The SBP continues to improve governance framework for banks’ overseas operations in an effort to strengthen the risk management and compliance practices of the institutions. According to the latest instructions of the State Bank, boards of the banks have been advised to play a more active role in oversight and half of all profits from overseas branches must be remitted back to Pakistan every year. The boards and senior management at banks should “have clear understanding of relevant important laws and regulations in respective overseas jurisdictions”. The banks were expected to maintain ROE – profit after tax/total capital – in each jurisdiction at least equal to industry or peer average of that particular jurisdiction. Those overseas operations that fall below this standard for two consecutive years will have to submit an action plan to the SBP explaining reasons for the losses as well as action planned to be undertaken to reverse the trend. Under the framework, all banks will be required to develop comprehensive risk governance framework for its overseas operations within six months while the banks with overseas assets of over dollar 1 billion will consider forming a separate sub-committee of board to oversee the overseas operations. Banks will have also to ensure that all their transactions, dealings, contracts with foreign branches and joint ventures of those foreign branches among themselves are also carried out in a transparent manner. Finally, banks will not be allowed to operate in jurisdictions where SBP itself is unable to conduct on-site examination or through a third-party due to host country’s laws and regulations. In jurisdictions where no such bar was in place, the bank will bear the cost if SBP decides to conduct an inspection of bank’s existing operations through a third party.

It is quite obvious that the latest “Governance Framework” for banks’ overseas operations issued by the SBP is primarily meant to keep up with changing dynamics of foreign environment under which banks operate and to further strengthen the governance, risk management and compliance practices for banks’ overseas operations. Seen closely, the framework covers almost all foreign operations of Pakistani banks including general operations, overseas subsidiary operations, profit repatriation, performance monitoring and regulatory reporting of overseas bank branches. Besides, the circular makes it clear that if a bank has overseas branches/offices, its board and senior management should have a clear understanding of relevant laws and regulations in overseas jurisdiction. This clause is meant to ensure that top management of the bank has no excuse, including the ignorance of laws to offer for the troubles being faced by an overseas branch. Besides, the respective boards of banks are now required to oversee the business of foreign branches more actively. The mandate to repatriate at least 50 percent of the profit of overseas branches is probably meant to ensure constant flow of foreign exchange to Pakistan and strengthen the capital/equity base of foreign branches. In order to expand the control of central bank and avoid problems, SBP has also advised the banks not to expand operations in places where it is unable to conduct on-site examination, etc.

The SBP seems to have moved to develop a more detailed “Governance Framework” after two of the country’s largest banks had problems with the regulatory authorities in the United States. While the Habib Bank had to pay a penalty last year, UBL had to sign an agreement with the Federal Reserve Bank of New York last month to comply with the laws and regulations of the US. Such an action does not only affect the credibility and reputation of the Pakistani banks abroad but is also harmful for trade and investment in the country. Hopefully, the latest instructions of the SBP would serve to make the banks more careful and transparent in operations in line with the laws and regulations of the host countries. The only care which needs to be taken is not to over-regulate the system so that the innovative spirit of the financial sector of the country is not stifled.