CG requiremnets for banks in tanzania

transcript

CorporateGovernanceRequirementsforBanksin

TanzaniaNBAA/BOTJointConference,Arusha2014

KassimHussein,PhD

Weplantodiscuss:

•  OverviewofCG;CGFramework;MainsourcesofCGforbanks

•  FocusofbankCG;WhyCGmaQersforBanksandFI’s;WhatCGensures

•  BankDirectorsduTes,responsibilityandliability

•  Compliancerole….OnprudenTalregulaTons•  PromptCorrecTveAcTons)RegulaTons2008

Corporate Governance (CG)

CG includes all structures, processes, policies, systems and procedures whereby the bank/FI or controlling company is governed.

BOTGuideline…CGas..…. the manner in which the business and affairs of individualinsTtuTonsaregovernedbytheirboardsofdirectorsandseniormanagement,andinparTcular,howbankinginsTtuTons:

–  setcorporateobjecTves;–  operatethebank’sbusinessonaday-to-daybasis;–  meettheobligaTonofaccountabilitytotheirshareholdersand take into account the interests of other recognizedstakeholders;

–  align corporate acTviTes and behavior with theexpectaTon that banks will operate in a safe and soundmanner, and in compliance with applicable laws andregulaTons;and

–  Protecttheinterestsofdepositors.

BoardGovernanceFramework

Audit&RiskCommiQee

HR&RemuneraTonCommiQee

LoansCommiQees

BoardCommiQees

Strategy

BoardofDirectors• AchievementofstrategicobjecTvesandvaluecreaTon• FulfilresponsibiliTesandduTesinlawandprescribedfuncTons

BoardOpe

ChairmanBoardMeeTngs

ReporTng&Disclosure

InternalControls&Assurance

OtherCommiQee

InternalAudit ExternalAudit AssuranceInsTtuTons Management

CombinedAssuranceModel

GovernanceSystemandControls

CorporatePolicies&Procedures

BoardGovernanceInstruments

MonitoringandEvaluaTon KeyAreaso

fRespo

nsibility

CEO&Management

Shareholders

Inform

CorporateSecretary

5Regulators(BOT;BRELA;CMSA/DSE;NBAA/IFRS)BestPracTces:TBAchartadaptedfromKPMG

Main Source of CG •  LocalandinternaTonalsourcesofCGforBanksandFinancialInsTtuTons

• BankingandFinanceAct,2006andregulaTonsmadeunderitbytheRegulator

• CMSA;CompanyAct2002;NBAA1972andIFRS;BRELA;TRA

Main Source of CG • TheCorePrinciplesforEffec2veBankingSupervision,BaselCommiQee–(1997,2006&2011)

• KingI(1994)&KingII(2001)• PrinciplesofCorporateGovernance,OECD(21June1999)

• TanzaniaBankersAssociaTon

BoxA:BankingSupervisoryCGInstruments1.  TheBankingandFinancialInsTtuTons(CapitalAdequacy)RegulaTons,

2008(New)2.  BankingandFinancialInsTtuTons(TanzaniaMortgageRefinance

Company)RegulaTons,2011(New)3.  BankingandFinancialInsTtuTons(DevelopmentFinance)RegulaTons,

2011(New)4.  BankingandFinancialInsTtuTons(InternalControlandInternalAudit)

RegulaTons,2005(New)5.  CreditReferenceDatabankRegulaTon20136.  CreditReferenceBureauRegulaTon20137.  GuidelinesforAgentBankingForBankingInsTtuTons20138.  BureaudeChangeOperators9.  TheForeignExchange(BureaudeChange)Act,1992

BoxA:BankingSupervisoryCGInstruments

9  BankingandFinancialInsTtuTons(FinancialLeasing)RegulaTons,201110  BankingandFinancialInsTtuTons(MortgageFinance)RegulaTons,201111  BankingandFinancialInsTtuTons(IndependentAuditors)RegulaTons,

200812  TheSocialSecuritySchemesInvestmentGuidelines,201213  BankingandFinancialInsTtuTons(ManagementofRiskAssets)

RegulaTons,200814  BankingandFinancialInsTtuTons(CreditConcentraTon)RegulaTons,

200815  BankingandFinancialInsTtuTons(ForeignExchangeExposureLimit)

RegulaTons,200816  BankingandFinancialInsTtuTons(Licensing)RegulaTons,200817  BankingandFinancialInsTtuTons(PhysicalSecurityMeasures)RegulaTons,

