CORPORATE GOVERNANCE IN BANKING: AN ASSESSMENT OF THE EXISTING LEGAL FRAMEWORK

BY

SSONKO ROBERT

LLB/39136/123/DU

A RESEARCH DISSERTATION SUBMITTED TO FACULTY

OF LAW IN PARTIAL FULFILLMENT FOR THE

REQUIREMENTS OF THE AWARD OF

BACHELORS DEGREE OF LAWS OF

KAMPALA INTERNATIONAL

UNIVERSITY

SEPTEMBER, 2016 DECLARATION

I hereby declare that this research project is my original work and has never been presented to any other university before for academic credit or any other purpose. Where other people's work has been used, due acknowledgement has been made.

. ~ · Stgnature ...... Date ....~ ·' ·. \~~ . .l. ~ .1. 6.

SSONKO ROBERT

ii APPROVAL

I certify that Mr. SSONKO ROBERT carried out this research under my supervision and has submitted with my approval as the University Supervisor.

Signature ......

iii DEDICATION

With gratefulness, I dedicate this work to my mother Miss Nabadda Scolla. My father Mr. Livingstone Ssemwanga , my auntie Miss Nantale Milly, my guardians Malcolm and Jill Preece and my pastor Mr Abdul Kisakye for having strived in mentoring me till this day and through their toil, sacrifice and hard work, they made me attain this level of education.

This work is with delight dedicated to my sister Miss Nakiwala Justine and all my relatives for their tireless work towards my education, may God reward them abundantly. My God given friends Nelly, Saul, Eric, Dick, Daniel, Alex and Sam, You guys, I believe when God created you, He must have been thinking about me.

iv ACKNOWLEDGEMENT

Many of us have dreams or ambitions we hope to fulfill some day. My own to write a book to be read by masses might never have succeeded had it not for my almighty God for giving me the love, wisdom, confidence and grace which has been sufficient for me throughout my education and this research.

Also my lecturers who have enabled me acquire knowledge. Special thanks go to my great supervisor who has worked tirelessly and sacrificed her time from commencement to denouncement of my research to ensure that I do not only complete this research but also be well equipped for any other research that might come my way.

l owe huge thanks to all my Law discussion group members right from first year to the final semester mostly, Alex, Rogers, Abby and Philip. You stand to be heattedly treated and thanked because without you getting through would have been a myth.

Special thanks go to all faculty staff members and, and the entire school of Law and all that I have not been able to mention because the list is endless.

v TABLE OF CONTENTS

DECLARATION ...... ii

APPROVAL ...... iii

DEDICATION ...... iv

ACKNOWLEDGEMENT ...... v

CHAPTER ONE ...... l

I .0 Introduction ...... I

1.1 Background of the Study: ...... I

1.2 Statement of the Problem: ...... 2

1.3 Objectives ofthe Study: ...... 3

1.4 Hypothesis: ...... 3

1.5 Methodology: ...... 4

1.6 Literature Review: ...... 4

CHAPTER TW0 ...... 9

2 .0 Regulatory frame work of corporate Governance in Banking ...... 9

2.1 Introduction ...... 9

2.2 The Rationale for Regulation ...... 9

2.3 Salient features of corporate governance laws and_regulations ...... 12

2.4 Critic of the laws and regulations ...... 20

2.5 Conclusion ...... 21

CHAPTER THREE ...... 22

3 .Olmplementation and Challenges of Corporate Governance in Banking ...... 22

vi 3.1 Implementation of Corporate Governance ...... 22

3.2Challenges in the implementation of Corporate Governance: ...... 26

CHAPTER FOUR ...... 30

4 .0 The growth of Corporate Governance ...... 30

4.1 Introduction ...... 30

4.2 Indicators of Growth of corporate Governance ...... 3D

4.3 Assessment of Growth of Corporate Governance ...... 33

CHAPTER FIVE ...... 36 ·

5 .0 Recommendations and conclusion ...... 36

5.1 Recommendations: ...... 36

5.2 Conclusion: ...... 38

REFERENCES ...... 39

APPENDIX ...... 41

vii CHAPTER ONE 1 .0 Introduction 1.1 Background of the Study: Uganda's banking sector suffered a crisis in the 1990s when a number of commercial banks failed to continueoperations and the central bank had to close them. Commenting on the situation then, the central banks public relations directorstated thus, "it is a troubled period but we are confident that the banking system will emerge strengthened" 1 the closed banks included international credit bank, Greenland bank2

The proprietor of the closed banks was a significant point of concern since all the closed banks 3 were owned by Ugandans , while foreign owned banks on other hands were not affected. Local banks were those founded and controlled by mainly Ugandans holding more than 50% of the capital in those banks while foreign banks were those that originated from outside Uganda usually with dominant foreign ownership.

It is noted that banks unlike local banks do not deal with the best interests ofUgandans, they tend to centre their operations in only urban areas therefore local banks need to be strengthened to be able to provide banking services to the larger Ugandan population.

However despite the need to strengthen local banks, these banks was due to both external and internal reasons, the ultimate cause of individual bank failure stemmed from the failed banks 4 often caused by the owners and managers of the banks •

In the case of Greenland bank, in the run up to its closure, the audit rep0115recommending fresh injection capital, strengthening of management and rationalizing of the role of board of directors. A memorandum of understanding was signed between the bank and central bank requiring it to

11 Andrew Meldrun "African business journal" 'ICB closed in 1998 and Greenland in 1999. 3 Andrew Mal drum ibid. 4 Prof. ErisaOchieng," commercial bank Failure in Uganda: Causes and Remedies" The Uganda Banker val 6 No.4 Dec 1998. 5 Audit report by Prince Waterhouse coppers.

1 take corrective measures to put the bank back on sound financial footing, but before this could materialize, other facts emerged regarding the banks irregular dealings with Uganda commercial bank this led to the eventual sacking ot the board of directors and the managing director.

6 According to McNaughten , the composition, role, responsibility and accountability of the board of directors influence a banks behavior, most failed banks had weak boards which lacked banking knowledge. This is true for the failed banks in Uganda. 1.2 Statement of the Problem: The driving force in any institution is its management. This applies to banks as well. The management has the immediate responsibility to keep the bank sound.

Financial institutions headed by weak management are usually the first to fall prey todeteriorating economic conditions;this is so because adequate management is more adapted to dealing with challenges in the economy. Management comprises of share holders, the board of directors and managers of the bank. The ultimate responsibility for management in a bank lies with the board and managers of the bank. In an ideal set up these bodies have different roles, duties and responsibilities and therefore it is important that each is independent.

However the local banks especially private, did not respect the different roles, duties and responsibility of the organs of management, later alone practice good governance principles coupled with the existence of inadequate legislation on corporate governance. This was mainly as a result of propriety of those banks, local banks tended to be formed along sectarian line, the common ones being family and religion, for this reason their management and leadership has tended to be family oriented giving to those members at most power and this made it difficult to have a system of checks and balances with respect to good governance. It is therefore no surprise that such banks failed to have sound systems of management and had board of directors who hardly functioned at all. "Weak corporate governance was the basic cause of bank failure in Uganda and this needsto be strengthened"7

6 Dian Naughten, "Banking Institution in Developing Markets". Voll Word Bank Publication. 7 The rationale for the financial institutions (corporate governance) regulation 2005.

