The importance of integrity in the monetary and financial systems, a conducive environment for private sector–led economic growth and an effectively functioning market economy cannot be overemphasised. In the age of globalisation, integrity in the monetary and financial systems has become an international concern. Many steps have therefore been taken at the international level to preserve the integrity of the monetary and financial systems and strengthen the effectiveness of regulatory bodies.
A key element of transparency is the timely availability of accurate, comprehen-sive and detailed information on who makes decisions, how they are made, the
Mauritius has taken steps to institutionalise arrangements for ensuring bipartisanship in the discussion of the auditor general’s report in parliament
objectives being pursued, the outcomes expected and how the structures are con-stituted, operate and relate to each other.
An important international initiative to address transparency in the global mone-tary and financial system is the Financial Stability Forum, which regularly brings together central bank governors, finance ministers and other financial regulators to exchange information and ideas on how to improve international financial stability.
The forum adopted key standards for sound financial systems that are now univer-sally accepted as critical for good practice.
In addition, several international donors, notably the IMF and the World Bank, have been providing countries assistance to strengthen their monetary and financial sys-tems. In April 2002 a group of donors, consisting of the IMF, the World Bank, the U.K. Department for International Development, the Canadian International Devel-opment Agency and Switzerland’s State Secretariat for Economic Affairs estab-lished the Financial Sector Reform and Strengthening Initiative to provide financial and technical assistance to developing countries that enables them to engage in comprehensive institutional reforms that strengthen and significantly improve their monetary and financial systems.
Progress in enhancing transparency
Several African countries have increased the transparency of their monetary and financial systems. However, while most of the central banks in Africa have independence and autonomy on paper, in practice their independence is sharply curtailed. This and the weak capacity of the regulatory and supervisory institutions have limited the effectiveness of these institutions.
The Bank of Botswana ensures transparency through the annual publication of a monetary policy statement that outlines the objectives and targets of its monetary and anti-inflation policies. Adjustments to the Bank rate are publicly announced, explained and justified. The exchange rate policy is also fully explained and justi-fied, and information is made available on the basket of currencies, but the exact weight of the different currencies used to calculate the exchange rate is not speci-fied. The Bank of Bostwana requires commercial banks and credit institutions to A key element of
transparency is the timely availability of accurate information on who makes decisions, how they are made, the objectives being pursued, the outcomes expected and how the stuctures relate to each other
Table 2.3 Expert opinion on the effectiveness of the legislature in holding the executive accountable
Share of experts that said, “The Legislature is always or mostly effective in holding the Executive accountable”
More than 0% of experts surveyed –0% of experts surveyed 0–% of experts surveyed Less than 0% of experts surveyed
Benin, Ghana, Mauritius, Namibia and South Africa
Botswana, Gabon, The Gambia, Lesotho, Mali, Morocco, Mozambique, Niger, Nigeria, Senegal and Tanzania
Burkina Faso, Cameroon, Chad, Egypt, Malawi, Swaziland, Uganda, Zambia and Zimbabwe
Ethiopia and Kenya
Source: ECA governance survey of experts
provide it with, and disclose to the public, details of all charges payable for the operation of accounts and other services rendered.
Responsibility for formulating and implementing monetary policy in Lesotho rests with the Central Bank of Lesotho. In 1998 the Exchange Rate Policy Technical Committee was established to conduct technical analysis and recommend mon-etary and exchange policies to the Central Bank. The committee also spearheads the implementation of all monetary and exchange policy decisions of the bank’s board. The bank consults and deliberates with the Ministry of Finance in order to ensure transparency and accountability. It also publishes daily and weekly eco-nomic indicators as well as quarterly and annual reports that are widely available to the public and that contain information on its activities and the performance of various sectors of the economy.
The Bank of Mauritius ensures transparency in its conduct of monetary policy by informing the public of the goals and instruments of policy and any changes in monetary policy procedures. The legal, institutional and economic framework of the bank, the objectives and rationale of policies and data and information on monetary and financial policies are available to the public in an understandable, accessible and timely manner, including on the bank’s website. Its financial statements contain many details on the Bank’s financial operations, and information on the operation of commercial banks, offshore banks and non-bank deposit-taking financial insti-tutions are regularly published. Finally, the Central bank participates in the IMF’s General Data Dissemination System.
Namibia has sought to promote transparency in its monetary and financial systems by adhering to and fully implementing the IMF’s code of good practices on transpar-ency. The Bank of Namibia formed a committee to examine the degree to which its practices conformed to the requirements of the code. The committee concluded that Namibia was already in compliance with many of the code’s provisions and rec-ommended several measures for areas not in compliance that were later adopted, including disclosing information on the boards of all organisations on which the governor, deputy governor and senior officials of the bank serve; posting particulars of its tender policy and putting the terms of reference of the overnight credit facility on the website; and publishing monthly information on the bank’s foreign exchange reserve assets, liabilities and commitments. It also signed a Memorandum of Un-derstanding on the consultative framework with the Namibia Financial Institutions Authority and included the number of grievances and complaints reported to the bank on unfair banking practices and the action taken on them in the bank’s annual report.
