classified
consumer financing portfolio. Below 3%
maximum limit 10 times of equity and above
10%,the lowest 2 times.
 To cover the risk associated with this special type
of financing, the banks are required to maintain a
general reserve at least equivalent 1.5% of
consumer portfolio which is fully secured and 5%
for unsecured.
In case of credit card clean limit has been raised
from PRs.500,000 to PRs. 2 Million .
Classification of NPLs has also become more strict
with the above relaxation. Loans will be classified
as loss if principle or mark up is overdue by 180
days
 Corporate governance
For appointment of president/Chief executives and
directors on board require prior clearance from SBP.
The role of directors is to make policy and general
directions, oversight and supervision of the affairs and
business of the bank and not indulge in day to day
operations.
Board of directors will receive management letter from
external auditors and with consultation of audit
committee take controlling actions. A copy of
management letter should be sent to SBP.
Every bank should be credit rated by credit rating
agencies on approved panel of SBP.
 KYC and Money Laundering
To stop money laundering ,terrorist financing and
transfer of illegal monies the SBP has made some
prudential regulations for banks. That is done by
obtaining different documents from different
customers at the time of establishment of banker
customer relationship and on going inspection of
customers accounts by banks.
Banks are required to keep record for 5 years and
for suspicious transactions record should be kept
by bank until further instructions from SBP.
Banks are required to report all suspicious
transactions to banking policy department.
 Operations
Banks have been restrained from window dressing.
All the entries outstanding in Inter-branch
account/suspense account must be cleared and taken to
proper account within maximum period of 30 days from
the date of entry.
Every bank in Pakistan shall create 80% of its assets from
time and demand liabilities.so assets of bank held abroad
should not exceed 20% of time and demand liabilities. All
assets generated other than time & demand liabilities
should be kept in Pakistan.
FE deposits can not be invested in fund management
schemes of other banks & not exceeding 25% in single
institutions.
 Bankers core business-deposits
Bankers core business is to take deposits
because that have been discussed in the BCO
1962 in banking definition as
Banking means the accepting for the purpose of
lending or investment, of deposits of money
from the public, repayable on demand or
otherwise and withdrawal by cheque , draft
order or other wise
Deposit mobilizations
It means campaigning and collecting customer
deposits. for ex: a bank may have a campaign with
advertisements and gifts to attract deposits.
Prior to make strategies for deposit mobilization,
some activities should be done by banker. These
activities are..
1-calculate average cost of deposits
2-average return on re-investment of deposits
 To attract more depositors, two factors should be
considered.
1-rate of return to the depositor
2-quantum of efforts put by bank in this behalf
Types of account
An account is a relationship with the customer, operated
on a day-to-day basis, into which deposits are received
and out of which cheques are paid. A deposit account
is usually in credit, but an overdraft facility may be taken
by pre-arrangement with the bank. Some deposit
accounts are opened for a limited time such as:
1-Current Account
A current account is an account from which any
part of the balance may be withdrawn on demand.
Withdrawal from the account can be made via
cheques, direct debit, standing instructions or ATM.
No interest/ profit is paid on the current account.
These accounts are generally for business
purposes and can be overdrawn on arrangement
with the bank. Zakat is not deducted on current
accounts.
2. PLS Saving Account
Saving accounts are meant solely for saving purposes. Saving
means to set aside money for future use or to retain money
to meet future spending needs.
Saving accounts have all the features of a current account,
except that profit is paid on the balance maintained as per the
PLS rules of the bank.
Saving accounts are generally opened in the name of
individuals but can also be opened in the name of
charitable institutions, for provident funds, benevolent funds
and pension funds.
Initial deposit and minimum balance requirement features
can be decided by each bank as per their own policies. Zakat is
deducted on the balance maintained on the valuation date
(first day of Ramadan).
Different banks have introduced different variation products
of saving accounts for individuals and companies where profit is
paid bi-annually.
 As per BPRD circular no 7 dated 30th May
2008, SBP has instructed all banks to pay a
minimum of mandatory 5% profit to their
saving account holders.
Types of saving accounts
1) Saving bank chequing account (cheque book
issued)
2) Saving bank non-chequing account(withdrawl
slip)
3. Basic Banking Accounts (BBA)
BBAs were introduced by SBP, with special features; vide BPD
circular No. 30 dated 29th November 2005, to facilitate
banking for low income people in Pakistan. Prior to the
introduction of BBAs banks used to collect service charges
from all the customers who failed to maintain a minimum
balance in their accounts as per each bank's policy. In order to
resolve this issue and to facilitate banking for small
depositors.SBP has formulated the BBA scheme with the
following features:-
Initial deposit to open a BBA is Rs.1000/-- No profit is paid
into this account.