2 It is now recognize that corporate governance is an essential tool for prosperity and economic growth. Past macro economic difficulties had been exacerbated by weak or inadequate corporate governance arising from a weak legal system, inconsistent auditing standards, poor banking 8 practices, inefficient boards and ignoring the rights of minority shareholders . 1.3 Objectives of the Study: The main objects of this research include; establishing what the basic tenets corporate governance are and their importance to sound banking. To analyze and evaluate theadequacy of the new reversed laws on corporate governance, as a source of enforcement of corporate governance standards in commercial banks. To assess the how much progress has been made instrengthening the weak corporate governance in Uganda and identify and challenges faced by commercial banks in attaining the highest standards corporate governance.

To make recommendations for the improvement of corporate governancestandards 111 the banking sector.

1.4 Hypothesis: Uganda like many third world countries has embarked on banking has a vehicle for economic development since banking plays a crucial role in the performance of the economy it is imperative that the sector be controlled and legislated to ensure that it is running on sound commercial principles9 the aim being to ensure that in conducting of private banking the public is not cheated of their savings by unscrupulous bankers and to avoid or at least minimize the collapse of banks. Regulations to enhance corporate governance have recently been put in place.

10 According to Howard I Golden , effective corporate governance will not magically create a profitable company; however its absence almost always promotes the opposite. It's logical therefore to ensure that when managers and corporate boards are accountable for their actions and decisions through transparent oversight there will be increased responsiveness to societal and shareholder needs and at very least promotion the common good.

8 Manual on corporate governance by ICGU,"need for corporate governance" pg 11 9 Essays in banking law and practice by G.P.T Mukubwa Uganda Law watch 1998. 10 Howard I Golden Esq. why corporate governance- Back ground issues 2006.

3 1.5 Methodology: Various methods will be relied upon. In particular primary and secondary data sources. Primary data generated from interview and discussions with representatives of the institutions from which is to be collected for example the institute of corporate Governance and Bank of Uganda.

Secondary data from legislation, journals, and publications obtained from various resources centers and libraries; to provide necessary information for study and analysis.

1.6 Literature Review: Good corporate governance refers simply to a system by which a company or corporation is managed properly and efficiently. This benefits its shareholders and society as a whole. It entails the following attributes: accountability, efficiency, effectiveness, responsibility, transparency an d mtegnty· · II .

Corporate governance has been defined to mean the process and structure used to direct and manage the business and affairs of a financial institution with the objective of ensuring its safety and soundness and enhancing shareholder value and covers the overall environment on which the financial institution operates comprising of a system of checks and balances which promotes a healthy balancing of risks and returns.

Corporate governance in both the public and private sectors is crucial to economic growth and social progress. Investor's base decisions to invest not only on the company's outlook but increasingly also on its reputation and good corporate practices, therefore sound corporate governance principles and practices must be put in place12 Good corporate governance is important because it promotes good leadership within the corporate sector. It also attracts large investors to increase public participation in the privatization of the economy in developing countries.

11 www.corporategovernanceafrica.org. 12Manual on corporate governance by I.C.G.U- PG 12.

4 It also enhances the company's returns since well governed companies can attract low cost capital by improving investors' confidence. This combined with greater oversight of the use of a capital usually provide a greater return on investment.

Proper corporate governance precludes corruption. A corrupt management is interested in redistributing the assets of a company to friends and relations. A management governed by proper authority seeks to develop the company's competitiveness in order to survive 13 and thrive; this means among others benefits to the society .

Corporate governance principles also promote fairness to shareholders. Since the company belongs to its shareholders and not the board of directors. the owners have a right to expect that their money will be properly handled especially in transactional economies where privatization has created shareholders out of people in the low economic strata of society. These shareholders usually know nothing or very little about how to create a proper control mechanism to ensure that the company runs according to their interest. Effective corporate governance promotes protection of share holder's rights.

For most of the post independence period, Ugandan's major institutions were state owned. There was no opportunity of creating an environment for checks and balances due tothe manner in which these institutions were managed. some of these parastatalwere actually mandated to perform a dual role both as regulator and also as a business entity; for example the former Uganda posts and telecommunication corporation (UPTC) doubled as both the country's regulator of postal and telecommunication industry and a commercial business entity in that same industry. Under such circumstances, it was not easy to enforce any principles of corporate governance. Secondary, the dominance of government in the business sector through the prevalence of parastatal bodies in the economy meant that business activities were overly politicized. This politicization of

13 Howard I Golden Ibid

5 business tended to undermine the rationale of effectiveness and efficiency in those 14 institutions and ultimately in society as a whole •

The capacity to monitor and effectively evaluate performance in the private sector was also very low. The big private multinational corporations and locally based small and medium companies remained closed to public scrutiny once they complied with the licensing authority, paid taxes and satisfied the minimum labor and health standards, the rest was a preserve of managers and shareholders. Issues of corporate governance as known today were of little consequences then.

A healthy banking system is an absolute prerequisite for well functioning corporate sector. Good corporate governance within the banking system is especially important in developing countries like Uganda where commercial banks provide most of the finance; 15 moreover liberation of the economy has exposed banks to credit risks •

Poorly governed commercial banks can seriously damage the national economy. 16 According to the Governor Bank of Uganda , the costs relating to poor corporate governance are phenomenal. At the closure of commercial banks in 1998 and 1999 a number of stakeholders were left impoverished, Greenland bank at the time of its closure had one hundred thousand depositors. The government had to intervene to rescue the situation using taxpayers' money, also included was several years of straight measures by bank of Uganda to stabilize the financial sector.

Incidents of poor corporate governance in the closed banks included the following in the case of Greenland bank. The managing Director Mr. Suleiman Kiggundu who was arrested for contravening sound banking practices in April 1999, had this against him.

He was managing director of the bank, the chairman board of directors and the majority shareholder at the same time. He was therefore in control of all arms of management and

14 Manual Ibid pg 23- Uganda's Corporate History. 15 Dr. C. Kutcha et al, Instituting Corporate Governance in Developing Economies. 16Mr Emmanuel T Mutebile, Article in the SubstainableWealyh Creation Journal 2005.

6 as a result no effective system of checks and balances was in management was existent. The role of shareholders and board of directors was greatly weakened due to lack of independence.

Examples of a weak board of directors was shareholders are shown in the following; in 1995 a proposal was made to open a forex bureau in Nairobi but before the share holder and the board of directors could endorse it they leant that the bureau had opened. The project cost over five hundred thousand US dollars and this weakened the liquidity of the bank. The bank also acquired Entebbe Resort Beach against the will of the board and shareholders; shareholders and board members had rejected this project on the ground that it would involve sale of alcohol, which was against the Muslim faith to which the majority of the board and shareholders belong.

The above exposed the poor corporate governance practices in Greenland Bank. coupled with the fact that the bank supervision at the time was weak and they were hardly any laws governing corporate governance in a banking sector, the closure of commercial banks such as Greenland Bank were inevitable.

In Uganda, the institute of corporate Governance is the focal point of the introduction and implementation of acceptable governance standards. The activities of the institution include; to prepare a code of best practice and guidance for good corporate governance and implement corporate governance principles and procedure.

There are three sets of international principles and guidelines of corporate governance adopted by the institute on which to buildthe national code of corporate governance. there are the common wealth principles. The O.E.C.D principles and the code of corporate practices and conduct (the king's committee report of South Africa).

7 The institute also networks both locally and globally to see to it that as the world moves towards a common standard of governance practices, Uganda adapts to the global movement that is shaping standards of the corporate governance. There are other organizations like the Capital Markets Authority, the registrar of companies and the Uganda Association of Bankers which contributes significantly towards the adoption and dissemination of best corporate governance principles alongside the institute.

