Key Takeaways
- The State Bank of Pakistan (SBP) has amended investment limits for banks in startups.
- New caps apply to shares, mutual funds, REITs, and private equity funds.
- Banks must develop formal policies to evaluate each investment decision.
The State Bank of Pakistan (SBP) has introduced new restrictions on how much money banks can invest in startups and other financial instruments, according to a circular issued on October 23. The central bank has amended Regulation R-6 of its Prudential Regulations for Corporate/Commercial Banking.
Under the new rules, banks are limited to investing no more than 5 percent of their Tier-I capital or 10 percent of the paid-up shares of a single company in shares. For startups, including fintech startups, the cap is the lower of 5 percent of Tier-I capital or Rs. 500 million. For mutual funds, REITs, and private equity funds, the limit is the lower of 5 percent of Tier-I capital or 20 percent of the fund’s units.
The SBP has also mandated that banks and development finance institutions (DFIs) have a formal policy for equity investments. This policy must include an internal evaluation process to assess each investment decision objectively, considering the bank’s financial standing, overall investment portfolio, risk appetite, expected return, expertise, and business strategy, including an exit plan.
Strategic investments and investments in mutual funds and private equity funds will also count towards these limits. However, National Investment Trust (NIT) units are excluded until NIT is privatized. The SBP stated that all other instructions on the subject remain unchanged.
Earlier this year, the central bank had given local banks more control over foreign investment and dividends. The new regulations are part of a broader effort to ensure that banks manage their investments prudently and in line with their overall business strategies.
The SBP’s move comes as the Pakistani startup ecosystem continues to grow, with increasing interest from both local and international investors. The new limits aim to strike a balance between supporting innovation and maintaining financial stability.
Banks and DFIs are expected to adapt to the new guidelines, ensuring that their investment portfolios align with the new regulatory framework. The SBP’s directive underscores the importance of a structured approach to investment decisions, particularly in the volatile startup sector.
The SBP’s announcement is part of a series of measures aimed at strengthening the financial sector in Pakistan. By setting clear guidelines, the central bank hopes to promote responsible investment practices and support sustainable growth in the economy.
