Non banking finance companies (NBFCs), also known as non-bank financial institutions (NBFIs) are entities that provide similar like banking and financial services but do not hold a banking license. NBFCs are not subject to the banking regulations and oversight by federal and provincial authorities adhered to by traditional banks.
Non banking financial companies describe as companies “predominantly engaged in a financial activity” when more than 85% of their consolidated annual gross revenues or consolidated assets are financial in nature. Examples of NBFCs include investment banks, mortgage lenders, money market funds, insurance companies, hedge funds, private equity funds, and P2P lenders.
NBFCs are financial institutions that offer various banking services but do not have a banking license. Generally, these institutions are not allowed to take traditional demand deposits—readily available funds, such as those in checking or savings accounts—from the public. This limitation keeps them outside the scope of conventional oversight from federal and provincial financial regulattions.
Zafar & Associates-LLP help their clients to establish the Non Banking Financial Companies (NBFC), these are financial institutions that offer services similar to a bank but do not hold a banking license. They are usually licensed to carry out businesses such as:
- Asset Management Services
- Discounting Services
- Housing Finance Services
- Investment Advisory Services
- Investment Finance Services
- Leasing Services
- Pension Fund Scheme Services
- Private Equity & Venture Capital Fund Management Services
- REIT Management Services
- Venture Capital Investment Services
BANKING AND NON BANKING FINANCE COMPANIES COMPARISON
| Basis | Banking Companies | Non Banking Finance Companies (NBFCs) |
| Meaning | Bank is a government entitled financial intermediary which aims to provide banking services to customers. | NBFC is a company which provides services similar to banking services to people without holding a bank license. |
| Deposit | Banks accept and lend deposit. | NBFC do not accept and lend deposit. |
| Payment System | Payment and settlement are the core activity of banks. | In NBFC, the payment system is not a part of the activity. |
| Demand Draft | Bank can issue self-demand draft on itself. | NBFC cannot issue self-demand draft their own. |
| Cheque Drawn | Banks can draw a self-cheque by their own. | NBFC cannot draw self-cheque their own. |
| Credit Creator | Banks can create credit through multiplier financial activities. | NBFC cannot do it. |
| Transaction Services | Bank provides a variety of transaction services. | NBFC does not facilitate transaction services. |
Table: Difference between a Bank and a Non-Banking Finance Companies
RELEVANT LAWS
In Pakistan, following are the Relevant Laws with regards to NBFC:
- The Companies Ordinance, 1984 (Sec. 282A – 282K)
- The Companies Act, 2017 (Sec. 509)
- The Non-Banking Finance Companies and Notified Entities Regulations, 2008
- The Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003
PERMISSION TO FORM A NBFC
As per Rule 4, any person who wishes to establish the NBFC shall make an application for permission to the Commission on the prescribed Form -I of the rules along with all the required documents and the non-refundable fee. The permission is usually in writing to form the NBFC valid for the period of six (6) months. This duration of six months can be extended to nine months in special circumstances. During this duration, the NBFC shall be incorporated and an application should be submitted to the Commission for the grant of License.
CONDITIONS FOR THE GRANT OF LICENSE
The NBFC or any other company subject to eligibility in terms of schedule I shall make separate applications to the Commission for grant of license for carrying out each form of business. The said application shall be submitted to the Commission in Form-II along with a non-refundable processing fee as may be specified by the Commission.
PROCESS FEE
- NOC / Permission = Rs.250,000
- Licensing = Rs.500,000
The SECP has provided the following chronological methodology for the incorporation of a NBFC and licensing as AMC:
THE ASSET MANAGEMENT COMPANY (AMC)
The Asset Management Company(AMC) is a Non-Banking Finance Company(“NBFC”) licensed by the Securities and Exchange Commission of Pakistan (“SECP”) to carry out Asset Management in accordance with Part VIII-A of the Companies Ordinance, 1984 (the “Ordinance”) and the NBFC & NE Regulations, 2008 . AMC shall be incorporated under the Ordinance read with the provisions of the NBFC Rules, 2003 (the “Rules”).
The SECP has given the following methodology chronologicallly for the incorporation of a NBFC and licensing as AMC:
- NOC for Formation of NBFC: Application to Specialized Companies Division, SECP Headquarter Islamabad for obtaining permission to form an NBFC along with the following documents: Form I of the Rules along with all relevant supporting documents and Fee with Form I (as per Schedule II of the regulations)
- Incorporation of NBFC: Incorporation of NBFC as a Public Limited Company, at the concerned Company registration office, as per the existing procedures, form and fees.
- Licensing as AMC: Application to Specialized Companies Division, SECP Headquarter Islamabad for grant of license for to carry out Asset Management Services: Form II of the Rules along with all relevant supporting documents and Fee with Form II (as per Schedule II of the Regulations)
- AMC Established