The South African Reserve Board announces its inflation target and the time frame for achieving it and is held responsible if the target is not realised. The board issues a Monetary Policy Statement after each meeting of the Monetary Policy Committee, holds a Monetary Policy Forum for all interested parties and stake-holders to express their views on monetary policy, publishes semi-annually the Monetary Policy Review, which reports on and explains the board’s actions and monetary developments in the country and internationally that could affect inflation,
The Bank of Mauritius ensures transparency in its conduct of monetary policy by informing the public of the goals and instruments of policy and any changes in policy procedures
and provides regular reports to parliament on the monetary policies and activities of the board.
Monetary policy in most of the French-speaking countries in West and Central Africa are under the control of the Central Bank of West African States and the Bank of Central African States. These are integral parts of the West African Economic and Monetary Union, comprising Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo, and the Central African Monetary Union, which com-prises Cameroon, Central African Republic, Chad, Republic of Congo, Gabon and Equatorial Guinea. These two central banks and monetary unions originated in the colonial period as part of the Franc zone. There was a fixed exchange rate between the French franc and the currencies in the two monetary unions, and France guar-anteed their free convertibility. France essentially determined the monetary policies of these two monetary unions and central banks, an arrangement that gave a high degree of integrity and stability to the monetary systems. Since 1999 the currencies of French-speaking West and Central Africa have been pegged to the euro, but France maintains a dominant role in monetary policies through its membership in the governing body of the two central banks.
In contrast with the above success stories, the monetary system in Ethiopia in gen-eral lacks transparency, with monetary policies not communicated, explained or justified to the public. The financial policies of the National Bank of Ethiopia are not made known to other financial institutions or the general public. And the credit system of commercial banks is not very clear. Efforts have been made to reform the financial sector since 1992/93 as part of the measures to create a market-based economy, including proclamations 84/1994 and 86/1994, which provided for the licensing and supervision of banks and insurance companies, defined the role of the central bank in supervising and regulating the financial system and authorised private banks and other financial institutions for the first time since the 1980s.
Central bank’s independence
In many countries a major threat to monetary stability and the overall integrity of the monetary and financial systems is excessive borrowing by the government and intervention in the conduct of monetary and financial policies for political or other short-term reasons. To counter this threat, the central banks and other agencies that control monetary policies and regulate and supervise banks and other finan-cial institutions must enjoy a high degree of independence and autonomy from the executive.
Most African countries have adopted provisions either in their constitutions or in the legislation or acts creating their central banks that grant them autonomy and pendence. In reality, however, many central banks enjoy less autonomy and inde-pendence than is provided for in their constitutive documents. Some powers may be reserved for the government, central banks may have to consult the government on certain matters, the government may have financial leverage over the banks, real and effective limits on government borrowing may not exist, and perhaps most important, the head, senior officials and members of the board of central banks may be appointed by the government. This raises fundamental questions of institutional Central Banks and other
agencies that control monetary policies and regulate and supervise banks and other financial institutions must enjoy a high degree of independence and autonomy from the executive
checks and balances, the role and accountability of the executive and respect for the rule of law.
The situation in Botswana is unclear, even though the Central Bank seems to take decisions independently in areas under its competence. The governor of the bank is appointed by the president, and the bank falls under the purview of the minister of finance and development planning, who appoints the members of the board.
In addition, according to the Bank of Botswana Act of 1996, certain powers are reserved, such as the power of the president to determine the par value of the national currency on the advice of the minister and in consultation with the bank. In practice though, the president has always accepted the advice of the bank.
The Central Bank of Egypt has the legal autonomy to manage its affairs and to control, regulate and implement monetary and credit policies. This power is vested in the bank’s board of directors. At the same time, though, the governor of the bank and deputy governors are appointed for renewable four-year terms by a presidential decree, on the advice of the prime minister, who also fixes their remuneration. The board has representatives of the Ministry of Economy, Finance and Planning as well as two chairs of banks, two representatives of the private sector and others. The central bank suffers from lack of clarity in the role and responsibilities of the chair, who is the governor of the bank, and those of board members, who represent other institutions.
The document establishing the National Bank of Ethiopia describes it as an autono-mous institution, but, its governing board includes the ministers of finance, trade, and economic development and other members appointed by the government.
Under these circumstances, it is difficult to see how the bank could have any au-tonomy and independence from the government. Case in point: even though the Monetary and Banking Act of 1994 limits government borrowing, the bank may still be required to finance government deficit beyond the specified limit.
The statutory instruments establishing the Bank of Ghana contain enough provi-sions to ensure its independence. The reality, however, is different. The bank needs narrower macroeconomic objectives to be more focused, adequate capitalisation to reduce dependence on the Treasury or Ministry of Finance for operating funds, longer tenure for the governor, deputies and members of the board of directors and legal limits on how much the bank can finance the government’s budget.
The Central Bank of Kenya has little autonomy and independence because the governor is appointed and can be removed by the government. A blatant case of government intervention in the bank’s activities occurred when the bank was pres-sured to print more money in time for the 1992 general elections.
