It is heartening to note that
Republic of Maldives is hosting 7th South Asian Management Forum 2002.
The theme is very interesting namely "Towards South Asian Economic
Renaissance." This piece looks at Finance, Banking and Governance
Prof. Dr. KHAWAJA AMJAD SASED
July 08 - 14, 2002
THE PAPER CONSISTS OF THE FOLLOWING AREAS:
AREA I: FINANCE
AREA II: BANKING
AREA III: GOVERNANCE
ABOVE THREE AREAS ARE NOW REVIEWED BELOW:
AREA I: FINANCE
In the wake of globalization of businesses, the
function of finance construed within the terminology of "Financial
Management" is undergoing significant changes. WTO Regime is
expanding. Businesses are becoming global. They need to seek new
markets, material, technology, production efficiency and
diversification. The shifting emphasis of Financial Management in global
perspectives has been captured in the following box:
Box No. 1
Emphasis of Financial Management in Global Perspectives
Emerged as an independent
field of study with focus on legal aspects of formation of new
companies and different types of securities for raising
This decade dominated
recession in the world. The emphasis shifted to liquidations due
to bankruptcies and reorganization of corporate entities and
regulation of market securities.
Focus shifted to managerial
decisions regarding choice of assets and liabilities.
Emphasis continued covering
areas such as valuations, inflationary impact on business
decisions, deregulation of financial institutions, diversified
financial services, growing use of computers for financial
analysis and electronic transfer of information and ever
increasing horizons of global markets and business operations.
The following factors are
going to dominate the global scene in relation to financial
Increase in the use of
Use of various financial
Excerpts from a speech delivered by the Chairman of
Federal Reserve Board of USA, Mr. Alan Greenspan before the Annual
Financial Markets Conference of the Federal Reserve Bank of Atlanta,
Miami Beach, Florida on February 27, 1998 are as under:
"The Management of systemic risk, of course, is
beyond the scope of individual institutions. While interest and currency
risk taking, excess leverage and interbank funding represent decisions
by individual firms, such decisions, as well as weakness of financial
systems, are all encouraged by the existence of a safety net. I believe
that what is being referred to as the architecture of the international
financial system will need to be thoroughly reviewed and altered as
necessary to fit the needs of the new global environment".
Information Technology is having a profound impact on
global Financial Management. Some important aspects in this respect are
I.T.: Financial Decisions
I.T. is revolutionizing the way financial decisions
are being made. The impact can be seen in the light of following
a) Companies have their networks of personal
computers linked to one another, to the firm's own mainframe computer
and to their customers and suppliers Computers.
b) Financial Managers are able to share information
and have "face-to-face" meetings with distant colleagues
through video teleconferencing.
c) Access and analysis of data on a real-time basis
is enabling quantitative analysis quickly.
d) New generation of financial managers are
ornamenting themselves with computer skills and quantitative skills.
Now Software is available for financial analysis.
This is enabling financial managers to have quick access to the analyzed
data for prompt financial decisions in global dimensions in a prompt
Computer models are available for financial
forecasts. This is enabling financial managers to undertake quick
project analysis for decision making in global financial decisions.
In the background of above, twelve emerging trends in
Global Financial Management which every business must carefully attend
in South Asia are now explained below:
Financial Management Linked to Other Disciplines
In Financial Management, several financial decisions
are needed to be undertaken. Significant areas are identified in the
Box No. 2
Maior Financial Decisions
Sources of funds
Costs of funds
Efficient Working Capital
Analysis of Risks and Returns
The dominant goal of financial management is to
maximize shareholders wealth. Support to the above finandal decisions is
being taken from primary disciplines (accounting, macro and micro
economics) and other related disciplines (marketing, production and
Capital markets are witnessing divestures, hostile
take over, new financial instruments, reconstitution of governing
boards, computerization of transactions, floorless stock exchanges,
strong regulatory frameworks, strengthening democratic accountability of
managements by stakeholders, rise of effective corporate governance,
Central depository systems, transparency relating to information in
respect of fluctuations of listed stock prices, risk management in stock
markets, tightening financial discipline, development of ethical codes
for jobbers and stock brokers, application of International Accounting
Standards (IASs) and Standards on International Standards on Auditing
(ISA) - earlier known as International Audit Guidelines, increasing the
frequency of disclosure of financial information through quarterly
highlights, half yearly financial statements over and above annual
financial statements, enforcing voluntary disclosure of financial
information in the annual financial statements, greater informative
disclosures in financial reports, making mandatory requirements for
consolidation of financial statements of holding companies and
subsidiary companies, greater awareness of using capital markets for
privatizing nationalized enterprises. Vistas in these respects are ever
expanding to add to the challenges of finance managers. They ought to
develop special skills and acquire a sound and firm grip to deliver the
goods in a befitting manner.
