CORPORATE GOVERNANCE REQUIREMENTS FOR TZ BANKS

1. Corporate Governance
Requirements for Banks in
Tanzania
NBAA/BOT Joint Conference, Arusha 2014
Kassim Hussein, PhD
1

2. We plan to discuss:
• Overview of CG; CG Framework; Main sources
of CG for banks
• Focus of bank CG; Why CG maQers for Banks
and FI’s; What CG ensures
• Bank Directors duTes, responsibility and
liability
• Compliance role…. On prudenTal regulaTons
• Prompt CorrecTve AcTons) RegulaTons 2008

3. Corporate Governance (CG)
CG includes all structures,
processes, policies, systems and
procedures whereby the bank/FI or
controlling company is governed.
3

4. BOT Guideline… CG as ..
…. the manner in which the business and affairs of individual
insTtuTons are governed by their boards of directors and senior
management, and in parTcular, how banking insTtuTons:
– set corporate objecTves;
– operate the bank’s business on a day-to-day basis;
– meet the obligaTon of accountability to their shareholders
and take into account the interests of other recognized
stakeholders;
– align corporate acTviTes and behavior with the
expectaTon that banks will operate in a safe and sound
manner, and in compliance with applicable laws and
regulaTons; and
– Protect the interests of depositors.
4

5. Board Governance Framework
Audit & Risk
CommiQee
HR & RemuneraTon
CommiQee
Loans
CommiQees
Board CommiQees
Strategy
Board of Directors
• Achievement of strategic objecTves and value creaTon
• Fulfil responsibiliTes and duTes in law and prescribed funcTons Board OperaTons
Chairman
Board
MeeTngs
ReporTng &
Disclosure
Internal Controls
& Assurance
Other
CommiQee
Internal Audit External Audit Assurance InsTtuTons Management
Combined Assurance Model
Governance
System and
Controls
Corporate Policies & Procedures
Board Governance Instruments
Monitoring and EvaluaTon
Key Areas of Responsibility
CEO & Management
Shareholders
InformaTon and CommunicaTon
Corporate
Secretary
5 Regulators (BOT; BRELA; CMSA/DSE; NBAA/IFRS) Best PracTces:TBA
chart adapted from KPMG

6. Main Source of CG
• Local and internaTonal sources of CG
for Banks and Financial InsTtuTons
• Banking and Finance Act, 2006 and
regulaTons made under it by the Regulator
• CMSA; Company Act 2002; NBAA 1972 and
IFRS; BRELA; TRA
6

7. Main Source of CG
• The Core Principles for Effec2ve Banking
Supervision, Basel CommiQee – (1997, 2006
& 2011)
• King I (1994) & King II (2001)
• Principles of Corporate Governance, OECD
(21 June 1999)
• Tanzania Bankers AssociaTon
7

8. Box A: Banking Supervisory CG Instruments
1. The Banking and Financial InsTtuTons (Capital Adequacy) RegulaTons,
2008(New)
2. Banking and Financial InsTtuTons (Tanzania Mortgage Refinance
Company) RegulaTons, 2011(New)
3. Banking and Financial InsTtuTons (Development Finance) RegulaTons,
2011(New)
4. Banking and Financial InsTtuTons (Internal Control and Internal Audit)
RegulaTons, 2005(New)
5. Credit Reference Databank RegulaTon 2013
6. Credit Reference Bureau RegulaTon 2013
7. Guidelines for Agent Banking For Banking InsTtuTons 2013
8. Bureau de Change Operators
9. The Foreign Exchange (Bureau de Change) Act, 1992
8

9. Box A: Banking Supervisory CG Instruments
9 Banking and Financial InsTtuTons (Financial Leasing) RegulaTons, 2011
10 Banking and Financial InsTtuTons (Mortgage Finance) RegulaTons, 2011
11 Banking and Financial InsTtuTons (Independent Auditors) RegulaTons,
2008
12 The Social Security Schemes Investment Guidelines, 2012
13 Banking and Financial InsTtuTons (Management of Risk Assets)
RegulaTons, 2008
14 Banking and Financial InsTtuTons (Credit ConcentraTon) RegulaTons,
2008
15 Banking and Financial InsTtuTons (Foreign Exchange Exposure Limit)
RegulaTons, 2008
16 Banking and Financial InsTtuTons (Licensing) RegulaTons, 2008
17 Banking and Financial InsTtuTons (Physical Security Measures) RegulaTons,
2008
9

