- Corporate governance for banks and financial institutions.
- Formation of committees in the Board of Directors of a bank or financial institution.
- Responsibilities of the senior management, board of directors and liabilities of directors in financial institutions.
- Controls against misappropriation of business resources and guide to arm’s length terms when transacting with insiders?
- Corporate governance structure focusing at interest in a subsidiary bank or financial institution.
- Restrictions in shareholding and management of banks and financial institutions.
- Consequences for failure to comply with the Regulations.
Recently, the Bank of Tanzania has enacted new regulations on corporate governance for banks and financial institutions. The newly imposed regulations, Banking and Financial Institution (Corporate Governance) Regulations, 2021 (“the Corporate Governance Regulations”) were published on 29th October, 2021. The Corporate Governance Regulations set standards for corporate governance and structures of banks and financial institutions. It provides guidance to board of directors, directors and senior management of banks and financial institutions for proper discharge of their responsibilities.
In this update, our Corporate, Commercial Department at Breakthrough Attorneys provides an overview and highlights of the key provisions of the Corporate Governance Regulations for banks and financial institutions to observe.
2.0 Corporate Governance of Banks and Financial Institutions
The concept of corporate governance is the system by which corporations are managed and controlled. Regulation 2 of the Corporate Regulations defines corporate governance as “a set of relationships between a company’s management, its Board, its shareholders and other stakeholders, which provide the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance, including how the Board and senior management:
- set the bank’s or financial institution’s strategy and objectives;
- select and oversee personnel;
- operate the bank’s or financial institution’s business on a day-to-day basis;
- protect the interests of depositors, meet shareholder obligations, and take into account the interests of other recognized stakeholders;
- align corporate culture, corporate activities and behavior with the expectation that the bank or financial institution will operate in a safe and sound manner, with integrity and in compliance with applicable laws and regulations; and
- establish and oversee control functions.”
Corporate governance of banks and financial institutions is reflected through the board of directors and senior management of a specific bank or financial institution as the governing body.
3.0 Key Provisions of the Corporate Governance Regulations which Set Good Corporate Governance Practice for Banks and Financial Institutions
From our review of the Regulations, we have identified ten (10) key provisions of the Corporate Governance Regulations for banks and financial institutions to observe:-
- Establishment of the Board its membership and tenure;
- Establishment of the board of directors
Regulation 4 of the Corporate Governance Regulations provides for establishment of the board of directors of the bank or financial institutions.
- Composition of the board of directors
The minimum number of the board of directors is five (5). Two third (2/3) of members of the board must be non-executive directors. In appointing members of the board, the appointing authority should ensure that at least two (2) of the non-executive members are independent and have requisite experience in banking, finance, accounting, auditing, law or economics; and two (2) of the members are Tanzanians. Furthermore, no person shall simultaneously serve as a Board member or in any executive capacity in more than one bank or financial institution in Tanzania unless one has sought and obtained an approval from the Bank of Tanzania and has proved that there is no conflict of interest.The Corporate Governance Regulations under Regulation 14 now restricts the appointment of a member of National Assembly or House of Representatives or councilor of local government authority as a director of a bank or financial institution.Banks and financial institutions are required to obtain an approval of the Bank of Tanzania before appointing and assigning a person with responsibilities as a member of the board or in any senior management position.
- Tenure of office
A Board member or a Chief Executive Officer of a bank or financial institution shall not hold office for a consecutive period aggregating more than ten (10) years.In circumstances where a director held office for a period of less than ten (10) years, he/she shall be reappointed in that capacity after lapse of two (2) years from the date when he/she ceased to be a director of a bank or financial institution unless permission from the Bank of Tanzania is obtained. This is provided under Regulation 13 of the Corporate Governance Regulations.Nonetheless, if a person has served as a board member or a Chief Executive Officer of a bank or financial institution for a consecutive period of ten (10) years, he/she does not qualify for appointment in any capacity in his former bank or financial institution until a lapse of three (3) years from the date when he/she ceased to be a board member or Chief Executive Officer of a bank or financial institution.
- Establishment of the board of directors
- Formation of committees which function within the board of directors;
Regulation 7(2) of the Corporate Governance Regulations requires the board of directors to appoint and form, from among its members Audit Committee, Credit Committee, Remuneration Committee and such other committees for better carriage of its responsibilities. Members of the committees shall not be less than three (3) and shall consist of non-executive directors. Additionally, at least two (2) of the Audit Committee members shall be independent members having accounting, auditing or related financial management experience.
- Reporting requirement of vacancy or exceptional events such as infringement of the law;
A bank or financial institution is required to notify the Bank of Tanzania of any vacancy in a post of senior management or member of the board of directors; and exceptional events that constitute a departure from the proper conduct of banking business, infringement of the law or violation of interest of stakeholder.Information has to be in a written form and must be sent to the Bank of Tanzania within seven (7) working days from the date of occurrence of an event. We note that the Regulation does not specify whether the form has to be in physical format or even electronic. This is provided for under Regulation 15 of the Corporate Governance Regulations.
