Banking Law

9 min read

Banking law in Pakistan is a layered ecosystem of statutes, regulations and case law. The principal instruments are the State Bank of Pakistan Act 1956, Banking Companies Ordinance 1962, Banks (Nationalisation) Act 1974, Financial Institutions (Recovery of Finances) Ordinance 2001 (FIO), and the Anti-Money Laundering Act 2010. Islamic banking sits in a parallel regulatory track under SBP's Islamic Banking Department.

Banking

Section 5(b) Banking Companies Ordinance 1962: 'banking' means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. The two essential elements are (i) acceptance of deposits and (ii) lending/investment.

Regulatory architecture

Institution	Statute	Function
State Bank of Pakistan	SBP Act 1956	Central bank: monetary policy, currency, supervision
SBP Banking Services Corp.	BSC Act 2001	SBP's operational arm
Securities and Exchange Commission of Pakistan	SECP Act 1997	Non-bank financial institutions, capital markets
Pakistan Deposit Protection Corporation	DPC Act 2016	Deposit insurance up to Rs. 500,000 per depositor
Banking Mohtasib (Ombudsman)	BCO 1962, § 82A	Consumer banking complaints
FIA Banking Crimes Circle	NAB Ordinance 1999; PECA 2016	Investigation of bank-related crimes

Banker–customer relationship

The relationship is multi-faceted:

Debtor–creditor: when customer deposits — the bank becomes debtor (Foley v. Hill (1848) 2 HLC 28).
Creditor–debtor: when bank lends.
Principal–agent: when bank collects cheques, pays bills.
Bailee–bailor: locker services.
Trustee–beneficiary: where funds are held under specific instructions.

The bank owes a duty of secrecy (codified in § 33A BCO 1962 and Bankers' Books Evidence Act 1891) and a duty of reasonable care in operations (Tournier v. National Provincial Bank [1924] 1 KB 461 — four-fold exceptions to secrecy: by law, public duty, bank's interest, customer's consent).

Key Points

Duty of secrecy (BCO § 33A): bank cannot disclose customer information except as required by law, court order, or with customer consent.
Wrongful dishonour of cheque: liability for substantial damages (Marzetti v. Williams (1830); Pakistan Mercantile v. Habib Bank PLD 1990 SC 250).
Banker's lien (BCO § 171, Contract Act): general lien on securities deposited by customer.
Set-off: bank may set off credit balance in one account against debit balance in another after notice.

Licensing and supervision

§ 27 BCO: licence to carry on banking business; only SBP-licensed entities may use the word "bank".
Minimum capital: SBP-prescribed (currently Rs. 10 billion paid-up free of losses for commercial banks).
Prudential regulations: separately for corporate/commercial banking, SME, consumer, agriculture and Islamic banking.
Capital Adequacy Ratio (CAR): Basel III implementation — minimum 12.5% (including capital conservation buffer).

Recovery of finances

The Financial Institutions (Recovery of Finances) Ordinance 2001 (FIO) is the principal recovery statute:

Banking Courts with exclusive jurisdiction over financial-institution recoveries.
Summary procedure: short defence requirement; leave-to-defend stage filters frivolous defences.
Decree-execution: sale of mortgaged property without prior court order in specified cases.

The Supreme Court in Apollo Textile Mills v. Soneri Bank PLD 2012 SC 268 clarified the leave-to-defend test under § 10 FIO.

Islamic banking

Pakistan operates a dual banking system — conventional and Islamic. Key elements:

Meezan Bank received Pakistan's first full Islamic banking licence in 2002.
State Bank's Islamic Banking Department (IBD) issues separate prudential regulations.
Sharia governance framework mandates a Sharia Advisor at each Islamic bank/window.
Federal Shariat Court's Riba Judgment 2022 ordered conversion of the entire banking system to Sharia-compliant operations by 31 December 2027.

Anti-money laundering

Anti-Money Laundering Act 2010 as amended.
Financial Monitoring Unit (FMU) receives suspicious transaction reports (STRs).
Know Your Customer (KYC) and Customer Due Diligence (CDD) required for account opening.
Targeted Financial Sanctions under UNSC 1267 and the Anti-Terrorism Act 1997.
Pakistan's FATF compliance: removed from grey list in October 2022 after legislative reforms.

Negotiable instruments and banking

Banks are deeply involved in negotiable instruments — cheques (drawee), bills (acceptor/discounter), promissory notes. Special protections:

§ 85 NI Act 1881: banker's protection on payment of order cheque in due course.
§ 128 NI Act: protection on payment of crossed cheque in accordance with crossing.
§ 131: collecting banker's protection on collecting cheques in good faith without negligence.

Pakistan's banks operate the Pakistan Real-Time Interbank Settlement Mechanism (PRISM) for high-value payments and the National Payment System for low-value clearing.

For CSS Banking-Law questions, structure the answer around: (i) definitional source (§ 5(b) BCO 1962); (ii) banker-customer relationship with Foley v. Hill and Tournier; (iii) regulatory layer (SBP, SECP, AMLA, DPC); (iv) Islamic banking parallel track; (v) recovery via FIO 2001. Cite the 2022 FSC Riba judgment as the watershed for the future of banking law in Pakistan.

Modern developments

Digital banking: SBP licensed 5 Digital Banks in 2023 (Raast, NRDS, etc.) — fully digital, no physical branches.
Raast instant payment system launched 2021 — free P2P transfers.
Cryptocurrency: SBP circular 2018 prohibits dealing in virtual currencies; Sindh High Court's order in Waqar Zaka v. Federation 2023 directed regulatory framework — still pending.
Open banking: regulatory framework under development.
Branchless banking: Easypaisa, JazzCash, Upaisa — operate under SBP's Branchless Banking Regulations.
Banking Mohtasib: section 82A BCO; appellate jurisdiction via President under § 82C.