SBP Announces Limit on Bank Investments in Startups

The State Bank of Pakistan (SBP) has revised the rules governing banks' investments in shares, startups, mutual funds, real estate investment trusts (REITs) and private equity funds. These changes were implemented through a circular letter issued by the central bank on October 23. The new investment limits apply to all commercial banks and development finance institutions (DFIs) operating in Pakistan.

For banks, the total investment in any single company cannot exceed the lesser of two percentages: 5 percent of its Tier-I capital or 10 percent of the paid-up shares of the company being invested in. Tier-I capital refers to the bank's core capital, as determined by its most recent half-yearly or annual audited financial statements. When it comes to individual startups, including fintech-focused ventures, the investment cap is the lower of 5 percent of Tier-I capital or Rs. 500 million.

Similarly, banks are restricted to investing a maximum of 5 percent of their Tier-I capital or 20 percent of the units of any single mutual fund, REIT or private equity fund. These limits apply to all types of equity investments, including strategic investments and investments in various mutual funds and private equity funds. However, units of the National Investment Trust (NIT) are exempt from these limits until the NIT is privatized.

To ensure proper oversight, the SBP has instructed banks and DFIs to establish a formal investment policy. This policy must include an internal evaluation process to assess each investment decision objectively, taking into account factors such as the bank's financial health, overall investment portfolio, risk tolerance, anticipated returns, expertise, and business strategy, including an exit plan.

While the new regulations introduce these restrictions, they do not alter other existing guidelines issued by the central bank. Earlier this year, the SBP had granted local banks greater autonomy in managing foreign investments and dividends.