The law governing financial institutions to which commercial banks belong was inadequate in dealing sufficiently with corporate governance except for vetting of the appointment of the auditors. Following the banking crisis in the 1990s' the laws were revised to amend the existing statutes and also create new legislations to cater for corporate governance. The revised Financial Institutions Act 2004, the financial institutions (Corporate Governance) regulations and the Financial institutions (owners and control) regulation cater for corporate issues in the banking sector.

8 CHAPTER TWO REGULATORY FRAME WORK OF CORPORATE GOVERNANCE IN BANKING 2.1 Introduction Banking regulations encompasses the legislative frame work and guidelines, which govern the bank activities 17 According to Palgrave's dictionary of finance, Regulations entails the issuance of action that command and control the individual decision of firms in an effort to prevent decision-making that would take inadequate account of public interest.

The aim of regulation therefore is to foster efficient and competitive banking as well as protect depositors. Regulation is not to otherwise hinder free flow of private investment but rather to avoid or at least minimize the collapse ofbanks. 18 Banking laws and regulations have been extended to corporate governance Issues with the enactment of the financial institutions Act 2004 that provides for corporate governance in part seven of the Act. The financial institutions (corporate governance) regulation 2005 and the financial institutions (owners and control) regulations 2005.

2.2 The Rationale for Regulation Banks are subject to great amount of regulation and control than other business organization because when a bank is closed, the local economy is deprived of resources such as credit and savings. This destabilizes the entire macro- economic programmers of the country. This destabilizes the entire macro-economic programmes of a country. Thus the failure of a bank 19 affects more than fo1iunes of its shareholder, creditors and depositors .

Regulation of commercial banks is a must for a prospector's economy. The public has interest in the manner in which the banking business is conducted, if deposits are collected from public and squandered by the bank, depositors will lose their savings. Apart from depositors loss of private

17 The annual supervisory and regulations report issue 1 Dec. 1999 pg 9. 18 Essays on Banking by prof G.T Mukubwa. 19 By Henry Kibirige, The Uganda Banker vol 5 No 1 April1997.

9 savings, investment and job security of employees of the bank is also affected as collapse of a bank is a total to the economy and has far reaching consequences as mentioned in the above paragraph.

Edwards20 notes the principle justification of regulations, when he states that, fundamental to financial regulation is the desire to protect so lvency of a financial institution. Solvency is to ensure continuity and soundness ofthe institution.

The financial distress experienced in Uganda in the 1990s is proof that an unregulated finan cial market is inherently destructive. It is noted that the repealed law didn't deal in depth with the issues of corporate governance except for venting the appointment of the auditors. It therefo re made it difficult to enforce corporate governance principles to enhance sound banking practices.

Regulation also acts as a shadow management to reduce the incidence of mismanagement and above all it substantively reduces the information costs of depositors and stake holders of the bank. If a depositor has to rely on his own wit and resources to evaluate the soundness of a bank when deciding where to put his money, he wou ld incur a sizable information cost.

Specific to the financial institution (owners and control) regulation 2005, whose objective is to prevent dominant share holders from exerting undue influence on the management of the bank 21 and also create transparence in share holding of the bank . The rationale for thi s regulation is that without ownership restriction, a majority shareholder may appoint a bigger number of directors and be in position to influence over the policies and operations of the bank

Secondly that shareholding in banks should be diversified among many individuals to ensure that there are many interest parties as possible to allow multiplicity of views, adequate debate and system of checks and balances. Further noted is that the share holding structure of a bank can be a source of weakness in corporate governance of banks as shown in most bank failures22

20 Edward Franklin R, issues in financial regulation NY 1979. 21Section 4 fl (owners and control) regulations 2005. 22 Ibid Section 5.

10 2.3 SALIENT FEATURES OF CORPORATE GOVERNANCE LAWS AND REGULATIONS Prudent regulation entails elements of sound banking principle recognized worldwide and includes the existence of adequate legal frame work. A sound financial sector cannot be achieved if sound corporate governance is not in place in banks. This is because corporate governance is a key tenet of regulation. Consequently the new regulation and reversed law seek to ensure that banks maintain appropriate corporate governance standards, management, internal control and risk management systems.

The new regulation were made in pursuance of section 131 (k) ofthe financial Act that provides for the central bank in consultation with the minister to make regulation providing for anything required or authorize by the Act to be provided for. The Board of Directors Section 52 of the Act requires a bank to have a board of directors of not less than five members whose chairman must be a non executive director. This to ensure independence of the board by preventing it from being manipulated by an executive director and also removes the possibility of the executive director from taking decision on behalf of the board of directors.

Employees of the bank or any of its subsidiaries or affiliates cannot constitute more 50% of the board of directors. To become a director, the person must pass the test of a "fit and proper person" there the person is subject to be screened by the central bank and if cleaned by it, can be a director. Factors taken into consideration by the central bank include the general probity of the person, his or her competence and soundness of judgment to fulfill the responsibilities of the 25 office in question . Section 53 sets out grounds on which a director may be disqualified for example if one is below the age of 18 years, or is of un sound mind, or is an un discharged bankrupt.

In the process of approving ones appointment ass director, the central bank has authority to seek further information and documents from the applicant or other sources to decide whether to give

25Critaria for fit and proper person, second scheled to thye financial institutions Act.

12 approval or not. Any reckless, false or misleading information provided on a material particular is an offence and punishable by a fine or two year imprisonment.

Directors are prohibited from taking part in decisions or any matter in which the person or his related interests has an interest, or in any meeting where such interest arises the director should inform the meeting of his interest and exclude himself from the meeting to the extent of the interest. Conflict of interest my compromise conducting of sound banking business.

Responsibilities of the Board of Directors The main responsibilities of the board include insuring, good corporate governance and business performance, that the board is in full control of the affairs and business operations of the bank as well as ensure that banking business is in compliance with the applicable laws and regulations and the bank is conducive for safe and sound banking practices. Also included is repc·rting to the share holders at annual general meeting.26

The corporate governance regulations further proved that the board of directors establish strategic objectives and set of corporate values that are communicated throughout the bank . prohibit corruption and bribery in corporate activities both internal and external transactions and section 6(7)(j) provide that the directors shall observe the duties and responsibilities set out in the schedule.

Further still the board should ensure that management implements policies that prohibit relationship which diminish the quality of corporate governance such as conflict of interest. Enforce clear lines of responsibility and accountably in the bank by making sure there is a clear demarcation of responsibilities of the board and management in the interest of an effective accountability regime. The board should also ensure that directors have a clear understanding of their role in corporate governance and are not subject to undue influence from management.

It is the responsibility of the board to appoint from among themselves two executi"e directors who must be resident in Uganda, have knowledge of the Manner in which the banks long term

"section 56 (1) FlA.

13 strategy is to pursued in practice and have ability to influence its policies as well as effectively 27 direct the business of the bank • This is to ensure that the bank business is run on the corporate goals of the bank and keep its business on sound footing.

Duties of Directors In section 56 of the Act, directors stand in fiduciary relationship and owe the bank shareholders the duty to; act in good faith, act in the best interest and benefit of the bank, to act independently and free undue influence as well duty to access necessary information to enable them discharge· their responsibilities.

The directors also have the duty to report in writing to the central bank if they have reasons to believe that the bank may not be in position to meet all or any of its obligations or that the bank may not be able to properly conduct its business as a going concern.28 Where the board or a director fails, omits or neglects to report to the central bank on any matter above the central bank has the discretion to withdraw its approval of the board or that particular director. This duty is important because it enables the central bank to act in the timely manner and put the bank back on sound footing or prevent excessive loss if it collapses as the key controllers of the banks affairs will have indicated sources of trouble in the banks system of operation.

