To meet FATF stipulations: SBP fines Rs1.68 bn on 15 banks for forex trading violations

KARACHI: The State Bank of Pakistan has fined 15 commercial banks Rs1.68 billion in March-June 2020 for deficiencies in foreign exchange trading, as well as failure to comply with customer due diligence (CDD) and know your customer (KYC) requirements in line with requirements of FATF action plan on anti-money laundering and countering terror financing.

The SBP imposed penalties on banks for violating CDD and KYC laws and lapses in their foreign exchange operations. Some banks were also fined over lax anti-money laundering controls. The SBP advised them to strengthen their process related to KYC/CDD, in order to avoid recurrence of such violations.

The government continued to ensure the earliest completion of the Financial Action Task Force (FATF) Action Plan through increasing the effectiveness of its anti-money laundering (AML) and combating the financing of terrorism (CFT) regime. Pakistan had already addressed 14 out of 27 FATF Action Plan items while substantial progress had been made in addressing the remaining 13 ones.

The country had taken various measures in recent years to contain illicit financial flows through strengthening of the AML/CFT regulations on CDD and KYC and other AML/CFT instructions to financial institutions have been brought in line with FATF standards.

Analysts said the Pakistan’s banking sector is expected to face a squeeze on their profitability in 2020 due to economic slowdown, low interest rate environment and the coronavirus pandemic. However, the central bank, in its financial stability review for 2019, stated that the strong capital buffers built over the years have significantly enhanced the resilience of Pakistan’s banking sector.

The stress tests suggest that the banking sector should remain resilient to the Covid-19 shock under most reasonable shock scenarios, reflecting the strong capital and liquidity positions of the majority of banks, it said. The capital adequacy ratio of banks improved to 17 percent, well above global and domestic minimum regulatory requirements of 10.5 percent and 11.5 percent, respectively.

Earnings of the banking sector surged by 14.3 percent to Rs170 billion in 2019, a turnaround after the contraction of the previous few years. The higher interest income of the sector improved the net interest margin to 4 percent, a 60 bps rise over the last year. Accordingly, profitability indicators like the return on assets and equity also increased. While demand for financing weakened—amid sluggish economic conditions—bank assets expanded by 11.73 percent last year, primarily, due to a surge in investment in treasury instruments. Though asset quality saw some deterioration, most of the non-performing loans continued to be fully provisioned. Encouragingly, the deposit base also exhibited a marked recovery, expanding by 11.92 percent, and provided the resources to support asset growth.