No minimum balance is required and no service charges are
to be paid by the customer.
If an account remains at Nil for a continuous period of six
months, the bank has the right to close it.
 Maximum two deposits and two cheque
withdrawals are allowed free of charges in a month.
Unlimited free of charge ATM withdrawals are
allowed from banks own ATMs.
4. PLS Term Deposits
Term deposits are the deposits repayable after a
predetermined future date. Such deposit
transactions may be for a period ranging from
seven days to ten years or even longer.
Profit is paid on the simple interest basis.
5. Cash Management Account
A Cash Management Account is a banking service
provided to high profile business customers through
which they can speedily obtain funds from their
collection accounts and transfer to their main account
through a computer module. The module collects and
consolidates data from the customer's bank account in
any location in the country. Through cash
management, customers can speed up collection of
their accounts receivable and utilize their funds to the
optimum level.
6. Collection accounts
Collection accounts are opened for collection of
funds at the request of business customers,
charitable institutions and on the instructions of the
government in the case of any disaster.
For the scenarios listed above, a main account is
opened in any branch of the bank. In lieu of this
main account, collection accounts are opened in
other branches from where funds are transferred to
the main account as per instruction / arrangement.
7. Share Subscription account
When a public limited company floats its shares for
subscription, it has to open accounts in banks
that are called "bankers to the issue". These
banks authorize their branches to collect share
applications from the public against deposits of
subscription money in a collection account; this is
ultimately transferred to a main account of the
bank on the closing date of the subscription.
8. Dormant Accounts
Dormant means sleeping, inactive, and inoperative.
If an account which has not been used by the
customer for a long time, it is classified as
dormant. Banks are allowed to make their own
policy regarding dormant accounts.
9. Deceased Accounts
On the death of an account holder, the account is
immediately marked as deceased. No further
withdrawals are allowed, but credit in accounts
can be received.
 If the balance in the account is small, it can be
released against indemnity on production of
the death certificate and heir ship certificate,
as per procedure given In the deposit manual of
the bank.
In the case of a large amount, production of
a succession certificate becomes mandatory,
along with other related documents, as per
the operations manual of the bank.
10. Account of Minor
A person below the age of 18 years is classified as a
Minor. When the age of 18 years is attained,
they become entitled to obtain their CNIC from
NADRA and can enter into a valid agreement in
their own name. An account in the name of a minor
is generally initiated or operated by the guardian.
Example: Salman Aziz (Minor) Muhammad Aziz
(Guardian).
11-Opening of Foreign Currency Accounts
Accounts other than Pak Rupees are Foreign
Currency Accounts. A foreign currency account
can be opened only in those branches that have
been permitted by SBP to deal in Foreign
Exchange. According to the SBP Foreign
Exchange Manual (chapter VI), the following
private foreign currency accounts can be opened
without prior approval from SBP:
 Pakistani nationals resident in or outside Pakistan,
including those having dual nationality.
All foreign nationals residing abroad or in Pakistan.
Joint account with resident and non-resident.
All diplomatic missions and their diplomatic officers.
All international organizations in Pakistan.
Companies established in Pakistan including foreign share
holdings.
Charity trusts, foundations, etc which are exempted from
Income Tax.
Branches of foreign firms and companies in Pakistan.
Non-resident Exchange Companies even if owned by a
bank or financial institution.
 All foreign firms, corporations other than the banks
and financial institutions owned by the banks,
incorporated and operating abroad, provided these are
owned by persons who are otherwise eligible to open
foreign currency accounts
12-Private Non-Resident Rupee Account
Accounts of individuals, firms or companies resident in
countries outside Pakistan are designated as non-resident
accounts. All Pakistani nationals, except persons holding
office in the service of Pakistan, who go out of the
country for any purpose, i.e. employment, study, business
tour, pleasure trip, etc, are treated as non-resident for as
long as they remain outside Pakistan.
Non-resident accounts can broadly be divided into
four groups:
Non-resident Pakistani nationals permanently
residing abroad.
Non-resident Pakistani nationals who are abroad
for a short visit.
Non-resident foreign nationals residing abroad.
A non-resident foreign national who is an
ordinary resident in Pakistan but who has gone
abroad for a short visit.
 Account opening procedure
An account is opened by completing an Account
Opening Form (AOF). This is the basic document to
be used.
Procedure
Customer visits the bank in order to open the
account.