The central bank according to section 57 of the Act has authority to remove a director or a board of directors for sufficient cause which includes failure, omission or neglect of their responsibilities or duties provided for in the Act and where the board is removed the central bank takes lover its powers until a new board is formed.

The board Meeting: The corporate governance regulations provide for the board meeting to be held not less than once in every quarter of the financial year of the bank and that the chairperson of the board shall

27Sectiopn 55 (2) empthesis in the corporate governance. 28Section 56 (2).

14 ensure that clear and complete minutes of the board meeting are circulated to members of the board.29

The central bank may intervene in the board meeting according to section 58nof the act by notice, ordering the bank to provide it within specified period a true copy of board minutes and secondly in the interest of the bank or safety of depositors order the board to have a meeting within three days at a specified place and orders the board to consider such items as it deems necessary as well as appoint an observer to any board meeting.

Internal Audit The internal audit function is an impmiant part of corporate governance and one of the mechanisms of the system of checks and balances in a bank. An internal auditor has been a recognized as an increasingly important key player in the risk management process of the bank. He or she is concerned with monitoring the risk to which a bank is exposed and reporting whether risk is adequately controlled. Section 59 of the Act requires the bank's board of directors to constitute from among its members a committee on audit constituting not less than two persons. The committee shall meet every quatier of the financial year of the bank and members of the committee as well as the internal auditor must be present at the meeting. The duties of the audit committee include; reviewing internal audit report and programs of the bank, review internal controls, operation procedure and system of management information. Other functions include; reviewing the financial statements of the bank and making recommendations as well as ensuring that any insider transactions of the bank, which may have material effect on the stability or solvency of the bank are identitied and dealt with.

The corporate governance regulations require the board and senior management to recognize the importance of audit process and communicate this throughout the bank, take measures to enhance the independence and status of internal audit. Utilize in timely and effective manner the tindings of internal and external audit, and ensures the independence of the internal auditor

29Section 7 (h) and (i).

15 through his or her direct access to information and reporting responsibility to the board or audit committee.

Section 61 of the Act provides that every bank shall appoint an internal auditor suitably qualified and experienced in banking and shall report to the committee on audit of the board of directors. The internal auditor's duties include; evaluating the reliability of information produced by accounting, to evaluate the effectiveness and efficiency of economic operations and evaluate compliance with law, policies and industry operating instructions. Internal auditors also have the duty of certifying the returns submitted to the central bank by the bank. External Auditors External auditors provided an opinion on the structure of checks and controls within a bank. They report on and ensure quality of information produced by the bank management, adequacy of management and disclose in truth and fairness of the bank's financial position. It is also external auditor's duty to check on the reliability of the banks internal control systems accounting management and information systems. Given that external auditors play a crucial role in ensuring strong corporate governance and sound-banking systems in a bank the Act gives the central bank great influence over the auditor as they carry out their duties.

According to section 62 of the Act, Every bank is required to annually nominate from a pre­ qualified list published by the central bank, a finn of qualified auditors whose duty is to perform an audit of the bank as external auditors. They are required to give an opinion in accordance with the Act and international standards on the annual balance sheets, profit and loss account and other financial statements required to be submitted by the bank to the central bank. Also included is an opinion of the bank's compliance with financial institution requirements of the Act.

The central bank has to approve the appointment of the auditors and may for sufficient cause withdraws its approval in circumstances such as failure to comply with the requirements of the Act or inability to perform to prescribed standard.3°Further still no bank can ch3nge its current external auditor before expiry of the term of office without prior Witten consent from the central

30 Section 62 (8) and (9)

16 bank. 31 No auditor shall serve the same bank in the capacity of external auditor for a continuous period exceeding four years. This is to insure independence of the external auditor and protect the reliability of the report from undue influence from bank management and board.

A person will not qualify to be appointed as an external auditor of a bank if he or she has directly or indirectly a material interest in the bank to its affiliated or if the central bank is of the opinion that circumstances exist which may impair the independence or impartiality of the auditor's performance of his her duties.32

Apart from the primary duty of auditing the bank, section 68 provides for other duties of the external auditor to the bank, they include; a duty to warn the board of directors of the banks inability to meet capital, reserves or liquidity requirements and of any matter of which it becomes aware in the performance of duties as an auditor which may be detrimental to interest of depositors or violate principles of sound financial management. The auditors also have the duty to ascertain, evaluate and test internal controls before placing reliance on them.

External auditors duties to the central bank include; duty to inform it if there is reasonable ground to believe that the bank is insolent or is at significant risk of becoming so, that the bank has contravened a prudential standard or requirement of the act as well as verify all qum1erly returns and other rep011s of the banks that the central bank may require from time to time.

Section 70 gives external auditors the right of access at all times to such books, accounts financial records, computer systems and securities of the bank. They are also entitled to receive information and explanations they may require in performance of their duties. Any person, who obstructs auditors in performance of their duties, commits an offence and is liable to a fine or imprisonment not exceeding one year.

31Section 65. 32Secton 64.

17 In return the external auditors are required to give information to the central bank when required to give information to the central bank when requested to do so, failure to give such information of giving misleading information is an offence under the Act.33

When external auditors have performed their duty, an audit report must be submitted to the bank. The bank should within three months after close of its financial year submit this report to the central bank with a letter of assurance that management disclosed all financial and other related transactions both off and on balance sheets34 This provision holds the bank management responsible for any misleading information that may prohibit the external auditors from showing true status of bank. The central bank may if dissatisfied with the standards or quality or both of the auditor's report may reject it and call for a fresh audit. Therefore the Act gives the central bank discretion to accept or reject the audit report. Risk Management Section 60 provides for the board of directors to constitution an asset and liability management committee of not less than two people whose function is to establish the board guidelines on the bank's tolerance for risk and expectation from investment. The guidelines include; limits on exposure to single or related customers, limits on lmm to capital ratio and to loan deposit ration, minimum acceptance between costs and yields of liabilities and assets.

The corporate governance regulation in section 10 states that the committee should provide an over sight of senior management activities on managing credit; market, liquidity, operations, legal and other risks of the banks. Without adequate risk management insolvency of the bank is highly likely therefore risk management is crucial to survival of the bank as a going concern.

33Section 71. 34 Section 72

18 Remedial Measures and Administrative Sanctions The corporate governance regulations provides that where the central bank determines through inspection that a bank is not in compliance with the regulation, it may impose any of corrective action under part ix of the Act. Section 77 the Act gives the central bank power to write an order to remove from office a chairperson, director or CEO of a bank if it deems necessary in public or the banks interest to do so.

In addition the regulation provides that central bank may impose any of the administrative sanction mentioned in section I 4 and may include, prohibition from declaring or paying dividends, suspension of access to credit facilities of the central bank and suspension of acceptance of new deposits.

Ownership and Control Regulations The final institution (owners and control) regulation in section 6 prohibits an individual or corporate body from acquiring more than 49% of shares in a commercial bank without approval of the central bank. Further still the bank shall allot or transfer 5% or more of its shares to any one without the central banks' approval.

If a person does not satisfy the criteria of 'fit and proper test' relating to the substantial shareholder in accordance to third schedule of the regulation he shall not acquire more the five. percent of the shares of bank.