The Central Bank of Lesotho is an autonomous body that works closely with the executive branch of the government. The bank is required to consult or hold deliberations with the Ministry of Finance to ensure transparency and accountability.
In addition, the ministry’s permanent secretary attends all meetings of the bank.
This exchange is likely to create confusion and doubt about the actual degree of the bank’s independence.
In many countries, central banks have little autonomy and independence because the governor is appointed and can be removed by the government
In Mauritius the governor and the managing director of the Bank of Mauritius are appointed by the prime minister, who also appoints the other directors of the bank on the recommendation of the minister of finance. The president or prime minister can remove any of these officials from office in case of insolvency, misconduct or other crimes or lapses. The government recognises the need for improvement and is in the process of amending the Bank of Mauritius Act to give the bank greater independence in formulating and implementing monetary policies.
Namibia’s constitution and the Bank of Namibia Act of 1990 provide for the es-tablishment of the Bank. Neither document explicitly mentions the bank’s inde-pendence, although in practice it has independence in administrative and financial matters. Because, the president appoints the governor and the deputy governor, on the advice of the minister of finance, the overall independence of the bank is rated as moderate.
The independence of the Central Bank of Swaziland is compromised to some ex-tent by the fact that the governor is appointed by the king, who has an important role in the political life of the country. Not surprisingly, there are reports that the cen-tral bank is subject to political and commercial influence.
Regulatory and supervisory bodies
Effective regulation and supervision of banks and other financial institutions are crucial to ensure stability and credibility in the financial system. The main objectives of regulating and supervising banks and other financial institutions are proper valu-ation of assets, prompt recognition of losses, early corrective measures to prevent insolvency and prompt action to deal with failures. The Basel Committee on Bank-ing Supervision identified the preconditions for effective bankBank-ing supervision in its Core Principles for Effective Banking Supervision.1 As is often the case, the problem does not lie with formulating and adopting principles, rules, procedure, codes and standards of good and internationally accepted behaviour. The problem is how to implement them at the national level.
Several African countries have improved their regulatory and supervisory bodies, but limited institutional capacity has been a major stumbling block to more prog-ress. The arrangements for regulating and supervising banks and other financial institutions in Botswana are still evolving, with several bodies in the government, central bank and other agencies sharing overlapping responsibilities and interests in this area. For example, while the Bank of Botswana regulates and supervises the financial institutions it licences, mainly commercial banks, the Ministry of Finance and Development Planning is responsible for development financing institutions, insurance companies and pension funds, and there is a separate body for the stock exchange. Some of these regulatory authorities, such as the Bank of Botswana, have independence and credibility, but others, such as those responsible for non banking financial institutions, lack independence. On the whole, the banks are well regulated and supervised, and efficiency in the banking system improved between 1997 and 2001.
Ethiopia has been trying to reform its financial sector since 1992/93 by improving its legal, institutional and regulatory framework. Major steps in this direction were the The problem does not lie with
formulating and adopting principles, rules, procedures, codes and standards of good and internationally accepted behaviour, but implementing them at the national level
adoption of proclamations 84/1994 and 86/1994, which provided for the licensing and supervision of banks and insurance companies, authorised private entry into the financial sector and defined the regulatory and supervisory role of the National Bank of Ethiopia. Proclamation 40/1996 provided for the licensing and supervision of micro finance institutions and established the legal framework for their opera-tions. The National Bank of Ethiopia is empowered to licence and supervise banks, insurance companies and other financial institutions and to issue directives on cred-it transactions. To enable the bank to perform cred-its duties effectively, the Supervision Department was created in the 1990s, but it has a serious shortage of specialised workforce. Consequently, regulation and supervision of the financial sector is not yet effective.
The Bank of Ghana has made some progress in performing these functions, and the proliferation of new banks and other financial institutions has resulted in greater competition, improved efficiency and the introduction of new and improved financial products. But, the financial system is still weak, due to the operation of unlicensed foreign exchange dealers and the hoarding and conservation of assets in foreign currency because of the lack of confidence in monetary stability, which the bank has been unable to control.
Several agencies are responsible for regulating and supervising the financial sector in Kenya: the Central Bank of Kenya, the Capital Markets Authority, the Commission of Insurance and the Retirement Benefits Authority. All of these institutions report to the Treasury. The Central Bank of Kenya has, on the whole, successfully regu-lated and controlled the banking system, but it has not been effective in controlling non performing loans in commercial banks or in supporting the small and unsta-ble banks that have recently threatened the banking system. The Capital Markets
Several agencies are responsible for regulating and supervising the financial sector in Kenya: the Central Bank of Kenya, the Capital Markets Authority, the Commission of Insurance and the Retirement Benefits Authority. All of these institutions report to the Treasury. The Central Bank of Kenya has, on the whole, successfully regu-lated and controlled the banking system, but it has not been effective in controlling non performing loans in commercial banks or in supporting the small and unsta-ble banks that have recently threatened the banking system. The Capital Markets