BoxA:BankingSupervisoryInstruments

18  BankingandFinancialInsTtuTons(LiquidityManagement)RegulaTons,200819  BankingandFinancialInsTtuTons(PromptCorrecTveAcTon)RegulaTons,200820  BankingandFinancialInsTtuTons(PublicaTonofFinancialStatements)RegulaTons,200821  TheForeignExchange(BureaudeChange)RegulaTons,1999(Repealed)22  TheForeignExchange(BureaudeChange)RegulaTons,200823  BankingandFinancialInsTtuTonsAct,200624  SupervisoryMethodologies,Acts,GuidelinesandCircularinplace25  LicensingCondiTons26  ApplicaTonFormforBureaudeChangeLicense(PDF)27  ApprovedAuditors28  RiskManagementGuidelinesforBanksandFinancialInsTtuTons(NewRevised)29  RiskBasedSupervisionFramework30  OutsourcingGuidelinesforBanksandFinancialInsTtuTons,200831  BoardofDirectorsGuidelinesforBanksandFinancialInsTtuTons,200832  BusinessConTnuityManagementGuidelinesForBanksandFinancialInsTtuTons,200933  CriteriaforApprovingandRegisteringExternalAuditorsofLicensedBanksandFinancial

InsTtuTonsSource:BOTwebsite 10

CG in Banks is special… why?

•  Banks operate in a complex business environment competitive

– Fulfil a central role in an economy – Theyareenginesofeconomicgrowth– Banksprovidemonetarytransmissionmechanisms

– Require ‘fit for purpose’ for its directors •  Safeguards depositors interests

WhyCGmaQersforBanks

•  IntermediaTonrole(anditsfailurewouldresulttofinancialcrisis).

•  Dealinpeople’ssavings,informaTonandtrust•  Theyprovidefinance–vitalwherecapitalmarketsarenotyetfullydeveloped.

CGensuresthat

§  accountabilitytotheirshareholdersandallstakeholders

§  operateinasafeandsoundmanner,§  complywithapplicablelawsandregulaTons§  Protecttheinterestsofdepositors

GeneralConduct–expectedfromGuidelines

•  The proper conduct of a bank orfinancial insTtuTon requires that theboardofdirectorsfuncTonappropriatelyandathighstandards.

•  adirector,mustcommandahighlevelofintegrity, honesty, competence andability to adhere to good corporategovernance principles. (BOT fit forpurpose)

Theobjec>vesofBOTGuidelines•  PromoTon and maintenance of publicconfidenceinbankinginsTtuTons;

•  Establishment of standards for corporategovernanceprocessesandstructures;

•  Provision of guidance to directors for properdischargeoftheirfiduciaryresponsibiliTes.

Du>esandResponsibili>esoftheBoard• AppointmentofExecuTveOfficers• EffecTveOversightoftheBankingInsTtuTon'sAffairs• RegulatoryCompliance• SemngandReviewingPoliciesandObjecTves• Developingastrategicplan• Ensuringarm’slengthtransacTonswithinsiders• Semng and enforcing clear lines of responsibility andaccountability.

• MaintenanceofAdequateCapital• EffecTveuTlizaTonofInternalandExternalAuditors’work.• Ensuring that the banking insTtuTon has a beneficialinfluenceontheeconomyofitscommunity.

Directors’Responsibili>es

•  Non compliance with a memorandum ofundertaking to ensure safe and soundoperaTonsofhisbankinginsTtuTon.

•  Non-compliancewith secrecy provisions of theBankingandFinancialInsTtuTonsAct2006.

•  I nvo l vement i n f r aud o r de l i be ra temismanagement.

•  Non-compliancewitharm'slengthprinciple.•  NotinhibiTnghimselffromaQendingameeTng

which intends to deliberate or approve atransacToninwhichheisthebeneficiary.

Directors’Liability•  adirectormaybefined,removedfromoffice,ordisqualified

fromholdinganyposiTonorofficeinanybanking insTtuTonincaseofviolaTonofprovisionsoftheBAFIitsorregulaTons.

•  each director has a duty of care and loyalty to the bankinginsTtuTon'sinterests.

•  adirectorisliablefornon-diligentandnegligentperformanceofthejobofdirector.

•  each director is responsible for exercising raTonal andindependentjudgment.

BoardmeeTngs

•  Meet at least quarterly, to discuss the businessaffairsofthebankinginsTtuTon.

•  Minimum contents of the reports to besubmiQedtoBoDmeeTngs

•  At least annually, the board of directors shouldsetimplementaTontargets.

AFendanceatmee>ngsoftheboardofdirectors

•  Every member of the board should aQend at least75%oftheboardmeeTngsofthebankinginsTtuTonineachyear.