Foreign Direct Investment
Foreign Direct Investments (FDI) have been growing.
The capital flows have accelerated and now multinational and
transnational networks have expanded considerably. This trend will
certainly grow and pose challenges to financial managers to move into a
phase of international finance managers. The World Development Report
2002 contains pertinent information stating Institutional Credit Rating.
This rating enables global finance managers to make sound decisions
relating to foreign direct investment in respect of location of FDI.
While deregulation has been increasing in several
countries, the traditional set up of registrars joint stock companies,
as an extension and attached department of Ministries of Industries of
several developing countries, were replaced by quasi autonomous bodies
known as Corporate Law Authorities and are now functioning under
autonomous Securities and Exchange Authorities. Therefore regulatory
frameworks are getting strengthened for a vigilant on watch of Capital
Markets. Financial Managers ought to comply with the regulatory
Exchange Rate Fluctuations
Financial managers face lot of challenges to posing
problems of fluctuations of foreign exchange rates. Since 1973, foreign
exchange rates have been floated and at present most of the countries
are following free float concept while some are on managed floating
principle. A few have fixed the rates. However, Dollar dominates as an
intervention currency, although the rise of Euro is steady and this new
currency will take several years to stabilize and expand its usage
muscles. The financial managers face the difficult job of financial
forecasting due to volatility in foreign exchange rates. The case of Far
East starting from 1997 is well known. Rescue packages had to be offered
in bigger terms by IMF for Indonesia, South Korea and Thailand. However,
Malaysia fixed its rate of exchange and avoided rescue package by not
pursuing development projects for US $ 28 billion. Financial Managers in
developing countries face the challenge of depreciation of their
currencies due to use of US Dollar as Intervention Currency and also due
to appreciation of US Dollar against other currencies in which letters
of credit need to be opened in other denominated currencies.
At one time only three major rating firms in the
United States (Standard & Poors Corporation, generally known as
S&P, Moody's Investors Service and Fitch Investor Services)
dominated the credit rating agencies scene. Now more agencies on global
and national scene are growing. In fact the new trends are that
financial institutions, rather than relying on financial and related
analysis, are relying greatly on the rating of accredited rating
agencies. In this respect it is interesting to note that industrial
company rating methodology profile is improving with passage of time.
Some of the pertinent areas to develop credit rating rank are included
in box No. 3.
Finance Managers are more concerned with
non-performing assets. This special attention is bringing out a sharp
focus on productive use of assets to achieve greater profitability and
efficient use of assets. Special areas identified have been plants not
utilized to full capacity and non-performing loans of nationalized and
private sector FIs and DFls. Special skills and innovative knowledge
backed up with enlightened and forward looking attitudes are surfacing
for bejeweling the finance managers to comprehend the issues involved
and to achieve the goal of optimal utilization of assets and other
Box No. 3
Factors for Credit Rating Rank
Industry Risk Analysis
Issues Industry Position
Evaluation of Management
Protection of Earning
Financial Leverage and Asset
Adequacy of Cash Flow
Financing needs and
accomplish the above
Capital Adequacy Ratios
Concerns have been growing to move towards greater
capital adequacy ratio as a financial cushion to banks. As against 7.5%
as capital adequacy ratio, the 21st century follows 8.0% and some Middle
East countries even are following 11% to 12%. The finance managers ought
to guide the top management to move to around 10% as capital adequacy
ratio for finandal institution for healthy financial position.
IAS 39 was approved by the IASC board in December
1998 to be effective for financial statements for financial years
beginning on or after January 01, 2001.