10. Box A: Banking Supervisory
Instruments
18 Banking and Financial InsTtuTons (Liquidity Management) RegulaTons, 2008
19 Banking and Financial InsTtuTons (Prompt CorrecTve AcTon) RegulaTons, 2008
20 Banking and Financial InsTtuTons (PublicaTon of Financial Statements) RegulaTons, 2008
21 The Foreign Exchange (Bureau de Change) RegulaTons, 1999 (Repealed)
22 The Foreign Exchange (Bureau de Change) RegulaTons, 2008
23 Banking and Financial InsTtuTons Act, 2006
24 Supervisory Methodologies, Acts, Guidelines and Circular in place
25 Licensing CondiTons
26 ApplicaTon Form for Bureau de Change License (PDF)
27 Approved Auditors
28 Risk Management Guidelines for Banks and Financial InsTtuTons (New Revised)
29 Risk Based Supervision Framework
30 Outsourcing Guidelines for Banks and Financial InsTtuTons, 2008
31 Board of Directors Guidelines for Banks and Financial InsTtuTons, 2008
32 Business ConTnuity Management Guidelines For Banks and Financial InsTtuTons, 2009
33 Criteria for Approving and Registering External Auditors of Licensed Banks and Financial
InsTtuTons
Source: BOT website 10

11. CG in Banks is special… why?
• Banks operate in a complex business
environment competitive
– Fulfil a central role in an economy
– They are engines of economic growth
– Banks provide monetary transmission
mechanisms
– Require ‘fit for purpose’ for its directors
• Safeguards depositors interests
11

12. Why CG maQers for Banks
• IntermediaTon role (and its failure would
result to financial crisis).
• Deal in people’s savings, informaTon and trust
• They provide finance – vital where capital
markets are not yet fully developed.
12

13. CG ensures that
§ accountability to their shareholders and all
stakeholders
§ operate in a safe and sound manner,
§ comply with applicable laws and regulaTons
§ Protect the interests of depositors
13

14. General Conduct – expected from Guidelines
• The proper conduct of a bank or
financial insTtuTon requires that the
board of directors funcTon appropriately
and at high standards.
• a director, must command a high level of
integrity, honesty, competence and
ability to adhere to good corporate
governance principles. (BOT fit for
purpose)
14

15. The objec>ves of BOT Guidelines
• PromoTon and maintenance of public
confidence in banking insTtuTons;
• Establishment of standards for corporate
governance processes and structures;
• Provision of guidance to directors for proper
discharge of their fiduciary responsibiliTes.
15

16. Du>es and Responsibili>es of the Board
• Appointment of ExecuTve Officers
• EffecTve Oversight of the Banking InsTtuTon's Affairs
• Regulatory Compliance
• Semng and Reviewing Policies and ObjecTves
• Developing a strategic plan
• Ensuring arm’s length transacTons with insiders
• Semng and enforcing clear lines of responsibility and
accountability.
• Maintenance of Adequate Capital
• EffecTve uTlizaTon of Internal and External Auditors’ work.
• Ensuring that the banking insTtuTon has a beneficial
influence on the economy of its community.
16

17. Directors’ Responsibili>es
• Non compliance with a memorandum of
undertaking to ensure safe and sound
operaTons of his banking insTtuTon.
• Non-compliance with secrecy provisions of the
Banking and Financial InsTtuTons Act 2006.
• Involvement in fraud or deliberate
mismanagement.
• Non-compliance with arm's length principle.
• Not inhibiTng himself from aQending a meeTng
which intends to deliberate or approve a
transacTon in which he is the beneficiary.
17

18. Directors’ Liability
• a director may be fined, removed from office, or disqualified
from holding any posiTon or office in any banking insTtuTon
in case of violaTon of provisions of the BAFI its or regulaTons.
• each director has a duty of care and loyalty to the banking
insTtuTon's interests.
• a director is liable for non-diligent and negligent performance
of the job of director.
• each director is responsible for exercising raTonal and
independent judgment.
18

19. Board meeTngs
• Meet at least quarterly, to discuss the business
affairs of the banking insTtuTon.
• Minimum contents of the reports to be
submiQed to BoD meeTngs
• At least annually, the board of directors should
set implementaTon targets.
19

20. AFendance at mee>ngs of the board of
directors
• Every member of the board should aQend at least
75% of the board meeTngs of the banking insTtuTon
in each year.
• A director who has, whether directly or indirectly, a
personal interest in an exisTng or proposed
transacTon should declare his personal interest and
inhibit him/herself.
20

21. Evalua>on of the Board of Directors
• Regularly review its mix of skills and experience and other qualiTes in
order to assess the effecTveness of the board and its commiQees.
• A copy of the review report be submiQed to BOT
Immediate repor>ng to the Bank
• A change in the composiTon of the board of directors or its commiQees
should be reported to the Bank:
– a statement regarding the reasons for the resignaTon or dismissal,
– a signed statement by the director regarding the reasons for his
resignaTon or dismissal;
• ExcepTonal events that consTtute a departure from the proper
conduct of banking business, or infringement of the provisions of the
law, or substanTve violaTon of the interests of the insTtuTons’
stakeholders.
21

