In a recent development, Pakistan’s central bank has levied substantial fines amounting to Rs775.54 million on nine commercial banks, including several leading ones, for breaching regulations concerning foreign currency transactions. The penalties were imposed during the quarter ending March 31, 2024, as part of the State Bank of Pakistan’s (SBP) heightened scrutiny of foreign exchange dealings amidst the country’s persistently low foreign exchange reserves.
With Pakistan’s foreign exchange reserves hovering around $8 billion in recent months, providing import cover for less than two months, the SBP has intensified its oversight to ensure compliance with regulatory instructions. The reserves experienced a temporary decline to approximately $7 billion after the repayment of a $1 billion foreign debt last week. However, they are expected to rebound to around $8 billion following the disbursement of the final tranche of $1.1 billion by the International Monetary Fund (IMF) later this month.
According to a report released by the SBP, seven banks faced monetary penalties ranging from Rs38.54 million to Rs187.65 million for contravening instructions related to foreign exchange dealings. While the report did not delve into the specifics of the violations, the central bank urged financial institutions to bolster their internal processes and systems to ensure strict compliance with regulatory directives and prevent recurrence of similar infractions.
This crackdown on commercial banks follows earlier findings by the central bank in 2022, where 18 banks were allegedly involved in overpricing foreign currency in terms of the Pakistani rupee. However, no punitive action was taken at that time due to strong opposition from the financial sector. The government contemplated imposing a 40% tax on windfall income earned by 19 commercial banks amounting to Rs110 billion in 2021 and 2022 through unwarranted devaluation of the rupee against major currencies, but this proposal was shelved.
Furthermore, the SBP has been actively addressing issues related to money laundering, terrorism financing, and compliance with anti-money laundering (AML) and combating the financing of terrorism (CFT) instructions. In addition to the penalties imposed on commercial banks, a Shariah-compliant bank was fined for violating AML/CFT regulations.
Despite economic challenges and subdued industrial activities in the country, Pakistan’s listed banks reported a remarkable 86% growth in net profit in 2023, reaching a record high of Rs572 billion. This surge in profits was attributed to policy rate hikes and robust growth in deposits.
In conclusion, the SBP’s stringent enforcement actions underscore its commitment to maintaining the integrity and stability of Pakistan’s financial system while promoting transparency and adherence to regulatory standards in the banking sector.