Bank officer should explain the requirements
with respect to account type.
The Account Opening Form, Specimen Signature
Card (SS Card), Cheque Book request form should
be given to the customer.
 The customer will fill in the Account Opening Form, Cheque
Book, and ATM card request (if required) SS Card and
submits other relevant documents as per requirement of
the bank.
The customer should provide any of the following
verification documents.
1. CNIC
2. Passport
3. Pakistan Origin Card (POC)
4. National Identity Card for Overseas Pakistani
(NICOP)
5. Evidence of profession
 NADRA verification should be completed immediately but
not later than 5 working days.
1.Individual/Joint and Sole Proprietorship
Joint Accounts
These accounts are not to be treated as partnership accounts.
These are the accounts opened in the name of two or more
persons who are not partners.
Operations of Joint Account:
The mandate must bear the signatures of all the account
holders.
Can be operated jointly by all the account holders
Can be operated by any one or more persons authorized to
operate the account
Either or Survivor /s mandate.
Stop Payment Instructions in a Joint Account
Any one of the joint account holders can give stop payment
instructions of any cheque to the bank; however, for
reinstatement of the payment of such cheque, such
instructions must bear signatures of all the account holders.
Partnership Account:
Partnership is the relation between persons who have
agreed to share the profits of a business carried on by all or
any of them acting for all Right to sue vests in registered firm.
Partner is treated as an agent of firm (Section 18 of
Partnership Act. 1932) however; partner has no authority to
open an account on behalf of the firm (Section 19-2B)
Documents required
Partnership declaration / Mandate Form duly signed by each
partner under firm's stamp.
Attested photocopies of CNIC or other verification
documents of all partners.
CNIC must be duly verified from NADRA.
Attested copy of "Partnership Deed" duly signed by all the
partners of the firm.
Attested copy of Registration Certificate issued by Registrar
of Firms.
In cases where the partnership is unregistered, this fact
should be clearly mentioned on the AOF.
Authority letter, in original, in favor of the person authorized
to operate the account of the firm in cases where authority is
given.
Accounts of Companies
Documents Required:
Resolution passed by Board of Directors for
opening the account
Copy of Memorandum of Association
Copy of Articles of Association
Certificate of Incorporation
Certificate of commencement of business
Balance Sheet.
Accounts of Clubs, Societies & Association
An association dedicated to a particular interest or
activity.
Documents required
Resolution passed by managing
committee/executive committee/Governing body
etc.
Certified copy of by- laws/rules
Signatures of the persons authorized to operate
account.
Account of Trusts:
Trusts are governed by Trust Act-1882
Any person who is competent to contract may create a trust.
Opening of Account
Account is opened in the name of the Trust.
All trustees to sign account opening form.
Documents required
An attested copy of Certificate of Registration.
Attested copies of CNIC of all the trustees.
Certified copies of Instrument of Trust.
No trust account should be opened without prior permission
from the Legal Department or any other competent authority
of the bank.
CNIC of Trustees should be verified from NADRA.
Executors & Administrator's Account
Executor is a person who is entrusted responsibilities of
executing WILL.
An administrator is a person appointed by a court to look
after the estate of a person who died without leaving a WILL
or the person appointed as executor is not competent to
perform the contract (for example minors, insolvent, lunatics)
The banks must carefully study the contents of the WILL
before opening an account of Executor/Administrator.
Accounts of Local Bodies:
The accounts must be in conformity with local bodies
law/rules.
The request for opening an account must be made by
competent authority
 Negotiable Instruments
A negotiable instrument is a document
guaranteeing the payment of a specific amount of
money, either on demand, or at a set time. The
three main negotiable instruments are a
promissory note, a bill of exchange and a cheque,
payable either to order or to bearer.
A negotiable instrument is transferable from one
person to another by delivery or by endorsement
and delivery.
Types of negotiable instruments
1.Promissory note
2. Bill of exchange
3. Cheques
promissory note
A signed document containing a written promise
to pay a stated sum to a specified person or the
bearer at a specified date or on demand.
Bill of exchange
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.
Difference between Inland and Foreign Bills
A bill of exchange may be inland or foreign. An
inland bill is a bill which is both drawn and payable
within the country. A foreign bill is one which is
drawn in one country but accepted and payable in
another country.
Parties to a bill of exchange
There are three parties to a bill:
1. Drawer
2. Drawee
3. Payee
Cheque
A cheque is a standard document drawn on a
particular bank, through which cash is
withdrawn; payments are made to settle
financial transactions. It is a negotiable
instrument, which can be issued payable to the
bearer or order on demand.
