The Presidents/ Chief Executives
All Banks/DFIs,

Dear Sirs / Madam,

AMENDMENTS IN REGULATION G-1 OF PRUDENTIAL REGULATIONS

State Bank of Pakistan has been emphasizing upon the banks / DFIs to strengthen and improve the corporate governance level for better management of their affairs for which guidelines have been issued vide Prudential Regulation G-1. In order to have effective compliance, it is important that Board of Directors and the management should play their roles within the parameters specified in SBP Prudential Regulations and other relevant instructions. Accordingly, for further improving and strengthening of the Corporate Governance practices, some amendments have been made in section B & C of Prudential Regulation G-1 for Corporate and Commercial Banking. Revised text of both sections is reproduced below:

B. RESPONSIBILITIES OF THE BOARD OF DIRECTORS:

The Board of Directors shall assume its role independent of the influence of the Management and should know its responsibilities and powers in clear terms. It should be ensured that the Board of Directors focus on policy making and general direction, oversight and supervision of the affairs and business of the bank / DFI and does not play any role in the day-to-day operations, as that is the role of the Management.

2. The Board shall approve and monitor the objectives, strategies and overall business plans of the institution and shall oversee that the affairs of the institution are carried out prudently within the framework of existing laws & regulations and high business ethics.

3. All the members of the Board should undertake and fulfill their duties & responsibilities keeping in view their legal obligations under all the applicable laws and regulations. All Board members should preferably attend at least 1-2 weeks training program(s) which will enable them to play effective role as a director of bank/DFI, at an institution like Pakistan Institute of Corporate Governance or other similar institution within first year of their directorship on the Board of bank/ DFI

4. The Board shall clearly define the authorities and key responsibilities of both the Directors and the Senior Management without delegating its policy-making powers to the Management and shall ensure that the Management is in the hands of qualified personnel.

5. The Board shall approve and ensure implementation of policies, including but not limited to, in areas of Risk Management, Credit, Treasury & Investment, Internal Control System and Audit, IT Security, Human Resource, Expenditure, Accounting & Disclosure, and any other operational area which the Board and/or the Management may deem appropriate from time to time. The Board shall also be responsible to review and update existing policies periodically and whenever circumstances justify.

6. As regards Internal Audit or Internal Control, a separate department shall be created which shall be manned preferably by professionals responsible to conduct audit of the bank’s/DFI’s various Divisions, Offices, Units, Branches etc. in accordance with the guidelines of the Audit Manual duly approved by the Broad of Directors. The Head of this department will report directly to the Board of Directors or Board Committee on Internal Audit.

7. The business conditions and markets are ever changing and so are their requirements. The Board, therefore, is required to ensure existence of an effective ‘Management Information System’ to remain fully informed of the activities, operating performance and financial condition of the institution, the environment in which it operates, the various risks it is exposed to and to evaluate performance of the Management at regular intervals.

8. The Board should meet frequently (preferably on monthly basis, but in any event, not less than once every quarter) and the individual directors of an institution should attend at least half of the meetings held in a financial year. The Board should ensure that it receives sufficient information from Management on the agenda items well in advance of each meeting to enable it to effectively participate in and contribute to each meeting. Any advisor, if appointed by the Board member, shall neither attend the Board meeting(s) on behalf of the Board member nor shall regularly sit in the Board meeting(s) as an observer or any other capacity.

9. The Board should carry out its responsibilities in such a way that the external auditors and supervisors can see and form judgment on the quality of Board’s work and its contributions through proper and detailed minutes of the deliberations held and decisions taken during the Board meetings.

10. To share the load of activities, the Board may form specialized committees with well-defined objectives, authorities and tenure. These committees, preferably comprising of ‘Non-Executive’ Board members, shall oversee areas like audit, risk management, credit, recruitment, compensation etc. These committees of the Board should neither indulge in day-to-day affairs/operations of the bank nor enjoy any credit approval authority for transaction/limits. These committees should apprise the Board of their activities and achievements on regular basis.

11. The Board should ensure that it receives management letter from the external auditors without delay. It should also be ensured that appropriate action is taken in consultation with the Audit Committee of the Board to deal with control or other weaknesses identified in the management letter. A copy of that letter should be submitted to the State Bank of Pakistan so that it can monitor follow-up actions.

C. MANAGEMENT:

No member of the Board of Directors of a bank / DFI holding 5% or more of the paid-up capital of the bank/DFI either individually or in concert with family members or concerns/companies in which he / she has the controlling interest, shall be appointed in the bank/DFI in any capacity except as Chief Executive of the bank/DFI. Further, maximum two members of Board of Directors of a bank/DFI including its CEO can be the Executive Directors.

2. The banks/DFIs during a calendar year may pay a reasonable and appropriate remuneration for attending the Board or its committee (ies) meeting(s), to their non-executive directors and chairman. However, the remuneration to be paid shall be linked to the actual number of Board or committee meetings attended by an individual director / chairman i.e. no fixed remuneration on periodical basis (monthly or yearly etc.) shall be paid to the non-executive directors. Furthermore, the scale of remuneration to be paid to the non-executive directors and chairman for attending the Board and / or committee meetings shall be approved by the shareholders on a pre or post facto basis in the Annual General Meeting. However, no such remuneration shall be paid to the executive directors, except usual TA/DA as per banks/ DFIs standard rules and regulations. Banks/DFIs shall also ensure that except as mentioned above, no additional payment or perquisites will be paid to the non-executive directors and chairman. Furthermore, no consultancy or allied work will be awarded to the non-executive directors or to the firms / institutions/ companies etc. in which they hold substantial interest.

3. The Directors on the Boards of banks/DFIs should not appoint, at the bank’s/DFI’s expense, any advisor(s) to assist them in discharge of their duties / responsibilities as members of the Board of Directors of a bank/DFI. In case any Board member feels it necessary to appoint an advisor for his/her assistance, his/her remuneration/expenses shall be borne by the concerned Board member himself/herself. Furthermore, the advisor so appointed by the Board member shall be required to sign an appropriate confidentiality agreement to ensure confidentiality of documents / information that may come to his/her knowledge, before assuming any such role.

The banks/DFIs shall ensure meticulous compliance with the above amended Regulation.

Please acknowledge receipt.