•  Adirectorwhohas,whetherdirectlyor indirectly,apersonal interest in an exisTng or proposedtransacTonshoulddeclarehispersonal interestandinhibithim/herself.

Evalua>onoftheBoardofDirectors

•  RegularlyreviewitsmixofskillsandexperienceandotherqualiTesinordertoassesstheeffecTvenessoftheboardanditscommiQees.

•  AcopyofthereviewreportbesubmiQedtoBOTImmediaterepor>ngtotheBank•  AchangeinthecomposiTonoftheboardofdirectorsoritscommiQees

shouldbereportedtotheBank:–  astatementregardingthereasonsfortheresignaTonordismissal,–  asignedstatementbythedirectorregardingthereasonsforhis

resignaTonordismissal;

•  ExcepTonaleventsthatconsTtuteadeparturefromtheproperconductofbankingbusiness,orinfringementoftheprovisionsofthelaw,orsubstanTveviolaTonoftheinterestsoftheinsTtuTons’stakeholders.

Termsofappointment,remunera>onandre>rement

•  The board of directors should put in place a policyspellingoutclearly:–  appointment,–  remuneraTon,and–  reTrement terms for the members of the board, oftheirinsTtuTons.

Riskmanagement•  The board of directors should review all policies – at least

annually•  Theboardofdirectorsshouldensurethatitisinformedofall

newacTviTesandapprovesstrategicacTviTesofthebankinginsTtuTonaperithasclearunderstandingofthefollowing:–  therisksinvolvedinthatnewkindofacTvity,–  the mechanisms the banking insTtuTon will use for the managing,

measuringandcontrollingoftherisks,–  the quanTtaTve restricTons required in connecTon with the risks

embodiedinthenewacTvity,–  the appropriate personnel, sources of finance, and technical and

technologicalinfrastructureforthenewacTvity,and;–  themanagementofthenewacTvityandwhethercanbeadaptedto

theexisTngsituaToninthebankinginsTtuTon.

Onmembership:size,composi>on,etc

•  Membershipofnotlessthanfive,majorityofwhommustbe non-execuTve and have banking or relatedexperience.;

•  The chairperson of the board must be a non-execuTvedirector;

•  Each banking insTtuTon should appoint at least twoTanzanianstoitsboard;and

•  A board member should not simultaneously serve as aboard member or in any execuTve capacity in otherbankinginsTtuToninTanzania.

•  To avoid conflict of interest, no individual who is amember o f NaTona l Assembly or House o fRepresentaTvesor localgovernmentauthority shouldbeappointedasdirectorofabankinginsTtuTon.

OwnershipandManagement

•  No individualshareholderwithafivepercentumormoreshareholding in a banking insTtuTon should form part ofmanagementofthebankinginsTtuTon.

•  No individual shareholderwitha tenper centumormoreshareholding in abanking insTtuTon shouldbeappointedas Chairperson or Deputy Chairperson of the board ofdirectorsofabankinginsTtuTon.

•  Noindividualshareholderwhohadasignificantinterestina failed banking insTtuTon should acquire a significantinterestinabankinginsTtuTon.

•  No individual who was involved in themanagement of afailed banking insTtuTon should be allowed to hold aposiTonofaccountabilityinabankinginsTtuTon.

Prac>cingProfessionals

•  In order to tap experTse of pracTcing professionals, abanking insTtuTon may appoint such professionals asboarddirectors–  notemployedbyorpartnersinafirmwhichisengagedtoconduct audit of or consultancy work for the bankinginsTtuTon;

•  PracTcing professionalswho are appointed as directorsof banking insTtuTons should exercise the highestdegreeofintegrityandprofessionalism.

CriteriaforFitandProperPersons

•  Possession of formal qualificaTons and management orbusinessorprofessionalexperienceofatleastfiveyears,preferably,possessionofaproventrackrecordinbankingindustry or related acTviTes; on- convicTon in anycriminal

•  Non involvement as a member of the management ofboard of directors, with a banking insTtuTon whoseregistraTon or license has been revoked or cancelled orwhichhasgoneintoliquidaTon.

CriteriaforFitandProperPersons

•  absence of default record of any creditaccommodaTon taken by him or his relatedparTesfromanybankinginsTtuTon.

•  Absence of bankruptcy record or suspension ofpaymentsorcomposiTonwithhiscreditors.

PermanentConflictofInterests–Disqualifica>onfromServing

•  Apersonshouldnot serveasadirector ifhisbusiness or permanent occupaTon creates apermanent conflict of interests between himand the insTtuTon, or if it is reasonable toassume that such conflict may existpermanently.