22. Terms of appointment, remunera>on and
re>rement
• The board of directors should put in place a policy
spelling out clearly:
– appointment,
– remuneraTon, and
– reTrement terms for the members of the board, of
their insTtuTons.
22

23. Risk management
• The board of directors should review all policies – at least
annually
• The board of directors should ensure that it is informed of all
new acTviTes and approves strategic acTviTes of the banking
insTtuTon aper it has clear understanding of the following:
– the risks involved in that new kind of acTvity,
– the mechanisms the banking insTtuTon will use for the managing,
measuring and controlling of the risks,
– the quanTtaTve restricTons required in connecTon with the risks
embodied in the new acTvity,
– the appropriate personnel, sources of finance, and technical and
technological infrastructure for the new acTvity, and;
– the management of the new acTvity and whether can be adapted to
the exisTng situaTon in the banking insTtuTon.
23

24. On membership: size, composi>on, etc
• Membership of not less than five, majority of whom must
be non-execuTve and have banking or related
experience.;
• The chairperson of the board must be a non-execuTve
director;
• Each banking insTtuTon should appoint at least two
Tanzanians to its board; and
• A board member should not simultaneously serve as a
board member or in any execuTve capacity in other
banking insTtuTon in Tanzania.
• To avoid conflict of interest, no individual who is a
member of NaTonal Assembly or House of
RepresentaTves or local government authority should be
appointed as director of a banking insTtuTon.
24

25. Ownership and Management
• No individual shareholder with a five per centum or more
shareholding in a banking insTtuTon should form part of
management of the banking insTtuTon.
• No individual shareholder with a ten per centum or more
shareholding in a banking insTtuTon should be appointed
as Chairperson or Deputy Chairperson of the board of
directors of a banking insTtuTon.
• No individual shareholder who had a significant interest in
a failed banking insTtuTon should acquire a significant
interest in a banking insTtuTon.
• No individual who was involved in the management of a
failed banking insTtuTon should be allowed to hold a
posiTon of accountability in a banking insTtuTon.
25

26. Prac>cing Professionals
• In order to tap experTse of pracTcing professionals, a
banking insTtuTon may appoint such professionals as
board directors
– not employed by or partners in a firm which is engaged to
conduct audit of or consultancy work for the banking
insTtuTon;
• PracTcing professionals who are appointed as directors
of banking insTtuTons should exercise the highest
degree of integrity and professionalism.
26

27. Criteria for Fit and Proper Persons
• Possession of formal qualificaTons and management or
business or professional experience of at least five years,
preferably, possession of a proven track record in banking
industry or related acTviTes; on- convicTon in any
criminal
• Non involvement as a member of the management of
board of directors, with a banking insTtuTon whose
registraTon or license has been revoked or cancelled or
which has gone into liquidaTon.
27

28. Criteria for Fit and Proper Persons
• absence of default record of any credit
accommodaTon taken by him or his related
parTes from any banking insTtuTon.
• Absence of bankruptcy record or suspension of
payments or composiTon with his creditors.
28

29. Permanent Conflict of Interests –
Disqualifica>on from Serving
• A person should not serve as a director if his
business or permanent occupaTon creates a
permanent conflict of interests between him
and the insTtuTon, or if it is reasonable to
assume that such conflict may exist
permanently.
• A person shall not be appointed a director if
he was a director of another banking
insTtuTon and less than a year has passed
since he ceased to serve as a director of that
insTtuTon unless the permission of the Bank is
obtained. (COOLING PERIOD)
29

30. BOARD COMMITTEES
Types of CommiFees
The board of directors should form an audit commiQee and such
other commiQees as it may be necessary for discharge of its
funcTons.
Composi>on of Board commiFees
The board of directors should specify the composiTon and
funcTons of every commiQee formed and the terms and
condiTons upon which the commiQee would exercise its
funcTons.
• The board commiQees should consist solely of non execuTve
directors, and the number of commiQee members should not
be less than three;
30

31. Minimum capital for community banks (r.
7.1); TZS 250 million or such higher amount
as the Bank may prescribe
– Shall establish branch, agency or other
office if has capital of TZS 500 million with
prior approval of the Bank (r.7.2);
• Minimum capital for MFC and FICCO (r.8);
as prescribed in
– Banking and Financial InsTtuTons
(Microfinance Companies and Microcredit
AcTviTes) RegulaTons, 2005
31

32. Restric>ons and limita>ons
§ on Dividends (Sec. 19)
§ No declaraTon if contravenes capital requirement
§ Liquid Assets Ra>o (Sec. 21)
§ Accounts and Independent Auditors (Sec. 22)
32

