Dr Shamshad Akhtar, Governor State Bank of Pakistan has said good corporate
governance for the banking industry, with assets to GDP ratio of almost 59%, is critical
in ensuring solvency and stability of the country’s financial system and to provide
impetus to economic growth.
Delivering her keynote address on ‘Corporate Governance for Banks’ at a
convocation of the Institute of Bankers, Pakistan today at a local hotel in Lahore, she said
that the State Bank has been on the forefront in promoting good corporate governance in
the country as a regulator and supervisor of banks and DFIs.
“SBP has implemented a comprehensive corporate governance regime for banks,
which is driven by a robust legal and regulatory framework, risk-based supervision and
over-arching banking sector reforms, notably, privatization, liberalization and
consolidation of banks,” she said and added the major thrust of legal and regulatory
requirements is to strengthen the functioning of the Boards of Directors of banks.
Dr Akhtar said recently the State Bank has separated the positions of chairman
and CEO of banks and made it mandatory on banks to appoint on the Board at least 25%
independent directors and not more than two executive directors. SBP has also
strengthened the fit and proper criteria and approves appointment of directors and CEO
of banks in line with the criteria. Banks must also follow the fit and proper criteria in
appointing key executives although such appointments do not require SBP approval, she
added.
She said SBP has also issued guidelines on risk management, internal controls, IT
security and business continuity planning besides detailed instructions on policy
framework for banks, risk management framework including regulatory requirements that
check banks’ exposure to group companies and other related parties, restrict exposure to
single borrower, borrowing group or sector, as well as limit banks’ investments in equity
market.
While giving details about current regulatory requirements for banks, SBP
Governor said that the State Bank like other central banks is also steering the
implementation of Basel-II in a phased manner. Initially banks are required to adopt the
Standardized Approach for credit risk and the Basic Indicator/ Standardized Approach for
operational risk from 1st January 2008, she said and added, subsequently, once banks
improve their in house systems, they would have the option to switch over to more
advanced approaches from 1st January 2010 subject to the adequacy of capacities and
capabilities and its due diligence by SBP.
Dr Akhtar said as a further step to strengthen governance of banks, they are
required to undergo credit rating annually. The rating must be announced publicly and
disclosed in the financial statements of the bank, she said and added SBP also requires
banks to appoint auditors from a panel of pre-approved auditors maintained by it. “The
objective is to ensure credibility of audited financial statements of banks,” she added.
Referring to monitoring and supervision mechanisms, she said that the State Bank
has implemented a comprehensive framework, which is underpinned by regular on-site
inspections of banks and DFIs under the regulatory ambit of SBP. Banks are inspected in
accordance with a pre-approved annual inspection plan, following the CAMELS-S
approach. SBP has also developed a comprehensive surveillance mechanism – the
Institutional Risk Assessment Framework (IRAF) – to capture the host of risks facing
individual banks based on the information gathered from on-site inspections, off-site
supervision, market intelligence and self-assessment by banks, she added.
“The objective is to obtain a composite rating for each bank for effective and
proactive supervision by SBP,” SBP Governor said and added the State Bank is
endeavoring to further strengthen its own governance processes in consultation with its
Board of Directors. “An adequate and appropriate governance framework is crucial for
the optimal functioning of any enterprise, but more so for a central bank because of its
objectives of maintaining price stability and ensuring financial stability along with its
crucial contribution to the overall economic policy framework,” she said.
Dr Akhtar said SBP’s efforts to improve corporate governance have resulted in a
visible improvement in the corporate governance practices of banks and the fundamental
change is in the effectiveness of the board. The implementation of Fit and Proper criteria
has ensured that board members are well equipped to carry out their responsibilities, she
said. Furthermore, internal control system has been strengthened in banks through setting
up of audit committees and internal audit functions. Compliance officers are now
appointed to manage banks’ compliance to the policy framework and laws and
regulations, including the AML requirements, she said.
SBP Governor said frequency of financial reporting has improved through
circulation of quarterly accounts and financial reporting standards are at par with
international best practices while credibility of financial information has received a boost
through rotation of auditors after every five years. These improvements have been
reflected in international assessments of corporate governance framework in Pakistan.
She said although considerable progress has been achieved in enhancing corporate
governance practices of banks, SBP is geared towards filling in the remaining gaps.
In this regard, foremost is the need to develop a suitable cadre of professional directors
who are knowledgeable of banks’ affairs as well as independent of their management and
majority shareholders, she said and added allied to this is the need to clarify and
strengthen directors’ fiduciary duties to act in the interests of the bank and all of its
stakeholders. It is also essential for banks to provide sufficient time and information to
directors to prepare for Board meetings, structure Board meetings so as to allow ample
time for discussion and establish appropriate criteria for assessing and improving
performance of directors, including independent directors. To raise awareness on these
and related aspects, SBP is working towards issuing comprehensive corporate
governance guidelines for banks.
Dr Akhtar pointed out that Pakistan’s corporate and financial sectors present
corporate governance issues peculiar to complex ownership and group structures and that
to address such corporate governance issues, there is a need for group supervision by the
regulators. As regard the banking supervision, SBP is working towards introduction of
consolidated supervision whereby it will not be monitoring banks as a stand-alone entity
but rather as part of the entire banking group. “This will help to evaluate the strength of
the entire group and to mitigate risks arising from group companies,” she said.
She said the State Bank has recently launched a survey of banks to assess their
corporate governance practices. The survey will help to identify areas for reform in the
regulatory framework as well as its implementation by banks and its results will be a key
input in further improving the corporate governance framework for banks, she added.
While concluding her speech, Dr Akhtar asserted that no amount of regulatory
intervention can fully institutionalize corporate governance unless Boards and senior
management of banks appreciate the value addition of corporate governance to their
productivity and competitiveness. In this context, banks should strive to build a
reputation for honest and fair dealing while interacting with their internal as well as
external stakeholders.
“Good corporate governance is essential in establishing an attractive investment
climate characterized by competitive companies and efficient financial markets, she said
and added it is imperative that Pakistan’s banking sector develops and implements good