Hands off Bank of Botswana, IMF Tells Govt

The International Monetary Fund (IMF) has made recommendations to Botswana’s Ministry of Finance to steer clear of the Bank of Botswana’s (BoB) operations. The Bretton Woods Institution made the strongly-worded recommendation after conducting Botswana’s Financial Stability Assessment. “The current allowances for Ministerial representatives on the BoB’s Board, and the involvement of the Minister in licensing and supervisory appeals, could undermine BoB’s operational independence.” It warns in a report released this month. “Remaining provisions suggest that the BoB has to refer to the [ihc-hide-content ihc_mb_type="show" ihc_mb_who="3,4,2,1" ihc_mb_template="3" ] MoF (Ministry of Finance) in order to exercise direct control over some regulatory matters, e.g. interest rate and credit regulations.” “Though there is no evidence that the current allowances under the law have been tested, the material gap in the operational independence of the BoB, relative to Basel norms, may require additional legislative changes to safeguard BoB’s operational independence in supervisory oversight.” Vetting controlling shareholders The report speaks of a need to amend the Banking Act (BA) so that BoB is empowered to vet “significant” and “controlling” shareholders. It notes efforts to that end and acknowledges that Botswana authorities informed IMF staff that the Banking Act is being revised to strengthen the powers of the country’s central bank to vet the significant and controlling shareholders (Section 21). The IMF also calls on the government to “give powers to BoB to supervise banking groups on a consolidated basis; set basis for improved cooperation domestically and cross-border and further develop relationships.” To that end, Botswana authorities indicated that the Banking Act is being revised to empower BoB to supervise a banking group or conglomerate (Section 42 of the revised Banking Act.) The report says the planned revisions to the Banking Act are important to strengthen bank supervision and align the framework with Basel norms and should be considered alongside upskilling for staff in specific areas. Key next steps include strengthening the supervisory approach and tools to develop a risk-based, forward-looking framework that is implemented by supervisors and risk specialists that can identify emerging risks among banks and banking groups that are becoming more complex. The report calls on BoB to play its part in achieving these reforms by articulating the regulatory requirements, limits, and supervisory expectations, including reviewing financial models used by banks in internal risk modelling, liquidity risk, and interest rate risk in the banking book. Corporate governance standards “It (BoB) also needs to develop guidance for banks in other areas, such as credit concentration by industry and geographic location, collateral concentrations, and prudential limit for exposure to a single counterparty or group of an inter-connected counterparty,” it says. The key next steps should also include establishing corporate governance standards to include regulations that facilitate ongoing oversight of board accountability for promoting corporate culture and values through codes of conduct and conflict of interest policies, as well as an upscaled regulation for transactions with related parties. Other key steps should entail introducing consolidated supervision. The IMF notes that planned legal reforms that give powers to BoB for consolidated supervision supported by enhancements to internal procedures for monitoring the financial conglomerates would be beneficial. “Once the revised BA comes into force, the planned circulation of Guidelines on Supervision of Financial Conglomerates should proceed as a priority,” says the report. On other related issues, the IMF points to a need to develop a framework for country and risk transfer. It notes that to effectively manage country and transfer risks, a comprehensive approach to measure these risks is needed. “Weak financial performance by some state-owned financial institution (SOFIs) is a concern and should be addressed,” it says, noting that the oversight of SOFIs by the government and respective line ministries should be strengthened. “To overcome the lack of government oversight functions in respect to SOFIs, the MoF should create a unit with adequate capacity and authority, with a particular focus on OECD guidelines on corporate governance of SOEs (including on the selection process for the Board and management), says the report. Independent oversight “The government should also refrain from directly intervening in operational decisions for the Development Finance Institutions (DFIs),” it says and instead recommends independent oversight for all SOFIs, subject to proportionality rules, either by BoB or NBFIRA (Non-Banking Financial Institutions Regulatory Authority). The report says the separation of regulation and supervision from the ownership function and respect for the independent judgment of the prudential supervisor is essential to realise the benefits of prudential supervision. “SOFIs will need to operate on a financially sustainable basis with properly defined objectives and mandates,” it says. “It is important to preserve the independence of a supervisor by minimising political interference to achieve financially unsustainable policy objectives.” In this context, the report notes, authorities may also consider introducing a regulatory framework for SOFIs, including for licensing, regulation and supervision. As a prelude to privatisation, the report calls on the government to “give full supervisory authority to BoB for statutory banks and license these institutions as BoB still does not have full authority over statutory banks. It does not have powers to license statutory banks but derives its power to supervise them from Section 3 of the revised Banking Act (BA)”. [/ihc-hide-content]

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