In June 2000, the IASC Board approved Exposure Board
E66 on five limited revisions to IAS 39, Financial Instruments,
Recognition and Measurement and related standards. None of the proposed
revisions represents a change to a fundamental principle in IAS 39.
Instead, the purpose of the proposed changes is primarily to address
technical application issues that have been identified following
approval of IAS 39 in December, 1998. The Board's assessment is that the
proposed changes will assist enterprises preparing to implement IAS 39
for the first time in 2001 and will ensure a consistent application of
New Budgeting Techniques
The last quarter of the 20th Century saw the rise of
PPBS and ZBB. Now the innovative approach, while translating the
benefits from the above two approaches, is output budgeting. The finance
managers need to make effective contributions.
Due to competitive trends, several enterprises are
undergoing corporate restructuring, corporate sickness is being tackled
in two ways. The first one relates to identifying sickness through early
warning signaling system. The other one is through institutionalized
approach by establishing organizations to diagnose the sick and
recommend rehabilitation or liquidation packages. Finance managers ought
to play new role in respect of above aspects.
Mergers & Acquisitions
Financial Managers are now accepting challenges of
mergers and acquisitions. This global trend is ever expanding and
translating the benefits of economy of scales and other related
Rationale supporting business combinations is
supported by several factors explained below:
Financial motivation has portfolio effect by
achieving risk reduction while perhaps maintaining the firm's rate of
Improved funding posture is possible as larger firms
have access to financial marks.
c) Tax Impact
A favorable tax impact may be available due to carry
forward of losses.
There are non-financial management reasons, These
generally include the following:
This can be facilitated by acquisition of
This can be achieved by acquisition of businesses or
sellers of goods or services to companies.
AREA II: BANKING
Most of the developed world including USA and Japan
have critical difficulties in the area of Banking. Assets and
Liabilities Management (ALM) is the area in big trouble. Non-performing
loans have been increasing. Sick units continue to attract public
criticism. Consequently, financial institutions are suffering a lot. In
view of the growing importance of Risk Management and I.T. Applications,
the Law of Obsolesce on employees of Financial Institutions is badly
affecting their performance. Human Resource Development Frontier needs
to be strengthened. A new breed of bankers need to be developed. Moral
degradation requires proper attention. Monitoring and Evaluation of
projects need to be properly addressed as a serious agenda. Spread needs
to be reduced and burden also should be minimized after a careful
analysis of Spread and Burden of Financiai Institutions. Capital
Adequacy Ratio should be raised beyond the recommended 8%. New products
need to be innovated considering the emerging needs of the depositors
and borrowers. The Financial Institutions should seriously address the
issue of extending advances and loans to SME Sector. Accountability of
bad decisions, particularly in terms of lending decisions should be
The above points represent a serious agenda for
discussion for SAARC Countries. Research should be initiated and steps
should be taken to ensure that banking sector performs well for the
prosperity on a wider spectrum rather than serving selected few as
AREA III: GOVERNANCE
Good Governance at the Government's level is the
crying need of today. However, sound corporate governance at the
corporate level is the need of the hour in SAARC Countries. This portion
deals with the following aspects:
1. Concept of
Countries of Asia reflecting experiences of Hong Kong and Malaysia.
3. Sharing of recommendations of two UK
Committee Reports (Cadbury Committee and Hampel Committee)
4. Twelve points
suggested Code of Ethics for South Asia
The above aspects are now reviewed below:
Concept of Corporate Governance
OECD has defined Corporate Governance as under:
"Corporate Governance comprehends that structure of relationship
and corresponding responsibilities among a core group consisting of:
designed to best foster the competitive performance
required to achieve the Corporation's primary objective".
a) HONG KONG
Two Countries have been sampled out to review good
corporate governance practices. These include Hong Kong and Malaysia.