- Monitoring and evaluation in corporate governance;
Banks and financial institutions are required to have highly skilled individuals in senior management to ensure impartial and progressive decision making in their operations. Selection process of board members must be clear and straight forward. During the assessment process a bank or financial institution must consider:-
- honesty, integrity, diligence, fairness, competence, capability and financial soundness of the candidate;
- possession of knowledge, skills, experience and independence of mind given his responsibilities on the Board and in the business and risk profile of bank or financial institution;
- availability of sufficient time to fully discharge his responsibilities;
- conviction of an offence involving fraud or dishonesty;
- non-involvement as a member of the management of Board in a bank or financial institution whose registration or license has been revoked or cancelled or which has gone into liquidation;
- absence of default record of any credit accommodation taken by him or his related parties from any bank or financial institution; and
- absence of bankruptcy record or suspension of payments or composition with his creditors.
Regulation 19 of the Corporate Governance Regulations requires banks and financial institutions to ensure that directors are participating in induction programs and ongoing training on relevant matters.
Regulation 21 of the Corporate Governance Regulations requires Regular assessment of the board of directors, its committees and individual board members to be carried out to review the effectiveness of governance practices and individual suitability. An assessment report must be submitted to the Bank of Tanzania within thirty (30) days from the date of completion of the assessment.
As a way of promoting accountability and increasing transparency all new activities must be communicated and approved by the board of directors. Moreover, strategies, business plans and policies must also be approved by the board of directors and submitted to the Bank of Tanzania within thirty (30) days from the date of approval. This is provided under Regulation 24 of the Corporate Governance Regulations.
- Responsibility of the board of directors and liabilities of directors;
Part IV of the Corporate Governance Regulations discusses various responsibilities of board of directors and directors of banks and financial institutions.
Responsibilities of the board of directors include:-
- to provide oversight on all affairs of the bank or financial institution;
- to appoint senior management and monitor their performance;
- to approve strategies, business plans and policies and monitor management’s performance in implementing them;
- to promote sound corporate culture by setting corporate values and create a strong risk culture;
- establish lines of responsibility and accountability, which shall be communicated throughout the bank or financial institution;
- to approve and oversee the implementation of capital adequacy assessment process and capital plan of the bank or financial institution;
- to manage risks in a bank or financial institution pursuant to Risk Management Guidelines for Banks and Financial Institutions;
- to ensure that departments or units responsible for risk management, compliance and audit are properly positioned, staffed and resourced; and carry out their responsibilities independently and effectively;
- to approve strategic activities of the bank or financial institution
- to review all policies relating to various types of risks and determine the exposure limits for such risks and activity segments at least once a year;
- to take into account the legitimate interests of depositors, shareholders and other relevant stakeholders; and
- to meet at least once every three months to discuss the affairs of a bank or financial institution.
Liabilities of directors are specifically stated under Regulation 34 of the Corporate Governance Regulation. In performing their responsibilities under the Banking and Financial Institutions Act and the Corporate Governance Regulations, directors shall:-
- execute an undertaking that he shall jointly and severally ensure that the bank or financial institution operates in a safe, sound and profitable manner; and be liable for non-compliance with such undertaking;
- be responsible for complying with secrecy provisions of the Baking and Financial Institutions Act;
- not involve himself in fraud or deliberate mismanagement;
- ensure that all credit facilities granted to him or his related parties by the bank of financial institution to which he is a member of the Board, are given at an arm’s length basis;
- refrain from attending a meeting which deliberates or approves a transaction in which he is beneficiary;
- have a duty of care and loyalty to the bank or financial institutions interests and shall be liable for damage caused where he breaches that duty;
- be liable for non-diligent and negligent performance of his duties as a director; and
- be responsible for exercising rational and independent judgment.
- Restrictions on insiders transactions;
Based on our experience, insider transactions are commercial transactions between the bank or financial institutions and an employee, member of the board or persons who are at the senior management level of the corporation. The Corporate Governance Regulations requires banks and financial institutions to establish and implement policies that guide transactions with insiders and ensure that arm’s length terms are observed and business resources of the bank or financial institution are not misappropriated. Nonetheless, the Regulations have not defined “insider transactions” leaving it open to general commercial and finance industry interpretation.Regulation 37 of the Corporate Governance Regulations sets out a requirement for banks and financial institutions to ensure that any transaction with an insider is on terms, which are not more favorable than would be available to other customers.Regulation 38 of the Corporate Governance Regulations sets out a requirement for banks and financial institutions ensure a credit accommodation is granted to an insider after obtaining approval from all members of the board of directors.Regulation 42 of the Corporate Governance Regulations restricts banks and financial institutions to grant salary advance to any of its officers or employees which exceed the annual remuneration of the borrowing officer or employee.
