BANK LICENSING, SUPERVISION AND …

1 In line with the objectives and commitments enshrined in the mid-term Monetary Policy Statement regarding the issuanceof certain guidelines to the Banking Sector and the public at large, I hereby issue two guidelines as follows:1. bank licensing , SUPERVISION and Surveillance -2. bank licensing , SUPERVISION and Surveillance -Corporate GovernanceMinimum Internal Audit Standards in Banking InstitutionsBANK licensing , SUPERVISION AND SURVEILLANCECORPORATE GOVERNANCEG uideline No. 01-2004/BSD1 INTRODUCTIONPREFACE2 SOUNDCORPORATEGOVERNANCE3 IMPLEMENTATIONOF THEGUIDELINE4 EFFECTIVEDATE1Dr. DhliwayoBank licensing , SUPERVISION & Surveillance,Exchange Control & Anti - Money LaunderingDeputy Governor GovernanceThe Guideline is issued under the authority of section 45 of the Banking Act [Chapter 24: 20].

2 This Guideline applies to all banking and non banking institutions. Wherever the term " bank (s)" or "banking institution(s)" is used in theguideline, it shall also be read to include non- bank financial institutions that are licensed and supervised by the Reserve bank includingBank Holding Guideline covers a variety of governance related issues. However should there be additional areas arising out of the particularcircumstances of the bank that merit coverage, the board will be responsible for ensuring that relevant governance systems and practicesare an independent function that identifies, assesses, advises on, monitors and reports on the institution'scompliance risk, that is, the risk of legal or regulatory sanctions, financial loss, or loss to reputation an institution may suffer as a result ofits failure to comply with all applicable laws, regulations, codes of conduct and standards of good practice.

3 '' means a non-executive director who is not a shareholder or a representative of a shareholder, hasnot been employed by the banking institution and or bank holding company in any executive capacity for the preceding three financialyears, and has no significant contractual relationship with, or interest in, the banking institution and or bank holding an individual not involved in the day-to-day management and not a full time salaried employee of abanking institution or of its subsidiaries. An individual in the full time employment of the bank holding company or its subsidiaries, otherthan the institution concerned, would also be considered to be a non-executive director of the institution concerned, unless such individual,by his conduct or executive authority, could be construed to be directing the day to day management of the institution and its any company, co-operative, private business corporation, syndicate orassociation of persons in which the individual has a significant interest, or is the largest single shareholder.

4 Including any person who hasentered into an agreement or arrangement with the first mentioned person, relating to the acquisition, holding or disposal of, or theexercising of voting rights in respect of shares in the banking institution in any (i) subsidiary or holding company and any other company of which thatholding company is a subsidiary, (ii) associate of the following terms used in this Guideline shall be taken to have the meaning assigned to them hereunder.'Compliance Function'Independent Non-Executive Director'Non-Executive Director''Related Interest' in relation to an individual'Related Interest', in relation to a company,Wherever the word "he" appears it shall be taken to include she and vice (a) RequirementsPublic confidence is the cornerstone of astable banking system.

5 As the custodian ofpublic funds, the management of a bankinginstitution must exhibit impeccable integrityand professionalism in their conduct so as toengender public confidence in the safety oftheir deposits. With the broadening anddeepening of the country's financialinfrastructure, the need for an effective boardof directors to assume full responsibility forthe overall management of each and everybanking institution is more crucial now thanever of a bank 's special position of trust inthe national economy, corporate governanceis a matter of paramount importance.

6 Banksare highly leveraged institutions, with most oftheir funds coming from depositors andcreditors. They provide basic financialservices to the public, financing tocommercial enterprises, and access to thepayments system. Increasing globalisation offinancial markets, emergence ofconglomerate structures, technologicaladvances and innovations in financialproducts have added to the complexity of riskmanagement in the banking sector. For thesereasons, the quality of corporate governanceexpected of banking institutions is a banking and financial sectorperspective, corporate governance involvesthe manner in which the business and affairsof individual institutions are governed bytheir boards of directors and seniormanagement, affecting how bankinginstitutions:set corporate objectives (includinggenerating economic returns toowners);set risk management policies andprocedures.

7 Ensure that the day-to-dayoperations of the business are carriedout efficiently and with integrity;protect the interests of depositorsand other recognized stakeholders;align corporate activities andbehaviour with the expectation thatthe banking institutions will operatein a safe and sound manner; and incompliancewith applicable lawsand regulations;implement corporate values, codesof conduct and other standards ofappropriate behaviour and systemsused to ensure compliance with theaforementioned;articulate corporate strategy againstwhich the success of the overallenterprise and the contribution ofindividuals are measured;clearly assign responsibilities anddecision-making authorities,incorporating a hierarchy of requiredapprovals from individuals to theboard of directors;establish mechanisms for interactionand co-operation amongst the boardof directors, senior management andthe auditors.

8 Implement strong internal controlsystems, including internal andexternal audit functions, riskmanagement and compliancefunctions and other checks andbalances, independent of businesslines;monitorrisk exposures whereconflicts of interest are likely to beparticularly great, includingbusiness relationships withborrowers affiliated with thebanking institution, largeshareholders, senior management, orkey decision makers within theinstitution;offer financial and managerialincentives in the form ofcompensation, promotion andrecognition to senior management,business line management andemployees; andimplement appropriate informationflows internally and to the following have significant implicationson corporate governance: -Good corporate governancestructures promote effectiveidentification, measurement,monitoring and management of allmaterial business risks.

9 Bankinginstitutions differ from mostcompanies in terms of their natureand range of their business risks, andthe adverse consequences that wouldfollow if these risks are poorlymanaged. Banking institutions face awide range of risks, many of themcomplex in nature. These risksinclude credit risk, market risk,compliance risk, reputational risk,settlement risk and businesscontinuity risks. If the risks arepoorly identified and managed, theyexpose the institutions to institutions are required tocomply with a large number ofregulatory requirements includingprudentialgovernance refers to the processesand structures used to direct and manage thebusiness and affairs of an institution with theobjective of ensuring its safety and soundnessand enhancing shareholder value.

10 The processand structure define the division of power andestablish mechanisms for achievingaccountability between board of directors,management and shareholders, whileprotecting the interests of depositors andtaking into account the effects on otherstakeholders, such as creditors, employees,customers and the and variousreporting obligations. There is,therefore, a need for the corporategovernance framework to includesystems for ensuring that allstatutory and regulatoryrequirements are being adhered toand highlight potential or actualbreaches if and when they essential complement to soundcorporate governance is theimplementation of robust financialdisclosure requirements forcorporates and banking disclosure is essential as ameans of strengthening theaccountability of directors andsenior management and enhancingthe incentives for risk is also essential for marketpar