Section 7 prohibits any person other than a reputable financial institution or public company to exercise control over a bank. A person is deemed to exercise control over a bank where he is entitled or has power to determine appointment of the majority of directors or prevent any person from being appointed so or directly or indirectly exercises a controlling influence over the bank, its major policies or strategy.

19 According to section 10 the bank shall maintain a register of the current beneficial holders of the shares and any transfer that is not recorded in that register is invalid. This list should be provided to the central bank.

Any person wishing to allot or transfer shares of the five percent or more should apply to the central bank director of supervision explaining to him or her in detail the nature of the intended allotment or transfer and must give information and supporting documents. Any misleading information by the applicant shall render such person not 'fit or proper persons' and application shall be rejected.

In section 15 the central bank has authority, if it considers that retention of a certain shareholding in a bank by a person is detrimental to the bank or its depositors, to order the person to reduce within a period not exceeding three years the shareholding in the bank to a percentage of total issue of shares as the central bank shall determine within ninety days after the order is given. The central bank may also hinder the voting right of such a shareholder.

Administrative sanctions 111 failure to comply with these regulations similar to the ones mentioned in the corporate governance regulation above and also include sanctions provided for section 25 Of the Act. The provisions of this regulation seek to ensure that shareholders are separated from excessive involvement in management of the bank.

2.4 Critic of the laws and regulations Law is an authoritative and enforceable source of corporate governance standards. The introduction of corporate governance law and regulations for the banking sector has been hailed by the institute of corporate governance of Uganda since it adopts most of guidelines set for by the institute for corporate governance in Uganda and makes them enforce under the law. This makes enforceability of corporate governance easier in the banking sector. However there are some short falls of the law in attaining the desired corporate governance standards and principles. They typically flaws include;

20 • The silence of the law on the appointment of board of directors' committee members • Silence on appointment of independent directors. • Silence on the development of strategic formulation risk management. • Silence on the attendance and patticipation of members at board meetings. • Silence on the supply of timely and adequate information to the boat·d.

2.5 Conclusion The role of regulation in promoting corporate governance needs to be kept proportional since optimum degree of regulation falls short of removing all possibility of bank failure although it lays a good foundation for implementing corporate governance in banking sector. It's notewotthy that the laws on corporate governance have not been greatly exposed to test their· applicability as the laws were recently enforced. Therefore implementation of laws and corporate governance plays a crucial role in determining the role of regulation in promoting corporate governance in the banking sector.

21 CHAPTER THREE IMPLEMENTATION AND CHALLENGES OF CORPORATE GOVERNANCE IN BANKING

3.1 Implementation of Corporate Govemance The implementation in corporate governance is vital to the growth of corporate governance in banking sector.

At the core of the implementation of corporate governance IS the institute of corporate governance of Uganda. It was founded in 1998 and launched in 2000. This was through the initiative of both the private and public sector which shared the same environment saddled with problems of corruption in its diverse manifestations which included; inefficiency, poor record keeping, lack of accountability and transparency, and poor corporate governance. The main objective of the institute is to nature and promote good corporate governance by setting and enforcing practicing of the high standard of commercial probity, efficient and ethical conduct.

The institute implements corporate governance in the following ways: it has developed recommended guidelines for corporate governance using international standards as a bench mark on which Uganda can build national code of corporate governance. These recommended guidelines have been adopted by the Uganda bankers Association and also incorporated the laws governing commercial banks.

The institute has also published a manual in corporate governance to incorporate the recommended guidelines for Uganda35 .this document sets out to provide an overview of the concept of corporate governance and its relevance to all institutions, commercial banks 36 inclusive , in particular but not confined to the private sector.

Workshops and seminars for directors and senior management in corporations with the aim of making them aware of corporate governance and imparting skills for effective implementations

35Adopted in the revised financial institutions Act 2004. 36MrAberJoanital Ethel, lawyer.

22 of corporate governance in their work places, is another of another of the institutes activities. The institute in collaborations with the bank of Uganda held seminars for commercial bank directors in July 2005 in Entebbe.

Further still the institute has opened its membership to director's and senior management of 37 corporations to join in the promotion of corporate governance. According to the institute CE0 , Barclays bank is a member, DFCU bank founder member while post bank and centenary rural development bank are involved with the institute through members of their senior management. He further adds, this is good for a start but would like to see all banks involved in the institute activities since this would enhance in implementation of corporate governance in the banks.

The institute also publishes a quarterly journal entitled "sustainable wealth creation. "The aim of this journal is to explain aspects of corporate govern such as corporate social responsibility, business ethics and corporate fraud to the public to enable better understanding of corporate governance thus enhancing its effective implementation. The institute has also created cheque list by which it can access a corporate body's' compliance with the best corporate governance practices but, according to the CEO many corporate bodies have fallen below the average marl<.

Although not much has been done, the institute hopes to use advocacy and lobbing of policy makers to implement corporate governance this will be done by identifying weak areas in law of practice that inhabit the practicing of good corporate governance and seek policy makers help to deal with the situation accordingly in order to enhance corporate governance implementation.

One such hindrance is section 126 of the FIA, which provides that a director manage or officer who fails to take reasonable steps to secure compliance with the Act commits an offence for which he may be convicted or fined. Such draconian regulation may intimidate willing and 38 straighter forward members of society to serve on the board of directors .

37 MrVicent F Kaheru CEO, ICGU. 38Mr Simon Kagugube, excutive director CERUDEB Bank. SWC journal Dec 2005.

23 Working closely with institute in the implementation of the corporate governance is bank of Uganda. The centenary bank plays an important role in the implementation of corporate governance in the banking sector in its functions as a supervisor, regulator, controller and disciplinarian of financial institutions39 as well as being a member of institute of corporate governance, having a representative on the institute's council of advisors.

The bank of Uganda as a regulator of the banking sector has ensured implementation of corporate governance through the revision of banking laws to include comprehensive corporate governance legislation. It has also provided commercial banks with guidelines to foster good corporate governance for example the risk management guidelines of commercial banks.

The supervision function of bank of Uganda another avenue in which corporate governance is implemented. Supervision in the banking sector is a process primarily aimed at promoting and maintaining safe and sound banking system and preventing financial instability. It is also aimed at fostering efficient and competitive banking as well as protecting depositor's funds. It is within the supervisor's power to implement corporate governance in the banking sector and this power 0 should be utilize effectivei/ .

Supervision at licensing level screen new applicants with the banking sector to ensure they are financially sound to run the banking business, that the proposed senior management and board of directors pass the fit and proper test required by the financial institution Act. During the operation of the commercial bank supervisors ensure that banks operate in accordance with law and in line with prudential norms of banking of which corporate governance is inclusive.

Bank of Uganda has adopted the baser committee principle of supervision. These principles states that the role of the supervisors to determine whether the bank has sound governance practices, to hold the board and senior management accountable for governance and internal control weakness, and be attentive to warning signs of deterioration ion management. Accordingly supervisors should use the following questions as guidelines. Does the board

39 Section 4, the Bank of Uganda Act Cap 51. 40My emphasis.

24 exercise effective over sight? Are the controls to mitigate conflicts adequate? And are internal controls properly implemented as opposed to being only written down.

Prudential supervision in the banking industry is carried out through off sight surveillance, on sight examination as well as consolidated supervision. Consolidated supervision entails ongoing risk management of the overall of the banking business intended to mitigate the impact of risks arising in the bank. It also involves regular interactions with the key players involved in the risk management process of the bank that is, the directors, managers, audit committee members and both internal as well as external auditors.

