Regulation and Supervision

Regulation and Supervision of Banks
The regulatory and supervisory framework for Banks is specified in the Banking Act, Monetary Law Act and the Exchange Control Act. The Central Bank issues banking licenses for two categories of banks, namely Licensed Commercial Banks and Licensed Specialised Banks (which are savings and development banks). The main difference between a Licensed Commercial Bank and a Licensed Specialised Bank, is that the former is permitted to accept demand deposits from the public (operate current accounts for customers) and is an Authorised Dealer in foreign exchange which entitles it to engage in a wide-range of foreign exchange transactions, whereas the latter is not.

The laws empower the Central Bank to undertake the following:

The regulatory and supervisory function relating to banks licensed by the Monetary Board is carried out by the Bank Supervision Department of the Central Bank. The supervision of banks is based on the internationally accepted standards for bank supervision set out by the Basel Committee for Banking Supervision. Under the off-site surveillance system, the financial condition of Licensed Commercial Banks and Licensed Specialised Banks is monitored on the basis of periodic information provided by banks on their operations. The periodic information includes weekly interest rates of deposits and advances, monthly returns on selected financial information, assets and liabilities, statutory liquid assets, quarterly returns on income and expenditure, capital adequacy, non-performing advances, classified advances and provisioning for bad and doubtful advances, investments in shares, accommodation granted to bank directors, their close relations and concerns in which a director has a substantial interest, interest spreads, half-yearly return on share ownership of the banks and annual audited financial statements.

In terms of the provisions of the Banking Act and the Monetary Law Act, all Licensed Commercial Banks and Licensed Specialised Banks are subject to statutory examinations, at least once in two years. A new approach to on-site supervision has now been adopted - the risk based examination process, which focuses on identification of banking risks, the management of these risks and the assessment of adequacy of resources to mitigate these risks. This is supplemented by examination based on the internationally accepted CAMEL model (Capital Adequacy, Asset Quality, Management, Earnings, and Liquidity). In addition, a bank's compliance with statutory requirements, applicable laws and regulations, internal controls and the standards of corporate governance are assessed. Matters relating to non-compliance with prudential requirements and any weaknesses and deficiencies in the financial condition, controls and systems of a bank are brought to the notice of its Board of Directors, by the Central Bank to ensure that corrective action is taken by the bank.

Licensed Commercial Banks and Licensed Specialised Banks are also required to publish their quarterly and annual audited financial statements, including key performance indicators, in the newspapers, in all three languages, within two months of the end of each period.

Common Banking Forum - The Governor holds monthly meetings with the Chief Executive Officers of Licensed Banks, which serves as a forum for the exchange of views on issues and policies relating to banking operations and the financial sector.

Public Awareness - The Central Bank conducts a public awareness programmes on the banking and financial system and regular notices are published in the newspapers to advise the public to assess and to be cautious of the risks and returns on their transactions with financial institutions.

Main Prudential Regulations, Directives and Guidelines applicable to Licensed Commercial Banks & Licensed Specialized Banks >>
Banking Act & Banking (Amendment) Act >>
A Guide to Financial Services >>
Guide to Interest Rates of Banks >>
Institutions Authorised to Accept Deposits From the Public- Pamphlet Series No.5 >>

Regulation and Supervision of Finance Companies
The regulation and supervision of Registered Finance Companies is governed by the Finance Companies Act. The Department of Supervision of Non-Bank Financial Institutions of the Central Bank carries out the regulatory and supervisory functions in respect of Registered Finance Companies, with the objective of ensuring that these institutions comply with the minimum prudential requirements stipulated by the Central Bank. These functions are carried out mainly through off-site surveillance and on-site examinations. The directions and rules issued under the provision of the Finance Companies Act cover minimum capital adequacy and liquidity requirements, deposits, provisioning for bad and doubtful debts, single borrower limits and limits on equity investments. Matters relating to non-compliance with prudential requirements and any weaknesses and deficiencies in the financial condition, controls and systems of a finance company are brought to the notice of its Board of Directors, by the Central Bank to ensure that corrective action is taken by the finance company.

The Central Bank also conducts investigations into the affairs of institutions, which are allegedly engaged in finance business, without legal authority. These unauthorised institutions are taking money from the public either as deposits or in a manner akin to deposits by calling them other names, such as investments, credit, borrowings or placements. Appropriate action is taken against such unauthorised institutions that contravene the Finance Companies Act. Legal action is also instituted against entities that fail to provide information for investigations to ascertain whether such companies are conducting finance business.

Public Awareness - The Central Bank conducts a public awareness programme through notices, posters and publications to inform the public of authorised financial institutions and to warn them of unauthorised persons/entities that engage in finance business.

Main Prudential Regulations, Directives & Guidelines applicable to Registered Finance Companies >>
Finance Companies Act >>
Institutions Authorised to Accept Deposits From the Public - Pamphlet No.5 >>

Regulation and Monitoring of Finance Leasing Establishments
In terms of the Finance Leasing Act, a certificate of registration is necessary to conduct finance leasing business. There are four categories of institutions that are eligible to register as Finance Leasing Establishments - Specialised Leasing Companies, Registered Finance Companies, Licensed Commercial Banks and Licensed Specialised Banks. The Department of Supervision of Non-Bank Financial Institutions of the Central Bank registers, regulates and monitors Finance Leasing Establishments in terms of the law. Directions relating to prudential requirements have been issued which cover minimum capital, provision for bad and doubtful debts, single borrower limit, gearing ratio, treatment of accrued interest, reserve fund, financial statements, corporate and operational information The monitoring function is mainly carried out through off-site surveillance and on -site examination.

Main Prudential Regulations, Directives and Guidelines applicable to
Finance Leasing Establishments / Specialized Leasing Companies >>
Finance Leasing Act >>

Regulation and Supervision of Primary Dealers
The regulatory and supervisory framework for Primary Dealers in government securities is specified by regulations issued under the Local Treasury Bills Ordinance and the Registered Stocks and Securities Ordinance. The Central Bank is empowered to regulate and supervise Primary Dealers, which entails the appointment of Authorised Primary Dealers, the issuing of prudential directions and determinations under the laws, the off-site and on site examination of Primary Dealers and the enforcement of regulatory actions, including the suspension and cancellation of the appointment of Primary Dealers for non-compliance with the laws. The Public Debt Department of the Central Bank is responsible for supervising Primary Dealers.

There are two categories of institutions that are eligible to be Authorised Primary Dealers - Licensed Commercial Banks and Dedicated Primary Dealers Companies. The supervision of Primary Dealers is carried out to ensure an efficient, sound and safe primary dealer system, to promote the stability of the government securities market and to safeguard the interests of investors. The main Directions issued to Primary Dealers cover Minimum Capital Requirement, Capital Adequacy, Special Risk Reserve, Segregation of Securities Accounts, Custodial Holdings of Securities, Market Valuation, Repurchase Agreements, Forward Rate Agreements and Interest Rate Swaps and Risk Management. The Public Debt Department supervises Authorised Primary Dealers through off-site surveillance and on -site examinations. Regular meetings, as well as, one to one discussions, are held with Primary Dealers to exchange views and to institute remedial measures, where necessary. In addition, the Central Bank has issued a Code of Conduct for Primary Dealers to promote best practices in the conduct of trading and compliance is monitored.

Main Prudential Regulations, Directives and Guidelines applicable to Primary Dealers in Government Securities >>
Local Treasury Bills Ordinance >>
Registered Stocks and Securities Ordinance >>