Tanzania: New Banking And Financial Institutions Regulation On Corporate Governance

On this legal update, we provide an overview of the new regulation, The Banking and Financial Institutions (Corporate Governance) Regulations, Government Notice No. 767 of 2021. The regulation shall apply to all banks and financial institutions in Tanzania, and it aims at establishing standards for corporate governance process and the structures in all banks and financial institutions.

In summary the Regulation introduces Board of Directors as the governing body of a bank or financial institution and set out the composition of the Board, qualifications and criteria for selection of board members, responsibilities and functions of the board and the senior management, liabilities of the directors and new sanctions for non-compliance that the Bank of Tanzania ("BOT") may impose on banks or financial institutions.

There are 9 Parts to the Regulation, each Part addresses a topic relating to the corporate structure of banks and financial institutions and the Board of Directors.

PART I

Part I of the Regulation provides for the citation, definition of terms and objectives of the regulation. Regulation 3 provides that the Regulation aims to establish standards for corporate governance processes and structures, provide guidance to directors for proper discharge of their fiduciary duties and promote public confidence in banks and financial institutions.

PART II

This Part provides for the establishment of board of directors, it's composition, tenure of office, selection criteria of members and persons not qualified to be appointed as directors in a bank or financial institution.

Establishment of Board of Directors and its composition

Regulation 4 provides for the establishment of Board of Directors which shall be the governing body of the bank or financial institution. The Board shall be composed of five members, two-thirds of whom shall be non-executive. It is also required that at least two members of the Board must be Tanzanians. Members of the Board and Chief Executive Officers shall hold office for a period of ten years. In circumstances where there is a merger or acquisition, the period of tenure of members shall be counted pre and post the merger.

Restriction on Board Members to serve simultaneously in more than one bank

Regulation 5(3) sets out the restriction of a person to simultaneously serve as a Board member or any executive capacity in more than one bank or financial institution in Tanzania except with prior written approval from Bank of Tanzania (BOT).

Committees formed by the Board

The Board has a mandate to form an Audit committee, Credit committee, Remuneration committee and any other committee to carry out oversight role of the Board and other responsibilities.

Restricted Persons to be Directors of a Bank/Financial Institutions

Members of the National Assembly or House of Representatives or councilor of local government authority shall not be appointed as a director of a bank or financial institution.

Obligation to report any vacancy and exceptional events

A bank or financial institution shall notify BOT of any vacancy in post of senior management or member of the Board and any violation of law or stakeholders' interests within 7 days.

PART III

This Part provides for the qualification and selection criteria of members of the board and senior management position.

Criteria for selection of Board Members

A candidate for member of the board and senior management position has to possess the following criteria under Regulation 16:

• The candidate must possess honesty, integrity, diligence, fairness, competence, capability and financial soundness;
• Must possess knowledge, skills, experience and independence of mind in the business and risk profile of bank or financial institution;
• The candidate must be available and have sufficient time to fully discharge his responsibilities;
• The candidate must have a clean criminal record;
• The candidate must not be involved as a member of Board in a bank or financial institution whose registration or licence has been revoked or cancelled or which has gone into liquidation;
• Must have a clean record of any credit accommodation taken by him or his related parties from any bank or financial institution; and
• Must not have a bankruptcy record or suspension of payments with his creditors.

Also, under regulation 17 no bank shall appoint a person in senior management position or a board member without prior approval from BOT.

Obligation to conduct induction and training programs

Under regulation 19, banks are obligated to conduct induction and training programs of its directors and to submit a report on training programs conducted in the previous year to BOT, a month before the end of the year.

PART IV

This part sets out the oversight responsibility of the board, appointment of senior management and approval of strategies and business plans of a bank or financial institution together with the liabilities of directors.

Appointment and Oversight Role

The Board shall be responsible for providing oversight on all affairs of the bank or financial institution including risk management, setting corporate values to be adhered by all employees of the bank and the management; appointing senior management, monitoring their performance in implementing the bank's business strategies and policies and ensuring that there is a succession plan for senior management positions.

Requirement to submit business plans and policies to BOT

The Board shall also approve the bank or financial institution strategies, business plans and policies and submit to BOT such approved plans and policies, within 30 days after the approval.

Liabilities of a director

Regulation 34 provides for the Directors DO'S and DON'TS, and liabilities of a director.

DO'S DON'TS

A director shall be held liable on the following accounts;

• For non-compliance with the undertaking of ensuring the bank operates in a safe, sound and profitable manner;
• For the damage caused by his breach of duty of care to the Bank;
• For non-diligence and negligence of performance of his duties as a director; and
• For any violations of any provisions of Acts or Regulations, a director may be fined, removed from office or disqualified from holding any position or office in a bank/financial institution.