•  Aperson shall not be appointed a director ifhe was a director of another bankinginsTtuTon and less than a year has passedsinceheceasedtoserveasadirectorof thatinsTtuTonunlessthepermissionoftheBankisobtained.(COOLINGPERIOD)

BOARDCOMMITTEESTypesofCommiFeesTheboardofdirectorsshouldformanauditcommiQeeandsuch

othercommiQeesas itmaybenecessary fordischargeof itsfuncTons.

Composi>onofBoardcommiFeesThe board of directors should specify the composiTon and

funcTons of every commiQee formed and the terms andcondiTons upon which the commiQee would exercise itsfuncTons.

•  TheboardcommiQeesshouldconsistsolelyofnonexecuTvedirectors,andthenumberofcommiQeemembersshouldnotbelessthanthree;

Minimumcapitalforcommunitybanks(r.7.1);TZS250millionorsuchhigheramountastheBankmayprescribe

– Shallestablishbranch,agencyorotherofficeifhascapitalofTZS500millionwithpriorapprovaloftheBank(r.7.2);

•  MinimumcapitalforMFCandFICCO(r.8);asprescribedin– BankingandFinancialInsTtuTons(MicrofinanceCompaniesandMicrocreditAcTviTes)RegulaTons,2005

Restric>onsandlimita>ons

§  onDividends(Sec.19)§ NodeclaraTonifcontravenescapitalrequirement

§  LiquidAssetsRa>o(Sec.21)§  AccountsandIndependentAuditors(Sec.22)

InternalControls(Sec.23)

§ Boards’responsibility§ AuditCommiFeeoftheBoard

§ Chairedbynon–execu>vemember

LargeExposures/SingleBorrowerslimit(Sec.25)

§  RefertoConcentra>onofCreditandotherExposurelimitsRegula>ons

§  ConnectedLending(Sec.26)§ ManagementofRiskAssetsRegula>ons•  Limita>onsoninvestmentsinCompaniesengagedinac>vi>esnotauthorizedandinFixedAssets(Sec.28&29)

DepositInsurancefund(Sec.36to42)

•  ManagedbyDepositInsuranceBoard

ProhibiTonontakingdepositswhileinsolvent(Sec.43)

•  Unlawfultocollectdepositifknowntobeinsolvent

ExhibiTonofLicense(sec.44)

•  ConspicuousposiToninpublicpart

ExhibiTonofFinancialStatements(sec.45)

•  LatestAuditedStatements

AbandonedProperty(Sec.46&47)

•  SurrendertoBOTatendofeachcalendaryear

FidelityandSecrecy(sec.48)

•  NodivulgingofanyinformaTonrelaTngtoitscustomersortheiraffairs

FairlendingandcollecTonpracTces(Sec.49)

•  Existenceofcontract

LiquidaTon,SeizureandreorganizaTon(Sec.50to61)

•  ResponsibiliTesundereachstage.

LIQUIDITYREQUIREMENTS

•  LiquidityManagementPolicies(r.5);responsibilityoftheboardofdirectorsandinlinewithRiskManagementGuidelines,2005;

•  ConTngencyPlan(r.6)•  MinimumLiquidAssetRaTon(r.7);20percent•  LoantodepositraTo(r.8);Maximumlimit80percent

BankingandFinancialIns>tu>ons(PromptCorrec>veAc>ons)Regula>ons

Introduction

•  Made under Sections 34 and 71 of the BFIA, 2006

•  The Regulations contains – Mandatory actions in response to capital

triggers; and – Additional discretionary actions open to the

Objectives

•  Ensure timely and effective actions – Necessary for dealing with weakening banking

institutions

•  Enhance transparency – Both Regulator and the regulated know actions to

be taken to address weakening capital

•  Maintain confidence in Tanzanian banking sector –  Safety and soundness!!!!!

Corrective Actions •  Regulation 5 provides major mandatory

actions if a bank is: - – adequately capitalised banking institution

but likely to incur loss causing it to be undercapitalised; and/or

– business is conducted in an unsound manner

•  Any Three actions are required: –  to submit written plan of corrective actions

that: - •  Identifies existing weaknesses in administration

and operations 47

Corrective Actions •  determines the corrective measures for

remedying the weaknesses; and •  offers realistic time-frame for taking the

actions –  prohibition from declaration and payment of

dividends which would result into failure to meet the requirements of Capital Adequacy Regulations

–  intensification of oversight and monitoring in accordance with principles of risk-based supervision