In November 2002 risk based supervision was launched and in January 2003 commercial banks 41 submitted their risk management programs to the bank of Uganda for approval. Stress testing was also introduced to assess the resilience of individual banks to shock. An example of a shock is a large loan becoming delinquent that is where there is a decline interest necessitating capital infusion.

Lastly, in the supervision inspection manual of bank of Uganda the supervision department carries out up risers of the management and board of directors during the course of examination of the organization structure of the bank, it also examines the policies applied, the quality of decision making and efficiency as well as well as progress achieved by the bank in a bid to improve the management by taking collective actions on weakness and deficiencies brought to its attention.

Capital market authority also plays a role in the implementation in corporate governance in the banking sector. Its un fortune however, that the authorities role is limited since only one bank that is DFCU is listed under the stock exchange and as a result it is subject to authorities . 4' regu Iat1on. -

41According to the annual surpervision report by bank of Uganda 2014. 42According to DFCU banks head of legal service, SWC journal Sep 200S.pg 32.

25 The rule and regulations governing capital market industry have direct linkages with good corporate governance principle. The regulation is concerned with ensuring investor protection, systematic risk assessment, fairness and transparency in the market. Capital market authority also has corporate governance guidelines which listed companies are subject to. The guidelines are modeled from those recommended by the institute of corporate governance of Uganda.

Implementation of corporate governance is done by requiring of proper accounting records and submission and audit reports to the authority; failure to do so is an offence under the regulations. Further still factors taken into consideration before a license is issued include the protection of the investors and the financial probity of the company seeking to be licensed.

The listed companies are required to furnish information concerning all matters of the company to enable investors make informed choices in transacting with them. This requires disclosure of their legal status, information on the board of directors and senior management that is, their back ground, qualifications and experience. Also disclosed are the capital assets and debts of the company and the rights of the shareholder. Only when the capital market authority is satisfied with the information given can the company be allowed to give such information to the public. To this end, Dr Martin Aliker thus, "listed companies are under regulation and public scrutiny and must confirm to the established best practices."43

The commercial banks are also played significant role in the implantation of corporate governance in their respective banks, following the revision of the law most of the banks have appointed new board of directors in order to comply with new regulations of corporate governance. Banks like DFCU according to its board secretary and legal manager have developed their own corporate governance manual. Crane bank included a corporate governance report of the bank in its audit report given to the external auditors.

3.2 Challenges in the implementation of Corporate Governance: According to a World Bank surveyor of governments in developing countries, like Uganda corruption is the greatest obstacle to implementation of good governance. The implementation is

43His article "business doesn't operate in a vacuum'~ .SWC journal Sept 2005.

26 undermined by the existence of weak monitoring thus presenting a challenge both in adoption of corporate governance and criminal enforcements essential to implementation.

Good corporate governance seeks to promote accountability, efficiency and transparence, and business ethics while corruption does just the opposite. Corruption brings about proficiency, lack of transparency and accountability as well as lack of ethical conduct.

While increase sophistication of the financial sector in terms of financial innovations and application of superior information technology systems are welcomed developments, the commercial banks risk profiles has become quite complicated and therefore poses a new challenge44 Bank of Uganda has compelled the managements of all supervised banks to institute prudent risk management systems which effectively identify minor problems anci control all inherent risks in the business operation in a timely manner and in a continued basis.

The competitive pressure within the banking environment has also increased the threats to corporate governance in the sector especially as regards corporate fraud. Corporate fraud occurs when top management officials conceal vital information or misrepresent the true statement of 5 affairs of the bank to the share holders and the investigating public. In the global fund injur/ , it has discovered that DFCU bank entered in a brokerage contract, which was only known to three senior managers and was never written down despite the fact it involves a larger sum of money. This example illustrates the fact that corporate fraud is indeed a big challenge in the banking environment.

The low levels of literacy and education in Uganda are also a challenge to the implementation of corporate governance through public awareness campaigns by the institute of corporate governance therefore only a limited portion of a society can be made aware of corporate governance principles yet society makes up the bank customers.

44 The governors review, Annual surpevision report by bank of Uganda 2014. 45 The commisin of inquiry report, the new vision 2nd June pg 6.

27 From the bank management point of view 46 challenges to the implementation of corporate governance include, the fact that Uganda as a developing country lacks human resources, which is vital to the implementation of sound governance principles suitable for the banks, It is noted that there is no cause on how to become a director, you are merely appointed and run on the job, this makes directors prone to mistakes and abuse of good corporate governance principles, which may become costly to the bank,

Another challenge is the poor remunerations of the board of directors and senior managers, This provides a suitable ground on which corruption and abuse of ethical conduct thrive and this leads to the neglecting of good governance principles this challenge is tough for people in poor economies as Mr. Ray Croc 47 stated, "It is easy to have principles when you are rich, The important thing is to have principles when you are poor,"

The third challenge is that the majority of board members have other business to attend to, being a board member is not a regular job and as such they intend to get so busy in their private affairs so that little time and attention is given to the governing of the bank in scrutinizing of a report and supervising management operations, This lack of management oversight by the board may lead to abuse of good corporate governance practices and may go un noticed until its too late to take collective action without damage being done,

Within the board room internal rivalry is another challenge in corporate governance, this rivalry at times spiels over to the senior management of the bank, Lack ofhannony within the board and management create difficult in effective caring out of board duties and breaks the ethical conduct of the business, Bribes for example, may be given to non executive directors to stifle their independence, The voting in the board meeting becomes based on allegiance rather than the best interest of the bank and stake holders, The rivalry in the board of management is usually started by the formation of cliques,

''The view of the operations manager post bank, 47 Mr. Ray Croc, Founder of Me Donald's food chain (1902·1985),

28 The Jack of moral obligation by the management of the banks to abide by the good practices of governance is another challenge to the implementation of good corporate governance. Despite the availability of laws governing corporate governance in the sector and knowledge of governance principles by the management, the managers are still mainly driven by profit goals and neglect the principles of good governance at the expense of profit making. In the global fund injury, although the body secretary of DFCU indicated knowledge of corporate governance principles he was involved in the brokerage contract on behalf of the bank that was not compliant was goo d governance pnnctp. . Ies. 48

"'The commission of Inquiry 29'" Nov 2005.

29 CHAPTER FOUR THE GROWTH OF CORPORATE GOVERNANCE

4.1 Intl'oduction Although there have been no study to assess how far corporate governance have been strengthened in the post crisis era, this chapter highlight indicators of growth in corporate governance in the banking sector.

4.2 lndicatoi'S of G1·owth of cot'porate Govemance In the annual supervision report 2004, the governor of bank of Uganda repotied that according to the world bank's financial sector assessment programme up date in 2004, Uganda's banking industry continues to be stable , sound and healthy, and more resilient than in the past. In 49 addition according to the international monetary fund experts , the banking sector is on the rebound. This is because of the strengthening of commercial banks supervision and modernization of regulatory framework to international standards, which has led to improvement and restored level of confidence in the sector

There has been steady growth of public confidence in the banking sector, which had greatly declined following the banking crisis. This growth is a result of reforms in the banking sector especially in regard to corporate governance regulation and implementation. The growth in public confidence is evidence in the continued rise in the deposits in the commercial banks. In 2004 the total deposits rose from 2.214 Billion shs in the previous year, to 2.238 Billion shs. Ruther still, the overall performance in the banking sector was rated as satisfactory in 2004. Two banks were up graded from a fair rating the previous year to satisfactory rating in 5the end of 2004. No bank scored a marginal or an un satisfactory rating during the year.

