KARACHI, May 25: The State Bank has introduced the concept of capital adequacy ratio to development finance institutions (DFIs). From July 1, the DFIs will maintain this ratio at the rate of eight per cent of their risk-weighted assets.

The SBP banking supervision department informed the DFIs, through a circular, that they should also have to have a minimum paid-up capital of Rs1 billion from July 1. Currently, only banks are required to have a minimum paid-up capital of Rs1 billion and keep capital adequacy ratio at eight per cent of their risk-weighted assets.

SBP officials told Dawn that the central bank regulated only six DFIs, adding that the rest are regulated by the Securities and Exchange Commission of Pakistan.

The SBP-regulated DFIs are: Pak-Kuwait Investment Company, Pak-Libya Holding Company, Pakistan Industrial Credit & Investment Corporation, Pak-Oman Investment Company, Saudi Pak Industrial & Agricultural Investment Company, and Small & Medium Enterprises (SME) Bank.

Dawn inquiries reveal that the paid-up capital of at least the first five of these DFIs are already more than Rs1 billion. So that should not be an issue for them. But it could not be learnt immediately whether they are also maintaining an eight per cent or higher capital adequacy ratio.

"We are in very safe margins," said Zaigham Mahmood Rizvi, managing director of Pak-Kuwait Investment Company, referring to the capital adequacy ratio of DFIs. "But if the State Bank wants us to maintain the ratio at a certain level that we are ready to comply," he told Dawn.

He said the requirement of maintaining eight per cent capital adequacy ratio should not be seen as a move to bring the DFIs on a par with the banks. "If one or two particular requirements happen to be identical in case of banks and DFIs it does not bring the two types of entities at par. Banks are banks and DFIs are DFIs."

"By requiring us to maintain an eight per cent capital adequacy ratio the central bank perhaps wants to set standards for future discipline in the DFIs sector," he said.

The SBP circular issued to the DFIs says that from the first quarter of the next fiscal year they will also be required to report their capital position on quarterly basis along with the quarterly statement of condition. The first such report will cover the July-September 2004 period.

The concept of the capital adequacy relates the riskiness of a bank or DFI to the amount of its capital. Internationally, the capital adequacy ratio at eight percent of the risk-weighted assets of banks and DFIs is considered to be quite safe. A lower ratio may expose the bank or DFI to both liquidity and operational risks.