Types of cheques
1.Bearer cheque
This is a cheque that is expressed to be payable to the
bearer. Ownership of a bearer cheque passes to the
holder by simple delivery of the cheque, with an
intention to transfer the title.
2.Order cheque
This is one that is payable to a named person or to his or
her order. The ownership of an ordered instrument is
transferred through endorsement.
3.Blank cheque
A blank cheque is one that is signed by the drawer but no
details are filled in.
 `
4. Open cheque
An open cheque is just that, one which does not
bear a crossing on the face and therefore can be
presented across the counter of the bank for cash
payment.
5.Crossed cheque
A crossed cheque is one that bears across its face
two parallel lines with or without words not
negotiable, payee account only, & coor two,:
lines with the name of a bank. A crossed cheque
must be collected through a banker and cannot be
cashed at the counter.
6.Traveler's cheques (TCs)
This is a value received instrument, issued in local as well
as foreign currencies, to the banks regular customers as
well as walk-in. Each travelers cheque has a space for
customers to sign at receiving it and another space for
signing in the presence of agent bank officer at time of
payment.
7.Cheque is post dated or out of date
When is drawn in advance date i.e the date which is yet
to arrive ,it is called post dated cheque.when cheque is
in circulation beyond six months from the date it is
drawn and presented for payment,it is called out of date
or stale cheque.
8.Stopped cheque
This is a cheque for which instructions of Not to be paid from
the drawer.
9.Cheque is mutilated
During transit ,in post or otherwise when a cheque is torn or
defaced by mishandling, it is called a mutilated cheque.
10.Bounced Cheque
A slang word for a cheque that cannot be processed because
the maker has insufficient funds. A bounced cheque will often
be returned to the maker along with a penalty fee for non-
sufficient funds.
Also known as a rubber cheque, dishonored cheque, or bad
cheque.
Holder
The Holder of a promissory note /bill of
exchange or a cheque means the payee or the
endorsee who is in possession of it or a bearer
of the instrument. If an instrument is lost and
not found again, or is destroyed, the person in
possession of it at the time of loss or destruction
will continue to be treated as its holder.
Holder in due course
Holder in due course means the claimer of a
cheque / negotiable instrument, who has lawful
title free from any defect. Title will be treated as
defective if possession of the instrument /
cheque has been taken by means of any offence,
fraud or any unlawful consideration.
 Remittances
Remittances can be defined as an act of
transferring money to a distant place. Banks issue
remittances on behalf of customers after
receiving the value of remittance and related
charges/Govt taxes, if any, are taken care of
Remittances payable within the country are
called In Land Remittances. Remittances payable
outside the country and received from foreign
countries are called Foreign Remittances'.
Types of Inland Remittances
Pay order
Demand draft
Telegraphic transfer
Cashiers cheques / bankers cheques / Rupee
travelers cheques
Online transfer
1. Pay order (PO)
Pay order is an order to pay a certain amount of
money mentioned in the instrument on demand or
to the endorsee on behalf of the payee. The bank is
discharged by payment in due course. Pay order is
generally used for making local payments and the
same is done by the branch that issues it.
This is an order instrument and transferred through
negotiation. This is like a Banker's Cheque but
issued locally for local payments. This is different
from a demand draft which is payable for
outstations and is generally used for outstation
payments.
Customer approaches the bank
for issuance of PO/CC

Request will be received1 In the case of walk-in customer, required KYC should be completed, such as
either on standard application
form or customer written
request
Address and telephone number(s) of the purchaser.
Photo copy of CNIC and its comparison with original for due diligence. Purpose of
remittance.

Dealing officer must check that all required information in the application form is
completed and it is signed

if PO/CC is to be issued against cash, then same shall be collected along with charges and
cash received stamp shall be affixed onto application form

If PO/CC is to be issued against cheque, it shall be posted in the account, if charges are
not included in the cheque separately, debit voucher shall be prepared and charges shall
be recovered

Cheques will be cancelled and transfer stamp must be affixed onto all related vouchers

Duplicate copy shall be handed Pay order/cashier cheque shall be prepared as per details in the application, either
over to the customer manually or through system
It shall be signed by the maker and counter signed by the checker
2. Demand Draft (DD)
A demand draft is a value received instrument
issued by the bank. It is issued in order to pay
money drawn by one branch of a bank upon
another branch of the same bank or its
correspondent. Since this is an order instrument,
the drawee bank is discharged by payment in due
course and the instrument is transferred through
negotiation. DDs are generally drawn on other cities
with an objective of making payments there.
