Banking Litigation- A Road Full Of Twists And Turns

Banking Litigation- A Road Full Of Twists And Turns

A conversation with different law students from law schools across Pakistan can give one a convincing insight into the sectors that most upcoming lawyers aspire to litigate in: corporate and banking. The major reason behind this inclination is money making, which of course is obvious, but an important thing to note is that banking litigation is arguably the most research-oriented litigation. Banking litigation is not simple in Pakistan as it is generally believed to be. Dealing with the legal departments of banks, ample documentation, finance records and paperwork, requires vigilance 24/7.

Moreover, understanding the technical finance facilities that banks deal with and finding a way out for one’s clients is a job which requires thorough brainstorming. The major statute that deals with banking laws in Pakistan is the Financial Institutions (Recovery of Finance) Ordinance 2001. Here are some of the key concepts of bank finance facilities which must be understood while dealing with banking companies.

Types of finance facilities as envisaged under Section 2, FIO 2001:

1. Term Financing: A type of loan availed by the borrower to acquire fixed assets (immovable properties i.e. land, buildings and vehicles for commercial use). The loan carries a predetermined length of time (tenure), with repayments done in installments. Long term purchase of land, building, vehicles is repaid in installments.
2. Lease Financing: A type of facility that helps borrowers acquire equipment and machineries for their businesses on lease. This is a long term finance facility and as such, the repayment is made in installments.
3. Overdraft (OD): This is a short term facility which is granted to the borrowers to enable them to meet their daily expenses; like payment of salaries, utilities and the ability to purchase inventories, etc. The bank sanctions the agreed limit and the borrower can draw that amount through his current account.
4. Revolving Credit: A type of loan which is short-term in nature and is used to meet short-term funding requirements of the borrowers. This loan does not have a fixed number of payments, as in the case of installment loan.
5. Letter of Credit (LC) or Documentary Credit (DC): In case the importer or buyer fails to pay the liability, a letter of credit is a written undertaking issued by a financial institute for the supplier or seller to pay him or her for the amount of imported or purchased goods. It is a facility which allows a customer to import or purchase goods without making advance payment from his or her own resources; i.e. the importer pays only on receipt of actual goods and documents.
6. Bills of Exchange Purchased (BEP): This is a short term facility that is provided to exporters against purchase of export bills on discounted price.
7. KIBOR: Karachi Interbank Offered Rate is a daily reference rate which is based on the interest rates at which banks offer to lend to other banks, in the money market. This is known as an interbank market.
8. Finance against Imported Merchandize (FIM): Banks grant this short term facility to importers against the security of a Trust Receipt which is also called a Letter of Trust. The borrower undertakes to repay the loan as soon as he or she sells the goods by signing the Letter of Trust. If the borrower defaults, it constitutes a breach of trust and is a criminal offence under law.
9. Unsecured or Clean Loans: Any loan for which the bank does not demand tangible securities is an unsecured or clean loan. Examples of tangible securities are fixed or current assets, land, building and tradable inventory, etc.
10. Secured loan/financing: Secured financing, also known as collateralized financing is when banks demand any of the above mentioned security.
11. Demand Finance: This kind of financing can be short or long term. Its repayment is usually done through installments. It is provided for more than a year to help establish new projects and capacity expansion, for financing factory construction or machinery expenses.
12. Finance against Packaging Credit (FAPC): Banks grant this prior to shipment to help with arranging goods and to procure raw materials ready for export.
13. Home Loans: Loans granted by banks to provide for the purchase of a home.
14. Agri-Loans: Loans made only to farmers to finance farming and agricultural activities.
15. Credit Card Facilities: A facility given to credit card holders allowing them to borrow funds at point of sale. This is used for short term financing.
16. Musharaka, or Sharika or Shirkat: When two or more properties provide for a project development. It is an Islamic mode of finance and refers to partnerships.
17. Murabaha: This is when the seller discloses the price of a good and adds a specific amount of profit. This falls outside the ambit of riba because it is not an interest-bearing loan. Murabaha is an acceptable form of credit sale under Sharia.
18. Musawamah: Referred to as ‘bargaining sale’. The seller does not disclose the original price of the commodity and sells it at a mutually agreed upon rate between buyer and seller. One can differentiate it from Murabaha.
19. Istisna: A contract to manufacture, assemble or process goods. It can also include building a house or structure according to exact specifications and a fixed timeline. Payments are made on the completion of work on property.
20. Revolving Credit: A short term loan provided to fulfill funding requirements of buyers. It is useful for individuals and businesses that require quick withdrawal of money. It comes up with a relatively high mark-up.
21. Export Refinance: A scheme to boast non-traditional items. Finance is given prior to and post shipment for export of eligible commodities. Exporters may avail it on the basis of their performance in the previous year.
22. Islamic Export Refinance: Islamic banks obtain refinance facilities from State Bank of Pakistan against finances provided by them to the exporters.

Only after an unblemished understanding of these concepts can one smoothly tread on the meandering path of litigating for banks.

 

The views expressed in this article are those of the author and do not necessarily represent the views of any organization with which she might be associated.