CORPORATE GOVERNANCE FOR BANKS

SHAMS GHANI <shams_ghani@hotmail.com>
Mar 24 - 30, 2008

The State Bank Governor, while addressing an IBP convocation audience at Lahore last week stated that the decades-old concept of corporate governance got renewed impetus and widespread recognition during 1990s with the launching of Cadbury Report and Prognosis of East Asian Crisis. The loss of investor confidence in the aftermath of corporate failures contributed to the greater significance of corporate governance. A study suggests that investors are willing to pay as more as 30 per cent for the shares in companies with decidedly good corporate governance.

Pakistan's financial system is predominantly bank-based with total bank assets to GDP ratio of 59 per cent for the year 2007. Good corporate governance for banks means a solvent and stable financial system. The corporate governance of banks is obviously linked with the corporate governance of banks' client firms. Well managed profitable firms get a higher ranking in the banks' loan and investment portfolios. The banks operate in a highly precarious and vulnerable environment with little margin to go wrong. The financial market intelligence keeps them on their toes. Any bonafide or perceived impression of malpractices could trigger a run on the deposits of the bank.

THE SBP WATCH LIST

The SBP has been instrumental in designing, modifying and updating its watch list for the banks in an effort to promote good corporate governance. In a recent move, the SBP has separated the positions of chairman and CEO of banks. It is now mandatory for banks to appoint at least 25 per cent independent directors and not more than two executive directors. It has also strengthened the fit and proper criteria for directors and CEOs.

SBP has issued guidelines on risk management, internal controls, IT security and business continuity planning. The Institutional Risk Assessment Framework (IRAF) and CAMELS-S approach contain such guidelines. The CAMELS-S approach means, Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, Sensitivity and Systems & Controls of banks. Banks are now required to undergo credit rating process annually. Rating is to be announced publicly and disclosed in the bank's financial statements.

SBP has also undertaken to get implemented in a phased manner the Basel-II regime. Initially the banks are required to adopt the Standardized Approach for credit risk and the Basic Indicator / Standard Approach for operational risk from January 2008. After improvement of their in-house systems, the banks will have the option to adopt more advanced approach from January 2010.

The Basel-II regime is not being favoured as beneficial to the country's banking system. The SBP's enthusiasm to ensure its early implementation is being widely criticized. The regime is said to be aimed at :

* Wiping off the smaller banks and financial institutions to ensure further strengthening of the banking cartel.

* Securing free access for the international hegemonistic forces to country's classified financial data to perpetrate destablizing financial maneuvers.

* Giving a walk-over to the foreign banks who have adopted Basel-II under the Advanced Approach criteria.

CHARITY SHOULD BEGIN AT HOME

While concluding her address at the convocation, the State Bank Governor, out of her "learned ignorance" stated :

"An adequate and appropriate governance framework is crucial for the optimal functioning of any enterprise, more so for a central bank because of its objectives of maintaining price stability and ensuring financial stability alongwith its crucial contribution to the overall economic policy framework."

At the outset, she had mentioned fairness, transparency and accountability as the basic principles of corporate governance for banks. She also mentioned the obvious that the banks are highly leveraged business undertakings dependent on the money borrowed from their depositors and must, therefore, be accountable to these depositors.

The banks during their ominous journey of eminence have been totally unfair to the depositors. They have been operating with transparent belligerence with a conviction that they are accountable to none. The State Bank governor knows it all. She would have done well by giving her comments on the government-in-making or the cancelled Australian cricket team's tour rather than telling her juniors to do what she herself is unable to accomplish

We Know the Problems ; Give us the Solution

On the conglomerate phenomenon, the governor's take was :

"Ownership and group structure of banks in Pakistan is highly varied. The banking sector comprises of foreign-controlled, family-owned, and some state-owned banks with each type of ownership posing its peculiar governance challenges. Some banks operate as parts of industrial/commercial groups while a large number of them has exposure to the non-bank financial sector through ownership and control. In such a scenario transparency and fairness in banks' lending and investment decisions particularly those concerning group companies, become a crucial requirement."

The aforesaid is a statement of facts. But who allowed these conglomerates to take roots and then develop into a threat for a balanced economic growth. Surely, the central bank, somewhere, somehow, failed to exert its authority and acted in subservience to the elected/un-elected governments. Carrying 33 per cent of the total market capitalization weight, the banks are now a cartel power difficult to civilize through appeals to their sense of justice or to control through rules so easy for them to circumvent. This cartel power has been responsible for the woes of the common man who has been handed a raw deal of a negative real return on its hard earned money that forms the blood line of the banking system. This power now needs to be tamed if not outrightly demolished. The governor should know that her requests to increase the rate of return on deposits will be lost in wilderness. This is time about for her to control this financial rowdyism. Take a bold step; the masses, the academia and possibly the new government too are there to support you.