When Banks Fail

An analysis of the Banking Act (Chapter 24:20)

INTRODUCTION 

In 2015, the Banking Amendment Act (Act 12 of 2015) brought with it various amendments to the Banking Act (Chapter 24:20), key among these being the introduction of principles of corporate governance, as well as extending the regulatory role of the Reserve Bank to companies that hold significant shareholding in banking institutions. In previous years, the country had experienced the failure of several banking institutions, some of these due to weak corporate governance structures, and others due to misuse of depositors’ funds. The 2015 Amendments sought to close those gaps, and tighten accountability of shareholders, directors and principal officers of banking institutions.  

This article seeks to provide an analysis of the provisions of the Banking Act as they relate to board composition, corporate governance, shareholding, and the safeguards put in place to mitigate against bank failure. The article concludes that these measures adequately protect against bank failure. The article motivates for co-regulation in the financial services sector, to enable regulators to leverage on each other’s strengths, thus protecting the transacting public even further. 

SHAREHOLDING IN BANKING INSTITUTIONS 

Sections 15A and 15F of the Banking Act (as amended) introduce limitations on shareholding in banking institutions. The sections state that only a financial institution, or registered controlling company, or an approved body corporate can hold more than 25% shares in a banking institution. Individuals are prohibited from holding more than 25% shareholding, and section 15B prohibits the acquisition of more than 5% shareholding by an individual without the approval of the Reserve Bank. The result of these Amendments is to bring controlling companies of banking institutions into the regulatory framework of RBZ. Therefore, the Amendments discussed below relating to board composition, corporate governance and responsibilities of directors and principal officers apply not only to banking institutions but also to controlling companies.

BOARD COMPOSITION 

Section 18 of the Banking Act mandates banking institutions to set up Boards of directors that have more than five directors, with 60% expected to be non-executive, and the majority of the non-executive directors being independent directors. The section goes further to require that the Chairman of the Board and the Chairman of every committee of the Board must be an independent non-executive director. The quorum for Board meetings is 60%, provided that the officers of the bank do not make up the majority of those attending. The section disqualifies any person from being a director if he was previously a director or principal officer of a banking institution that was wound up or liquidated or placed under judicial management or curatorship due its failure to pay its debts or for non-compliance with regulatory requirements. There are other disqualifications that are listed in section 19, including the limitation of the number of Board appointments, the limitation on tenure, and the imposition of a five-year cooling off period for a non-executive director prior to reappointment. 

In section 20, the Banking Act requires that a banking institution and its controlling company each appoint their own CEO, CFO, Compliance Officer, Internal Auditor, Company Secretary, and other prescribed officers. These principal officers are prohibited from holding more than two offices, except on a temporary basis and with the approval of RBZ. It is prohibited to appoint any persons to these positions if they hold more than 5% shares directly or indirectly in a banking institution or controlling company. 

The underlying theme in these provisions is that a person who is appointed as a principal officer or to the Board of directors of a banking institution must carry the role in earnest, and dedicate sufficient time to his duties. Further, banking institutions must have more independent non-executive directors so that there is adequate independent oversight on the business of the bank. In complying with these provisions, a banking institution must strike a balance between the appropriate size of the board on one hand, juxtaposed with the size of the operations of the institution on the other hand.

RESPONSIBILITIES OF DIRECTORS AND PRINCIPAL OFFICERS 

The Banking Act in section 20A outlines the responsibilities that directors and principal officers of banking institutions carry in the exercise of their functions. They have a duty to act in good faith for the benefit of the bank and the depositors; they must avoid any conflict of interests; they must possess the knowledge and skill required for the role they hold; they must exercise due care in the conduct of their responsibilities; and they must observe the prudential standards issued by RBZ. 

The section goes further to state that where a banking institution is placed under curatorship or judicial management or is wound up and it is discovered that the business of the bank was carried out without regard to the Reserve Bank’s prudential norms and standards or good corporate governance principles, then every person who was a director or principal officer when this was happening, and every shareholder who was knowingly a party to the conduct of business in this manner is jointly and severally liable with the banking institution for any loss or damage suffered by creditors, including depositors. The Section empowers RBZ and the Deposit Protection Corporation to institute legal proceedings against a director, principal officer or shareholder of a banking institution for any liability incurred in this regard, or in a fraudulent manner as outlined in the Companies and Other Business Entities Act. 

