ISLAMABAD - State Bank of Pakistan Governor Ashraf Mahmood Wathra Wednesday informed a Senate panel that an Iranian proscribed organisation was operating its account worth Rs 19 billion in former KASB Bank, now merged with Bank Al-Islami, which was later frozen.

Giving a briefing to the Senate Standing Committee on Finance about the amalgam of KASB Bank with Bank Al-Islami, the SBP governor said that no major bank of the country was ready to merge KASB with it because of the account of that proscribed organisation. After the authorities found that the Iranian proscribed organisation was in the of US list of banned organisations, the account was immediately frozen, he said. He further said that different companies deposited their money in KASB Bank, which was transferred into the accounts of that proscribed organisation, he added.

The committee members voiced their concerns over the way KASB was merged with Bank Al-Islami by the SBP, saying a transparent and open bidding method was not adopted in this regard. Senator Saif Ali Khan came down hard on the SBP authorities over the way the bank was merged and said that SBP even rejected the foreign investment offer of Chinese Company that was ready to run the bank.

However, the SBP governor rejected the allegations of the lawmakers and remarked that the procedure of merger was adopted under the relevant laws and there was no requirement to give an advertisement for this purpose. He said that initially a moratorium was placed on KASB as it had run short of capital required to run a bank; later, it was merged with another bank.

On another agenda item, the SBP governor said that there might be capital flight from Pakistan through Hundi business, but this did not come under the purview of the central bank. It was the responsibility of the law-enforcement agencies, especially FIA, to check this illegal business.

The Senate Standing Committee on Finance and Revenue that met with Senator Saleem Mandviwalla in the chair was told that merger of KASB Bank into Bank Al-Islami was not an extraordinary case as the banks were merged in the entire world when their financial condition deteriorated. The Allied Bank of Pakistan faced similar circumstances 10 years before, which later improved its condition.

The SBP governor further said that financial conditions of Pakistan’s six banks, including Summit, Silk, Punjab and KASB, worsened in 2008-09 and the government provided Rs 75 billion to these banks to strengthen their financial position. Three banks, Summit, Silk, and Punjab, succeeded in improving their financial condition. However, KASB neither honoured its commitments nor did it implement the agreements with the central bank, which weakened its financial Position, he added.

The KASB management approached a court, but later it withdrew the petition when it came to know that its case was not strong.

The State Bank of Pakistan governor said that four banks – Askari Bank, Sindh Bank, JS Bank and Bank Al-Islami – showed their interest in acquiring KASB Bank, however, the matter was settled with Bank Al-Islami.

Senator Saeed Ghani of Pakistan People’s Party said the SBP should have asked the National Bank of Pakistan to consider merging KASB Bank. He said the bank should provide its audit report for the last five years. The SBP officials told the Senate Standing Committee on Finance and Revenue that KASB Bank was continuously facing losses which had surged to Rs 12.5 billion. The SBP sent the details of the losses of KASB Bank to the Finance Ministry which took legal advice from the Law Division. The SBP has completed the process of KASB merger into Bank Al-Islami after completing all the legal requirements.

The SBP officials also briefed the committee on the role of the central bank in the agreement in April 2015 between Pakistan and China and the status of currency swap.

They pointed out that both the countries had reviewed the agreement to enhance the bilateral trade in April this year.