33. Internal Controls (Sec. 23)
§ Boards’ responsibility
§ Audit CommiFee of the Board
§ Chaired by non – execu>ve member
33

34. Large Exposures/Single Borrowers limit (Sec.
25)
§ Refer to Concentra>on of Credit and other
Exposure limits Regula>ons
§ Connected Lending (Sec.26)
§ Management of Risk Assets Regula>ons
• Limita>ons on investments in Companies
engaged in ac>vi>es not authorized and in
Fixed Assets (Sec. 28 & 29)
34

35. Deposit Insurance fund (Sec. 36 to 42)
• Managed by Deposit Insurance Board
35

36. ProhibiTon on taking deposits while
insolvent (Sec. 43)
• Unlawful to collect deposit if known to be
insolvent
36

37. ExhibiTon of License (sec. 44)
• Conspicuous posiTon in public part
37

38. ExhibiTon of Financial Statements
(sec. 45)
• Latest Audited Statements
38

39. Abandoned Property (Sec. 46 & 47)
• Surrender to BOT at end of each calendar year
39

40. Fidelity and Secrecy (sec. 48)
• No divulging of any informaTon relaTng to its
customers or their affairs
40

41. Fair lending and collecTon pracTces
(Sec. 49)
• Existence of contract
41

42. LiquidaTon, Seizure and
reorganizaTon (Sec. 50 to 61)
• ResponsibiliTes under each stage.
42

43. LIQUIDITY REQUIREMENTS
• Liquidity Management Policies (r.5); responsibility of
the board of directors and in line with Risk
Management Guidelines, 2005;
• ConTngency Plan (r.6)
• Minimum Liquid Asset RaTon (r.7); 20 percent
• Loan to deposit raTo (r.8); Maximum limit 80 percent
43

44. Banking and Financial Ins>tu>ons
(Prompt Correc>ve Ac>ons) Regula>ons
2008
44

45. 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
Bank
45

46. 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!!!!!
46

47. 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

48. 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
48

49. 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
49

50. 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
50

51. 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
51

52. 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
52

53. 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
53

54. 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
54

55. 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
55

56. PUBLICATION OF FINANCIAL
STATEMENTS REG. 2008
• Reg. 4 objecTves of RegulaTons are to
– ensure that every bank or financial insTtuTon maintains a
level of transparency adequate to enable depositors and
creditors and the public at large to make informed
decisions;
– promote and maintain public confidence in the Tanzanian
banking sector; and
– enhance market discipline by providing financial
informaTon to various stakeholders.
56

57. PUBLICATION OF FINANCIAL STATEMENTS
• Quarterly financial reporTng (r.5)
– to be published at least once in a paper of general
circulaTon
– be published within 45 days aper end of quarter
– a community bank, shall in addiTon to the req. sub-reg. 1,
display its quarterly accounts in public places within the
areas in which the bank operates
– a copy of quarterly and audited fin stm to be submiQed to
BOT
57

58. PUBLICATION OF FINANCIAL STATEMENTS
• Audited financial statements (r.6)
– Shall be published at least once every year in the
newspapers of wide circulaTon in Tanzania
– Shall be published within 15 days aper approval of
the Board but not later than 105 days aper end of
financial year
58

59. PUBLICATION OF FINANCIAL STATEMENTS
• ExhibiTon of audited FS (r.7)
– At all Tmes should be exhibited in a conspicuous
posiTon in the public part of its principal place of
business and in branches and agencies
59

60. Board Process - Charters
Ø Board charter – funcTons and responsibiliTes
Ø CommiQee charters – role, objecTves and powers
Ø Delegated authoriTes – board, commiQees, CEO,
staff
Ø AccountabiliTes linked to authoriTes
Ø DelegaTons policy document reviewed annually
Ø Detailed corporate governance statement
60

61. Board Process - Ethics
Ø Code of conduct – statement of ethical standards
Ø ConfidenTality a criTcal requirement
Ø Conflicts of interest to be disclosed
61

62. Board Process – Support for Directors
Ø Formal inducTon program
Ø Directors’ handbook/charter
Ø ConTnuing educaTon
Ø Access to independent professional advice
KH - 62

63. Future CG requirement for banks
• Over the next several years… more reforms on
regulatory framework (Basle 11 to Basle 111) which
will impact on Directors role on CapitalizaTon,
management of risk, transparency or addiTonal
disclosure and its Tming.
• Regulators supervision will increasingly be risk based,
cover a wide range of risks and more use of
quanTtaTve approaches. Therefore CG will require
Directors oversight to be offsite, real-Tme using IT
• More investment in IT architecture and conTnuous
plauorm upgrade
63

64. Q and A
64