The State Bank of Pakistan has advised all banksDFIs (development finance institutions) to ensure meticulous compliance of Section 24 of the Banking Companies Ordinance, 1962 which forbids them to grant financing facilities to members of their Board of Directors and related parties without fulfilling the required conditions.
The SBP issued these restrictions following reports that some banks are not observing Section 24 of the Banking Companies Ordinance, 1962 while granting financing facilities to their related parties. "The BanksDFIs are, therefore, advised to ensure meticulous compliance of aforesaid provisions of BCO, 1962 while extending all types of financing facilities, including consumer finance, to related parties and members of their Board of Directors," a circular issued to all banksDFIs on Saturday said.
Under Section 24 (1) of BCO, 1962 no banking company can make any loans or advances against security of its own shares; or 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 referred to in sub-clause (i) or sub-clause (ii) 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.
Similarly, under clause (2) of Section 24 of BCO, 1962, no banking company can make loans or advances to any of its directors or to individuals, firms or companies in which it or any of its directors is interested as partner, director or guarantor, as the case may be, without the approval of the majority of the directors of that banking company, excluding the director concerned.