- Responsibilities of senior management of a bank or financial institution;
Senior management is defined under Regulation 2 of the Corporate Governance Regulations to mean “a Chief Executive Officer, head of function, any other senior manager reporting to the Chief Executive Officer and any person, other than a member of the Board, who, individually or as a group:-
- makes or participates in making decisions that affect the whole or a substantial part of the business of the bank of financial institution;
- has the capacity to affect the bank’s or financial institution’s financial standing; or
- may affect the whole, or a substantial part, of the business of the bank or financial institution or its financial standing through their responsibility for-
- enforcing policies and implementing strategies approved by the Board of the bank or financial institution;
- developing and implementing systems that identify, assess, manage or monitor risks in relation to the business of the bank or financial institution; or
- monitoring the appropriateness, adequacy and effectiveness of risk management systems.”
- Corporate governance of group structures;
Companies which operate in a group structure are those companies (subsidiaries) which are controlled by one company called the parent company or holding company. The Corporate Governance Regulations tasks the board of directors of a parent company to exercise adequate oversight over subsidiaries regardless of the independent legal and governance responsibilities of the board of directors of the subsidiaries.According to Regulation 48 of the Corporate Governance Regulations, the board of director of a parent company is responsible for:-
- establishing a structure and a governance framework with clearly defined roles and responsibilities, including those at the parent company level and at the subsidiary level;
- defining an appropriate subsidiary board of directors and management structure which takes into account different risks to which the group, its businesses and its subsidiaries are exposed;
- assessing whether the group’s corporate governance framework includes adequate policies, processes and controls and addresses risks across the business and legal entity structures;
- ensuring the group’s corporate governance framework includes appropriate processes and controls to identify and address potential intragroup conflicts of interest, such as those arising from intragroup transactions;
- approving policies and clear strategies for establishing new structures and legal entities, and ensuring that they are consistent with the, policies and interests of the group;
- assessing whether there are effective systems in place to facilitate exchange of information among the entities within the group; and
- ensuring the group has sufficient resources to monitor compliance of subsidiaries with all applicable legal, regulatory and governance requirements.
- Restrictions on shareholding and management of the bank and financial institution;
An individual shareholder with five per centum (5%) or more shareholding in a bank or financial institution cannot form part of management of the bank or financial institution; AND an individual with ten per centum (10%) or more shareholding in a bank or financial institution cannot be appointed as chairperson or deputy chairperson of the Board. These restrictions are provided under Regulation 52 of the Corporate Governance Regulations.
- Consequences for failure to comply with provisions of the Corporate Governance Regulations;
Banks and financial institutions are required to adhere with provisions of the Corporate Governance Regulations religiously. On top of penalties provided by the Banking and Financial Institutions Act, Regulation 53 of the Corporate Governance Regulations empowers the Bank of Tanzania to impose on any bank or financial institution any of the following sanctions for non-compliance:-
- a penalty of the amount to be determined by the Bank of Tanzania;
- prohibition from declaring or paying dividends;
- suspension of the privilege to issue letters of credit or guarantee;
- suspension of access to credit facilities of the Bank of Tanzania;
- suspension of lending and investment operations;
- suspension of capital expenditure;
- suspension of the privilege to accept new deposits;
- revocation of banking license;
- suspension from office of the defaulting director, officer or employee; and
- disqualification from holding any position or office in any bank or financial institution under supervision of the Bank.
Application of these penalties may extend to directors, officers or employees of the bank or financial institution.
Based on our experience, we advise banks and financial institutions to observe procedures required to suspend or terminate a director, officer or employee as provided by the Employment and Labour Relations Act Cap 366 RE 2019 as the main law which regulates employment and labour relations in Tanzania.
Recently, the High Court (Labour Division) has reminded employers to observe proper procedures and reasons for termination before they act. This was emphasized in the case of Stanbic Bank Tanzania Limited and Iddi Khalfan, Revision No. 858/2019 where the court ruled against Stanbic Bank Tanzania Limited for failure to observe termination procedures when they terminated Mr. Iddi Khalfani. Breakthrough Attorneys got an opportunity to represent Mr. Iddi Khalfani.
Compliance in corporate governance is essential for the proper conduct of a bank or financial institution. Banks and financial institutions should not compromise any compliance matter as there are a number of consequences for non-compliance as stipulated in item 3.0.10 above. A great corporate governance practice of a bank or financial institution is an indicator of protection of financial consumers and it speaks well of a bank or financial institution. Kindly read here for more details regarding financial consumers protection.
Corporate Governance Regulations has evidenced that the responsibility for the oversight and direction of banking institutions rests with the Board of directors the senior management team of a particular bank or financial institution. Hence, we argue for total compliance to board of directors of banks and financial institutions in discharging their responsibilities. This will allow a bank or financial institution to operate smoothly and free from unnecessary destructions such as penalties for non-compliance, suspension and revocation of their licenses.
Please contact us should you require further information.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any