3.Telegraphic transfer (TT)
Telegraphic transfer is a transfer of money by cable
or through telegram from one branch of a bank to
another branch of the same bank or correspondent
of a named beneficiary.
TT message is prepared under t number. The
authenticity of the TT message should be confirmed
by the drawee branch by verifying a secret test
number. When the test is confirmed, the proceeds
of the TT are credited in the account of the
beneficiary.
4 Cashier cheque / bankers cheque
A cashier cheque is a kind of a draft drawn by a branch
on its Head Office or Main Office. Cashier cheques are
a guaranteed form of payment.
This is an order instrument that can be paid when
presented at the counter, but generally issued as a
crossed cheque. This is a very customer-friendly
instrument as it serves the purpose of both demand
draft and pay order. A pay order is issued and paid by
the same branch; a DD is paid by the branch on which
it is drawn, whereas a cashier cheque can be paid at
any branch of the bank. Any customer, including walk-
in customers, can order a cashiers cheque from any
bank simply by handing them the money over the
counter, but if he/she has an account with the bank it
is sometimes cheaper.
 A cashier cheque includes the name of the
issuing branch and its code, instrument
number, date, drawn on main office and
amount in words and figures. It can be issued
for any amount and requires the signatures of
two authorized officers.
5.Rupee Travelers Cheques (TC)
Cheques issued in Pak rupees by the banks to
their customers who wish to travel within the
country are called Rupee Traveler's Cheques.
Each cheque has a space for the customer to
sign immediately on receipt of the cheque and
another space to sign in the presence of the
paying banker at the time of encashment.
6.Online Transfer
Online transfer means transfer of funds electronically
through a computer system. In a cash-free world all
transactions can be done electronically. To receive
money the customer should have a bank account in the
country, but to transfer money, a walk-in customer can
also make use of the online fund transfer facility. This is
a highly effective and secure way to transfer money.
Through an online system, branches are linked to
computer centers and customers account records are
held and processed centrally.
Procedure for online transfer
Customers can apply for online transfer either
through a standard application form or by using
deposit slips. These slips are designed in a
manner so that a depositor can write the name
of a local branch where the cash is deposited
and name of the remote branch where funds
have to be credited.
 Before accepting an online transfer it should be checked if
the re branch is computerized and online.
If cash is deposited, a received cash' stamp should be
affixed onto the application form after counting the cash
and recovering charges.
The customer's cheque and written instructions can also
be accepted for online transfer.
In the case of written instructions, vouchers for debit of
the customer s account should be prepared for
remittance amount plus charges.
If the remitter is a walk-in customer, a copy of CNIC
should be obtained along with the original for attestation.
After all cheques are cleared, access to the remote branch
should be made and vouchers should be posted. After
posting and supervision, fund transfer through the online
system should be completed on a real time basis.
 Endorsement:
Definition of endorsement
When the maker or holder of a negotiable
instrument signs the same, otherwise than as
such maker, for the purpose of negotiation, on
the back or face thereof or on a slip of paper
annexed thereto, or so signs for the same
purpose a stamped paper intended to be
completed as a negotiable instrument, he is said
to indorse the same, and is called endorser.
Essentials of an Endorsement
It should be on the instrument. If there is no
space on it, it may be on a separate slip of paper
annexed to the instrument called allonge.
The endorser should sign the endorsement in the
same style and with the same spellings as written
in the instrument.
Signatures should be in ink and not by pencil or
rubber stamp.
It should be made by the holder or the maker. It
cannot be endorsed by a stranger.
The delivery of the instrument with the intention
of passing the property in it to the endorsee is
important.
Kinds of Endorsement:
The endorsements are divided as under:
Blank or general
Full or special endorsement
Restrictive endorsement
Partial endorsement
 1. Blank or general endorsement:
If the endorser signs his name only and does not
specify the name of the endorsee, the endorsement
is said to be in blank. It generally converts "order"
paper to "bearer" form.
2. Endorsement in full or special endorsement:
If the endorser, in addition to his signature, also
adds a direction to pay the amount mentioned in
the instrument to, or to the order of, a specified
person the endorsement is said to be in full.
3. Partial Endorsement:
A partial endorsement which transfers the rights to
receive only a part payment of the amount due on
the instrument is invalid.
4. Restrictive endorsement:
In addition to holder's signature, includes a
restriction on how the paper may be used by
transferee. Most common wording is "For Deposit
Only." The transferee bank must apply the cheque
to the holder's deposit account.