49 Ms. SlyviaJukko, "IMF experts say banking sector is on the rebound." THE NEW VISION Jan 31st 2006

30 Prudent risk management together with aggressive loan recovery efforts resulted into substantial 50 reduction of nonperforming assets from 7.2% to 2.2% . All commercial banks managed to maintain full compliance with the minimum statutory and ongoing capital adequately from a suitable basis. There has been law reform in the banking sector aimed at the creation of corporate governance 51 regulation. The by then justice of Uganda justice 8 Odoki , commented that law reform is important because of the vital role the law lays in the smooth running of economic systems in any given society. The law creates an environment conducive for growth. It can therefore be conclusive that the reform of the banking laws to cater for corporate governance regulation creates a conducive environment for good corporate governance practices to shrive in the banking sector.

52 The new corporate governance regulation has been described as a comprehensive lnw . Further still, the president institute of corporate governance of Uganda commenting on the laws stated thus, "it covers almost everything audit, the composition of board of directors, risk management and continued reporting" in his view this is the best thing that the policy makers have done to promote corporate governance. The banking sector laws have been well done and enhance corporate governance, which the institute strives to achieve. There has been marked improvement in the business efficiency of the banking sector through the effort of both bank of Uganda and the commercial banks by initiating development programmes in the sector. An example of such programme is the introduction of the electronic cheque clearing system which automated the cheque clearing system and also strengthened risk management through the implementation of national cheque standards.

The above developments have promoted economic efficiency and competitiveness through expeditious transfer of funds and enabling of Uganda to improve efficiency in management of monitory policy through timely availability of data on the cash flows in the financial system.

50The annual supervision Report Bank of Uganda 2004. 51The chief justice Article forward to the capital market journal 1998. 52 According to the CEO institute of corporate governance of Uganda.

31 Following the recommendations in the judicial commission of inquiry into the closure of commercial banks report, the bank of Uganda took measures to strengthen its supervision which has led to growth in the implementation of corporate governance in the banking sector. This is due to the adoption of the Basel committee principles of supervision. In a review held in 200 I bank of Uganda was found to be compliant with 19 out of 23 principles applicable to Uganda. The launch of the risk based supervision was a significant boost to compliance with the Basel principles.

Another indicator of the growth of corporate governance is the fact that no commercial bank has been closed in the same manner as was done during the crisis. The then governor bank of Uganda regretted after the closure of banks and commented that the closed banks should have been closed earlier to avoid the crisis but weaknesses in the laws governing the bhnking sector did not among other factors enabled the bank of Uganda to do so. The reversed financial institutions act gives bank of Uganda authority to close down any bank that is caring on business in a manner detrimental to the interest of the depositors. Exercising this authority, the bank of Uganda closed Trans Africa Bank in 2002.

The growth of corporate social responsibility and the banking sector is an indicator of improved corporate governance. Corporate social responsibility involves consideration of all stake holders' relationships and interests balanced with profit making motive of enterprise53 The link between corporate governance and corporate social responsibility is important since good corporate govemance within the corporate environment sets the stage for corporate social responsibility. This repairs the ground for the appreciation of the value of corporate social responsibility that is, 4 the return of some benefit to the society by the bank 5 •

It makes business sense to be socially responsible since business does not operate in the vacuum but within the society. The banks have therefore developed strategies aimed at profit going as· well as demonstrating awareness of stake holders and society concerns. City bank for example donated money to habitat for humanity to build houses in Buwayi in Jinja district for the

53Mr Leo Kibirango "corporate social responsibility for greater prosperity" SWC journal Sept 2005 pg 7 54 Dr martin Aliker, "business does not operate in a vacuum" SWC journal Sept 2005 pg 5

32 residents on the other hand Stanibic bank has build a village in Mbarara in mukono district as way for giving back to the community.

4.3 Assessment of Growth of Corporate Governance According to the president institute of corporate governance, although bank of Uganda is applying Basel committee principles it its supervision thus contributing to improved corporate governance, on the international scene, other banking systems have already adopted Basel II committee principles. This is an indicator that growth of corporate governance is slower than it should be, and yet for better results bank of Uganda should follow the international pace. Secondly, from the indicators of corporate governance in the banking sector it is clear that more effort in improving corporate governance has been made by the bank of Uganda and institute of corporate governance. This type of growth has been termed as the top bottom or top down approach.

This approach can return out to be problematic since the semor management and board of directors of the commercial banks may not develop the will to practice good corporate perse but. do so because they are obeying the law. However there is need for them to have the 'sprit' or will to use sound ethical principles of governance in carrying out of business whether or not the law provides for them.

According to executive director post bank, corporate governance in Uganda has taken a top - down approach holding directors accountable for the bank's action to society. He however stresses that the professional ethics of management should be complementary to corporate· governance in order to ensure that the banks keep to the expectations of society.

To implement growth of corporate governance within the board of directors and senior management, the institute of corporate governance has been reluctant to advocate for the enacting of the recommended guidelines of corporate governance into law. This is because of the negative aspect of law that is; the bank management would obey corporate governance principles as a matter of law but lack the will to practice good governance. An illustration of this is in the analysis of DFCU Bank's involvement in the Global Fund inquiry.

33 Despite DFCU bank being regulated by the revised banking laws and capital market as well as having its own corporate governance guidelines; the bank's management neglected to use the 5 practices of corporate governance as was discovered in the Global Fund probe. 5

The report56stated that the bank's management entered into a brokerage transaction involving a claimed three hundred and fifty million shs but, there was no documentary evidence of the contract and the terms of payment were not specified. Further still, the contract was only known to three members of the banks management.

From the above it is clear that there was lack of accountability and transparency by the managers who carried out the transaction, as required by good governance principles.

The report also stated that there was pressure on the Global Fund to exchange its Dollars for Uganda shillings with DFCU bank despite the fact that the bank was not offering the best exchange rates on the market. This implies that there was lack of fairness and transparency in the manner in which DFCU Bank obtained Global Fund as a business partner.

During the inquiry the DFCU executive director stated that it was the bank's policy to change 57 low exchange rates when involved in large exchange foreign exchange transactions . however the commission had an official letter from then Deputy Governor Bank of Uganda that stated that when involved with large foreign exchange transactions the exchange rate should be high. This exposed the contravention of bank of Uganda's policy by DFCU bank managers. As a result the global bank fund report recommended that the bank pay the Global Fund Four hundred and fifty five million shillings. This is detrimental to the shareholders of the bank since they bare the loss caused by shareholders and stakeholders of the bank since they bare the loss caused by the manager's neglect of good corporate governance practices.

55 The Global Fund Commissiuon of inquiry headed by justice J Ogoola 2006. 56Summary of the global Fund Commission of inquiry Report. New Vision 2"' July 2006, pg 6. 57The Global Fund Commission of Inquiry Hearing, Nov. 25'" 2005.

34 When DFCU's head of legal services before the commission58 he was asked whether given the circumstances in which the brokerage contract was entered into, and his knowledge that the board of directors sets the parameters in which the management operates banking business, the board would have endorsed the contract. He did not give a direct answer but mentioned that it was a problem of corporate governance.

This indicates that he was aware of corporate governance principles although there were neglected when entering into the contract.

The commission recommended that three bank managers who appeared before the commission of inquiry be further investigated with a view of criminal prosecution of their actions.