PART V

This part provides for the insider transactions in a bank or financial institution, conditions for credit accommodation and the credit limit to a single insider, aggregate credit limit to an insider and loans to employees of a bank.

Regulation 37 provides Board shall establish, implement and regularly review policies that guide transactions with insiders and their related parties and ensure that all transactions are conducted on terms that would be available to other customers and there is no misappropriation of banks resources

Conditions for credit accommodations to insider

No credit accommodation shall be granted to an insider without prior approval of all members of the Board.

When such credit accommodation is granted, a bank is required to notify BOT within 7 days from the date the credit accommodation was granted.

Regulation 39 provides for the total amount of credit accommodation which any bank may grant to an insider. The credit limit shall be 10% of the core capital of the bank regardless of the type and value of security held.

Furthermore, the bank is restricted to grant credit accommodation to an insider who has ceased to be an insider whose aggregate amount exceeds 25% of the bank's core capital. This credit limit shall not apply after lapse of two years from the date the person has ceased to be an insider.

Restriction on unsecured credit accommodation

A bank or financial institution shall not grant any unsecured credit accommodation to insiders except as set out under regulation 42.

Regulation 42 sets out the limit of loans to employees. A salary advance of any of the bank's employees shall not exceed the annual remuneration of the borrowing employee. Annual remuneration shall be the basic salary together with fixed allowances only paid in cash to the employee. Medical allowances, allowances for attending seminars, meetings or other non-cash benefits shall not be considered as part of annual remuneration when it comes to employees' loan.

PART VI

This part introduces the responsibilities of senior management which includes conducting oversight and risk management and reporting to the Board on bank affairs, performance, breach of risks, changes in business plans and strategies and legal or regulatory concerns.

A member of senior management of a bank or financial institution shall be responsible for the following;

• To provide adequate oversight of those they manage;
• To ensure that the activities of a bank or financial institution are consistent with the business strategy, risk appetite and the policies approved by the Board;
• To implement risk management systems, processes and controls for managing the risks with direction of the Board
• To ensure compliance with laws, regulations and internal policies; and
• Senior management shall report to the Board on any changes in business strategy, bank performance, any breaches of compliance rules, internal control failures and legal or regulatory concerns.

PART VII

This part provides for the management and governance of subsidiary banks/financial institutions and the oversight role of the Board of the parent bank and its responsibilities.

Responsibilities of Board of parent company

The Board of the parent company shall be responsible for;

• Exercising adequate oversight over subsidiary banks;
• establishing a structure and a governance framework with clearly defined roles and responsibilities, including those at the parent company level and at the subsidiary level;
• defining an appropriate subsidiary Board and management structure which takes into account different risks to which the bank and its subsidiaries are exposed;
• assessing whether the group's corporate governance framework includes adequate policies, processes and controls and addresses risks across the business and legal entity structures;
• ensuring the group's corporate governance framework is appropriate enough to identify and address potential intragroup conflicts of interest arising from intragroup transactions;
• assessing whether there are effective systems in place to facilitate exchange of information among the entities within the group; and
• ensuring the group has sufficient resources to monitor compliance of subsidiaries with all applicable legal, regulatory and governance requirements.

PART VIII

This Part introduces compensation of senior management and development of compensation policies and systems.

Regulation 50 sets the obligation of the Board to approve the compensation of senior management and oversee development and operation of compensation policies, systems and related control processes by the management.

The Board shall ensure that the compensation to be paid is evaluated qualitatively and quantitatively.

PART IX

This is the final Part with general provisions on restrictions set on individual shareholders in being part of the management of the bank and the sanctions that BOT can impose on any bank/financial institutions for any non-compliance.

Regulation 52 provides that an individual shareholder with 5% shares or more shall not form part of management of the bank. An individual shareholder with 10% shares and more shall not be appointed as chairperson or deputy chairperson of the Board. Furthermore, a shareholder who had significant interest in a failed bank shall not have significant interest in a bank.

Sanctions by BOT

BOT may impose on any bank or financial institution any of the following sanctions for non-compliance;

• a penalty of the amount to be determined by BOT on directors and employees of a bank/financial institution;
• prohibition from declaring or paying dividends;
• suspension of the privilege to issue letters of credit or guarantee;
• suspension of access to credit facilities of the Bank;
• suspension of lending and investment operations;
• suspension of capital expenditure;
• suspension of the privilege to accept new deposits;
• revocation of banking licence;
• suspension from office of the defaulting director, officer or employee; and
• disqualification from holding any position or office in any bank or financial institution under supervision of the Bank.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.