Based on two reports of the working group on corporate governance
published in December 1995 and January 1997 by the Hong Kong Society of
Accountants, salient features of the Code for effective corporate
governance are summed up as under:
matters should be identified.
ii) Same family
must not have more than 50% members of Board of Directors.
iii) There should
be a CFO (Chief Financial Officer) through a mandatory provision. iv)
Attendance record of Board at AGM should be maintained.
v) Four board
meetings must be held every year. However, six meetings are preferred.
vi) Other fees
paid to auditors should be separately disclosed.
vii) There should
be separate disclosure regarding corporate governance in the annual
report of the company.
viii) An Audit
Committee, with defined functions, should be established.
reports containing balance sheet, income statement and cash flow should
x) The above
interim reports should be reviewed by auditors.
b) MALAYSIA .
Two separate Codes of Ethics for Directors and
Secretary of the Company have been developed and published by Registry
of Companies, Malaysia.
a) UNITED KINGDOM
Two Committees namely Cadbury Committee (1991) and
Hampel Committee (1995) have done a very useful work. Salient features
of recommendations of these Committees are summarized below:
i) Cadbury Committee
Four areas were identified for significant
improvements. These included Board of Directors, Non-Executive
Directors, Executive Directors and Reporting & Controls. In respect
of Board of Directors, it was recommended that meetings of Board of
Directors should be regularly held, the board must retain full and
effective control over the company, it must monitor the executive
development, no one individual be given unfettered power, a balance be
maintained between power and authority, non-executive directors having
sufficient caliber and number be included in the board of directors,
direction and control of the company should be firmly in their hand,
independent professional advice at company's expense be obtained for
furtherance of their duties and for getting benefits from the Secretary
of the board and enabling him to stay independent, guidelines included
access to advice and services, procedure, rules and regulations should
be complied with and board as a whole should examine the question of
removal of secretary.
Two basic aspects governing non-executive directors
included the extension of their role to contribute towards independent
judgment together with areas of contributions to include strategy
performance, key appointments and standard of conduct. To ensure that
fairness and independence. are achieved, guidelines included: enjoying
independent status away from pressure of management, fees reflecting the
time which they commit to the company, appointment for specified terms
and selection through a formal process. Board as a whole must make the
In respect of executive director recommendations
included three year contract with shareholders approval, transparent
disclosure of directors and chairman's total emoluments with
identification of amounts to be paid under major headings, disclosure of
salary and performance related elements separately including the basis
on which performance is measured, setting up a remuneration committee to
recommend the pay of the executive director. The committee must be made
up wholly or mainly of non-executive directors. Four major
recommendations regarding Reporting and Controls included acceptance by
the Board its duty to present a balanced and understandable assessment
of the company's position, maintaining an objective and professional
balance between Board and internal and external auditors, set up an
audit committee of at least three non-executive directors with terms of
reference to be in writing and clearly dealing with its authority and
duties and reporting by the directors on the effectiveness of the
company's system of internal control.
ii) Hampel Committee
The Committee devoted two years (1995-1997) and
released their report in January 1998. Summary of conclusions and
recommendations covered seven aspects namely, principles of corporate
governance, applications of the principles, the future, directors,
directors' remuneration, shareholders and the AGM.
Twelve Points Suggested Code of Ethics for South Asia
1. Code of Ethics
should be developed separately for;
2. Issuance of
quarterly audited financial reports should be made mandatory.
3. A minimum of
four meetings of Board of Directors should be held in a year and salient
features of decisions made in the above meetings should be circulated to
members of the Company as part of transparency.
4. Every listed
company must employee a CFO who should be either Chartered Aceountant or
Cost & Management Accountant.
5. Board of
Directors should address strategic issue.
6. Frequency of
board meetings be increased.
Committee, with defined functions, must be constituted at least in every
training be given to Board of Directors to enable them to play a
productive and meaningful role.
directors should be independent and fair in judgment. Their tenure must
not exceed three years.
section relating to Corporate Governance should be included in the
annual report of the company.
11. The above
recommendations must be included in the listing requirements of the
stock exchanges of the SAARC Countries.
12. Where there
is a need to reflect the above suggestions to be included in the
respective company legislation of SAARC Countries, steps be initiated to
get the amendments approved.
This article contains enough food for thought. It is
high time that issues identified are seriously addressed as an agenda
for the first decade of 21st Century to accelerate socio-economic
growth, ensure social stability and usher in an era of prosperity and
happiness for the over one billion people living in SAARC Countries.