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Lawyers question Reserve Bank of Malawi Governor role

Wilson Banda

Lawyers that specialise in financial matters have faulted Reserve Bank of Malawi (RBM) governor, for flouting good governance principles.

The RBM chief currently acts as both chief executive officer and chairperson. The current board of the central bank has eight members, of which three are in also management.

The International Monetary Fund (IMF) is one of the institutions that promote good governance in central banks and, in a December 2019 paper titled ‘The Role of Board Oversight in Central Bank Governance: Key Legal Design Issues’, it acknowledged that achieving that is always a challenge.

“Central banks are complex and sophisticated organisations that are challenging to manage,” the IMF says, adding that board oversight of central banks is “a central feature of sound governance. This form of oversight is the decision-making responsibility through which an internal body of the central bank— the Oversight Board— ensures that the central bank is well-managed.”

The Bretton Woods institution says central banks are complex institutions that have a sovereign, complex public policy-making mandate (the central) and an equally complex balance sheet (the bank).

“In that regard, central banks are different from (a) other governmental agencies, which often have public policy-making mandates but typically do not have complex balance sheets, and (b) commercial banks, which have complex balance sheets but do not have to deploy these to pursue public policy objectives. This makes central banks challenging organisations to manage.

“The complexity of managing central banks has recently increased due to the expansion of many of their balance sheets in response to the Global Financial Crisis and its aftermaths, and the eventual need for some degree of unwinding. To ensure sound and effective decision-making, central banks need to have robust governance arrangements. The importance of effective governance arrangements for central banks has been explicitly recognised under two policies established by the IMF’s Executive Board. The first such policy pertains to Safeguards Assessments, which, especially since the 2010 review, has stressed the importance of central bank governance. The second policy is the one on governance and corruption, approved by the Executive Board in 2018. For central banks, the cost of governance failures is high,” the IMF indicates.

In further indicates that poor governance in central banks may cause reputational damage, and that failures can have a severe financial impact by giving rise to losses which could amount to percentage points of gross domestic product.

It adds that this may lead to excessive external oversight by the political bodies of the State, with ensuing reduced autonomy, a constrained mandate and ultimately policy ineffectiveness.

“In other words, sound governance of central banks has a direct macro-economic relevance. Effective Board oversight plays a critical role in ensuring central banks’ sound governance. We define board oversight as the decision-making responsibility through which an internal body of the central bank—the Oversight Board—ensures that the central bank is well managed. As the highest decision-making bodies of central banks, oversight boards are the “last line of defence” in the broader internal governance structure of the central bank,” it says.

And, as if taking a cue from the IMF, lawyers that specialise in financial matters in Malawi are piling pressure on RBM to follow good governance principles, saying failure to do so could have negative consequences.

The lawyers raised the concern during an RBM and Malawi Law Society (MLC) Continuous Professional Development Financial Services Sector meeting in Salima District on Friday.

Among other things, the financial lawyers argued that doubling as CEO and Board Chairperson was against the dictates of good corporate governance, which promotes checks and balances.

MLS President Patrick Mpaka told The Daily Times on the sidelines of the meeting that “it is an issue that needs to be looked into “and a proper balance” must be achieved.

He, however, said central bank officials indicated to the lawyers that the positions-doubling was one way of making sure that the holder is someone who decides on issues while understanding the direction the central bank is taking.

But Mpaka said MLS suggested that there should be strict compliance on the issue of qualification of RBM governors to ensure qualify of deliverables.

“…and if the number of non-executive directors is kept higher than the number of executive directors, then maybe corporate governance standards can be met for the central bank.

“Otherwise it is an issue that needs to be looked into and a proper balance [should be) reached,” Mpaka said.

RBM Deputy Governor for Economics and Regulation Grant Kabango argued that, “elsewhere in the world and in many countries”, the governor is also the chairperson because the central bank is “peculiar and is not like a central bank.”

“Take it that central banks are a different animal and might, therefore, not be treated similar to commercial banks.

“There are quite a number of issues of national interest that he, as head of management of the central bank, has to take to the board and own [up to],” Kabango said.

He went on to indicate that the issue of doubling positions would continue being debated, but described doubling as an international best practice.

Kabango also said the legal fraternity provides a lot of support to the financial sector all over the world, including in legal representation and crafting of necessary laws.

The deputy governor, therefore, said the two sides needed to engage and exchange notes because the financial sector was dynamic and the registration framework changes over time.

On the day of the meeting, there were presentations on issues affecting the financial sector, which included a paper presentation on Insights into ‘Central Banking Law’ that looked at the RBM Act 2018.

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