58 he Global Fund Commission of Inquiry Hearing, Nov. 25th 2005

35 CHAPTER FIVE RECOMMENDATIONS AND CONCLUSION

5.1 Recommendations: Although the revised banking laws provision for corporate governance regulation has been appraised, the following additions would further contribute to the employment of corporate governance in the sector. The law should therefore provide for the following;- • The making of corporate governance reporting a legal requirement. • Criminalizing of corporate misconduct and prescribing personal reliability for cet1ain infringements of the law. • The establishment of a committee of corporate governance within the commercial banks. • The placing of emphasis on the role of the independent directors.

Commercial banks should be encouraged to go public and thus get listed on the stock exchange. This will subject them not only to regulation buy the banking sector laws but also to the capital market authority regulation and public scrutiny. Since listed banks will be subject to public scrutiny they will be made to confirm to the established best practices of governance. This will also boost bank of Ugandans effort to implement corporate governance in the banking sector. In· line with the above Ugandan stock exchange should be further developed. Bank of Uganda should strive to be fully compliant with the Basel I committee principles of supervision and move onto the Basel II committee principles. This will enable bank of Uganda to keep pace with international standards of supervision and will therefore enhance the implementation and of corporate governance in the banking sector through its supervision function.

If this is not done soon, the growth of corporate governance m the banking sector may be stagnated.

As the operation manager of post bank stated there is no course of how to become a director, one is just appointed and learns on the job. However, preparing and equipping a cadre of potential

36 business pleaders through introduction of corporate governance into the education system can solve this situation. This will increase corporate governance awareness and when these cadres get appointed on the board of directors of commercial banks, there will be well equipped with the skills to practice good governance principles in the operation of banking business. This will also create a necessary human resource vital for the implementation of corporate governance which is currently lacking.

As already noted the effect on corruption of corporate governance is catastrophic since it endorses what the principles of corporate governance bring about. In order to have corporate governance thrive in the banking sector, there is need to fight corruption in earnest. This can be done by developing professionalism and are binding by the ethical conduct required in the banking industry through continued training of the board members and management of the commercial banks.

Although for corporate to thrive the essential requirements are that an input legal and regulatory frame work be put in place, and management obeys the Jaw to the later; implementation of corporate governance goals behind this top bottom arrangement. In order to ensure long term and sustainable growth as opposed to short-term partial again, the managements of the banks should be encouraged not only to obey corporate governance regulation because it's the Jaw governing the banking sector but, to practice good governance on by their own will.

This can be done by implementing corporate governance through the bankers association where the members will be accountable to the association for practicing of the best governance practices.

Corporate governance awareness campaigns should be increased and spread away to enable the depositors in the commercial banks is aware of corporate governance principles which will equip them to ensure that their banks practice the best practices of governance. Share holders should be educated on their role in the implementation of corporate governance as well as their rights and responsibilities in the management of the banks.

37 5.2 Conclusion: In the aftermath of the banking crisis in the 1990s', corporate governance that was virtually non­ existent in the banking sector regulations and operations has been brought to the centre stage of the sectors activities albeit after serious damage to the sector, society and national economy and had been done as the consequence of lack of adequate corporate governance in the banking.

The revision of the laws in the banking sector to incorporate corporate governance regulation. the strengthening of the bank of Ugandans supervision of commercial banks and the launching of the institute of corporate governance of Uganda have contributed tremendously in the rectification of the inadequacies in the sector as regard corporate governance.

Despite the top-down approach adopted in the implementation of corporate governance, the growth of corporate governance in the banking sector can be rated as fair that is, so far so good. This is so considering the environment in which corporate governance is being implemented is 9 encumbered with challenges like rampart corruption. 5

Just as corruption cannot be eliminated at once but through a process. the implementation and growth of corporate governance in the banking sector cannot be by some enthusiastic championing at the top. It is a long-term process requiring commitment especially by the board of directors, which is crucial to the success of corporate governance. The board of directors performing their role, duties and responsibilities with professionalism expediently and diligently rests the crust of corporate governance.

59 Uganda ranks amongst the most corrupt countries in the world.

38 REFERENCES

~ The Financial Institutions Act 2004.

~ The Financial Institutions (Owners and control) Regulations 2005.

~ The Financial Institutions (Corporate Governance) Regulations 2005.

~ The Bank of Uganda Act, Cap 51 Laws of Uganda.

~ The Common Wealth association corporate governance guidelines.

~ The Organization of Economic Development Principles corporate governance. );;. The Code of Corporate Practice and Conduct. The King Report (South Africa)

~ The Bank of Uganda Annual Supervision and Regulation Reports;- 1999, 2000,2003 and 2004.

~ The Institute of Corporate Governance; "Sustainable Wealth Creation Journ:tl" Sept.-Dec 2005. and Jan-April 2006. );;. The New Vision April 8' 11 1999 "Quest for empire traps Greenland."

);- Prof. ErisaOchieng: "Commercial bank failure 111 Uganda: causes and remedies."The Uganda Banker Vol. 6 Dec. 1998.

~ Mr. Henry Kibirige: "Challenges of Financial sector regulations."The Ugandan Banker' Vol. 5 April 1997.

~ Mr Leo Kibirango: "Banking Ethics in a Liberalize Financial Environment." The Ugandan Banker Vol. 7 Sep. 1999.

);;. Mr Leo Kibirango: "Good Corporate Governance: the way to thenew millennium." Capital Market Authority Journal Vol. 3 April 1999.

~ Justice KiryaBwire: "the role of Board of Director in good corporate Governance"Capital Market Authority Journal Third Quarter 2003.

39 » Katie Kampmann: "Modern Trends in Corporate Governance."World Bank Publication 2000.

)> Dr Catherine L Kutcha&John D Sullivan"instituting of Corporate Governance 111 Developing and Transitional Econonmies"

)> Howard I Golden Esq: "Why Corporate Governance- Background issues"2006 www.corporategovernanceafrica.org.

)> Institute of Corporate GovernanceOf Uganda: "Manual on Corporate Governance for Uganda: Incorporate recommended guideline for Uganda"

)> Sam Merisha et a!: "Corporate Governanance and Corruption Ghana"2003.

)> Magdi R Iskander eta!: "Corporate Governance: A frame work for Implementation." 2000.

)> Mr T K KBhagarat: "Bank of Uganda Supervision Department Inspection Manual." :>- John L Coller Jr. & Jacqueline Doyle: "Corporate Governance" TATA McGraw- Hill Edition 2003. Websites: » www.world bank.org :>- www.wordbank.org J.- www.bou.or.ug » www.baselalert.com :>- www.corporategovernanceafrica.org J.- www.cma.org.ug

40 APPENDIX

(I) Institute of Corporate Governance of Uganda.

I. Introduction to the study

2. What does the activities ICGU do to promote the implementation of corporate governance in the banking sector?

3. Comment on the laws governing corporate governance in the banking sector in relation to the ICGU recommended corporate governance guidelines

4. Comment on the role played by Bank of Uganda in the strengthening of corporate governance in the banking sector.

5. What are the key indicators of growth corporate governance in the banking sector?

6. Comment on the growth of corporate governance so far.

7. What are the challenges facing the growth of corporate governance in the banking sector?

8. What strategies should be adopted to enhance growth of corporate governance in the banking sector?

41 (ii)

Commercial Banks: I. Introduction to the study

2. What strategies does the bank have in place to implement corporate governance?

3. What are the key indicators of growth of corporate governance in the banking sector?

4. Comment on the legal framework of corporate governance.

5. Comment on the growth of corporate governance.

6. What are the challenges you face in the implementation of corporate governance?

7. What can be done to overcome the challenges above?

8. Do you as regards corporate governance in the banking sector?

42