Corrective Actions •  Regulation 6 prescribes three

discretionary actions that may be taken: – Civil monetary penalties – Cease and desist orders – Suspension or removal of any director,

officer or person(s) in management position

Corrective Actions

•  Reg. 7 prescribes mandatory actions for case of undercapitalisation (<10): - – Measures prescribed in regulation 5 – Require a capital restoration plan within 45

days •  Specifying steps to be taken to restore capital •  Specifying levels of capital to be attained in each

quarter of the plan

Corrective Actions

•  Reg. 8 highlights the discretionary measures of BOT which may include – appointing a suitable person who shall

•  advise and assist the institution in designing and fulfilling capital restoration plan

•  Regularly submit progress report to the Bank •  The regulator shall fix the remuneration of such

person which shall be paid by the concerned institution

Part II – Corrective Actions •  Reg. 9 covers mandatory actions for the

case of significant undercapitalisation (<6) – Measures prescribed in regulation 7 – Prohibit transactions with officers, directors,

shareholders and related interests except: •  Payment of outstanding obligations •  Transactions authorised by the Bank to facilitate

capital restoration

– Prohibit bonuses or raises in salary, emoluments and other benefits entitled to directors and officers; and

Corrective Actions – Prohibit new branches or any other expansion

of operations

•  Reg. 10 highlights the discretionary measures which include –  restrictions on growth –  restrictions on the rate of interest on deposits – order to cease lending of any other business

activities

Corrective Actions •  Reg. 11 prescribes mandatory actions for

case of critical undercapitalisation (<4) – actions prescribed in regulation 9 – assist in handling the crisis – appoint a statutory manager or liquidator within

90 days of becoming critically undercapitalised unless

•  Core capital is greater than two percent •  Operating in substantial compliance with an

approved capital restoration plan

Corrective Actions •  Reg. 12 provides that if an undercapitalised

or significantly capitalised institution –  fails to submit recapitalisation plan; or – submits an un-acceptable plan

•  The Bank shall not later than 90 days of the original notification – deem the institution to be critically

undercapitalised –  take actions prescribed in regulation 11

PUBLICATIONOFFINANCIALSTATEMENTSREG.2008

•  Reg.4objecTvesofRegulaTonsareto–  ensurethateverybankorfinancialinsTtuTonmaintainsaleveloftransparencyadequatetoenabledepositorsandcreditorsandthepublicatlargetomakeinformeddecisions;

–  promoteandmaintainpublicconfidenceintheTanzanianbankingsector;and

–  enhancemarketdisciplinebyprovidingfinancialinformaTontovariousstakeholders.

PUBLICATIONOFFINANCIALSTATEMENTS

•  QuarterlyfinancialreporTng(r.5)–  tobepublishedatleastonceinapaperofgeneralcirculaTon

–  bepublishedwithin45daysaperendofquarter–  acommunitybank,shallinaddiTontothereq.sub-reg.1,displayitsquarterlyaccountsinpublicplaceswithintheareasinwhichthebankoperates

–  acopyofquarterlyandauditedfinstmtobesubmiQedtoBOT

•  Auditedfinancialstatements(r.6)– ShallbepublishedatleastonceeveryyearinthenewspapersofwidecirculaToninTanzania

– Shallbepublishedwithin15daysaperapprovaloftheBoardbutnotlaterthan105daysaperendoffinancialyear

•  ExhibiTonofauditedFS(r.7)– AtallTmesshouldbeexhibitedinaconspicuousposiToninthepublicpartofitsprincipalplaceofbusinessandinbranchesandagencies

BoardProcess-ChartersØ Boardcharter–funcTonsandresponsibiliTesØ CommiQeecharters–role,objecTvesandpowersØ DelegatedauthoriTes–board,commiQees,CEO,staff

Ø AccountabiliTeslinkedtoauthoriTesØ DelegaTonspolicydocumentreviewedannuallyØ Detailedcorporategovernancestatement

Board Process - Ethics Ø Codeofconduct–statementofethicalstandardsØ ConfidenTalityacriTcalrequirementØ Conflictsofinteresttobedisclosed

BoardProcess–SupportforDirectors

Ø FormalinducTonprogramØ Directors’handbook/charterØ ConTnuingeducaTonØ Accesstoindependentprofessionaladvice

FutureCGrequirementforbanks

•  Overthenextseveralyears…morereformsonregulatoryframework(Basle11toBasle111)whichwillimpactonDirectorsroleonCapitalizaTon,managementofrisk,transparencyoraddiTonaldisclosureanditsTming.

•  Regulatorssupervisionwillincreasinglyberiskbased,coverawiderangeofrisksandmoreuseofquanTtaTveapproaches.ThereforeCGwillrequireDirectorsoversighttobeoffsite,real-TmeusingIT

•  MoreinvestmentinITarchitectureandconTnuousplauormupgrade