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B-3 rated banks may give loans to Modarabas sans SBP okay

RECORDER REPORT

KARACHI: Banks have been allowed to grant financing facility to Modaraba comapnies without getting prior clearance from the State Bank of Pakistan.

Earlier, the banks were bound to get written permission from the State Bank before granting financing facility to (whether fund-based or non-fund based) Modarbas.

"The matter has been reviewed and it has been decided that banks shall no longer require prior clearance of State Bank, in respect of Modarbas having a credit rating of B-3 and above, while extending financing facilities to them (whether fund based or otherwise)," says a circular issued by State Bank on Tuesday.

It further says that the bank's exposure should be effectively secured and other prudential regulations and instructions issued by State Bank from time to time should be duly observed.

In other cases banks will, however, continue to seek prior clearance of State Bank in terms of instructions contained in the circular of September 3,. 1996.

Bankers feel that the step has been taken in the light of Supreme Court's decision regarding the interest-free banking and economy. Since Modaraba provides Islamic mode of financing, the State Bank has taken the step to encourage this kind of financing.

Besides, some bankers commented that the Modarabas have no significant presence in the market and have no major role in any kind of economic activities in the country.

"It may help Modarabas to grow but it does not have much potential to enlarge its activities," commented a seasoned banker.