These provisions serve to buttress the importance of the role of directors and principal officers in the conduct of banking business. The directors and principal officers have fiduciary duties to fulfil while they hold office, and any failure to do so results in personal liability to creditors and depositors. Further, section 18 states that any person who is a director or principal officer of a bank that has been wound up or placed under curatorship or judicial management is disqualified from ever being appointed to such office in future. 

CORPORATE GOVERNANCE

The Banking Act introduces principles of corporate governance that every banking institution and every controlling company must establish, which are in line with the prudential standards prescribed by RBZ. It is mandatory that these principles are implemented in the bank’s internal policies and procedures, demonstrating that there is commitment by the principal officers to adhere to corporate behaviour that is universally recognised and accepted as correct and proper. 

CAN A BANK FAIL? 

From the time the Banking Amendment Act was promulgated to date, there has been no reported bank failure. This can certainly be attributed to the Amendments outlined above, among other things.

Firstly, the shareholding of a banking institution is restricted, and a company that holds more than 25% shareholding must be approved by RBZ. All controlling companies immediately fall under the regulatory framework and oversight of RBZ.

Next, the composition of Boards of banking institutions ensure that the majority of the directors are independent non-executive directors, who are not involved in the day-to-day affairs of the bank; they provide independent oversight on the running of the bank. In addition, the restrictions on tenure of office and number of directorships assist in ensuring that principal officers and directors of banking institutions dedicate sufficient time and expertise to their roles. This is reinforced further by the corporate governance principles.

Finally, there is direct personal liability on each director, principal officer and shareholder where a banking institution is placed under curatorship or judicial management or is wound up. There is also risk of disqualification faced by such director or principal officer from future appointments to Boards of other banks. 

Therefore, if a banking institution is to fail today, the failure would be attributed to the conduct of business by the principal officers, board of directors, and shareholders, and not the Banking Act. The Banking Act has a plethora of safeguards that if implemented fully, pre-empt any bank failure, together with the directives and circulars issued to banking institutions by RBZ. 

A CASE OF CO-REGULATION

The Banking Act in section 4D requires that RBZ cooperates with other regulators in the exercise of its functions, to ensure efficient and coordinated regulation and development of the financial services sector of Zimbabwe. The RBZ therefore may request information from or share information with the Registrar of Companies, the Insurance and Pensions Commission, the Registrar of Collective Investment Schemes, the Securities and Exchange Commission, the Registrar of Asset Managers and the Director of the Bank Use Promotion and Suppression of Money Laundering Unit. In fact, many banking institutions are subject to various regulators as they offer insurance products regulated by IPEC, and investment advisory and trustee services regulated by SEC Zimbabwe. 

The advent of the Fourth Industrial Revolution, and the rapid development of financial products and services by non-traditional players or Fintech firms, necessitates the expansion of this cooperation to co-regulation. It is likely that through initiatives that are tested in the RBZ Regulatory Sandbox Framework, the Reserve Bank will rope in other regulatory bodies such as POTRAZ to provide expertise on regulating institutions whose products are cross-cutting into telecoms and ICT. Ultimately, the regulatory bodies in the financial services sector will have to consider converging and crafting a unified regulatory framework that standardises compliance across the sector. 

CONCLUSION

The amendments relating to shareholding, corporate governance and board composition of banking institutions introduced by the Banking Amendment Act (Act 12 of 2015) provide sufficient safety measures, which if implemented fully, deter bank failure. Also, the call for regulatory coordination, cooperation, collaboration, consultation and co-regulation in the financial services sector is more pronounced now than before, due to technological developments ushered in by the Fourth Industrial Revolution.

Author

  • Partner & Head: Banking, Finance and Investment (TITAN LAW) LLB (UCT) MBA (Glouc) Practice Areas: Company Law, Commercial Transactions, Corporate Governance, Regulatory Compliance, Anti-Money Laundering, Securities Exchanges and Instruments, Collective Investment Schemes, Banking Facilities, Securitisation, Debt Collection, Private Equity Investments

Leave a Reply

Your email address will not be published.